UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 31, 2010.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File Number 001-32408
FairPoint Communications, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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13-3725229 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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521 East Morehead Street, Suite 500
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28202 |
Charlotte, North Carolina
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(Zip code) |
(Address of Principal Executive Offices) |
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Registrants Telephone Number, Including Area Code:
(704) 344-8150
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Exchange on Which Registered |
Common Stock, par value $0.01 per share
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The Nasdaq Stock Market LLC
(Nasdaq Capital Market) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulations S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o*
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one).
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
The aggregate market value of the common stock held by non-affiliates of the registrant
as of June 30, 2010 (based on the closing price of $0.053 per share as quoted on the Pink Sheets as
of such date) was approximately $4,723,851.
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes þ No
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As of March 25, 2011, there were 26,197,432 shares of the Registrants common stock, par
value $0.01 per share, outstanding.
Documents incorporated by reference: None
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The Registrant is not currently required to file any such Interactive Data Files. |
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
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PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some statements in this Annual Report are known as forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Forward-looking statements may relate to, among other things:
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risks related to our ability to meet our expectations with respect to our
post-restructuring operating and financial objectives and the assumptions and business
plan associated therewith; |
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risks related to our reported financial information and operating results including
with respect to our adoption of fresh start accounting and our actual results as compared
to projected financial results; |
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future performance generally and our share price as a result thereof; |
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restrictions imposed by the agreements governing our indebtedness; |
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our ability to satisfy certain financial covenants included in the agreements
governing our indebtedness; |
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financing sources and availability, and future interest expense; |
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our ability to refinance our indebtedness on commercially reasonable terms, if at
all; |
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anticipated business development activities and future capital expenditures; |
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the effects of regulation, including restrictions and obligations imposed by
federal and state regulators as a condition to the approval of the Merger and the Plan
(each as defined herein); |
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material adverse changes in economic and industry conditions and labor matters,
including workforce levels and labor negotiations, and any resulting financial or
operational impact, in the markets we serve; |
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material technological developments and changes in the communications industry,
including disruption of our third party suppliers provisioning of critical products or
services; |
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the effects of competition on the markets we serve; |
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use by customers of alternative technologies and the loss of access lines; |
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availability and levels of regulatory support payments; |
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availability of net operating loss (NOL) carryforwards to offset anticipated tax
liabilities; |
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our ability to meet obligations to our Company-sponsored pension plans and
post-retirement healthcare plans; and |
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changes in accounting assumptions that regulatory agencies, including the
Securities and Exchange Commission (the SEC), may require or that result from changes
in the accounting rules or their application, which could result in an impact on
earnings. |
These forward-looking statements include, but are not limited to, statements about our plans,
objectives, expectations and intentions and other statements contained in this Annual Report that
are not historical facts. When used in this Annual Report, the words expects, anticipates,
intends, plans, believes, seeks, estimates and similar expressions are generally intended
to identify forward-looking 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, including our plans, objectives, expectations and intentions and other
factors discussed under Item 1A.
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Risk Factors and other parts of this Annual Report. You should not place undue reliance on
such forward-looking statements, which are based on the information currently available to us and
speak only as of the date on which this Annual Report was filed with the SEC. We undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. However, your attention is directed to any further
disclosures made on related subjects in our periodic reports filed with the SEC on Forms 10-K, 10-Q
and 8-K and Schedule 14A.
EXPLANATORY NOTE
Overview of Restatement
In this Annual Report on Form 10-K for our fiscal year ended December 31, 2010 (this Annual
Report), FairPoint Communications, Inc. (the Company) is restating its unaudited quarterly
financial statements for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010
(collectively, the 2010 Interim Consolidated Financial Statements).
The Companys previously filed Quarterly Reports on Form 10-Q for the quarters ended March 31,
2010, June 30, 2010 and September 30, 2010 (collectively, the 2010 Quarterly Reports) impacted by
the restatement have not been and will not be amended. Accordingly, the Company cautions you that
certain information contained in the 2010 Quarterly Reports should no longer be relied upon,
including the Companys previously issued and filed 2010 Interim Consolidated Financial Statements
and any financial information derived therefrom. In addition, the Company cautions you that other
communications or filings related to the 2010 Interim Consolidated Financial Statements should no
longer be relied upon. See note 17 to the
consolidated financial statements in this Annual Report for more information regarding the impact
of these adjustments on the 2010 Interim Consolidated Financial Statements. All of the Companys
Quarterly Reports on Form 10-Q that will be filed for fiscal year 2011 will include restated
results for the corresponding interim periods of 2010. All amounts in this Annual Report affected
by the restatement adjustments reflect such amounts as restated.
Background of the Restatement
As previously disclosed in the Companys Current Report on Form 8-K filed with the
SEC on March 22, 2011, management of the Company, with the concurrence
of the Audit Committee of the Companys Board of Directors (the Audit Committee), concluded that
the Company would restate the 2010 Interim Consolidated Financial Statements.
In connection with the preparation of the Companys audited financial statements for the year
ended December 31, 2010, management has discovered accounting errors that impact the accuracy of
the Companys previously issued 2010 Interim Consolidated Financial Statements. These errors were
detected in areas in which the Company had previously identified and disclosed material weaknesses
in internal controls.
The restated financial statements correct the following errors:
Project Abandonment Adjustment
Certain capital projects, principally a wireless broadband fixed asset project, had been
abandoned but the write-off of all of the related capitalized costs had not occurred in a timely
manner.
Costs Capitalized to Property, Plant and Equipment Adjustment
Due to a backlog of capital projects not yet closed, certain costs (principally labor
expenses) remained capitalized to property, plant and equipment rather than expensed.
Application of Overhead Costs Adjustment
An error was discovered in the application of overhead costs to capital projects.
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Each of the errors noted above resulted in an understatement of operating expenses and an
overstatement of property, plant and equipment.
Other Adjustments
In addition, as part of this restatement, the Company also adjusted other items, including
certain adjustments to revenue that were identified in connection with the preparation of the
consolidated financial statements for the year ended December 31, 2010, which individually were not
considered to be material, but are material when aggregated with the three adjustments noted above.
These adjustments are primarily related to (a) errors in the calculation of certain regulatory
penalties, and (b) errors in revenue associated with certain customer billing, special project
billings and intercompany/official lines. The restatement only affects the first three quarterly
periods of 2010.
The Company is currently reviewing the design of its controls and procedures in order to
remediate the material weakness that prevented these accounting errors from being detected in a
timely manner. While the Company implements a system solution, the Company has increased the
resources devoted to manual processes to compensate for the material weakness. The material
weakness has been identified and is further described in Part II Item 9A Controls and
Procedures.
The aggregate impact of these adjustments will result in an increase to the Companys
previously reported pre-tax loss for the nine month period ended September 30, 2010 of
approximately $28.4 million, which is mainly attributable to a reduction to reported revenues of
approximately $3.9 million, an increase to the Companys previously reported expenses of
approximately $26.8 million, a decrease in other expense of
approximately $3.2 million and a $0.9 million increase of
expense to reorganization items. The
aggregate impact of the adjustments for the nine months ended
September 30, 2010 will result in a reduction in net income of $28.4
million, net of taxes, and a decrease in the Companys reported
capital expenditures of approximately $15.4 million.
Cash, as previously reported, for the nine months ended September 30, 2010 was not impacted by
these adjustments. In addition, the Company expects that these adjustments will not have a
material impact on the Companys overall liquidity in the future.
Except as required to reflect the effects of the restatement for the items set forth above, no
additional modifications or updates have been made to the 2010 Interim Consolidated Financial
Statements or the 2010 Quarterly Reports. For example, this Annual Report does not give effect to
any subsequent events that may impact the 2010 Interim Consolidated Financial Statements or the
2010 Quarterly Reports. Other information not affected by the restatement remains unchanged and
continues to reflect the disclosures made at the time of the original filing of the 2010 Quarterly
Reports.
ITEM 1. BUSINESS
Except as otherwise required by the context, references in this Annual Report to:
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FairPoint Communications refers to FairPoint Communications, Inc., excluding its
subsidiaries; |
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FairPoint, the Company, we, us or our refer to the combined business of
FairPoint Communications, Inc. and all of its subsidiaries after giving effect to the
merger on March 31, 2008, with Northern New England Spinco Inc. (Spinco), a subsidiary of
Verizon Communications Inc. (Verizon), which transaction is referred to herein as the
Merger; |
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Northern New England operations refers to the local exchange business acquired from
Verizon and certain of its subsidiaries after giving effect to the Merger; |
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Legacy FairPoint or Telecom Group refers to FairPoint, exclusive of our acquired
Northern New England operations; and |
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Verizon Northern New England business refers to the local exchange business of Verizon
New England Inc. (Verizon
New England) in Maine, New Hampshire and Vermont and the customers of Verizon and its
subsidiaries (other than Cellco Partnership) (collectively, the
Verizon Group) related long distance
and Internet service provider business in those states prior to the Merger. |
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Emergence from Chapter 11 Proceedings
On October 26, 2009 (the Petition Date), FairPoint Communications and substantially all of
its direct and indirect subsidiaries filed voluntary petitions for relief under chapter 11 of title
11 (Chapter 11) of the United States Code (the Bankruptcy Code) in the United States Bankruptcy
Court for the Southern District of New York (the Bankruptcy Court) (Case No. 09-16335)
(collectively, the Chapter 11 Cases).
On January 13, 2011, the Bankruptcy Court entered an Order Confirming Debtors Third Amended
Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated as of December 29, 2010
(the Confirmation Order), which confirmed our Third Amended Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code (as confirmed, the Plan).
On January 24, 2011 (the Effective Date), we substantially consummated our reorganization
through a series of transactions contemplated by the Plan, and the Plan became effective pursuant
to its terms.
Plan of Reorganization
General
The Plan provided for the cancellation and extinguishment on the Effective Date of all our
equity interests outstanding on or prior to the Effective Date, including but not limited to all
outstanding shares of our common stock, par value $0.01 per share (the Old Common Stock), options
and contractual or other rights to acquire any equity interests.
The Plan provided for:
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(i) The lenders under the Credit Agreement, dated as of March 31, 2008, by and among
FairPoint Communications, Spinco, Bank of America, N.A. as syndication agent, Morgan
Stanley Senior Funding, Inc. and Deutsche Bank Securities Inc., as co-documentation agents,
and Lehman Commercial Paper Inc., as administrative agent, and the lenders party thereto
(as amended, supplemented or otherwise modified from time to time, the Pre-Petition Credit
Facility), (ii) the administrative agent under the Pre-Petition Credit Facility (other
than certain indemnity and reimbursement rights of the administrative agent which survived)
and (iii) holders of other claims against us arising under the Pre-Petition Credit Facility
or ancillary agreements (including swap agreements) (collectively, Pre-Petition Credit
Facility Claims) to receive the following in full and complete satisfaction of such
Pre-Petition Credit Facility Claims: (i) a pro rata share of a $1,000.0 million term loan
facility (the Exit Term Loan), (ii) a pro rata share of certain cash payments, (iii) a
pro rata share of 23,620,718 shares of our new common stock, par value $0.01 per share (the
New Common Stock or Common Stock) and (iv) a pro rata share of a 55% interest in the
FairPoint Litigation Trust (the Litigation Trust); |
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Holders of allowed unsecured claims against FairPoint Communications, including the
Pre-Petition Notes, as defined below, (the FairPoint Communications Unsecured Claims) to
receive the following in full and complete satisfaction of such FairPoint Communications
Unsecured Claims: (i) a pro rata share of 2,101,676 shares of New Common Stock, (ii) a pro
rata share of a 45% interest in the Litigation Trust and (iii) a pro rata share of the
warrants issued by us in connection with a Warrant Agreement (the Warrant Agreement) that
we entered into with The Bank of New York Mellon, as warrant agent, on the Effective Date;
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Holders of allowed unsecured claims against our subsidiaries and holders of certain
unsecured convenience claims against us to receive payment in full in cash in the amount of
their allowed claims. |
In addition, the Plan also provided for:
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Certain of our employees and a consultant of ours to receive (a) cash bonuses made
pursuant to the FairPoint |
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Communications, Inc. 2010 Success Bonus Plan (the Success Bonus Plan) and/or (b) New Common
Stock awards, consisting of restricted shares of New Common Stock and/or options to purchase
shares of New Common Stock, pursuant to the terms of the FairPoint Communications, Inc. 2010
Long Term Incentive Plan (the Long Term Incentive Plan); and |
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Members of our board to be appointed on the Effective Date (the New Board) to receive
options to purchase New Common Stock pursuant to the terms of the Long Term Incentive Plan. |
Finally, the Plan included certain discharges, releases, exculpations and injunctions that
became effective on the Effective Date, including the following:
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Except as otherwise provided in the Plan, all existing claims against, and equity
interests in, us that arose prior to the Effective Date were released, terminated,
extinguished and discharged; |
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In consideration of the services of the Released Parties (as defined in the Plan), we
and all persons who held, or may have held, claims against, or equity interests in, us
prior to the Effective Date released the Released Parties (as defined in the Plan) from
claims, causes of action and liabilities related to us; |
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None of the Company, the Released Parties (as defined in the Plan) or the Litigation
Trustee (as defined below) shall have or incur any liability relating to or arising out of
the Chapter 11 Cases; and |
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Except as otherwise provided in the Plan, all persons are permanently enjoined from
asserting claims, liabilities, causes of action, interest or remedies that are released or
discharged pursuant to the Plan. |
Termination of Material Agreements
On the Effective Date, in accordance with the Plan, we terminated, among others, the following
material agreements:
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The Pre-Petition Credit Facility (except that the Pre-Petition Credit Facility continues
in effect solely for the purposes of allowing creditors under the Pre-Petition Credit
Facility to receive distributions under the Plan and to preserve certain rights of the
administrative agent), and all notes, security agreements, swap agreements and other
agreements associated therewith; |
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Each of the respective indentures governing (i) the 13-1/8% Senior Notes due April 1,
2018 (the Old Notes), which were issued pursuant to the Indenture, dated as of March 31,
2008, by and between Spinco and U.S. Bank National Association, as amended (the Old
Indenture), and (ii) the 13-1/8% Senior Notes due April 2, 2018 (the New Notes and,
together with the Old Notes, the Pre-Petition Notes), which were issued pursuant to the
Indenture, dated as of July 29, 2009, by and between FairPoint Communications, Inc. and
U.S. Bank National Association (the New Indenture) (except to the extent to allow us or
the relevant Pre-Petition Notes indenture trustee, as applicable, to make distributions
pursuant to the Plan on account of claims related to such Pre-Petition Notes); and |
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Our Debtor-in-Possession Credit Agreement, dated as of October 27, 2009 (as amended, the
DIP Credit Agreement), by and among FairPoint Communications and FairPoint Logistics,
Inc. (FairPoint Logistics, and together with FairPoint Communications, the DIP
Borrowers), certain financial institutions (the DIP Lenders) and Bank of America, N.A.,
as the administrative agent for the DIP Lenders, which was terminated by its conversion
into the new $75.0 million Exit Revolving Facility, and all notes, security agreements and
other agreements related to the DIP Credit Agreement. |
Exit Credit Agreement
On the Effective Date, FairPoint Communications and FairPoint Logistics entered into a
$1,075.0 million senior secured credit facility with a syndicate of lenders and Bank of America,
N.A., as the administrative agent for the lenders, arranged by Banc of America Securities LLC (the
Exit Credit Agreement). The Exit Credit Agreement is comprised of a $75.0 million revolving loan
facility (the Exit Revolving Facility), which has a sub-facility providing for the issuance of up
to $30.0 million of letters of credit,
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and a $1,000.0 million term loan facility (the Exit Term
Loan and together with the Exit Revolving Facility and such letter of credit facility,
collectively, the Exit Credit Agreement Loans). On the Effective Date, we paid to the lenders
providing the Exit Revolving
Facility an aggregate fee equal to $1.5 million. Interest on the Exit Credit Agreement Loans
accrues at an annual rate equal to either (a) the British Bankers Association LIBOR Rate (LIBOR)
plus 4.50%, with a minimum LIBOR floor of 2.00% for the Exit Term Loan, or (b) a base rate plus
3.50% per annum in which base rate is equal to the highest of (x) Bank of Americas prime rate, (y)
the federal funds effective rate plus 0.50% and (z) applicable LIBOR (with minimum LIBOR floor of
2.00%) plus 1.00%. In addition, we are required to pay a 0.75% per annum commitment fee on the
average daily unused portion of the Exit Revolving Facility. The entire outstanding principal
amount of the Exit Credit Agreement Loans is due and payable five years after the Effective Date
(the Exit Maturity Date); provided that on the third anniversary of the Effective Date, we must
elect (subject to the absence of events of default under the Exit Credit Agreement) to continue the
maturity of the Exit Revolving Facility and must pay a continuation fee of $0.75 million and, on
the fourth anniversary of the Effective Date, we must elect (subject to the absence of events of
default under the Exit Credit Agreement) to continue the maturity of the Exit Revolving Facility
and must pay a second continuation fee of $0.75 million. The Exit Credit Agreement requires
quarterly repayments of principal of the Exit Term Loan after the first anniversary of the
Effective Date. In the second and third years following the Effective Date, such quarterly payments
shall each be in an amount equal to $2.5 million; during the fourth year following the Effective
Date, such quarterly payments shall each be in an amount equal to $6.25 million; and for the first
three quarters during the fifth year following the Effective Date, such quarterly payments shall
each be in an amount equal to $12.5 million, with all remaining outstanding amounts owed in respect
of the Exit Term Loan being due and payable on the Exit Maturity Date.
The Exit Credit Agreement Loans are guaranteed by all of our current and future direct and
indirect subsidiaries, other than (x) any subsidiary that is prohibited by applicable law from
guaranteeing the obligations under the Exit Credit Agreement Loans and/or providing any security
therefor without the consent of a state public utilities commission, and (y) any subsidiary of
ours that is a controlled foreign corporation or a subsidiary that is held directly or indirectly
by a controlled foreign corporation (the guarantor subsidiaries, together with us and FairPoint
Logistics, are collectively referred to as the Exit Financing Loan Parties). The Exit Credit
Agreement Loans as a whole are secured by liens upon substantially all existing and after-acquired
assets of the Exit Financing Loan Parties, with first lien and payment waterfall priority for the
Exit Revolving Facility and second lien priority for the Exit Term Loan.
The Exit Credit Agreement contains customary representations, warranties and affirmative
covenants. In addition, the Exit Credit Agreement contains restrictive covenants that limit, among
other things, the ability of the Exit Financing Loan Parties to incur indebtedness, create liens,
engage in mergers, consolidations and other fundamental changes, make investments or loans, engage
in transactions with affiliates, pay dividends, make capital expenditures and repurchase capital
stock. The Exit Credit Agreement also contains minimum interest coverage and maximum total leverage
maintenance covenants, along with a maximum senior leverage covenant measured upon the incurrence
of certain types of debt. The Exit Credit Agreement contains certain events of default, including
failure to make payments, breaches of covenants and representations, cross defaults to other
material indebtedness, unpaid and uninsured judgments, changes of control and bankruptcy events of
default. The lenders commitments to fund amounts under the Exit Credit Agreement are subject to
certain customary conditions.
Certificate of Incorporation and By-laws
Pursuant to the Plan, on the Effective Date, we filed with the Secretary of State of the State
of Delaware the Ninth Amended and Restated Certificate of Incorporation of FairPoint Communications
and adopted our Second Amended and Restated By-laws (the By-laws).
Departure and Appointment of Directors
Pursuant to the Plan, as of the Effective Date, the following directors ceased to serve on our
board of directors: Thomas F. Gilbane, Jr., Robert S. Lilien, Claude C. Lilly, Jane E. Newman and
Michael R. Tuttle.
As of the Effective Date, the number of directors on the New Board was fixed at eight, with
Todd W. Arden, Dennis J. Austin, Edward D. Horowitz, Michael J. Mahoney, Michael K. Robinson, David
L. Treadwell and Wayne Wilson becoming members of the
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New Board and Mr. Horowitz was appointed to
serve as chair of the New Board. Paul H. Sunu, our Chief Executive Officer, became a director of
ours effective as of August 24, 2010 and will continue to serve as a director on the New Board.
In accordance with the By-laws, the initial members of the New Board are expected to hold
office until the first annual meeting of stockholders which will be held following the one year
anniversary of the Effective Date. Thereafter, members of the New Board are expected to have
one-year terms so that their terms will expire at each annual meeting of stockholders.
Registration Rights Agreement
On the Effective Date, we entered into a registration rights agreement (the Registration
Rights Agreement) with Angelo, Gordon & Co., L.P. (Angelo Gordon), on behalf of and as
investment manager of the persons set forth in the Registration Rights Agreement (together with
Angelo Gordon, the Ten Percent Holders) that hold in the aggregate at least 10% of our New Common
Stock. Under the Registration Rights Agreement, the Ten Percent Holders are entitled to request an
aggregate of two registrations of the Ten Percent Holders registrable securities; provided that no
such rights shall be demanded prior to the expiration of 180 days from the Effective Date. If the
Ten Percent Holders in the aggregate hold less than 7.5% of the then outstanding New Common Stock,
such holders rights under the Registration Rights Agreement shall terminate.
Warrant Agreement
On the Effective Date, we entered into the Warrant Agreement with the Bank of New York Mellon,
as Warrant Agent. Pursuant to the Warrant Agreement, we issued or will issue the Warrants to
purchase an aggregate of 3,582,402 shares of New Common Stock. The number of shares of New Common
Stock issuable upon the exercise of the Warrants is subject to adjustment upon the occurrence of
certain events described in the Warrant Agreement. The initial exercise price applicable to the
Warrants is $48.81 per share of New Common Stock for which the Warrants may be exercised. The
exercise price applicable to the Warrants is subject to adjustment upon the occurrence of certain
events described in the Warrant Agreement. The Warrants may be exercised at any time on or before
the seventh anniversary of the Effective Date. The Warrants, and all rights under the Warrants,
are transferable as provided in the Warrant Agreement.
Litigation Trust Agreement
On the Effective Date, we entered into the FairPoint Litigation Trust Agreement (the
Litigation Trust Agreement) with Mark E. Holliday, as litigation trustee (the Litigation
Trustee), and the official committee of unsecured creditors appointed in the Chapter 11 Cases,
pursuant to which the Litigation Trust was established for the benefit of specified holders of
allowed claims and for the pursuit of certain causes of action against Verizon arising in
connection with the Agreement and Plan of Merger, dated as of January 15, 2007, by and among
Verizon, Spinco and FairPoint Communications, Inc., as amended (the Merger Agreement). Pursuant
to the Plan, we transferred such claims and causes of actions against Verizon related to the Merger
Agreement to the Litigation Trust with title to such claims and causes of action being free and
clear of all liens, charges, claims, encumbrances and interests except for the return to FairPoint
Communications of any funds deposited in the Litigation Trust bank account. In addition, pursuant
to the Plan, we transferred funds to the Litigation Trust to pay the reasonable costs and expenses
associated with the administration of the Litigation Trust. Pursuant to the Litigation Trust
Agreement, the Litigation Trustee may request additional funding for the Litigation Trust from us
following the Effective Date; provided, that (i) any such additional funding will be subject to the
approval of our New Board in its sole discretion, (ii) after giving effect to such additional
funding, our cash on hand may not be less than $20.0 million (after taking into account the cash
distributions to be made) and (iii) no proceeds of any borrowings under the Exit Revolving Facility
may be used to fund such additional funding. The Litigation Trustee may prosecute the transferred
claims and causes of action against Verizon as described in and authorized by the Plan and the
Litigation Trust Agreement, make timely and appropriate distributions to the beneficiaries of the
Litigation Trust and otherwise carry out the provisions of the Litigation Trust Agreement.
New Long Term Incentive Plan and Success Bonus Plan
As contemplated by the Plan, on the Effective Date, we were deemed to have adopted the Long
Term Incentive Plan and the Success Bonus Plan.
9
On the Effective Date, in accordance with the Plan, (i) certain of our employees and a
consultant of ours received (a) Success Bonuses of approximately $1.8 million in the aggregate
pursuant to the terms of the Success Bonus Plan and/or (b) New Common Stock awards, consisting of
restricted shares of New Common Stock and/or options to purchase shares of New Common Stock,
pursuant to the terms of the Long Term Incentive Plan, and (ii) members of the New Board received
restricted shares of New Common Stock and options to purchase New Common Stock pursuant to the
terms of the Long Term Incentive Plan. The Success
Bonuses were earned by our employees and were primarily based upon achieving certain
performance measures. 3,134,603 shares of New Common Stock are reserved for awards under the Long
Term Incentive Plan, of which stock options and restricted share awards were granted to certain of
our employees, a consultant of ours, and members of the New Board on the Effective Date.
Specifically, on the Effective Date, (a) 460,294 shares of stock were distributed to
management-level and other employees and a consultant of ours, with 120,000 restricted shares
issued to our Chief Executive Officer, 34,000 restricted shares issued to our Chief Financial
Officer, 161,800 restricted shares issued to other members of our senior management and 66,794
unrestricted shares issued to David L. Hauser, our former Chief Executive Officer, who is currently
a consultant, (b) 87,498 shares of restricted stock were awarded to the members of the New Board
and (c) stock options were granted with an exercise price of $24.29 for the purchase of (1) 859,000
shares of New Common Stock by management-level and other employees, with 125,000 options to
purchase New Common Stock granted to our Chief Executive Officer, 42,000 options to purchase New
Common Stock granted to our Chief Financial Officer and 236,500 options to purchase New Common
Stock granted to other members of our senior management and (2) 132,012 shares of New Common Stock
by members of the New Board. Except for the unrestricted shares awarded to David L. Hauser, these
stock option and restricted share awards vested to the extent of 25% on the Effective Date, and the
remainder of these awards is expected to vest in three equal annual installments, commencing on the
first anniversary of the Effective Date, with accelerated vesting upon (x) a change in control, or
(y) a termination of an award holders employment either without cause (but only to the extent the
vesting becomes at least 50%, plus an additional 25% for each year of the award holders employment
after the first year after the Effective Date) or due to the award holders death or disability
(but, for stock options, only to the extent vesting would have otherwise occurred within one year
following such termination of employment). Mr. Hausers shares were 100% vested on the Effective
Date.
Regulatory Settlements
In connection with the Chapter 11 Cases, we negotiated with representatives of the state
regulatory authorities in each of Maine, New Hampshire and Vermont with respect to (i) certain
regulatory approvals relating to the Chapter 11 Cases and the Plan and (ii) certain modifications
to the requirements imposed by state regulatory authorities as a condition to approval of the
Merger (each a Merger Order, and collectively, the Merger Orders). We agreed to regulatory
settlements with the representatives for each of Maine, New Hampshire and Vermont regarding
modification of each states Merger Order (each a Regulatory Settlement, and collectively, the
Regulatory Settlements). For more information regarding the Regulatory Settlements, see Item 1.
Business State Regulation Regulatory Conditions to the Merger, as Modified in Connection with
the Plan.
Reporting Requirements
In connection with the Chapter 11 Cases, regardless of the Effective Date having occurred, we
are required to continue to file quarterly operating reports with the Bankruptcy Court until the
Chapter 11 Cases have closed. Such reports have been and will be prepared according to
requirements of federal bankruptcy law and related rules. While these reports accurately provide
then-current information required under the Bankruptcy Code, they are nonetheless unaudited, are
prepared in a format different from that used in our consolidated financial statements filed under
the securities laws and certain of this financial information may be prepared on an unconsolidated
basis. Accordingly, we believe that the substance and format of these reports do not allow
meaningful comparison with our regular publicly-disclosed consolidated financial statements.
Moreover, the quarterly operating reports filed with the Bankruptcy Court are not prepared for the
purpose of providing a basis for an investment decision relating to our securities, or for
comparison with other financial information filed by us with the SEC.
Plan Injunction
Except as otherwise provided in the Plan, the Confirmation Order enjoined, or stayed, the
continuation of any judicial or administrative proceedings or other actions against us or our
properties to recover on, collect or secure a claim arising prior to the Effective Date. Thus, for
example, creditor actions to obtain possession of property from us, or to create, perfect or
enforce any
lien against our property, or to collect on monies owed or otherwise exercise rights or
remedies with respect to a claim arising prior to the Effective Date are enjoined except as
provided in the Plan.
10
Fresh Start Accounting
Upon our emergence from Chapter 11 on January 24, 2011, we adopted fresh start accounting in
accordance with guidance under the applicable reorganization accounting rules, pursuant to which
our reorganization value, which represents the fair value of the entity
before considering liabilities, and approximates the amount a willing buyer would pay for the
assets of the entity immediately after the reorganization, has been allocated to the fair value of
assets in conformity with guidance under the applicable accounting rules for business combinations,
using the purchase method of accounting for business combinations. The amount remaining after
allocation of the reorganization value to the fair value of identified tangible and intangible
assets will be reflected as goodwill, which is subject to periodic evaluation for impairment. In
addition to fresh start accounting, our future consolidated financial statements will reflect all
effects of the transactions contemplated by the Plan. Accordingly, our future consolidated
statements of financial position and consolidated statements of operations will not be comparable
in many respects to our consolidated statements of financial position and consolidated statements
of operations for periods prior to our adoption of fresh start accounting and prior to accounting
for the effects of the reorganization, including the consolidated financial statements contained
herein. As a result, our financial and operating results for the year ended December 31, 2010 may
not be indicative of future financial performance.
Impact on Net Operating Loss Carryforwards (NOLs)
Our NOLs will be substantially reduced by the
recognition of gains on the discharge of certain debt pursuant to the Plan. Further, our ability to utilize our NOL carryforwards
will be limited by Section 382 of the Internal Revenue Code of 1986, as amended, as the debt restructuring resulted in an ownership
change. In general, following an ownership change, a limitation is imposed on the amount of pre-ownership change NOL carryforwards
that may be used to offset taxable income in each year following the ownership change. We plan to elect, pursuant to a special rule
that is applicable to ownership changes resulting from a Chapter 11 reorganization, to calculate this annual limitation by increasing
the value attributed to our stock prior to the ownership change by the amount of creditor claims surrendered or canceled during the
reorganization. Specifically, the amount of the annual limitation would equal the long-term tax-exempt rate (published monthly by
the Internal Revenue Service (the IRS)) for the month in which the ownership change occurs, which in our cases is 4.10%, multiplied
by the lesser of (i) the value of the Companys stock immediately after, rather than immediately before, the ownership change, and (ii)
the value of the Companys pre-change assets. Any increase in the value attributed to our stock resulting from the ownership change
effectively would increase the annual limitation on our NOLs.
Any portion of the annual limitation on
pre-ownership change NOLs that is not used to reduce taxable income in a particular year may be carried forward and used in subsequent
years. The annual limitation is increased by certain built-in gains recognized (or treated as recognized) during the five years
following the ownership change (up to the total amount of built-in gain that existed at the time of the ownership change). The
Company expects the limitations on our NOL carryforwards for the five years following an ownership change to be increased by built-in
gains. The Company currently projects that all available NOL carryforwards, after giving effect to the reduction for debt discharged,
will be utilized to offset future income within the NOL carryforward periods. Therefore, the Company does not expect to have NOL
carryforwards after such time.
Cutover-Related Issues
From 2007 through January 2009, we were in the process of developing and deploying new
systems, processes and personnel to replace those used by Verizon to operate and support our
network and back-office functions in the Maine, New Hampshire and Vermont operations we acquired
from Verizon in the Merger. These services were provided by Verizon under the Transition Services
Agreement, dated as of January 15, 2007, which we entered into with certain subsidiaries of Verizon
in connection with the Merger, as amended (the Transition Services Agreement). On January 30,
2009, we began transitioning certain back-office functions from Verizons integrated systems to
newly created systems of the Company (the Cutover), and on February 9, 2009, we began operating
our new platform of systems independently from the Verizon systems, processes and personnel.
11
Following the Cutover, many of these new systems functioned without significant problems, but
a number of the key back-office systems, such as order entry, order management and billing,
experienced certain functionality issues as well as issues with communication between the systems.
As a result of these systems functionality issues, as well as work force inexperience on the new
systems, we experienced increased handle time by customer service representatives for new orders,
reduced levels of order flow-through across the systems, which caused delays in provisioning and
installation, and delays in the processing of bill cycles and collection treatment efforts. These
issues impacted customer satisfaction and resulted in large increases in customer call volumes into
our customer service centers. While many of these issues were anticipated, the magnitude of
difficulties experienced was beyond our expectations. Because of these Cutover issues, we have
incurred incremental costs in order to operate our business, including third-party contractor costs
and internal labor costs in the form of overtime pay.
By the end of 2010, we have substantially stabilized the back-office systems. We continue to
work on improving our processes and systems to support revenue growth, enhance customer service and
increase operational efficiency.
Restatements
On April 30, 2010, we filed amendments to our Quarterly Reports on Form 10-Q/A for the
quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 (collectively, the
Amendments) to reflect the effect of an accounting error, a one-time non-operating loss related
to a disputed claim and certain billing and other adjustments. For the nine months ended September
30, 2009, the accounting error and the billing and other adjustments resulted in a $25.0 million
overstatement of revenues, a $0.2 million understatement of operating expenses and a $9.6 million
overstatement of other income in the financial data originally reported in our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009, which was originally filed with the SEC on
November 20, 2009. The restatement of the interim condensed consolidated financial statements
contained in the Amendments (the 2009 Restatement), which Restatement accounted for the foregoing
overstatements and understatement, resulted in a reduction in net income of $21.8 million, net of
income taxes, for the nine months ended September 30, 2009. For more information, see the
Amendments as filed with the SEC.
In this Annual Report, the Company is restating its unaudited quarterly financial statements
for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010 (the 2010
Restatement). The aggregate impact of these adjustments will result in an increase to the
Companys previously reported pre-tax loss for the nine month period ended September 30, 2010 of
approximately $28.4 million, which is mainly attributable to a reduction to reported revenues of
approximately $3.9 million, an increase to the Companys previously reported expenses of
approximately $26.8 million, a decrease in other expense of
approximately $3.2 million and a $0.9 million increase of
expense to reorganization items. The
aggregate impact of the adjustments for the nine months ended
September 30, 2010 will result in a reduction in net income of $28.4
million, net of taxes, and a decrease in the Companys reported
capital expenditures of approximately $15.4 million.
See note 17 to the consolidated financial statements for further detail.
Our Business
We are a leading provider of communications services in rural and small urban communities,
offering an array of services, including high speed data (HSD), Internet access, voice,
television and broadband product offerings. We operate in 18 states with approximately 1.4 million
access line equivalents (including voice access lines and HSD lines, which include digital
subscriber lines (DSL), wireless broadband, cable modem and fiber-to-the-premises) in service as
of December 31, 2010.
We were incorporated in Delaware in February 1991 for the purpose of acquiring and operating
incumbent telephone companies in rural and small urban markets. Many of our telephone companies
have served their respective communities for over 75 years.
Voice access lines are an important element of our business. Over the past several years,
communications companies, including FairPoint, have experienced a decline in voice access lines due
to increased competition, including competition from wireless carriers and cable television
operators, increased availability of broadband services and challenging economic conditions. While
voice access lines are expected to continue to decline, we expect to offset a portion of this lost
revenue with growth in HSD revenue as we continue to build-out our network to provide HSD products
to customers who did not previously have access to such products and to offer more competitive
services to existing customers. In addition, due to the Cutover issues and the Chapter 11 Cases,
we have lost significant market share in recent years. Our strategy will be to focus on leveraging
our ubiquitous network in our Northern New England operations to regain market share, particularly
in the business and wholesale markets and for data services.
12
We are subject to regulation primarily by federal and state governmental agencies. At the
federal level, the Federal Communications Commission (the FCC) generally exercises jurisdiction
over the facilities and services of communications common carriers, such as FairPoint, to the
extent those facilities are used to provide, originate or terminate interstate or international
communications. State regulatory commissions generally exercise jurisdiction over common carriers
facilities and services to the extent those facilities are used to provide, originate or terminate
intrastate communications. In addition, pursuant to the Telecommunications Act of 1996 (the 1996
Act), which amended the Communications Act of 1934 (the Communications Act), state and federal
regulators share responsibility for implementing and enforcing the domestic pro-competitive
policies introduced by that legislation.
Legacy FairPoints operations and our Northern New England operations operate under different
regulatory regimes in certain respects. For example, concerning interstate access, all of the
pre-Merger regulated interstate services of FairPoint were regulated under a rate-of-return model,
while all of the rate-regulated interstate services provided by the Verizon Northern New England
business were regulated under a price cap model. See Part 1 Item 1. Business Regulatory
Environment for further information regarding rate-of-return and price cap models. On May 10,
2010, we received FCC approval to convert our Legacy FairPoint operations in Maine and Vermont to
the price cap model. Our Legacy FairPoint operations in Maine and Vermont converted to price cap
regulation on July 1, 2010. We have obtained permission to continue to operate our existing Legacy
FairPoint incumbent local exchange carriers (ILECs) outside of Maine and Vermont under the
rate-of-return regime until the FCC completes its general review of whether to modify or eliminate
the all-or-nothing rule. Without this permission, the all-or-nothing rule would require that all
of our regulated operations be operated under the price cap model for federal regulatory purposes.
In addition, while all of our operations generally are subject to obligations that apply to all
local exchange carriers (LECs), our non-rural operations are subject to additional requirements
concerning interconnection, non-discriminatory network access for competitive communications
providers and other matters, subject to substantial oversight by state regulatory commissions. In
addition, the FCC has ruled that our Northern New England operations must comply with the
regulations applicable to the Bell Operating Companies. Our rural and non-rural operations are
also subject to different regimes concerning universal service.
Our Services
We offer a broad portfolio of high-quality communications services for residential and
business customers in each of the markets in which we operate. We have a long history of operating
in our markets and have a recognized identity within each of our service areas. Our operating
companies are locally staffed, which enables us to efficiently and reliably provide an array of
communications services to meet our customer needs. These include services traditionally associated
with local telephone companies, as well as other services such as Internet, television and
broadband enabled services. Based on our understanding of our local customers needs, we have
attempted to be proactive by offering bundled services designed to simplify the customers
purchasing and management process.
Generation of Revenue
We primarily generate revenue through: (i) the provision of our basic local telephone service
to customers within our service areas; (ii) the provision of network access to interexchange
carriers for origination and termination of interstate and intrastate long-distance phone calls and
dedicated private line facilities; (iii) HSD services; (iv) Universal Service Fund high-cost loop
and high-cost model payments; and (v) the provision of other services such as long-distance resale,
other data and Internet and broadband enabled services, enhanced services, such as caller name and
number identification, and billing and collection for interexchange carriers.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations in this Annual Report for more information regarding our revenue sources.
13
Voice Services
Local calling service enables the local customer to originate and receive an unlimited number
of calls within a defined exchange area. Local calling services include basic local lines,
private lines and switched data services. We provide local calling services to residential and
business customers, generally for a fixed monthly charge and service charges for special calling
features. In a rural LECs territory, the amount that we can charge a customer for local service is
determined by rate proceedings involving the appropriate state regulatory authorities.
We offer switched and dedicated long-distance services within our service areas through resale
agreements with national interexchange carriers. In addition, through our wholly-owned subsidiary
FairPoint Carrier Services, Inc., we offer wholesale long-distance services to communications
providers that are not affiliated with us.
Network Access Charges / Intercarrier Compensation
Network access enables long-distance companies to utilize our local network to originate or
terminate intrastate and interstate communications. Network access charges relate to long-distance,
or toll calls, that typically involve more than one company in the provision of telephone service
as well as to the termination of interexchange private line services. Since toll calls and private
line services are generally billed to the customer originating the call or ordering the private
line service, a mechanism is required to
compensate each company providing services relating to the service. This mechanism is the
access charge and we bill access charges to long-distance companies and other customers for the use
of our facilities to access the customer, as described below.
Intrastate Access Charges. We generate intrastate access revenue when an intrastate
long-distance call involving an interexchange carrier is originated by a customer in one of our
exchanges to a customer in another exchange in the same state, or when such a call is terminated to
a customer in one of our local exchanges. We also generate intrastate access revenue when an
interexchange carrier orders special access to connect interexchange private line services, such as
HSD services, to a customer in one of our local exchanges. The interexchange carrier pays us an
intrastate access payment for either terminating or originating the communication. We bill access
charges relating to such service through our carrier access billing system and receive the access
payment from the interexchange carrier. Access charges for intrastate services are regulated and
approved by the state regulatory authority.
Interstate Access Charges. We generate interstate access revenue when an interstate
long-distance call is originated by a customer in one of our exchanges to a customer in another
state, or when such a call is terminated to a customer in one of our exchanges. We also generate
interstate access revenue when an interexchange carrier orders special access to connect
interexchange private line services, such as HSD services, to a customer in one of our local
exchanges. We bill interstate access charges in the same manner as we bill intrastate access
charges; however, interstate access charges are regulated and approved by the FCC instead of the
state regulatory authority.
Universal Service Fund High-Cost Loop. The Universal Service Fund supplements the amount of
local service revenue received by us to ensure that basic local service rates for customers in
high-cost areas are consistent with rates charged in lower cost areas. The Universal Service Fund,
which is funded by monthly fees charged to interexchange carriers and LECs, makes payments to us on
a monthly basis based upon our cost support for LECs whose cost of providing the local loop
connections to customers is significantly greater than the national average. For our rural service
areas, these payments fluctuate based upon our average cost per loop compared to the national
average cost per loop. For example, if the national average cost per loop increases and our
operating costs (and average cost per loop) remain constant or decrease, the payments we receive
from the Universal Service Fund would decline. Conversely, if the national average cost per loop
decreases and our operating costs (and average cost per loop) remain constant or increase, the
payments we receive from the Universal Service Fund would increase. For our non-rural service
areas, these payments are based on cost models which estimate the cost to provide services and
generate universal service support payments for high-cost areas. Universal Service Fund high-cost
support revenue accounted for less than 2% of our total revenue in the year ended December 31,
2010.
Data and Internet Services (HSD)
We offer broadband Internet access via DSL technology, fiber-to-the-home technology, dedicated
T-1 connections, Internet dial-up, high speed cable modem and wireless broadband. Customers can
utilize this access in combination with customer owned equipment and software to establish a
presence on the world wide web. In addition, we offer enhanced Internet services, which include
obtaining IP addresses, basic web site design and hosting, domain name services, content feeds and
web-based e-mail services. Our services include access to 24-hour, 7-day a week customer support.
14
Other Services
We seek to capitalize on our LECs local presence and network infrastructure by offering
enhanced services to customers, as well as billing and collection services for interexchange
carriers.
Enhanced Services. Our advanced digital switch and voicemail platforms allow us to offer
enhanced services such as call waiting, call forwarding and transferring, three-way calling,
automatic callback, call hold, caller name and number identification, voice mail, teleconferencing,
video conferencing, store-and-forward fax, follow-me numbers, Centrex services and direct inward
dial.
Billing and Collection. Many interexchange carriers provide long-distance services to our LEC
customers and may elect to use our billing and collection services. Our LECs charge interexchange
carriers a billing and collection fee for each call record generated by the interexchange carriers
customer.
Directory Services. Through our local telephone companies, we publish telephone directories
in the majority of our locations. These directories provide white page listings, yellow page
listings and community information listings. We contract with leading
industry providers to assist in the sale of advertising and the compilation of information, as
well as the production, publication and distribution of these directories.
Cable TV and Video. In certain of our markets, we offer video services to our customers by
reselling DirectTV content and providing cable and IP television video-over-DSL.
Our Markets
Most of our 33 local exchange carriers operate as the ILEC in each of their respective
markets. Approximately 63% of our voice access lines served residential customers as of December
31, 2010. Our business customers accounted for approximately 29% of our voice access lines as of
December 31, 2010 and wholesale customers accounted for approximately 8% of our voice access lines
as of December 31, 2010.
In addition to voice access lines, we offer HSD service to our customers. At December 31,
2010, we had 289,745 HSD subscribers. We include HSD subscribers in our calculation of access line
equivalents (including voice access lines and HSD lines, which include DSL, wireless broadband,
cable modem and fiber-to-the-premises).
Our operations are primarily focused on rural and small urban markets and are geographically
concentrated in the northeastern United States.
The following chart identifies the number of access line equivalents in each of our 18 states
as of December 31, 2010:
15
|
|
|
|
|
State |
|
Access Line Equivalents |
|
Maine |
|
|
507,118 |
|
New Hampshire |
|
|
414,768 |
|
Vermont |
|
|
284,469 |
|
Florida |
|
|
50,343 |
|
New York |
|
|
46,886 |
|
Washington |
|
|
42,893 |
|
Missouri |
|
|
13,823 |
|
Ohio |
|
|
12,703 |
|
Virginia |
|
|
8,520 |
|
Kansas |
|
|
6,620 |
|
Illinois |
|
|
6,142 |
|
Idaho |
|
|
6,051 |
|
Pennsylvania |
|
|
5,946 |
|
Oklahoma |
|
|
4,190 |
|
Colorado |
|
|
3,744 |
|
Other States(1) |
|
|
3,074 |
|
|
|
|
|
Total: |
|
|
1,417,290 |
|
|
|
|
|
|
|
|
(1) |
|
Includes Massachusetts, Georgia and Alabama. |
Sales and Marketing
We have a customer-oriented marketing approach that emphasizes our advanced reliable service.
We have approximately 4,000 employees that work and live in the markets in which we provide
service, and our IP/Multiple Protocol Label Switched (IP/MPLS) network that is fully fiber optic
based (the Next Generation Network, branded the VantagePoint network) in NNE has a level of
coverage and capacity that we believe is unmatched in our marketplace. Each of our local exchange
companies has a long history in the communities it serves. It is our policy to maintain and enhance
the strong identity and reputation that each LEC enjoys in its markets, as we believe this is a
significant competitive advantage. As we market new services, we will seek to continue to utilize
our identity in order to attain higher recognition with potential customers. We have divided our
efforts into four distinct markets: Residential, Small and Medium Business, Large
Business/Government/Education and Wholesale. Marketing plans, distribution strategies,
opportunities and tactics are tailored to each of these markets.
Our sales organization utilizes customer service representatives to service our residential
customers. This includes all the sales activities driven by our Residential marketing programs.
Our other markets are handled by professional direct sales teams emphasizing account management and
high touch customer service. All of our Small and Medium Business, Large
Business/Government/Education and Wholesale customers have an assigned salesperson and in the case
of our larger customers, a complete account team.
Information Technology and Support Systems
We have a customer-focused approach to information technology (IT) which allows for
efficient business operations and supports revenue growth. Our approach is to simplify and
standardize processes in order to optimize the benefits of our back-office and operation support
systems. Specifically, our simplify and optimize initiative targets the reduction of redundant
and manual processes to reduce cycle times, improve efficiency and deliver enhanced customer
service.
Our back-office and operations support systems are a combination of integrated off-the-shelf
packages that have been customized to support our operations as well as fully outsourced third
party solutions. Our Northern New England carrier access billing and our Telecom Group operations
are supported by fully outsourced third-party platforms. All other back-office and operations
support systems, including billing platforms, are maintained internally.
16
Our systems are supported by a combination of employees and contractors. Our internal IT
group supports data center operations, data network operations, systems analysis and custom
software development. We use professional services firms for the majority of software maintenance
and enhancements. In the future, we expect to increase our IT staff to transition certain
analysis, design and testing functions from third parties to our own internal organization.
Network Architecture and Technology
Rapid and significant changes in technology are underway in the communications industry. Our
success depends, in part, on our ability to anticipate and adapt to technological changes. With
this in mind, we are in the process of building and expanding our advanced Next Generation Network
in our Northern New England operations. The Next Generation Network is an IP/MPLS network that is
fully fiber optic based. We believe this network architecture will enable us to efficiently respond
to these technological changes.
Our LEC network consists of 95 host central offices and 417 remote central offices, all with
advanced digital switches. 99.5% of our central offices are served by fiber optic facilities which
we own. The primary interconnection with other incumbent carriers is also fiber optic. Our outside
plant consists of both fiber optic and copper distribution networks.
Our fiber optic transport system is a combination of Synchronous Optical Network (SONET),
Dense Wave Division Multiplexing (DWDM), and Ethernet transport capable of satisfying customer
demand for high bandwidth transport services. This system supports advanced services including
Carrier Ethernet Services (CES) and legacy data products such as Frame Relay and Asynchronous
Transfer Mode (ATM), facilitating delivery of advanced services as demand warrants.
In our LEC markets, DSL-enabled access technology has been deployed to provide significant
broadband capacity to our customers. As of December 31, 2010, nearly all of our central offices are
capable of providing broadband services through DSL technology, cable modem and wireless broadband.
Competition
We face intense competition from a variety of sources for our voice and Internet services in
most of the areas we now serve, and expect that such competition will continue to intensify in the
future. Regulations and technology change quickly in the communications industry, and changes in
these factors historically have had, and may in the future have, a significant impact on
competitive dynamics. In particular, the 1996 Act and other actions taken by the FCC and state
regulatory authorities have promoted competition in the provision of communications services. In
addition, many of our competitors have access to a larger workforce and have substantially greater
name-brand recognition and financial, technological and other resources than we do. Although many
of the competitive challenges now confronting larger regulated telephone companies are limited in
the rural areas we serve, these challenges are more prevalent in the small urban areas we serve.
Sources of competition include, but are not limited to, the following:
Wireless Competitors
In most of our service areas, we face competition from wireless carriers for voice services.
As technology and economies of scale improve, competition from wireless carriers is expected to
continue to increase. In addition, the FCCs requirement that telephone companies offer
wireline-to-wireless number portability has increased the competition we face from wireless
carriers. Our Northern New England operations service areas represent both rural and small urban
markets and tend to have better wireless coverage compared to Legacy FairPoints predominantly
rural service areas. Wireless competition is more robust in these NNE service areas. However, if
and to the extent wireless service improves in the areas we serve, and specifically in the Legacy
FairPoint service areas, we expect to face further competition from wireless providers.
Wireline and Cable Competitors
We also face competition from wireline and cable competitors, such as competitive local
exchange carriers (CLECs) and cable television providers. CLECs either maintain their own
facilities or lease services at wholesale rates.
17
CLECs not only provide competition for our voice services, but most also provide Internet
services at competitive speeds and prices. In addition, CLECs are capable of offering video
services in competition with us and we expect that they will increasingly do so in the future.
Cable television companies have aggressively entered the communications market by upgrading
their networks with fiber optics and installing facilities to provide voice, video and Internet
services to residential and business customers. Cable high-speed Internet services are generally
competitive with our Internet services in both pricing and the speed of such services. We estimate
that as of December 31, 2010, most of the customers that we serve had access to voice and Internet
services through a cable television company.
The FCCs requirement that telephone companies offer wireline-to-wireline number portability
has increased the competition we face from both CLECs and cable television providers. In addition,
CLECs and cable television companies have the ability to bundle voice, high-speed Internet and
video services to their customers, which has and will likely continue to intensify the competition
we face from these providers.
Electric utilities could also become a competitive threat to voice and high-speed Internet
services, since they have existing assets and access to low cost capital that could allow them to
enter a service area rapidly and accelerate network development.
Other Competitors
VoIP. VoIP service is increasingly being embraced by all industry participants. VoIP service
involves the routing of voice calls over the public Internet or private IP networks through packets
of data instead of transmitting the calls over the existing public switched telephone network. This
routing mechanism may give VoIP service providers a cost advantage, and enable them to offer
services to end users at a lower price. While current VoIP applications typically complete calls
using ILEC infrastructure and
networks, as VoIP services obtain acceptance and market penetration and technology advances
further, a greater number of calls may be placed without utilizing the public switched telephone
network. The proliferation of VoIP, particularly to the extent these calls do not utilize our LECs
networks or are accorded different regulatory treatment, may result in an erosion of our customer
base and loss of voice services and network access revenues.
Internet Service Providers. In addition to wireline and cable companies, our Internet
services also compete with Internet service providers. In addition to Internet access, many of
these companies, such as Microsoft and Yahoo!, offer online content services consisting of access
to closed, proprietary information networks.
Satellite. Satellite companies also currently offer broadband access to the Internet,
primarily to remote, unserved locations, and competition from satellite companies may intensify in
the future.
Strategic Alliances. Wireline, wireless, cable and utility companies have formed and may
continue to form strategic alliances to offer bundled services in our service areas. Competition
from these strategic alliances could increase if applications for certain broadband development
funding submitted by certain of these strategic alliances under the Recovery and Reinvestment Act
of 2009 (the Recovery Act) are approved and the networks funded thereby are built.
Recipients of Government Stimulus. Municipalities, public utilities and private businesses
receiving government stimulus funds may also choose to enter the high-speed Internet business.
Other. Our market is rapidly growing and providers of other emerging technologies and
alternative communication services continue to enter our markets.
Employees
As of December 31, 2010, we employed a total of 4,032 employees, 2,578 of whom were covered by
fourteen collective bargaining agreements. As of December 31, 2010, 113 of our employees were
covered by six collective bargaining agreements that expire during the next calendar year. We
believe the state of our relationship with our union and non-union employees is generally good.
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Intellectual Property
We believe we own or have the right to use all of the intellectual property that is necessary
for the operation of our business as we currently conduct it.
Regulatory Environment
We are subject to extensive federal, state and local regulation. At the federal level, the FCC
generally exercises jurisdiction over facilities and services of common carriers, such as us, to
the extent those facilities are used to provide, originate or terminate interstate or international
communications. State regulatory commissions generally exercise jurisdiction over common carriers
facilities, services and rates to the extent those facilities are used to provide, originate or
terminate intrastate communications. In addition, pursuant to local competition provisions of the
Communications Act, as amended by the 1996 Act, state and federal regulators share responsibility
for implementing and enforcing certain pro-competitive policies. In particular, state regulatory
agencies exercise substantial oversight over the offerings of ILECs to competing carriers of
interconnection and non-discriminatory access to certain facilities and services designated as
essential for local competition.
Legacy FairPoint and our Northern New England operations operate under different regulatory
regimes in certain respects. For example, concerning interstate access, all of the pre-Merger
regulated interstate services of FairPoint were regulated under a rate-of-return model, while all
of the rate-regulated interstate services provided by the Verizon Northern New England business
were regulated under a price cap model. On May 10, 2010, we received FCC approval to convert our
Legacy FairPoint operations in Maine and Vermont to the price cap model. Our Legacy FairPoint
operations in Maine and Vermont converted to price cap regulation on July 1, 2010. Under price cap
regulation, limits are imposed on a companys interstate rates without regard to its costs or
revenue requirements. These limits are adjusted annually based on FCC-specified formulae, such as
for inflation, as well as through occasional regulatory proceedings, but will generally give a
company flexibility to adjust its rates within these limits. In contrast, rate-of-return
regulation permits a company to set rates based upon its allowed costs and projected revenue
requirement, including an authorized
rate-of-return determined by the FCC. We have obtained permission to continue to operate our
Legacy FairPoint ILECs outside of Maine and Vermont under the rate-of-return regime until the FCC
completes its general review of whether to modify or eliminate the all-or-nothing rule. Without
this permission, the all-or-nothing rule would require that all of our regulated operations be
operated under the price cap model for federal regulatory purposes. In addition, while all of our
operations generally are subject to obligations that apply to all LECs, our non-rural operations
are subject to additional requirements concerning interconnection, non-discriminatory network
access for competitive communications providers and other matters, subject to substantial oversight
by state regulatory commissions. In addition, the FCC has ruled that our Northern New England
operations must comply with the regulations applicable to the Bell Operating Companies. Our rural
and non-rural operations are also subject to different regimes concerning universal service.
Federal Regulation
We are required to comply with the Communications Act which requires, among other things, that
telecommunications carriers offer telecommunications services at just and reasonable rates and on
terms and conditions that are not unreasonably discriminatory. The Communications Act was amended
in 1996 by the addition of provisions intended to promote competition in the provision of local
services, and to lead to deregulation as markets become more competitive.
On March 16, 2010, the FCC submitted the National Broadband Plan (the NBP) to the United
States Congress (Congress). The NBP is a plan to bring high-speed Internet services to the
entire country, including remote and high-cost areas. In accordance with the NBP, the FCC has
commenced several rulemakings that concern, among other things, reforming high-cost and low-income
programs to promote universal service, to make those funds more efficient while promoting broadband
communications in areas that otherwise would be unserved. We also expect the FCC to undertake new
rulemakings addressing changes to interstate access charges and other forms of intercarrier
compensation, classification of broadband providers and other obligations under federal law. We
cannot predict the outcome of these proceedings or the effect that resulting decisions may have on
our business.
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Interstate Access Charges
Our local exchange subsidiaries receive compensation from long-distance telecommunications
providers for the use of their network to originate and terminate interstate inter-exchange
traffic. With respect to interstate traffic, the FCC regulates the prices we may charge for this
purpose, referred to as access charges, as a combination of flat monthly charges paid by end-users,
usage-sensitive charges paid by long-distance carriers, and recurring monthly charges for use of
dedicated facilities paid by long-distance carriers. The amount of access charge revenue that we
will receive is subject to change.
Our ILEC operations in Maine, New Hampshire and Vermont and, effective July 1, 2010, our
Legacy FairPoint operations in Maine and Vermont, are subject to price cap regulation of access
charges. Under price cap regulation, limits are imposed on a companys interstate rates without
regard to its costs or revenue requirements. These limits are adjusted annually based on
FCC-specified formulae, such as for inflation, as well as through occasional regulatory
proceedings, but will generally give us flexibility to adjust our rates within these limits. In
contrast, our rural operations are subject to interstate rate-of-return regulation, permitting us
to set rates for those operations based upon our allowed costs and projected revenue requirement,
including an authorized rate-of-return of 11.25%. In an order dated January 25, 2008, the FCC
granted our request for a waiver of the all or nothing rule, which allows us to continue to
operate under both of these regimes until the FCC completes its general review of whether to modify
or eliminate the all or nothing rule, or makes other comprehensive changes to its access charge
rules.
The FCC has made various reforms to the existing rate structure for access charges, which,
combined with the development of competition, have generally caused the aggregate amount of
switched access charges paid by long-distance carriers to decrease over time. Other reform
proposals are now pending, and additional reforms were recommended in the NBP. These proposals
could require ILECs to convert all rate-of-return operations to price cap, or to restructure,
reduce, or eliminate access charges and recover the lost revenue through end-user charges or
Universal Service Support. The FCC has also sought comment on whether access charges should apply
to VoIP or other IP-based service providers. The FCC also is considering whether to restrict some
of the pricing flexibility enjoyed by price cap ILECs, which includes some of our Northern New
England operations. We cannot predict what changes, if any, the FCC may eventually adopt and the
effect that any of these changes may have on our business.
Universal Service Support
Current FCC rules provide different methodologies for the determination of universal service
payments to rural and non-rural carriers. In general, the rules provide high-cost support to rural
carriers where the companys actual costs exceed a nationwide benchmark level. High-cost support
for non-rural carriers, on the other hand, is determined by a nationwide cost proxy model. Under
the current FCC rules, our non-rural operations receive support under the non-rural model
methodology in Maine and Vermont. The FCCs current rules for support to high-cost areas served by
non-rural LECs were remanded by the U.S. Court of Appeals for the Tenth Circuit, which had found
that the FCC had not adequately justified these rules. In 2010, in response to the Tenth Circuit
remand, the FCC issued an order which justified its prior conclusion. The FCC is also considering
proposals to update the proxy model upon which non-rural high-cost funding is determined, as well
as other possible reforms to the high-cost support mechanisms for rural and non-rural carriers,
including redirecting the fund over time to support broadband communications in areas that
otherwise would be unserved.
The high-cost support payments that are received from the Universal Service Fund are intended
to support our operations in rural and high cost markets. Under current FCC regulations, the total
Universal Service Fund support available for high-cost loops operated by rural carriers is subject
to a cap. The FCC prescribes the national average cost per loop each year to keep the total
available funding within the cap. Payments from the Universal Service Fund will fluctuate based
upon our average cost per loop compared with the national average cost per loop. For example, if
the national average cost per loop increases and our operating costs and average cost per loop
remain constant or decrease, the payments we will receive from the Universal Service Fund will
decline. Based on historical trends, we believe the total high-cost support payments from the
Universal Service Fund to our rural operations likely will continue to decline. Universal Service
Support high-cost support revenue accounted for less than 2% of our total revenue in the year ended
December 31, 2010.
Universal Service Fund disbursements may be distributed only to carriers that are designated
as eligible telecommunications carriers (ETCs) by a state regulatory commission. All of our
non-rural and rural LECs are designated as ETCs.
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On May 1, 2008, the FCC adopted an interim emergency cap on the amount of high-cost
support that competitive ETCs may receive, pending the FCCs adoption of comprehensive reform.
Such support for each state was capped at the level of support that competitive ETCs were eligible
to receive during March 2008 on an annualized basis. The cap became effective on August 1, 2008
and is expected to constrain growth in the total amount of high-cost support available to
competitive ETCs. The FCC is currently considering other revisions to the distribution mechanisms
for Universal Service Fund high-cost support. The proposals under consideration include using
reverse auctions to determine recipients of rural high-cost support, using a model to determine
the appropriate level of support in all areas where there is no private sector business case for
providing voice and broadband services and accelerating targeted funding toward broadband
deployment in unserved areas. The FCC is also seeking comment on near-term proposals to reduce
current high-cost fund payments. These and other proposed rule changes could reduce our support in
the future, reduce the support available to our competitors or provide for new support, such as for
broadband services. We cannot predict what course the FCC will take on universal service
distribution reform, but it is possible that the remedy selected by the FCC could materially affect
the amount of universal service funding we will receive. If our rural LECs were unable to receive
Universal Service Fund payments, or if those payments were reduced, many of our rural LECs would be
unable to operate as profitably as they have historically in the absence of the implementation of
increases in charges for other services. Moreover, if we raise prices for services to offset loss
of Universal Service Fund payments, the increased pricing of our services may disadvantage us
competitively in the marketplace, resulting in additional potential revenue loss.
We receive additional support under the FCCs rules in the forms of Interstate Access Support
(IAS) and Interstate Common Line Support (ICLS). We receive IAS support in all three of our
federal price cap study areas (Maine, New Hampshire and Vermont). We also continue to receive ICLS
support in our rate-of-return study areas. These forms of support replace revenues previously
collected through interstate access charges. The FCC is seeking comment on a proposal to eliminate
IAS and transfer the funding to a Connect America Fund for broadband (see below). We have no
assurance that either of these support programs will remain unchanged if the FCC revises its rules
governing universal service and intercarrier compensation.
We also benefit indirectly from support to low-income users under the Lifeline and Linkup
universal service programs. The FCC has asked the Federal-State Joint Board for Universal Service
to recommend changes to these low-income programs to address, among other things, access to
broadband and eligibility for support. We have no assurance whether we or our competitors will be
affected by any such changes.
On February 9, 2011, the FCC released a Notice of Proposed Rulemaking and Further Notice of
Proposed Rulemaking In the Matters of Connect America Fund, A National Broadband Plan for our
Future, Establishing Just and Reasonable Rates for Local Exchange Carriers, High-cost Universal
Service Support, Developing a Unified Intercarrier Compensation Regime, Federal-State Board on
Universal Service, and Lifeline and Linkup (NPRM on ICC/USF). This NPRM on ICC/USF proposes
significant changes to all intercarrier compensation and USF funding for local exchange carriers,
such as us. In general, the NPRM on ICC/USF proposes to retarget existing USF funding to a new
program called Connect America Fund (CAF), which is designed to increase availability of
broadband services to areas which are currently unserved. It proposes to reduce and/or eliminate
intercarrier compensation for voice traffic, in anticipation of an all Internet Protocol (IP)
network. Intercarrier compensation includes state and interstate switched access charges and
reciprocal compensation payments for traffic exchanged between LECs. The FCC proposes both
short-term and long-term changes and transitions from the current regime to the new regime. It is
not known what changes the FCC will adopt in this proceeding, when the changes will occur, or what
impacts this will have on our business.
Universal Service Contributions
Federal universal service programs are currently funded through a surcharge on interstate and
international end-user telecommunications revenues. Declining long-distance revenues, the
popularity of service bundles that include local and long-distance services, and the growth in size
of the fund, due primarily to increased funding to competitive ETCs, all prompted the FCC to
consider alternative means for collecting this funding. As an interim step, the FCC has ordered
that providers of certain VoIP services must contribute to federal universal service funding. The
FCC also increased the percentage of revenues subject to federal universal service contribution
obligations that wireless providers may use as their methodology for funding universal service. One
alternative under consideration would be to impose surcharges on telephone numbers or network
connections instead of carrier revenues. Any further change in the current assessment mechanism
could result in a change in the total contribution that LECs, wireless carriers or others must make
and that would be collected from customers. We cannot predict whether the FCC or Congress will
require modification to any of the universal contribution rules, or the ultimate impact that any
such modification might have on us or our customers.
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Local Service Competition
The 1996 Act provides, in general, for the removal of barriers to market entry in order to
promote competition in the provision of local telecommunications and information services. As a
result, competition in our local exchange service areas will continue to increase from CLECs,
wireless providers, cable companies, Internet service providers, electric companies and other
providers of network services. Many of these competitors have a significant market presence and
brand recognition, which could lead to more competition and a greater challenge to our future
revenue growth.
Under the 1996 Act, all LECs, including both ILECs and CLECs, are required to: (i) allow
others to resell their services; (ii) ensure that customers can keep their telephone numbers when
changing carriers, referred to as local number portability; (iii) ensure that competitors
customers can use the same number of digits when dialing and receive nondiscriminatory access to
telephone numbers, operator service, directory assistance and directory listing; (iv) ensure
competitive access to telephone poles, ducts, conduits and rights of way; and (v) compensate
competitors for the cost of completing calls to competitors customers from the other carriers
customers.
In addition to these obligations, ILECs are subject to additional requirements to: (i)
interconnect their facilities and equipment with any requesting telecommunications carrier at any
technically feasible point; (ii) unbundle and provide nondiscriminatory access to certain network
elements, referred to as unbundled network elements (UNEs), including some types of local loops
and transport facilities, at regulated rates and on nondiscriminatory terms and conditions, to
competing carriers that would be impaired without them; (iii) offer their retail services for
resale at wholesale rates; (iv) provide reasonable notice of changes in the information necessary
for transmission and routing of services over the ILECs facilities or in the information necessary
for interoperability; and (v) provide, at rates, terms and conditions that are just, reasonable and
nondiscriminatory, for the physical co-location of equipment necessary for interconnection or
access to UNEs at the ILECs premises. Competitors are required to compensate the ILEC for the cost
of providing these services.
Our non-rural operations are subject to all of the above requirements. In addition, our
non-rural operations are subject to additional unbundling obligations that apply only to Bell
Operating Companies. In contrast to the unbundling obligations that apply generally to ILECs, these
Bell Operating Company-specific requirements mandate access to certain facilities (such as certain
types of local loops and inter-office transport, and local circuit switching) even where other
carriers would not be impaired without them.
Our Legacy FairPoint rural operations are exempt from the additional ILEC requirements until
the applicable rural carrier receives a bona fide request for these additional services and the
applicable state authority determines that the request is not unduly economically burdensome, is
technically feasible and is consistent with the universal service objectives set forth in the 1996
Act. This exemption will be effective for all of our existing Legacy FairPoint rural ILEC
operations, except in Florida where the legislature has determined that all ILECs are required to
provide the additional services as prescribed in the 1996 Act. If a request for any of these
additional services is filed by a potential competitor with respect to one of our other existing
rural operating territories, we will likely ask the relevant state regulatory commission to retain
the exemption. If a state regulatory commission rescinds an exemption in whole or in part and does
not allow us adequate compensation for the costs of providing the interconnection, our costs could
increase significantly; we could face new competitors in that state; and we could suffer a
significant loss of customers and incur a material adverse effect on our business, financial
condition, results of operations and liquidity. In addition, we could incur additional
administrative and regulatory expenses as a result of the interconnection requirements. Any of
these could result in a material adverse effect on our business, financial condition, results of
operations and liquidity.
Under the 1996 Act, rural LECs may request from state regulatory commissions suspension or
modification of any or all of the requirements described above. A state regulatory commission may
grant such a request if it determines that doing so is consistent with the public interest and is
necessary to avoid a significant adverse economic impact on communications users, and where
imposing the requirement would be technically infeasible or unduly economically burdensome. If a
state regulatory commission denies all or a portion of a request made by one of our rural LECs, or
does not allow us adequate compensation for the costs of providing interconnection, our costs could
increase and our revenues could decline. In addition, with such a denial, competitors could enjoy
benefits that would make their services more attractive than if they did not receive
interconnection rights. With the exception of certain requests by us to modify the May 24, 2004
implementation date for local number portability in certain states, we have not encountered a need
to file any requests for suspension or modification of the interconnection requirements.
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Long-Distance Operations
The FCC has required that ILECs that provide interstate long-distance services originating
from their local exchange service territories must do so in accordance with non-structural
separation rules. These rules have required that our long-distance affiliates (i) maintain
separate books of account, (ii) not own transmission or switching facilities jointly with the local
exchange affiliate and (iii) acquire any services from their affiliated LEC at tariffed rates,
terms and conditions. The Bell Operating Companies are subject to a different set of rules allowing
them to offer both long-distance and local exchange services in the regions where they operate as
Bell Operating Companies, subject to certain conditions with which we comply. In addition, our
operations have been obligated under the FCCs equal access scripting requirement to read new
customers a list of all available long-distance carriers presented in random order. Not all of our
competitors must comply with these requirements. Therefore, these requirements may put us at a
competitive disadvantage in the interstate long-distance market. The FCC recently ruled that the
Bell Operating Companies need no longer comply with these rules for their long-distance services in
order to avoid classification as a dominant carrier, and that their ILEC affiliates need no longer
comply with the separation rules for their long-distance services, provided that they comply with
certain existing and additional safeguards, such as providing special access performance metrics,
offering low-volume calling plans and making available certain monthly usage information on
customers bills. The FCC also has ruled that the Bell Operating Companies and their ILEC
affiliates are no longer required to comply with the equal access scripting requirement. However,
until similar relief is granted in each state by the state PUC, FairPoint will continue to comply
with the equal access scripting requirements.
Other Obligations under Federal Law
We are subject to a number of other statutory and regulatory obligations at the federal level.
For example, the Communications Assistance for Law Enforcement Act (CALEA), requires
telecommunications carriers to modify equipment, facilities and services to allow for authorized
electronic surveillance based on either industry or FCC standards. Under CALEA and other federal
laws, we may be required to provide law enforcement officials with call records, content or call
identifying information, pursuant to an appropriate warrant or subpoena.
The FCC limits how carriers may use or disclose customer proprietary network information
(CPNI), and specifies what carriers must do to safeguard CPNI provided to third parties.
Congress has enacted, and state legislatures are considering, legislation to criminalize the
unauthorized sale of call detail records and to further restrict the manner in which carriers make
such information available.
In addition, if we seek in the future to acquire companies that hold FCC authorizations, in
most instances we will be required to seek approval from the FCC prior to completing those
acquisitions. The FCC has broad authority to condition, modify, cancel, terminate or revoke
operating authority for failure to comply with applicable federal laws or rules, regulations and
policies of the FCC. Fines or other penalties also may be imposed for such violations.
Broadband and Internet Regulation
The FCC has adopted a series of orders that recognize the competitive nature of certain
services that utilize advanced technologies.
With respect to our local network facilities, the FCC has determined that certain unbundling
requirements do not apply to certain fiber facilities such as certain types of loops and packet
switches.
The FCC has ruled that dedicated broadband Internet access services offered by telephone
companies (using DSL technology), cable operators, electric utilities and terrestrial wireless
providers qualify as largely deregulated information services. LECs or their affiliates may offer
the underlying broadband transmission services that are used as an input to dedicated broadband
Internet access services through private carriage arrangements on negotiated commercial terms. The
FCC order also allows rural rate-of-return carriers, including most of our Legacy FairPoint
operations, the option to continue providing DSL service as a common carrier (status quo) offering.
The FCC also has concluded that broadband Internet access service providers must comply with
CALEA. Despite the
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FCCs previous ruling that broadband Internet access is an information service,
the FCC continues to evaluate this finding and is expected to issue a Notice of Proposed Rulemaking
(NPRM) that could re-regulate broadband Internet access. We can provide no assurance about the
outcome of such NPRM and how it may affect our business, financial condition, results of
operations, liquidity and/or the market price of our Common Stock.
In addition, a Verizon petition asking the FCC to forbear from applying common carrier
regulation to certain broadband services sold primarily to larger business customers was deemed
granted by operation of law on March 19, 2006 when the FCC did not deny
the petition by the statutory deadline. The U.S. Court of Appeals for the District of Columbia
Circuit has rejected a challenge to that outcome. The forbearance deemed granted to Verizon has
been extended to our Northern New England operations by the FCC in its order approving the Merger.
In October 2007, the FCC stated its intention to define more precisely the scope of forbearance
obtained by Verizon, but it has not yet done so.
The FCC has imposed particular regulatory obligations on IP-based telephony. It has concluded
that interconnected VoIP providers must comply with CALEA; provide enhanced 911 emergency calling
capabilities; comply with certain disability access requirements; comply with the FCCs rules
protecting CPNI; provide local number portability; and pay regulatory fees. Recently there have
also been discussions among policymakers concerning net neutrality, or the potential requirement
for non-discriminatory treatment of traffic over broadband networks. The FCC released a statement
of principles favoring customer choice of content and services available over broadband networks.
It has adopted open Internet access rules applicable to all broadband Internet access providers.
However, we cannot predict what impact, if any, this may have on our business, financial condition,
results of operations, liquidity and/or the market price of our Common Stock. The FCC has
preempted some state regulation of VoIP.
Additional rules and regulations may be extended to the Internet and to broadband Internet
access. A variety of proposals are under consideration in both federal and state legislative and
regulatory bodies. For example, the FCC is considering reclassifying the transport component of
broadband service as a telecommunications service. We cannot predict whether the outcome of
pending or future proceedings will prove beneficial or detrimental to our competitive position.
On February 17, 2009, Congress enacted the Recovery Act which, among other programs, provides
for $7.2 billion for broadband development in unserved and underserved areas of the United States.
We applied for stimulus funding under the Recovery Act, but did not receive any grant funding.
There have recently been several grants of stimulus funding under the Recovery Act in our Northern
New England and other service areas. Any networks built with these funds in such areas will at
some point provide competition for our products and services.
State Regulation
The local service rates and intrastate access charges of substantially all of our telephone
subsidiaries are regulated by state regulatory commissions which typically have the power to grant
and revoke franchises authorizing companies to provide communications services. In some states, our
intrastate long-distance rates are also subject to state regulation. States typically regulate
local service quality, billing practices and other aspects of our business as well.
Most state commissions have traditionally regulated LEC pricing through cost-based
rate-of-return regulation. In recent years, however, state legislatures and regulatory commissions
in most of the states in which our telephone companies operate have either reduced the regulation
of LECs or have announced their intention to do so, and we expect this trend will continue. Such
relief may take the form of mandatory deregulation of particular services or rates; or it may
consist of optional alternative forms of regulation (AFOR), which may involve price caps or other
flexible pricing arrangements. Some of these deregulatory measures are described in greater detail
below. We believe that some AFOR plans allow us to offer new and competitive services faster than
under the traditional regulatory regimes.
The following summary addresses significant regulatory actions by regulatory agencies in
Maine, New Hampshire and Vermont that have affected or are expected to affect our Northern New
England operations:
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Regulatory Conditions to the Merger, as Modified in Connection with the Plan
As required by the Plan as a condition precedent to the effectiveness of the Plan, we were
required to obtain certain regulatory approvals, including approvals from the public utility
commissions in Maine and New Hampshire and the Vermont Public Service Board (the Vermont Board).
In connection with the Chapter 11 Cases, we negotiated with representatives of the state regulatory
authorities in each of Maine, New Hampshire and Vermont with respect to (i) certain regulatory
approvals relating to the Chapter 11 Cases and the Plan and (ii) the Merger Orders. We agreed to
the Regulatory Settlements described below.
New Hampshire Regulatory Settlement
On July 7, 2010, the New Hampshire Public Utilities Commission (NHPUC) provided its
approvals for New Hampshire, including of the Regulatory Settlement for New Hampshire (the New
Hampshire Regulatory Settlement). The New Hampshire Regulatory Settlement provides for, among
other things, the following:
Service Quality Requirements:
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We will commit to meet the broadband build out and capital investment requirements
and continue operating under the service quality index (SQI) service quality program
of the January 23, 2008 Settlement Agreement (the NH 2008 Settlement) among Verizon,
the Company and the staff of the NHPUC and Order No. 24,823 in Docket DT 07-011 (the NH
2008 Order), subject to certain modifications described in the New Hampshire Regulatory
Settlement. |
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SQI penalties for 2009 were deferred until December 31, 2010. If we met specified
service levels on average in five performance areas over the twelve calendar months in
2010, the 2009 penalties would be waived. If we met the service levels for some but not
all of these five performance areas, the penalties would be reduced by 20% for each
performance area specified for which we met specified service levels on average over the
12 calendar months in 2010. As of December 31, 2010 we expect to receive a 60% penalty
waiver. The amount of the waiver is subject to the review and approval of the NHPUC. |
Broadband Commitments:
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We have agreed to adhere to the broadband coverage commitments prescribed in the NH
2008 Order; however, certain broadband build-out commitments with a deadline of April 1,
2010 were extended to December 31, 2010. We believe that we have fulfilled this
broadband coverage commitment as of December 31, 2010, although we are in the process of
confirming such compliance. |
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We confirmed our commitment to spend a total of at least $56.4 million on our New
Hampshire broadband build-out by March 31, 2015 and we have spent $51.7 million as of
December 31, 2010. |
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We have the option to resell terrestrial (non-satellite) based service providers
broadband service offerings in order to fulfill our broadband build out and/or service
requirements with respect to the last eight percent (8%) of our broadband availability
requirements as contained within the NH 2008 Settlement, provided that the services meet
or exceed all requirements of the NH 2008 Order, and the resold services are purchased
through and serviced by us. |
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Pricing restrictions regarding stand-alone DSL service will terminate on April 1,
2011; provided, however, that we will continue to honor the for life pricing that
Verizon had offered to certain customers. |
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The first $500,000 of any penalty amounts resulting from any failure to meet
broadband commitments will be paid to the New Hampshire Telecommunications Planning and
Development Fund. Any penalties above $500,000 will be invested within three years of
the date of the penalty as additional expenditures for our network, subject to NHPUC
approval.
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Expenditure Commitments:
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We reconfirmed our commitment to spend $285.4 million in capital expenditures through
March 31, 2013, of which $211.7 million has been spent through December 31, 2010;
provided, however, that the amounts expended toward the $56.4 million broadband
commitment described above may be applied to the $285.4 million capital expenditure
commitment. |
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We will reduce our $65.0 million other expenditure commitment by $10.0 million and
reallocate the $10.0 million to recurring maintenance capital expenditures to be spent
on or before March 31, 2013. This $10.0 million increases the $285.4 million capital
expenditure commitment to $295.4 million. |
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We may further reduce our $65.0 million other expenditure commitment by up to $10.5
million to the extent such amounts are needed and are actually expended beyond the
original $56.4 million broadband commitment in order to achieve 95% broadband
availability. |
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We may further reduce our $65.0 million other expenditure commitment by $4.5
million of capital expenditures already expended in excess of amounts estimated to
develop our Next Generation Network. |
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We will have from April 1, 2010 to March 31, 2015 to meet whatever other
expenditure commitment remains after the preceding reductions, which will be spent on
network enhancing activities. |
Financial Commitments:
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Certain of the financial conditions of the NH 2008 Settlement and the NH 2008 Order
are replaced by the terms of the New Hampshire Regulatory Settlement and are satisfied
or rendered moot by the debt reductions resulting from the Plan. |
Management Commitments:
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Our board of directors is required to consist of a supermajority of newly appointed
independent directors, and at least one member of the board of directors will reside in
northern New England. We are in compliance with this obligation. |
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Our board of directors is required to appoint a regulatory sub-committee that will
monitor compliance with the terms of the NH 2008 Order, as modified by the New Hampshire
Regulatory Settlement, and all other regulatory matters involving the States of Vermont,
New Hampshire and Maine. We appointed a regulatory committee on the Effective Date. |
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We are required to maintain a state president who will provide a senior regulatory
presence in New Hampshire and is able to reasonably respond to various future
Company-based NHPUC dockets or regulatory issues relating to telecommunications. We
fulfilled this obligation in February of 2010. |
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We agreed to seek to have a Chief Information Officer in place by June 30, 2010. We
fulfilled this obligation in March of 2010. |
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We have agreed that the 2010 Annual Incentive Plan and the Success Bonus will be
based on a combination of EBITDAR (EBITDA plus restructuring costs) and service metrics
goals and the weighting for each of these categories will be computed and clearly stated
for the incentive and bonus plans for each individual and for us in total. |
Other:
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We are required to reimburse the State of New Hampshire for certain costs and
expenses. |
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During the first two years following the Effective Date of the Plan, we are barred
from paying dividends if we are in material breach of the New Hampshire Regulatory
Settlement until we cure such breach.
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Maine Regulatory Settlement
On July 6, 2010, the Maine Public Utilities Commission (the MPUC) provided its approvals for
Maine, including of the Regulatory Settlement for Maine (the Maine Regulatory Settlement). The
Maine Regulatory Settlement provides for, among other things, the following:
General:
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We will comply with the MPUCs February 1, 2008 Order issued in Docket Nos. 2007-67
and 2005-155, and all stipulations approved thereby (the ME 2008 Merger Order),
including provisions regarding broadband build-out,
capital investment, the SQI program and other provisions of the ME 2008 Merger Order,
subject to certain modifications described in the Maine Regulatory Settlement. |
Service Quality Requirements:
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We and the MPUC agreed to submit a joint consent order to the Bankruptcy Court which
provides for the implementation of the SQI rebates for the 2008-2009 SQI year, starting
with bills issued in March 2010. |
Broadband Commitments:
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The deadline for the initial 83% broadband build-out requirement was extended from
April 1, 2010 to December 31, 2010. We believe that we have fulfilled this broadband
coverage commitment as of December 31, 2010, although we are in the process of
confirming such compliance. An additional interim requirement of 85% is established
with a July 31, 2012 deadline, and the final requirement, with a March 31, 2013
deadline, will be reduced from 90% to 87%. However, if we fail to meet any of these
requirements, we shall be further required to achieve 90% by March 31, 2014. We further
agreed that by March 31, 2013, we would achieve 82% for lines in UNE Zone 3. If we meet
the 87% requirement by March 31, 2013, we will contribute $100,000 to the ConnectME
Authority on July 1, 2013. |
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In meeting our broadband build-out requirements beyond 85%, we may resell the
broadband service offerings of other non-satellite providers in order to meet our
build-out and/or service requirements, provided that the services meet or exceed all
requirements of the ME 2008 Merger Order, the resold services are purchased through and
serviced by us, and the MPUC staff approves the provider(s). |
Financial Commitments:
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The financial conditions in the ME 2008 Merger Order were replaced by the terms of
the Maine Regulatory Settlement, which provided that such financial conditions were
satisfied or were rendered moot by the debt reductions resulting from the Plan. |
Management Commitments:
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Our New Board is required to consist of a supermajority of newly appointed
independent directors and at least one member of the New Board will reside in northern
New England. We are in compliance with this obligation. |
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The New Board is required to appoint a regulatory sub-committee that will monitor
compliance with the terms of the ME 2008 Merger Order, as modified by the Maine
Regulatory Settlement, and all other regulatory matters involving the States of Vermont,
New Hampshire and Maine. We appointed a regulatory committee on the Effective Date. |
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We agreed to seek to have a Chief Information Officer in place by June 30, 2010. We
fulfilled this obligation in March of 2010.
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We have agreed that the 2010 Annual Incentive Plan and the Success Bonus will be
based on a combination of EBITDAR (EBITDA plus restructuring costs) and service metrics
and the weighting for each of these categories will be computed and clearly stated for
the incentive and bonus plans for each individual and for us in total, and that we will
disclose such metrics to the MPUC and the Office of the Public Advocate of the State of
Maine (the Maine Public Advocate). |
Other:
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We are required to reimburse the MPUC and Maine Public Advocate for certain costs and
expenses. |
Vermont Regulatory Settlement
On December 23, 2010, the Vermont Board provided its approvals in Vermont, including of the
Regulatory Settlement for Vermont (the Vermont Regulatory Settlement). The Vermont Regulatory
Settlement provides for, among other things, the following:
Service Quality Requirements:
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In general, all of the service quality programs contained in the January 8, 2008
settlement agreement among Verizon, the Company and the Department of Public Service
(DPS) (the VT 2008 Settlement) and the February 15, 2008 Order RE: MODIFIED PROPOSAL
IN Docket Number 7270 (the VT 2008 Order) will remain in place subject to certain
modifications described in the Vermont Regulatory Settlement. |
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SQI penalties for 2008 and 2009 were deferred until December 31, 2010. If we met
specified service levels on average in ten performance areas over the twelve calendar
months in 2010, the 2008 and 2009 penalties would be waived. If we met the service
levels for some but not all of these ten performance areas, the penalties would be
reduced by 10% for each performance area specified for which we met specified service
levels on average over the 12 calendar months in 2010. As of December 31, 2010 we
expect to receive at least an 80% penalty waiver. The amount of the waiver is subject
to the review and approval of the Vermont Board. |
Broadband Commitments:
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We will undertake to deploy broadband services to 95% of all access lines in those
exchanges that have been identified for 100% broadband availability in the VT 2008 Order
(the 100% Exchanges) by June 30, 2011. With respect to the remaining 5% of lines in
the 100% Exchanges, we will deploy broadband to any requesting customer using an
extended service interval of 90 days from the date of the receipt of the order from the
customer, provided such order is made no sooner than June 30, 2011. Failure to meet
such requirements will require us to waive certain service charges. |
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We also will request that the Vermont Board authorize us to use high-cost USF funds
for three consecutive years to upgrade local loop plant and infrastructure in order to
improve our service quality and network reliability. If the Vermont Board authorizes us
to use the high-cost USF funds, and to the extent permitted by FCC rules, we may invest
the high-cost USF funds in network infrastructure that will support the deployment of
broadband services to an additional 5% of access lines on a timeline that varies
depending on the date of the Vermont Boards authorization. |
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We will have the option to resell terrestrial (non-satellite) based service
providers broadband service offerings in order to fulfill our broadband build-out
and/or service requirements as contained in the VT 2008 Order, provided that the
services meet or exceed all requirements of the VT 2008 Order as modified by the Vermont
Regulatory Settlement and the resold services are purchased through and serviced by us.
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Penalty amounts resulting from any failure to meet broadband deployment requirements
will be managed by us with funds deposited into an escrow account with an escrow agent,
which will reimburse us for costs incurred for additional network projects completed
within 18 months of the date of the penalty, such projects subject to the approval of
the DPS. |
Capital Investment Commitments:
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We will meet the capital investment requirements of the VT 2008 Order. |
Financial Commitments:
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Certain of the financial conditions of the VT 2008 Settlement and the VT 2008 Order
are replaced by the terms of the Vermont Regulatory Settlement and are satisfied or
rendered moot by the debt reductions resulting from the Plan. |
Management Commitments:
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Our New Board is required to consist of a supermajority of newly appointed
independent directors and at least one member of the New Board will reside in northern
New England. We are in compliance with this obligation. |
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The New Board is required to appoint a regulatory sub-committee that will monitor
compliance with the terms of the VT 2008 Order, as modified by the Vermont Regulatory
Settlement, and all other regulatory matters involving the States of Vermont, New
Hampshire and Maine. We appointed a regulatory committee on the Effective Date. |
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We are required to maintain a state president who will provide a senior regulatory
presence in Vermont and be able to reasonably respond to various future Company-based
dockets or regulatory issues relating to telecommunications. We fulfilled this
obligation in January of 2010. |
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We agreed to seek to have a Chief Information Officer in place by June 30, 2010. We
fulfilled this obligation in March of 2010. |
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We have agreed that the 2010 Annual Incentive Plan and the Success Bonus will be
based on a combination of EBITDAR (EBITDA plus restructuring costs) and service metrics
goals and the weighting for each of these categories will be computed and clearly stated
for the incentive and bonus plans for each individual and for us in total. |
Other:
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We are required to reimburse the State of Vermont for certain costs and expenses. |
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During the first two years following the Effective Date of the Plan, we are barred
from paying dividends if we are in material breach of the Vermont Regulatory Settlement
until we cure such breach. |
Other Regulatory Matters
Maine Retail Regulation
Our Northern New England operations in Maine currently operate under an AFOR implemented upon
consummation of the Merger. The AFOR provides for the capping of rates for basic local exchange
services and allows pricing flexibility for other services, including intrastate long-distance,
optional services and bundled packages. Under the terms of the ME 2008 Merger Order, among other
things, we reduced the caps on monthly basic exchange rates effective as of August 1, 2008 by an
amount designed to decrease revenues by approximately $1.5 million per month (depending on the
applicable number of access lines). The current AFOR caps basic exchange rates in Maine at the new
level for five years after August 1, 2008. The AFOR also includes an SQI requirement for our
Northern New England operations in Maine, which establishes benchmarks for certain performance
categories and imposes
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penalties for the failure to meet the benchmarks. Our Legacy FairPoint
operations in Maine and Vermont converted to price cap regulation on July 1, 2010. All telephone
companies in Maine are required to establish intrastate access rates which do not exceed their
interstate access rates as they existed on January 1, 2003. Certain intrastate wholesale services
are also subject to tariff requirements of the MPUC. In addition to the regulation of rates and
service, telephone companies are generally subject to regulation by the MPUC in other areas,
including transactions with affiliates, financing and reorganizations.
Maine Unbundling of Network Elements
In orders issued in 2004 and 2005, the MPUC ruled that it had the authority under federal law
to regulate compliance with certain conditions that our Northern New England operations must
satisfy to sell long-distance services, and in particular to define the elements that our Northern
New England operations must provide on a wholesale basis to competitive carriers under Section 271
of the Communications Act. The MPUC ruled that it had the authority to set rates for Section 271
elements and interpreted Section 271 to require our Northern New England operations to provide
access to elements that the FCC had held are not required to be provided as UNEs under Section 251
of the Communications Act. Prior to the Merger, Verizon New England challenged the ruling in the
U.S. District Court of Maine. Following an unfavorable ruling, Verizon New England appealed to the
First Circuit Court of Appeals. The First Circuit vacated the District Courts decision and held
that the MPUC has no such authority. The court remanded the matter for
further proceedings by the District Court, which subsequently dismissed the case at our and
the MPUCs request. On November 25, 2009, the MPUC petitioned the FCC for a declaratory ruling
requiring us to provide certain UNEs, which is now pending.
New Hampshire
Our ILEC business operations in New Hampshire are subject to rate-of-return regulation. We
have adopted the contractual and tariffed rates and terms and conditions that were in effect for
the Verizon Northern New England business prior to the Merger. No rate proceeding is pending.
Within this regulatory structure, the NHPUC has instituted rules and policies to expedite offerings
of new services, but we are subject to regulations, such as tariff filing and cost allocation
requirements, that are not applicable to our competitors. In addition to our access tariff, we
maintain two New Hampshire wholesale tariffs, one for interconnection, co-location and UNEs and
another for services offered to carriers for resale. The order of the NHPUC approving the spin-off
and the Merger includes conditions generally limiting rates for existing retail, wholesale and DSL
services during the three years following the closing of the Merger to those in effect as of the
close date of the Merger.
In a case similar to that of the MPUC described under Maine Unbundling of Network
Elements, the NHPUC had entered orders asserting authority under federal law to require the
Verizon Northern New England business to continue offering certain network elements no longer
required to be offered pursuant to Section 251 of the 1996 Act, and at existing total element long
run incremental cost rates, until the NHPUC decided otherwise. The Verizon Northern New England
business challenged the orders in the United States District Court for the District of New
Hampshire and obtained an order enjoining the NHPUC from enforcing the orders. The recent First
Circuit decision that considered the MPUC order also considered this New Hampshire decision and
affirmed the District Courts opinion.
In 2008, the NHPUC issued an order determining that intra-LATA carrier common line switched
access charges did not apply to certain interexchange calls where neither the calling nor the
called party is served by our Northern New England operations. This decision was reversed by the
New Hampshire Supreme Court on appeal. Following this decision, the NHPUC directed us to file
tariff revisions to remove such charges prospectively and we objected to this requirement. The
matter remains pending before the NHPUC.
Vermont
In April 2006, the Vermont Board issued a final order adopting an amended alternative
regulatory plan (the Amended Incentive Regulation Plan) for the Verizon Northern New England
business to replace a plan adopted in 2000. The Amended Incentive Regulation Plan is retroactive to
July 1, 2005, and runs through December 31, 2010. The Vermont Board has extended the Amended
Incentive Regulation Plan through March 31, 2011 to allow the parties time to negotiate a
replacement plan. Under the Amended Incentive Regulation Plan, the Verizon Northern New England
business committed to make broadband capability available to 75% of its access lines in Vermont by
2008 and 80% of its access lines in Vermont by 2010 with milestones of 65% and 77% for 2007 and
2009, respectively. The Amended Incentive Regulation Plan provides pricing flexibility for all new
services, and no price increases
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are permitted for existing services such as basic exchange
service, message toll service and most vertical services. The final order also continues an SQI
plan with a $10.5 million penalty cap. Other provisions of the order include lifeline credits for
qualified customers that subscribe to bundled services and a requirement to separately publish and
distribute white and Yellow Pages directories. The VT 2008 Order was conditioned on our being
subject to the terms and conditions of the Amended Incentive Regulation Plan. As a part of our
settlement with the Vermont DPS, and as ordered by the Vermont Board as a condition of approval of
the Merger, we agreed to exceed the existing Amended Incentive Regulation Plans broadband
build-out milestones and agreed to a condition that requires us to reach 100% broadband
availability in 50% of our exchanges in Vermont by December 31, 2010. This requirement has been
adopted by the Vermont Board as a condition of approval and is in addition to the broadband
expansion requirements contained in the existing Amended Incentive Regulation Plan. We have also
agreed in our settlement with the Vermont DPS to implement a performance enhancement plan, which
was adopted by the Vermont Board as a condition of approval (in addition to the retail service
quality plan required under the Amended Incentive Regulation Plan). As noted above, some of these
matters are subject to modifications as part of the Vermont Regulatory Settlement.
Local Government Authorizations
We may be required to obtain from municipal authorities permits for street opening and
construction or operating franchises to install and expand facilities in certain communities. If we
enter into the video markets, municipal franchises may be required for us to operate as a cable
television provider. Some of these franchises may require the payment of franchise fees. We have
historically
obtained municipal franchises as required. In some areas, we will not need to obtain permits
or franchises because the subcontractors or electric utilities with which we will have contracts
already possess the requisite authorizations to construct or expand our networks. In association
with the Recovery Act, there may be an increase in our requirements associated with road move
requests pursuant to new funding for roads. It is not certain whether funding will be available to
us for this potential obligation.
Environmental Regulations
Like all other local telephone companies, our 33 LEC subsidiaries are subject to federal,
state and local laws and regulations governing the use, storage, disposal of and exposure to
hazardous materials, the release of pollutants into the environment and the remediation of
contamination. As an owner of property, we could be subject to environmental laws that impose
liability for the entire cost of cleanup at contaminated sites, regardless of fault or the
lawfulness of the activity that resulted in contamination. We believe, however, that our operations
are in substantial compliance with applicable environmental laws and regulations.
Other Information
We make available on our website, www.fairpoint.com, our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to such reports as
soon as reasonably practical after we file such material with, or furnish such material to, the
SEC. Our filings with the SEC are available to the public over the Internet at the SECs website at
www.sec.gov, or at the SECs public reference room located at 100 F Street, N.E., Washington, DC
20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference room.
ITEM 1A. RISK FACTORS
Any of the following risks could materially adversely affect our business, consolidated
financial condition, results of operations, liquidity and/or the market price of our Common Stock.
The risks described below are not the only risks facing us. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial may also materially and adversely
affect our business operations.
Risks Related to Our Emergence from Chapter 11 Bankruptcy Protection
Our actual financial results may vary significantly from the projections filed with the
Bankruptcy Court.
In connection with the Chapter 11 Cases, we were required to prepare projected financial
information to demonstrate to the Bankruptcy Court the feasibility of the Plan and our ability to
continue operations upon emergence from Chapter 11 bankruptcy
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protection. These projections were
included in the disclosure statement approved by the Bankruptcy Court in March 2010 and reflected
numerous assumptions concerning anticipated future performance and anticipated market and economic
conditions that were and continue to be beyond our control and that may not materialize. These
projections were revised in connection with a subsequent review of our financial forecast, and as a
result of this review of our financial forecast, in December 2010 we provided notice of certain
changes to the forecasted financial results to the classes of creditors entitled to vote on the
Plan, which notice was filed with the Bankruptcy Court.
Projections are inherently subject to uncertainties and to a wide variety of significant
business, economic and competitive risks. Our actual results may vary from those contemplated by
the projections for a variety of reasons. The projections have not been incorporated by reference
into this report and neither these projections nor any version of the disclosure statement or the
notice referred to above should be considered or relied upon in connection with any investment
decision concerning our Common Stock.
Our bankruptcy proceedings, which improved our capital structure, contemplated that we would
implement our strategy and business plan based upon assumptions and analyses developed by us. There
is no guarantee that we will be able to achieve these objectives, which could have a material
adverse effect on our business, financial condition, results of operation, liquidity and/or the
market price of our Common Stock.
Our bankruptcy proceedings, which improved our capital structure, contemplated that we would
refine and implement our strategy and business plan based upon assumptions and analyses developed
by us in light of our experience and perception of historical trends, current conditions and
expected future developments, as well as other factors that we considered appropriate under the
circumstances.
Whether actual future results and developments will be consistent with our expectations and
assumptions depends on a number of factors, including but not limited to (i) our ability to obtain
adequate liquidity and financing sources; (ii) our ability to restore customers confidence in our
viability as a continuing entity and to attract and retain sufficient customers; (iii) our ability
to retain key employees; (iv) changes in consumer demand for, and acceptance of, our services; and
(v) the overall strength and stability of general economic conditions and of the financial
industry. The failure of any of these factors could materially adversely affect the successful
execution of our strategy and business plan and the stated goals of the Plan may not be achieved,
which could have a material adverse impact on our business, financial condition, results of
operations, liquidity and/or the market price of our Common Stock.
Because our future consolidated financial statements will reflect fresh start accounting
adjustments made upon emergence from bankruptcy, and because of the effects of the transactions
that became effective pursuant to the Plan, financial information in our future financial
statements will not be comparable to our financial information from prior periods, including the
statements contained herein.
Upon our emergence from Chapter 11 on January 24, 2011, we adopted fresh start accounting in
accordance with guidance under the applicable reorganization accounting rules, pursuant to which
our reorganization value, which represents the fair value of the entity before considering
liabilities and approximates the amount a willing buyer would pay for the assets of the entity
immediately after the reorganization, has been allocated to the fair value of assets in conformity
with guidance under the applicable accounting rules for business combinations, using the purchase
method of accounting for business combinations. The amount remaining after allocation of the
reorganization value to the fair value of identified tangible and intangible assets will be
reflected as goodwill, which is subject to periodic evaluation for impairment. In addition to
fresh start accounting, our future consolidated financial statements will reflect all effects of
the transactions contemplated by the Plan; therefore our future consolidated statements of
financial position and consolidated statements of operations will not be comparable in many
respects to our consolidated statements of financial position and consolidated statements of
operations for periods prior to our adoption of fresh start accounting and prior to accounting for
the effects of the reorganization, including the financial statements contained herein. As a
result, our financial and operating results for the year ended December 31, 2010 may not be
indicative of future financial performance.
In addition, as the Chapter 11 Cases remain open, our consolidated balance sheet upon our
emergence from Chapter 11 will include accruals for unresolved claims related to the Chapter 11
Cases. These accruals are based on managements best estimate of future settlements of such
unresolved claims and are subject to adjustment subsequent to the Effective Date. To the extent
that our negotiations result in favorable or unfavorable settlements in relation to the amount
accrued, we will recognize gains and/or losses in our consolidated statement of operations
subsequent to the Effective Date.
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Risks Related to our Common Stock and Our Substantial Indebtedness
The price of our Common Stock may be volatile and may fluctuate substantially, which could
negatively affect holders of our Common Stock.
Shares of our Common Stock were listed on the Nasdaq Capital Market effective as of January
25, 2011. There has been a public market for our Common Stock for only a short period of time. An
active, liquid and orderly market for our Common Stock may not be sustained, which could depress
the market price of our Common Stock. An inactive market may also impair our ability to raise
capital.
In addition, the market price of our Common Stock may fluctuate widely as a result of various
factors, period-to-period fluctuations in our operating results, the volume of sales of our Common
Stock, dilution, developments in the communications industry, the failure of securities analysts to
cover our Common Stock or changes in financial estimates by analysts, competitive factors,
regulatory developments, economic and other external factors, general market conditions and market
conditions affecting the stock of communications companies in general. Communications companies
have in the past experienced extreme volatility in the trading prices and volumes of their
securities, which has often been unrelated to operating performance. High levels of market
volatility may have a significant adverse effect on the market price of our Common Stock. In
addition, in the past, securities class action litigation has often been instituted against
companies following periods of volatility in their stock prices. This type of litigation could
result in substantial costs and divert managements attention and resources, which could have a
material adverse impact on our business, financial condition, results of operations, liquidity
and/or the market price of our Common Stock.
Concentration of ownership among stockholders may prevent new investors from influencing
significant corporate decisions.
Based on Schedules 13D and 13G filed by the respective holders, as of March 25, 2011, entities
advised by Angelo, Gordon & Co., L.P. (Angelo Gordon) hold approximately 17.7% of our outstanding
Common Stock, funds managed by Marathon Asset Management, L.P. hold approximately 10.9% of our
Common Stock and funds managed by Chatham Asset Management, LLC hold approximately 5.6% of our
Common Stock (assuming exercise of all warrants to purchase Common Stock held by those funds). As
a result, these stockholders may be able to exercise significant control over all matters requiring
stockholder approval, including the election of directors, amendment of our certificate of
incorporation and approval of corporate transactions and could gain significant control over our
management and policies.
Future sales or the possibility of future sales of a substantial amount of our Common Stock
may depress the price of our Common Stock.
Future sales, or the availability for sale in the public market, of substantial amounts of our
Common Stock could adversely affect the prevailing market price of our Common Stock, and could
impair our ability to raise capital through future sales of equity securities. The market price of
our Common Stock could decline as a result of sales of a large number of shares of our Common Stock
in the market or the perception that these sales could occur. These sales, or the possibility that
these sales may occur, may also make it more difficult for us to obtain additional capital by
selling equity securities in the future at a time and at a price that we deem appropriate.
As of March 25, 2011, we had 26,197,432 shares of Common Stock outstanding. All such shares
are freely tradable except for any shares of our Common Stock that may be held or acquired by our
directors, executive officers and other affiliates, as that term is defined in the Securities Act,
which will be restricted securities under the Securities Act. Restricted securities may not be sold
in the public market unless the sale is registered under the Securities Act or an exemption from
registration is available. In addition, Angelo Gordon has certain registration rights with respect
to the Common Stock it holds or may acquire in the future.
We may issue shares of our Common Stock, or other securities, from time to time as
consideration for future acquisitions and investments. In the event any such acquisition or
investment is significant, the number of shares of our Common Stock,
or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be
significant. We may also grant registration rights covering these shares or other securities in
connection with any such acquisitions and investments.
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We do not expect to pay any cash dividends for the foreseeable future.
On March 4, 2009, our board of directors voted to suspend our quarterly dividend. We do not
anticipate that we will pay any cash dividends on shares of our Common Stock for the foreseeable
future. Because we are a holding company, our ability to pay dividends depends on our receipt of
cash dividends from our operating subsidiaries. Any determination to pay dividends in the future
will be at the discretion of our board of directors and will depend upon limitations imposed by
orders of state regulatory authorities, results of operations, financial condition, contractual
restrictions contained in the agreements governing our Exit Credit Agreement or indebtedness we may
incur in the future, restrictions imposed by applicable law and other factors our board of
directors may then deem relevant.
Although we successfully consummated the Plan, we have substantial indebtedness which could
have a negative impact on our financing options and liquidity position.
As of the Effective Date, we had approximately $1,000.0 million of total debt outstanding. In
addition, as of the Effective Date, we had approximately $56.3 million, net of outstanding letters
of credit, available for additional borrowing under our Exit Revolving Loan.
Our overall indebtedness and the terms of our Exit Credit Agreement could:
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require us to dedicate a significant portion of our cash flow from operations to
paying the principal of and interest on our indebtedness, thereby limiting the
availability of our cash flow to fund future capital expenditures, working capital and
other corporate purposes; |
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limit our ability to obtain additional financing in the future for working capital,
capital expenditures or acquisitions; |
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limit our ability to refinance our indebtedness on terms acceptable to us or at all; |
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restrict us from making strategic acquisitions or cause us to make non-strategic
divestitures; |
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limit our flexibility in planning for, or reacting to, changes in our business and
the communications industry generally; |
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place us at a competitive disadvantage compared with competitors that have a less
significant debt burden; and |
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make us more vulnerable to economic downturns and limit our ability to withstand
competitive pressures. |
Our ability to continue to fund our debt requirements and to reduce debt may be affected by
general economic, financial market, competitive, legislative and regulatory factors, among other
things. An inability to fund our debt requirements, reduce debt or satisfy debt covenant
requirements could have a material adverse effect on our business, financial condition, results of
operations, liquidity and/or the market price of our Common Stock.
In addition, all of our indebtedness bears interest at variable rates. If market interest
rates increase, variable rate debt will create higher debt service requirements, which could
adversely affect our cash flow. In addition, interest payments on the Exit Term Loan in our Exit
Credit Agreement are subject to a LIBOR floor of 2.00%. While LIBOR remains below 2.00% we will
incur interest costs above market rates. While we may enter into agreements limiting our exposure
to higher interest rates, these agreements may not offer complete protection from this risk.
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We are a holding company and rely on dividends, interest and other payments, advances and
transfers of funds from our operating subsidiaries and investments to meet our debt service and
other obligations and to pay dividends, if any, on our Common Stock.
We are a holding company and conduct no operations. Accordingly, our cash flow and our ability
to make payments on, or repay or refinance, our indebtedness and to fund planned capital
expenditures and other cash needs will depend largely upon the cash flows of our operating
subsidiaries and the payment of funds by those subsidiaries to us in the form of repayment of
loans, dividends, management fees or otherwise. Distributions to us from our subsidiaries will
depend on their respective operating results and will be subject to restrictions under, among other
things,
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the laws of their jurisdiction of organization; |
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the rules and regulations of state and federal regulatory authorities; |
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agreements of those subsidiaries, including agreements governing their indebtedness;
and |
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regulatory restrictions. |
Our subsidiaries have no obligation, contingent or otherwise, to make funds available, whether
in the form of loans, dividends or other distributions to us. Any inability to receive
distributions from our subsidiaries could have a material adverse impact on our business, financial
condition, results of operations, liquidity and/or the market price of our Common Stock.
To operate and expand our business, service our indebtedness and meet our other cash needs, we
will require a significant amount of cash, which may not be available to us. We may not generate
sufficient funds from operations to repay or refinance our indebtedness at maturity or otherwise or
to fund our operations.
Our ability to make payments on, or repay or refinance, our indebtedness, and to fund planned
capital expenditures, unanticipated capital expenditures and other cash needs will depend largely
upon our future operating performance, including our ability to execute on our business plan. Our
future operating performance, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our control. In addition,
our ability to borrow funds in the future to make payments on our indebtedness will depend on the
satisfaction of the covenants in the agreements governing our indebtedness. Specifically, we will
need to maintain specified financial ratios and satisfy financial condition tests. In addition, the
limitations imposed by any financing arrangements on our ability to incur additional debt and to
take other actions might significantly impair our ability to obtain other financing.
In addition, we can provide no assurance that we would be able to refinance any of our
indebtedness on commercially reasonable terms, or at all. If we are unable to make payments or
refinance our debt or obtain new financing under these circumstances, we would have to consider
other options, including:
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sales of assets; |
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reduction or delay of capital expenditures, strategic acquisitions, investments and
alliances; or |
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negotiations with our lenders to restructure the applicable debt. |
The agreements governing our indebtedness may restrict, or market or business conditions may
limit, our ability to take some of these actions or the effectiveness of these actions.
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An inability to generate sufficient funds from operations to repay or refinance our
indebtedness at maturity or otherwise fund our operations could have a material adverse impact on
our business, financial condition, results of operations, liquidity and/or the market price of our
Common Stock.
Our financing arrangements subject us to various restrictions that could limit our operating
flexibility, our ability to make payment on our debt and to fund dividends, if any, on our Common
Stock.
The Exit Credit Agreement contains restrictions, covenants and events of default that, among
other things, require us to satisfy certain financial tests and maintain certain financial ratios
and restrict our ability to incur additional indebtedness and to refinance our existing
indebtedness. The terms of the Exit Credit Agreement impose, and the agreements governing any
future indebtedness may impose, various restrictions and covenants on us that could limit our
ability to respond to market conditions, provide for capital investment needs or take advantage of
business opportunities by limiting the amount of additional borrowings we may incur. These
restrictions may include compliance with, or maintenance of, certain financial tests and ratios and
may limit or prohibit our ability to, among other things:
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incur additional debt and issue preferred stock; |
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pay dividends in the future or make other distributions on our stock or repurchase or
redeem stock; |
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create liens; |
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redeem or prepay certain debt; |
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make certain investments; |
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engage in specified sales of assets; |
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enter into transactions with affiliates; |
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enter new lines of business; |
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engage in consolidation, mergers and acquisitions; and |
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make certain capital expenditures. |
These restrictions on our ability to operate our business could seriously harm our business
by, among other things, limiting our ability to take advantage of financing, merger and acquisition
and other corporate opportunities.
Various risks, uncertainties and events beyond our control could affect our ability to comply
with these covenants and maintain these financial tests and ratios. Failure to comply with any of
the covenants in the Exit Credit Agreement could result in a default thereunder. In addition, the
limitations imposed by any financing arrangements on our ability to incur additional debt and to
take other actions might significantly impair our ability to obtain other financing. Any of these
events could have a material adverse impact on our business, financial condition, results of
operations, liquidity and/or the market price of our Common Stock.
Limitations on our ability to use NOL carryforwards, and other factors requiring us to pay
cash to satisfy our tax liabilities in future periods, may affect our ability to repay our
indebtedness.
As of the Effective Date, our NOLs have been substantially reduced by the recognition of gains
on the discharge of certain debt pursuant to the Plan. In addition, our emergence from bankruptcy
resulted in an ownership change for federal income tax purposes
36
under Section 382 of the Code. This
followed previous ownership changes resulting from our initial public offering in February 2005
which resulted in an ownership change within the meaning of the U.S. federal income tax laws
addressing NOL carryforwards, alternative minimum tax credits and other similar tax attributes.
Moreover, the Merger with Spinco resulted in a further ownership change for these purposes. As a
result of these ownership changes, there are specific limitations on our ability to use these NOL
carryforwards and other tax attributes from periods prior to the initial public offering and the
Merger. Although we do not expect that these limitations will materially affect our U.S. federal
and state income tax liability in the near term, it is possible in the future if we were to
generate taxable income in excess of the limitation on usage of NOL carryforwards that these
limitations could limit our ability to utilize the carryforwards and, therefore, result in an
increase in our U.S. federal and state income tax payments over the amount we otherwise would have,
had we not experienced an ownership change. In addition, in the future we will be required to pay
cash to satisfy our tax liabilities when all of our NOL carryforwards have been used or have
expired. Limitations on our usage of NOL carryforwards, and other factors requiring us to pay cash
taxes in the future, would reduce the funds available to service our debt and pay dividends, if
any, in the future, which could have a material adverse impact on our business, financial
condition, results of operations, liquidity and/or the market price of our Common Stock.
Our actual operating results may differ significantly from our guidance.
From time to time, we have released and may continue to release guidance regarding our future
performance that represents our managements estimates as of the date of release. This guidance,
which consists of forward-looking statements, is prepared by our management and is qualified by,
and subject to, the assumptions and the other information contained or referred to in the release.
Our guidance is not prepared with a view toward compliance with published guidelines of the
American Institute of Certified Public Accountants, and neither our independent registered public
accounting firm nor any other independent expert or outside party compiles or examines the guidance
and, accordingly, no such person expresses any opinion or any other form of assurance with respect
thereto.
Guidance is based upon a number of assumptions and estimates that, while presented with
numerical specificity, are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and are based upon specific
assumptions with respect to future business decisions, some of which will change. We generally
state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis
as variables are changed but are not intended to represent our actual results which could fall
outside of the suggested ranges. The principal reason that we release this data is to
provide a basis for our management to discuss our business outlook with analysts and
investors. Notwithstanding this, we do not accept any responsibility for any projections or reports
published by any such outside analysts or investors.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the
assumptions or the guidance furnished by us will not materialize or will vary significantly from
actual results. Accordingly, our guidance is only an estimate of what management believes is
realizable as of the date of release. Actual results will vary from the guidance and the variations
may be material. Investors should also recognize that the reliability of any forecasted financial
data diminishes the farther in the future that the data is forecast. In light of the foregoing,
investors are urged to put the guidance in context and not to place undue reliance on it.
Any failure to successfully implement our operating strategy or the occurrence of any of the
events or circumstances discussed therein could result in the actual operating results being
different than the guidance, and such differences may be materially adverse.
Risks Related to Our Business
We provide services to customers over access lines, and if we lose access lines, our business,
financial condition, results of operations, liquidity and/or the market price of our Common Stock
may be materially adversely affected.
We generate revenue primarily by delivering voice and data services over access lines. During
the years ended December 31, 2010 and 2009, respectively, we experienced access line equivalent
loss of 8.3% and 10.2%. These losses resulted mainly from competition, including competition from
bundled offerings by cable companies, the use of alternate technologies as well as challenging
economic conditions and the offering of DSL services, which prompts some customers to cancel second
line service. We believe that the Chapter 11 Cases and certain issues associated with the Cutover
may have had an adverse effect on our ability to retain customers.
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We expect to continue to experience net access line losses. Our inability to retain access
lines could adversely affect our business, financial condition, results of operations, liquidity
and/or the market price of our Common Stock.
We provide access services to other communications companies, and if these companies were to
find alternative means of providing services, become insolvent or experience substantial financial
difficulties, our business, financial condition, results of operations, liquidity and/or the market
price of our Common Stock may be materially adversely affected.
We originate and terminate calls on behalf of long-distance carriers and other interexchange
carriers over our network in exchange for access charges. Interstate and intrastate access charges
represented approximately 35.6% of our total revenues in 2010. Should one or more of these
carriers find alternative means of providing services, loss of revenues from these carriers could
have a material adverse impact on our business, financial condition, results of operations,
liquidity and/or the market price of our Common Stock. In addition, should one or more of the
carriers that we do business with become insolvent or experience substantial financial
difficulties, our inability to timely collect access charges from them could have a material
adverse impact on our business, financial condition, results of operations, liquidity and/or the
market price of our Common Stock.
We are subject to competition that may materially adversely impact our business, financial
condition, results of operations, liquidity and/or the market price of our Common Stock.
We face intense competition from a variety of sources for our voice and Internet services in
most of the areas we now serve. Regulations and technology change quickly in the communications
industry, and changes in these factors historically have had, and may in the future have, a
significant impact on competitive dynamics. In most of our services areas, we face competition
from wireless carriers for voice services. As technology and economies of scale improve,
competition from wireless carriers is expected to increase. We also face increasing competition
from wireline and cable television companies for our voice and Internet services. We estimate that
as of December 31, 2010, most of the customers that we serve had access to voice and Internet
services through a cable television company. Wireline and cable television companies have the
ability to bundle their services, which has and is expected to continue to intensify the
competition we face from these providers. VoIP providers, Internet service providers, satellite
companies and electric utilities also compete with our services, and such competition is expected
to continue to increase in the future. In addition, many of our competitors have access to a
larger workforce and have substantially greater name-brand recognition and financial, technological
and other resources than we do.
In addition, consolidation and strategic alliances within the communications industry or the
development of new technologies have had and may continue to have an effect on our competitive
position. We cannot predict the number of competitors that will emerge, particularly in light of
possible regulatory or legislative actions that could facilitate or impede market entry, but
increased competition from existing and new entities could have a material adverse effect on our
business, financial condition, results of operations, liquidity and/or the market price of our
Common Stock.
Competition may lead to loss of revenues and profitability as a result of numerous factors,
including:
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loss of customers (given the likelihood that when we lose customers for local service, we will
also lose them for all related services); |
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reduced network usage by existing customers who may use alternative providers for voice and
data services; |
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reductions in the service prices that may be necessary to meet competition; and |
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increases in marketing expenditures and discount and promotional campaigns. |
We may not be able to successfully integrate new technologies, respond effectively to customer
requirements or provide new services.
Rapid and significant changes in technology and new service introductions occur frequently in
the communications industry and industry standards evolve continually, including but not limited to
a transition in the industry from primarily voice products to data
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services. We cannot predict the
effect of these changes on our competitive position, profitability or industry. Technological
developments may reduce the competitiveness of our networks and require unbudgeted upgrades or the
procurement of additional products that could be expensive and time consuming. In addition, new
products and services arising out of technological developments may reduce the attractiveness of
our services. If we fail to adapt successfully to technological changes or obsolescence or fail to
obtain access to important new technologies, we could lose customers and be limited in our ability
to attract new customers and sell new services to our existing customers, which could have a
material adverse impact on our business, financial condition, results of operations, liquidity
and/or the market price of our Common Stock.
The geographic concentration of our operations in Maine, New Hampshire and Vermont make our
business susceptible to local economic and regulatory conditions and consumer trends, and an
economic downturn, recession or unfavorable regulatory action in any of those states may materially
adversely affect our business, financial condition, results of operations, liquidity and/or the
market price of our Common Stock.
As of December 31, 2010, we operate in 18 states with approximately 1.4 million access line
equivalents, of which approximately 85% are located in Maine, New Hampshire and Vermont. As a
result of this geographic concentration, our financial results will depend significantly upon
economic conditions and consumer trends in these markets. From January 1, 2010 through December 31,
2010, our Northern New England operations experienced a 9.5% decline in total access line
equivalents in service, compared to a decline of 3.2% for Legacy FairPoint during the same period.
A deterioration in economic conditions in any of these markets could result in a further decrease
in demand for our services and resulting loss of access line equivalents which could have a
material adverse effect on our business, financial condition, results of operations, liquidity
and/or the market price of our Common Stock.
In addition, if state regulators in Maine, New Hampshire or Vermont were to take an action
that is adverse to our operations in those states, we could suffer greater harm from that action by
state regulators than we would from action in other states because of the concentration of our
operations in those states.
We depend on third party providers for certain of our billing functions, information
technology services, including network support and improvements, and for the provision of our
long-distance and bandwidth services.
We have agreements with outside service providers to perform a portion of our billing
functions and for our provision of long-distance and bandwidth services. We also rely on certain
third parties for information technology services, including network support and improvements.
If these service providers are unable to adequately perform such services or if one of them
experiences a significant degradation or failure with respect to such services, it could result in
disruptions in our billing, information technology systems and/or our long-distance and bandwidth
services. Furthermore, if these agreements are terminated for any reason, we may be unable to find
an alternative service provider in a timely manner or on terms acceptable to us, and may be unable
ourselves to perform the services they provide.
With respect to the agreements governing our long-distance and bandwidth services, these
agreements are based, in part, on our estimate of future supply and demand and may contain minimum
volume commitments. If we overestimate demand, we may be forced to pay for services we do not need.
If we underestimate demand, we may need to acquire additional capacity on a short-term basis at
unfavorable prices, assuming additional capacity is available. If additional capacity is not
available, we will not be able to meet this demand. In addition, if we cannot meet any minimum
volume commitments, we may be subject to underutilization charges, termination charges, or rate
increases.
If any of the foregoing events occurs with respect to our third party providers, our business,
financial condition, results of operations, liquidity and/or the market price of our Common Stock
could be materially adversely affected.
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A network disruption could cause delays or interruptions of service, which could cause us to
lose customers.
To be successful, we will need to continue to provide our customers reliable service over our
expanded network. Some of the risks to our network and infrastructure include:
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physical damage to access lines; |
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widespread power surges or outages; |
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software defects in critical systems; |
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disruptions beyond our control; and |
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capacity limitations resulting from changes in our customers usage patterns. |
From time to time, in the ordinary course of business, we could experience short disruptions
in our service due to factors such as cable damage, inclement weather and service failures of our
third-party service providers. We could experience more significant disruptions in the future. In
addition, certain portions of our network may lack adequate redundancy to allow for expedient
recovery of service to affected customers. Disruptions may cause interruptions in service or
reduced capacity for customers, either of which could cause us to lose customers and incur
expenses, which could have a material adverse impact on our business, financial condition, results
of operations, liquidity and/or the market price of our Common Stock.
Our success will depend on our ability to attract and retain qualified management and other
personnel.
Our success depends upon the talents and efforts of our senior management team. None of our
senior executives, with the exception of Paul H. Sunu, our Chief Executive Officer, are employed
pursuant to an employment agreement. Mr. Sunus current employment agreement expires on August 24,
2013. The loss of any member of our senior management team, due to retirement or otherwise, and
the inability to attract and retain highly qualified technical and management personnel in the
future, could have a material adverse effect on our business, financial condition, results of
operations, liquidity and/or the market price of our Common Stock.
A significant portion of our workforce is represented by labor unions and therefore subject to
collective bargaining agreements. If disputes arise, or if we are unable to successfully
renegotiate these agreements at an appropriate time, workers subject to these agreements could
engage in strikes or other work stoppages or slowdowns, which could materially adversely impact our
business, financial condition, results of operations, liquidity and/or the market price of our
Common Stock.
As of December 31, 2010 2,578 of our 4,032 employees were covered by fourteen collective
bargaining agreements. Disputes with regard to the terms of these agreements or our potential
inability to negotiate acceptable contracts with these unions could result in, among other things,
strikes, work stoppages or other slowdowns by the affected workers. If unionized workers were to
engage in a
strike, work stoppage or other slowdown, or other employees were to become unionized, we could
experience a significant disruption of our operations or higher ongoing labor costs, either of
which could have a material adverse effect on our business, financial condition, results of
operations, liquidity and/or the market price of our Common Stock. Additionally, future
renegotiation of labor agreements or provisions of labor agreements could adversely impact our
service reliability and significantly increase our costs for healthcare, wages and other benefits,
which could have a material adverse impact on our business, financial condition, results of
operations, liquidity and/or the market price of our Common Stock.
We have identified material weaknesses in our internal controls over financial reporting which
existed as of December 31, 2010. If the steps we take to remedy these material weaknesses are not
successful or we otherwise fail to maintain an effective system of internal controls, such a
failure could result in additional material misstatements in our financial statements, prevent us
from providing timely financial statements or prevent us from meeting our reporting requirements
both with the SEC and under our debt obligations, cause investors to lose confidence in our
reported financial information and have a negative effect on the market price of our Common Stock.
As discussed in Part IIItem 9A. Controls and Procedures, we concluded that the following
material weaknesses in our internal controls over financial reporting existed as of December 31,
2010:
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Our information technology controls were not adequate. Specifically, our change
management processes were not consistently followed to ensure all changes were
appropriately authorized. In addition, access to our information systems was not
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Our management oversight and review procedures designed to monitor the accuracy of
period-end accounting activities were ineffective. Specifically, our account reconciliation
processes were not adequate to properly identify and resolve discrepancies between our
billing system and our general ledger in a timely manner. In addition, project accounting
controls were not adequate to ensure charges to capital projects were appropriate or that
projects were closed in a timely manner. Furthermore, procedures for the review of our
income tax provision and supporting schedules were not adequate to identify and correct
errors in a timely manner. |
As a result of these material weaknesses, our management concluded that our disclosure
controls were not effective as of December 31, 2010. Our management has initiated steps to
remediate these issues. If the remediation is not successful or we otherwise fail to maintain an
effective system of internal controls, such a failure could result in material misstatements in our
financial statements, prevent us from providing timely financial statements or prevent us from
meeting our reporting requirements both with the SEC and under our debt obligations, cause
investors to lose confidence in our reported financial information and have a negative effect on
the market price of our Common Stock.
We will be exposed to risks relating to evaluations of internal control systems required by
Section 404 of the Sarbanes-Oxley Act.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act and the
related rules and regulations of the SEC, including accelerated reporting requirements and expanded
disclosures regarding evaluations of internal control systems. With respect to internal control
over financial reporting, standards established by the Public Company Accounting Oversight Board
define a material weakness as a deficiency in internal controls over financial reporting that
results in a reasonable possibility that a material misstatement of a companys annual or interim
financial statements will not be prevented or detected on a timely basis. If our management
identifies one or more material weaknesses in internal control over financial reporting in the
future in accordance with the annual assessments and quarterly evaluations required by the
Sarbanes-Oxley Act, we will be unable to assert that our internal controls are effective which
could result in sanctions or investigation by regulatory authorities. In addition, any such
material weakness could result in material misstatements in our
financial statements, prevent us from providing timely financial
statements or meeting our reporting requirements both with the SEC
and under our debt obligations and cause
investors to lose confidence in our reported financial information.
We note that we have identified material weaknesses in our internal controls over financial
reporting which existed as of December 31, 2010, which material weaknesses are discussed in greater
detail in Part IIItem 9A. Controls and Procedures.
Our financial condition and results of operations could be adversely affected if assets held
in our Company sponsored pension plans suffer significant losses in market value.
We sponsor pension and post-retirement healthcare plans for certain employees. During the
year ended December 31, 2010, we experienced actual gains on pension plan assets totaling
approximately 11.2%. Since the actuarial value of plan assets is dependent on the value of the
assets held by each plan, a significant decline in the market value of such assets could have a
detrimental impact on our pension plans and could result in us making additional contributions to
these plans, as required under the Employee Retirement Income Security Act of 1974, as amended.
Furthermore, if the third party trustee who holds these plan assets were to become insolvent,
access to the plan assets could be limited, and we could be required to pay participant benefits
from our assets. Such
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required contributions could have a material adverse impact on our business,
financial condition, results of operations, liquidity and/or the market price of our Common Stock.
Risks Relating to Our Regulatory Environment
We are subject to significant regulations that could change in a manner adverse to us.
We operate in a heavily regulated industry. Laws and regulations applicable to us and our
competitors may be, and have been, challenged in the courts, and could be changed by Congress or
regulators. In addition, the following factors could have a significant impact on us:
Risk of loss or reduction of network access charge revenues. A portion of our revenues comes
from network access charges, which are paid to us by intrastate and interstate interexchange
carriers for originating and terminating communications in the regions served. This also includes
Universal Service Support payments for local switching support, long-term support, and ICLS. In
recent years, several of these long-distance carriers have declared bankruptcy. Future declarations
of bankruptcy by a carrier that utilizes our access services could negatively affect our business,
financial condition, results of operations, liquidity and/or the market price of our Common Stock.
The amount of access charge revenues that we receive is based on rates set by federal and
state regulatory bodies, and those rates could change in the future. Further, from time to time
federal and state regulatory bodies conduct rate cases, earnings reviews, or make adjustments to
price cap formulas that may result in rate changes. In addition, reforms of the federal and state
access charge systems, combined with the development of competition, have caused the aggregate
amount of access charges paid by long-distance carriers to decrease. Additional reforms have been
proposed. If any of the currently proposed reforms were adopted by the FCC it would likely involve
significant changes in the access charge system and, if not offset by a revenue replacement
mechanism, could potentially result in a significant decrease in or elimination of access charges.
Decreases in or loss of access charges may or may not result in offsetting increases in local,
subscriber line or Universal Service Support revenues. Regulatory developments of this type could
materially adversely affect our business, financial condition,
results of operations, liquidity and/or
the market price of our Common Stock.
Risk of loss or reduction of Universal Service Fund support. We receive federal Universal
Service Support, referred to as the Universal Service Fund, and in some cases, state universal
support, to support our operations in high-cost areas. These federal revenues include Universal
Service Support payments for local switching support, ICLS, or IAS. High-cost support for our
Northern New England operations, referred to as our non-rural operations or non-rural LECs, and for
Legacy FairPoints traditional, rural local exchange operations, referred to as our rural
operations or rural LECs, is determined pursuant to different methodologies, aspects of which are
now under review. The FCC has proposed changes to the Universal Service Fund. Any changes to the
existing rules could reduce the Universal Service Fund revenues we receive. If we were unable to
receive such support, or if that support was reduced, our Northern New England operations would be
unable to operate as profitably as they have historically. Moreover, if we raise prices for
services to offset these losses of Universal Service Fund payments, the increased pricing of our
services may disadvantage us competitively in the marketplace, resulting in additional potential
revenue loss. See discussion of FCC NPRM in Part I Item 1. Business Regulatory Environment
Universal Service Support.
Further, the total payments from the Universal Service Fund to our rural operations will
fluctuate based upon our rural company average cost per loop compared to the national average cost
per loop and are likely to decline based on historical trends. We receive IAS in all of our price
cap study areas (Maine, New Hampshire and Vermont) and ICLS in our rate-of-return study areas. The
FCC also is considering changes to its rules governing who contributes to the Universal Service
Support mechanisms, and on what basis. Any changes in the FCCs rules governing the distribution
of such support or the manner in which entities contribute to the Universal Service Fund could have
a material adverse effect on our business, financial condition,
results of operations, liquidity and/or the market price of our Common Stock.
Risk of loss of statutory exemption from burdensome interconnection rules imposed on ILECs.
Our rural LECs generally are exempt from the more burdensome requirements of the 1996 Act governing
the rights of competitors to interconnect to ILEC networks and to utilize discrete network elements
of the incumbents network at favorable rates. To the extent state regulators decide
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that it is in
the public interest to extend some or all of these requirements to our rural LECs, we would be
required to provide UNEs to competitors in our rural telephone company areas. As a result, more
competitors could enter our traditional telephone markets than are currently expected, which could
have a material adverse effect on our business, financial condition, results of operations,
liquidity and/or the market price of our Common Stock.
Risks posed by costs of regulatory compliance. Regulations create significant compliance
costs for us. Subsidiaries that provide intrastate services are generally subject to certification,
tariff filing and other ongoing regulatory requirements by state regulators. Our interstate and
intrastate access services are currently provided in accordance with tariffs filed with the FCC and
state regulatory authorities, respectively. Challenges in the future to our tariffs by regulators
or third parties or delays in obtaining certifications and regulatory approvals could cause us to
incur substantial legal and administrative expenses, and, if successful, these challenges could
adversely affect the rates that we are able to charge our customers, which could have a material
adverse effect on our business, financial condition, results of
operations, liquidity and/or the
market price of our Common Stock.
In addition, our non-rural operations are subject to regulations not applicable to our rural
operations, including but not limited to requirements relating to interconnection, the provision of
UNEs, and the other market-opening obligations set forth in the 1996 Act. In approving the transfer
of authorizations to us in the Merger, the FCC determined that our non-rural operations would be
regulated as a Bell Operating Company following the completion of the Merger, subject to the same
regulatory requirements that currently apply to the other Bell Operating Companies. The FCC also
stated that we would be entitled to the same regulatory relief that Verizon New England had
obtained in the region. Any changes made in connection with these obligations could increase our
non-rural operations costs or otherwise have a material adverse effect on our business, financial
condition, results of operations, liquidity and/or the market price of our Common Stock. Moreover, we
cannot predict the precise manner in which the FCC will apply the Bell Operating Company regulatory
framework to us.
State regulators have also imposed conditions in various regulatory proceedings that could
materially adversely affect our business, financial condition,
results of operations, liquidity and/or the market price of our Common Stock.
Our business also may be affected by legislation and regulation imposing new or greater
obligations related to open Internet access, assisting law enforcement, bolstering homeland
security, minimizing environmental impacts, protecting customer privacy or addressing other issues
that affect our business. We cannot predict whether or to what extent the FCC might modify its
rules or what compliance with those new rules might cost. Similarly, we cannot predict whether or
to what extent federal or state legislators or regulators might impose new network access,
security, environmental or other obligations on our business.
Risk of losses from rate reduction. Our local exchange companies that operate pursuant to
intrastate rate-of-return regulation are subject to state regulatory authority over their
intrastate telecommunications service rates. State review of these rates could lead to rate
reductions, which in turn could have a material adverse effect on our business, financial
condition, results of operations, liquidity and/or the market price of our Common Stock.
For a more thorough discussion of the regulatory issues that may affect our business, see
Item 1. BusinessRegulatory Environment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM 2. PROPERTIES
We own or lease all of the properties material to our business. Our headquarters is located in
Charlotte, North Carolina, in a leased facility. We also have administrative offices, maintenance
facilities, rolling stock, central office and remote switching platforms and transport and
distribution network facilities in each of the 18 states in which we operate our LEC business. Our
administrative and maintenance facilities are generally located in or near the communities served
by our LECs and our central offices are often within the administrative building. Auxiliary battery
or other non-utility power sources are at each central office to provide uninterrupted service in
the event of an electrical power failure. Transport and distribution network facilities include
fiber optic backbone and copper wire
43
distribution facilities, which connect customers to remote
switch locations or to the central office and to points of presence or interconnection with the
long-distance carriers. These facilities are located on land pursuant to permits, easements or
other agreements. Our rolling stock includes service vehicles, construction equipment and other
required maintenance equipment.
We believe each of our respective properties is suitable and adequate for the business
conducted thereon, is being appropriately used consistent with past practice and has sufficient
capacity for the present intended purposes.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in litigation and regulatory proceedings arising out of our
operations. Management believes that we are not currently a party to any legal or regulatory
proceedings, the adverse outcome of which, individually or in the aggregate, would have a material
adverse effect on our financial position or results of operations. During fiscal year 2010, we were
subject to the Chapter 11 Cases. We have emerged from Chapter 11 protection; however, these cases
have not been closed. For a discussion of the Chapter 11 Cases, see Item. 1BusinessEmergence
from Chapter 11 Proceedings.
We are subject to certain service quality requirements in the states of Maine, New Hampshire
and Vermont. Failure to meet these requirements in any of these states may result in penalties
being assessed by the appropriate state regulatory body. As of December 31, 2010, we have
recognized an estimated liability of $20.8 million for service quality penalties based on metrics
defined by the PUCs in Maine and New Hampshire and the Vermont Public Service Board.
ITEM 4. (REMOVED AND RESERVED)
44
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
General
Our Common Stock began trading on the NASDAQ under the symbol FRP effective as of January
25, 2011. Prior to that time, our Old Common Stock traded (i) on the Pink Sheets under the symbol
FRCMQ from October 26, 2009 to January 24, 2011 and (ii) on the NYSE under the symbol FRP from
our initial public offering on February 4, 2005 until October 26, 2009, when the NYSE notified us
that trading of our Old Common Stock was suspended immediately as a result of the filing of the
Chapter 11 Cases. The last day that our Old Common Stock traded on the NYSE was October 23, 2009.
On November 16, 2009, the NYSE completed its application to the SEC to delist our Old Common Stock.
The following table shows the high and low closing sales prices per share of our Old Common
Stock as reported on the Pink Sheets from January 1, 2010 to December 31, 2010 and October 26, 2009
to December 31, 2009, and on the NYSE from January 1, 2009 to October 23, 2009. The stock price
information is based on published financial sources. As a result of the Chapter 11 Cases, on the
Effective Date, the Old Common Stock was cancelled. Accordingly, the prices of the Old Common
Stock set forth in the table below are not indicative of the future prices of our Common Stock.
The Pink Sheets quotations set forth below reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily reflect actual transactions:
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 |
|
High |
|
|
Low |
|
First quarter |
|
$ |
0.07 |
|
|
$ |
0.02 |
|
Second quarter |
|
|
0.13 |
|
|
|
0.03 |
|
Third quarter |
|
|
0.05 |
|
|
|
0.03 |
|
Fourth quarter |
|
|
0.03 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
High |
|
|
Low |
|
First quarter |
|
$ |
3.07 |
|
|
$ |
0.36 |
|
Second quarter |
|
|
1.82 |
|
|
|
0.52 |
|
Third quarter |
|
|
0.92 |
|
|
|
0.41 |
|
Fourth quarter |
|
|
0.44 |
|
|
|
0.03 |
|
On March 4, 2009, our board of directors voted to suspend our quarterly dividend.
Accordingly, no dividends were declared on our Old Common Stock in 2010 or 2009. We currently do
not anticipate that we will pay any cash dividends on shares of our Common Stock for the
foreseeable future. Any determination to pay dividends in the future will be at the discretion of
our board of directors and will depend upon limitations imposed by orders of state regulatory
authorities, results of operations, financial condition, contractual restrictions relating to
indebtedness we may incur, restrictions imposed by applicable law and other factors our board of
directors may deem relevant at the time.
The following table shows the dividends which were paid on our Old Common Stock during 2009:
|
|
|
|
|
|
|
|
|
|
|
Per Share |
|
|
|
|
|
|
Year Ended |
|
Dividend |
|
|
|
|
|
|
December 31, 2008 |
|
Declared |
|
Date Declared |
|
Record Date |
|
Date Paid |
Fourth quarter
|
|
0.25750
|
|
December 5, 2008
|
|
December 31, 2008
|
|
January 16, 2009 |
As of March 25, 2011, there were approximately 175 holders of record of our Common Stock.
45
Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total
stockholder return on shares of our common stock against (i) the cumulative total return of all
companies listed on the S&P 500 and (ii) the cumulative total return of the S&P 500 Telcom sector.
The period compared commences on February 4, 2005 and ends on December 31, 2010. This graph assumes
that $100 was invested on February 4, 2005 (the date of the initial public offering of our Old
Common Stock) in our Old Common Stock and in each of the market index and the sector index at the
closing price for FairPoint Communications and the respective indices, and that all cash
distributions were reinvested. As a result of the Chapter 11 Cases, on the Effective Date, the Old
Common Stock was cancelled. Accordingly, the Old Common Stock price performance shown on the graph
is not indicative of the future price performance of our Common Stock which was issued pursuant to
the Plan.
Comparison
of Cumulative Total Return Among
FairPoint Communications, S&P 500 and S&P 500 Telcom
Securities Authorized for Issuance under Equity Compensation Plans
The table below provides information, as of the end of the most recently completed fiscal
year, concerning securities authorized for issuance under our equity compensation plans. On the
Effective Date, in accordance with the Plan, all equity compensation plans in effect at the end of
the most recently completed fiscal year were terminated and all awards thereunder were cancelled
and extinguished.
46
Equity Compensation Plan Information (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available |
|
|
|
Number of securities |
|
|
|
|
|
|
for future issuance |
|
|
|
to be issued upon |
|
|
Weighted average |
|
|
under equity |
|
|
|
exercise of |
|
|
exercise price of |
|
|
compensation plans |
|
|
|
outstanding options, |
|
|
outstanding options, |
|
|
excluding securities |
|
Plan Category |
|
warrants and rights(2) |
|
|
warrants and rights(2) |
|
|
reflected in column (a) (3) |
|
Equity compensation plans approved by
our stockholders |
|
|
433,441 |
|
|
$ |
15.20 |
|
|
|
8,805,011 |
|
Equity compensation plans not approved
by our stockholders |
|
|
533,334 |
|
|
$ |
0.95 |
|
|
|
11,466,666 |
|
Total |
|
|
966,775 |
|
|
$ |
7.34 |
|
|
|
20,271,677 |
|
|
|
|
(1) |
|
On the Effective Date, in accordance with the Plan, all equity
compensation plans in effect at the end of the most recently completed
fiscal year were terminated and all awards thereunder, including those
set forth in this table, were cancelled and extinguished. |
|
(2) |
|
Includes 47,373 options to purchase shares of our Old Common Stock
under the FairPoint Communications, Inc. (formerly MJD Communications,
Inc.) 1998 Stock Incentive Plan, 130,935 options to purchase shares of
our Old Common Stock under the FairPoint Communications, Inc. 2000
Employee Stock Incentive Plan, 533,334 options to purchase shares of
our Old Common Stock under the FairPoint Communications, Inc. 2009 CEO
Compensation Plan, 79,781 restricted units granted under the FairPoint
Communications, Inc. 2005 Stock Incentive Plan and 175,352 restricted
units granted under the FairPoint Communications, Inc. 2008 Long Term
Incentive Plan. |
|
(3) |
|
Includes 8,980,363 shares under the FairPoint Communications, Inc.
2008 Long Term Incentive Plan and 12,000,000 shares under the
FairPoint Communications, Inc. 2009 CEO Compensation Plan. |
Repurchase of Equity Securities
We did not repurchase equity securities during the three months ended December 31, 2010.
Unregistered Sales of Equity Securities
We did not sell any unregistered equity securities during 2010.
ITEM 6. SELECTED FINANCIAL DATA
On March 31, 2008, Legacy FairPoint completed the acquisition of Spinco, pursuant to which
Spinco merged with and into Legacy FairPoint, with Legacy FairPoint continuing as the surviving
corporation for legal purposes. Spinco was a wholly-owned subsidiary of Verizon and prior to the
Merger the Verizon Group transferred certain specified assets and liabilities of the local exchange
businesses of Verizon New England in Maine, New Hampshire and Vermont and the customers of the
related voice and Internet service provider businesses in those states to subsidiaries of Spinco.
The Merger was accounted for as a reverse acquisition of Legacy FairPoint by Spinco under the
purchase method of accounting because Verizon stockholders owned a majority of the shares of the
consolidated Company following the Merger and, therefore, Spinco is treated as the acquirer for
accounting purposes. The following financial information reflects the transaction as if Spinco had
issued consideration to Legacy FairPoints shareholders. As a
47
result, for the year ended December
31, 2008, financial information derived from the statement of operations reflects the consolidated
financial results of the Company by including the financial results of the Verizon Northern New
England business for the three months ended March 31, 2008, the financial results of Spinco for the
nine months ended December 31, 2008 and the financial results of Legacy FairPoint for the nine
months ended December 31, 2008. Financial information derived from the statement of operations for
all periods prior to April 1, 2008 reflects the actual results of the Verizon Northern New England
business for such periods. Financial information derived from the balance sheet reflects the
consolidated assets and liabilities of Legacy FairPoint and Spinco at December 31, 2008.
As of the Effective Date, we adopted fresh start accounting in accordance with the
Reorganizations Topic of the Accounting Standards Codification (ASC), pursuant to which our
reorganization value, which represents the fair value of the entity before considering liabilities
and approximates the amount a willing buyer would pay for the assets of the entity immediately
after the reorganization, has been allocated to the fair value of assets in conformity with
guidance under the Business Combinations Topic of the ASC, using the purchase method of accounting
for business combinations. The amount remaining after allocation of the reorganization value to
the fair value of identified tangible and intangible assets will be reflected as goodwill, which is
subject to periodic evaluation for impairment. In addition to fresh start accounting, our future
consolidated financial statements will reflect all effects of the transactions contemplated by the
Plan; therefore, our future statements of financial position and statements of operations will not
be comparable in many respects to our consolidated statements of financial position and
consolidated statements of operations for periods prior to our adoption of fresh start accounting
and prior to accounting for the effects of the reorganization, including the financial statements
contained herein. As a result, our financial and operating results for the year ended December 31,
2010 may not be indicative of future financial performance.
On the Effective Date, in accordance with the Plan, all equity compensation plans in effect at
the end of the most recently completed fiscal year were terminated and all awards thereunder were
cancelled and extinguished. In addition, on the Effective Date, in accordance with the Plan, (i)
certain of our employees and a consultant of ours received New Common Stock awards, consisting of
restricted shares of New Common Stock and/or options to purchase shares of New Common Stock,
pursuant to the terms of the Long Term Incentive Plan, and (ii) members of the New Board received
restricted shares of New Common Stock and options to purchase New Common Stock pursuant to the
terms of the Long Term Incentive Plan. As of March 25, 2011, we had 26,197,432 shares of Common
Stock outstanding.
The following financial information should be read in conjunction with Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations and our consolidated
financial statements and notes thereto contained elsewhere in this Annual Report. Amounts are in
thousands, except access lines and per share data.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Statement of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,070,986 |
|
|
$ |
1,119,090 |
|
|
$ |
1,274,619 |
|
|
$ |
1,197,465 |
|
|
$ |
1,193,392 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
525,728 |
|
|
|
515,394 |
|
|
|
576,786 |
|
|
|
555,954 |
|
|
|
540,305 |
|
Selling, general and administrative expenses |
|
|
365,373 |
|
|
|
417,512 |
|
|
|
384,388 |
|
|
|
288,762 |
|
|
|
283,089 |
|
Depreciation and amortization |
|
|
289,824 |
|
|
|
275,334 |
|
|
|
255,032 |
|
|
|
233,231 |
|
|
|
258,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,180,925 |
|
|
|
1,208,240 |
|
|
|
1,216,206 |
|
|
|
1,077,947 |
|
|
|
1,081,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(109,939 |
) |
|
|
(89,150 |
) |
|
|
58,413 |
|
|
|
119,518 |
|
|
|
111,483 |
|
Interest expense(1) |
|
|
(140,896 |
) |
|
|
(204,919 |
) |
|
|
(162,040 |
) |
|
|
(70,581 |
) |
|
|
(65,741 |
) |
Gain (loss) on derivative instruments |
|
|
|
|
|
|
12,320 |
|
|
|
(11,800 |
) |
|
|
|
|
|
|
|
|
Gain on early retirement of debt |
|
|
|
|
|
|
12,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
2,715 |
|
|
|
2,000 |
|
|
|
3,494 |
|
|
|
3,350 |
|
|
|
3,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before reorganization items and
income taxes |
|
|
(248,120 |
) |
|
|
(267,392 |
) |
|
|
(111,933 |
) |
|
|
52,287 |
|
|
|
49,273 |
|
Reorganization items |
|
|
(41,120 |
) |
|
|
(53,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(289,240 |
) |
|
|
(320,410 |
) |
|
|
(111,933 |
) |
|
|
52,287 |
|
|
|
49,273 |
|
Income tax (expense) benefit |
|
|
7,661 |
|
|
|
79,014 |
|
|
|
43,408 |
|
|
|
(19,459 |
) |
|
|
(17,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(281,579 |
) |
|
$ |
(241,396 |
) |
|
$ |
(68,525 |
) |
|
$ |
32,828 |
|
|
$ |
31,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares outstanding |
|
|
89,424 |
|
|
|
89,271 |
|
|
|
80,443 |
|
|
|
53,761 |
|
|
|
53,761 |
|
Diluted shares outstanding |
|
|
89,424 |
|
|
|
89,271 |
|
|
|
80,443 |
|
|
|
53,761 |
|
|
|
53,761 |
|
Basic and diluted earnings (loss) per share |
|
$ |
(3.15 |
) |
|
$ |
(2.70 |
) |
|
$ |
(0.85 |
) |
|
$ |
0.61 |
|
|
$ |
0.59 |
|
Cash dividends per share |
|
$ |
|
|
|
$ |
0.2575 |
|
|
$ |
0.773 |
|
|
$ |
|
|
|
$ |
|
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
197,795 |
|
|
$ |
178,752 |
|
|
$ |
296,992 |
|
|
$ |
149,458 |
|
|
$ |
213,808 |
|
Access line equivalents(2) |
|
|
1,417,290 |
|
|
|
1,545,976 |
|
|
|
1,721,709 |
|
|
|
1,600,971 |
|
|
|
1,703,375 |
|
Residential access lines |
|
|
712,591 |
|
|
|
802,668 |
|
|
|
926,610 |
|
|
|
882,933 |
|
|
|
966,267 |
|
Business access lines |
|
|
327,812 |
|
|
|
357,605 |
|
|
|
392,496 |
|
|
|
371,041 |
|
|
|
390,379 |
|
Wholesale access lines(3) |
|
|
87,142 |
|
|
|
97,161 |
|
|
|
107,243 |
|
|
|
124,123 |
|
|
|
149,998 |
|
HSD subscribers |
|
|
289,745 |
|
|
|
288,542 |
|
|
|
295,360 |
|
|
|
222,874 |
|
|
|
196,731 |
|
Summary Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities |
|
$ |
191,626 |
|
|
$ |
150,323 |
|
|
$ |
57,505 |
|
|
$ |
264,504 |
|
|
$ |
340,590 |
|
Net cash used in investing activities |
|
|
(197,268 |
) |
|
|
(177,391 |
) |
|
|
(283,332 |
) |
|
|
(137,216 |
) |
|
|
(212,542 |
) |
Net cash provided by (used in) financing
activities |
|
|
1,784 |
|
|
|
66,098 |
|
|
|
296,152 |
|
|
|
(127,288 |
) |
|
|
(128,048 |
) |
Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, excluding restricted cash of $4,098, $4,036
and $68,503 at December 31, 2010, 2009 and 2008 |
|
$ |
105,497 |
|
|
$ |
109,355 |
|
|
$ |
70,325 |
|
|
$ |
|
|
|
$ |
|
|
Property, plant and equipment, net |
|
|
1,859,700 |
|
|
|
1,950,435 |
|
|
|
2,013,515 |
|
|
|
1,628,066 |
|
|
|
1,701,425 |
|
Total assets |
|
|
2,973,794 |
|
|
|
3,172,122 |
|
|
|
3,335,940 |
|
|
|
1,938,172 |
|
|
|
2,044,796 |
|
Total long-term debt(4) |
|
|
2,520,959 |
|
|
|
2,515,446 |
|
|
|
2,470,253 |
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(587,418 |
) |
|
|
(218,427 |
) |
|
|
23,786 |
|
|
|
1,119,162 |
|
|
|
1,211,913 |
|
|
|
|
(1) |
|
Interest expense includes amortization of debt issue costs aggregating $2.0 million and $3.8 million for
the fiscal years ended December 31, 2010 and 2009, respectively, as well as amortization of debt discount
of $0.5 million for the fiscal year ended December 31, 2009. Debt issue costs of $23.8 million on the
Pre-Petition Credit Facility and following the filing of the Chapter 11 Cases, $9.9 million of discount on
the Pre-Petition Notes were written off in order to adjust the carrying amount of our pre-petition debt to
the Bankruptcy Court approved amount of the allowed claims for our pre-petition debt. These write-offs
are included in Reorganization items for the year ended December 31, 2009. |
49
|
|
|
(2) |
|
Total access line equivalents includes voice access lines and HSD lines, which include DSL lines, wireless
broadband, cable modem and fiber-to-the-premises. |
|
(3) |
|
Wholesale access lines include residential and business resale lines and unbundled network element
platform (UNEP) lines. |
|
(4) |
|
Long-term debt at December 31, 2010 and 2009 is included in Liabilities subject to compromise (see note 2
to the consolidated financial statements for further information). |
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial statements and the
notes thereto included elsewhere in this Annual Report. The following discussion includes certain
forward-looking statements. For a discussion of important factors, including the continuing
development of our business, actions of regulatory authorities and competitors and other factors
which could
cause actual results to differ materially from the results referred to in the forward-looking
statements, see Item 1A. Risk Factors in this Annual Report.
On October 26, 2009, we filed the Chapter 11 Cases. On January 13, 2011, the Bankruptcy Court
entered the Confirmation Order which confirmed our Third Amended Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code (as confirmed, the Plan).
On January 24, 2011 (the Effective Date), we substantially consummated our reorganization
through a series of transactions contemplated by the Plan, and the Plan became effective pursuant
to its terms.
For a description of the Chapter 11 Cases and the Plan, see Item. 1BusinessEmergence from
Chapter 11 Proceedings.
Overview
We are a leading provider of communications services in rural and small urban communities,
offering an array of services, including HSD, Internet access, voice, television and broadband
product offerings. We operate in 18 states with approximately 1.4 million access line equivalents
(including voice access lines and HSD lines, which include DSL, wireless broadband, cable modem and
fiber-to-the-premises) in service as of December 31, 2010.
We were incorporated in Delaware in February 1991 for the purpose of acquiring and operating
incumbent telephone companies in rural and small urban markets. Many of our telephone companies
have served their respective communities for over 75 years.
As our primary source of revenues, access lines are an important element of our business. Over
the past several years, communications companies, including FairPoint, have experienced a decline
in access lines due to increased competition, including competition from wireless carriers and
cable television operators, increased availability of broadband services and challenging economic
conditions. In addition, while we were operating under the Transition Services Agreement, we had
limited ability to change current product offerings. Upon completion of the Cutover from the
Verizon systems to the new FairPoint systems, we expected to be able to modify bundles and prices
to be more competitive in the marketplace. However, due to certain systems functionality issues
(as described herein), we have had limited ability to make changes to our product offerings. While
voice access lines are expected to continue to decline, we expect to offset a portion of this lost
revenue with growth in HSD revenue as we continue to build-out our network to provide HSD products
to customers who did not previously have access to such products and to offer more competitive
services to existing customers. In addition, due to the Cutover issues and the Chapter 11 Cases,
we have lost significant market share in recent years. Our strategy will be to leverage our
ubiquitous network in our Northern New England operations to regain market share, particularly in
the business and wholesale markets and for data services.
We are subject to regulation primarily by federal and state governmental agencies. At the
federal level, the FCC generally exercises jurisdiction over the facilities and services of
communications common carriers, such as FairPoint, to the extent those
50
facilities are used to
provide, originate or terminate interstate or international communications. State regulatory
commissions generally exercise jurisdiction over common carriers facilities and services to the
extent those facilities are used to provide, originate or terminate intrastate communications. In
addition, pursuant to the 1996 Act, which amended the Communications Act of 1934, state and federal
regulators share responsibility for implementing and enforcing the domestic pro-competitive
policies introduced by that legislation.
Legacy FairPoints operations and our Northern New England operations operate under different
regulatory regimes in certain respects. For example, concerning interstate access, all of the
pre-Merger regulated interstate services of FairPoint were regulated under a rate-of-return model,
while all of the rate-regulated interstate services provided by the Verizon Northern New England
business were regulated under a price cap model. On May 10, 2010, we received FCC approval to
convert our Legacy FairPoint operations in Maine and Vermont to the price cap model. Our Legacy
FairPoint operations in Maine and Vermont converted to price cap regulation on July 1, 2010. We
have obtained permission to continue to operate our Legacy FairPoint ILECs outside of Maine and
Vermont under the rate-of-return regime until the FCC completes its general review of whether to
modify or eliminate the all-or-nothing rule. Without this permission, the all-or-nothing rule
would require that all of our regulated operations be operated under the price cap model for
federal regulatory purposes. In addition, while all of our operations generally are subject to
obligations that apply to all LECs, our non-rural operations are subject to additional requirements
concerning interconnection, non-discriminatory network access for competitive communications
providers and other matters, subject to substantial oversight by state regulatory commissions. In
addition, the FCC has ruled that our Northern New England operations must comply with the
regulations applicable to the Bell Operating Companies. Our rural and non-rural operations are
also subject to different regimes concerning universal service.
From 2007 through January 2009, we were in the process of developing and deploying new
systems, processes and personnel to replace those used by Verizon to operate and support our
network and back-office functions in the Maine, New Hampshire and Vermont operations acquired from
Verizon. These services were provided by Verizon under the Transition Services Agreement from March
31, 2008 through January 30, 2009. On January 30, 2009, we began the Cutover, and on February 9,
2009, we began operating our new platform of systems independently from the Verizon systems,
processes and personnel.
Following the Cutover, many of these systems functioned without significant problems, but a
number of the key back-office systems, such as order entry, order management and billing,
experienced certain functionality issues as well as issues with communication between the systems.
As a result of these systems functionality issues, as well as work force inexperience on the new
systems, we experienced increased handle time by customer service representatives for new orders,
reduced levels of order flow-through across the systems, which caused delays in provisioning and
installation, and delays in the processing of bill cycles and collection treatment efforts. These
issues impacted customer satisfaction and resulted in large increases in customer call volumes into
our customer service centers. While many of these issues were anticipated, the magnitude of
difficulties experienced was beyond our expectations. Because of these Cutover issues, we have
incurred incremental costs in order to operate our business, including third-party contractor costs
and internal labor costs in the form of overtime pay. By the end of 2010, we have substantially
stabilized the back-office systems. We continue to work on improving our processes and systems to
support revenue growth, enhance customer service and increase operational efficiency.
Fresh Start Accounting
Upon our emergence from Chapter 11 on January 24, 2011, we adopted fresh start accounting
pursuant to which our reorganization value, which represents the fair value of an entity before
considering liabilities and approximates the amount a willing buyer would pay for the assets of the
entity immediately after the reorganization, has been allocated to the fair value of assets in
conformity with guidance under the applicable accounting rules for business combinations, using the
purchase method of accounting for business combinations. In addition to fresh start accounting,
our future consolidated financial statements will reflect all effects of the transactions
contemplated by the Plan, therefore our future statements of financial position and statements of
operations will not be comparable in many respects to our consolidated statements of financial
position and consolidated statements of operations for periods prior to our adoption of fresh start
accounting and prior to accounting for the effects of the reorganization, including the financial
statements contained in this Annual Report on Form 10-K.
51
Basis of Presentation
On March 31, 2008, the Merger between Spinco and Legacy FairPoint was completed. In
connection with the Merger and in accordance with the terms of the Merger Agreement, Legacy
FairPoint issued 53,760,623 shares of the Old Common Stock to Verizon stockholders. Prior to the
Merger, the Verizon Group engaged in a series of restructuring transactions to effect the transfer
of specified assets and liabilities of the Verizon Northern New England business to Spinco and the
entities that became Spincos subsidiaries. Spinco was then spun off from Verizon immediately
prior to the Merger. While FairPoint was the surviving entity in the Merger, for accounting
purposes Spinco is deemed to be the acquirer. As a result, for the year ended December 31, 2008,
the statement of operations and the financial information derived from the statement of operations
in this Annual Report reflect the consolidated financial results of the Company by including the
financial results of the Verizon Northern New England business for the three months ended March 31,
2008, the financial results of Spinco for the nine months ended December 31, 2008 and the financial
results of Legacy FairPoint for the nine months ended December 31, 2008. The statement of
operations and the financial information derived from the statement of operations for the nine
months ended December 31, 2008 in this Annual Report reflects the actual results of the
consolidated Company (FairPoint and Spinco) for such period. The balance sheet and financial
information derived from the balance sheet in this Annual Report reflect the consolidated assets
and liabilities of Legacy FairPoint and Spinco at December 31, 2010 and 2009. Certain assets and
liabilities of the Verizon Northern New England business (principally related to pension, other
post-employment benefits and associated deferred taxes) were not distributed to Spinco prior to the
Merger. The statements of operations in this Annual Report may not be indicative of our future
results. For more information, see note 1 to the consolidated financial statements.
Management views our business of providing data, voice and communication services to
residential and business customers as one business segment as defined in the Segment Reporting
Topic of the ASC.
Revenues
We derive our revenues from:
|
|
|
Voice services. We receive revenues from our telephone operations from the provision
of local exchange, long distance, local private line, wire maintenance, voice messaging
and value-added services. Included in long-distance services revenue are revenues received
from regional toll calls. Value-added services are a family of services that expand the
utilization of the network, including products such as caller ID, call waiting and call
return. The provision of local exchange services not only includes retail revenues but
also includes local wholesale revenues from UNEs, interconnection revenues from CLECs and
wireless carriers, and some data transport revenues. Local calling services revenues also
include Universal Service Fund payments for high-cost loop support, local switching
support, long-term support and ICLS. |
|
|
|
|
Access. We receive revenues for the provision of network access, including interstate
access and intrastate access. |
|
|
|
|
Network access revenues are earned from end-user customers and long-distance and other
competing carriers who use our local exchange facilities to provide usage services to their
customers. Switched access revenues are derived from fixed and usage-based charges paid by
carriers for access to our local network. Special access revenues originate from carriers and
end-users that buy dedicated local and interexchange capacity to support their private
networks. |
|
|
|
|
Interstate access revenues are earned on charges to long-distance carriers and other
customers for access to our networks in connection with the origination and termination of
interstate telephone calls both to and from our customers. Interstate access charges to
long-distance carriers and other customers are based on access rates filed with the FCC. |
|
|
|
|
Intrastate access revenues consist primarily of charges paid by long-distance companies and
other customers for access to our networks in connection with the origination and termination
of intrastate telephone calls both to and from our customers. Intrastate access charges to
long-distance carriers and other customers are based on access rates filed with the state
regulatory agencies. |
52
|
|
|
Data and Internet services. We receive revenues from monthly recurring charges for
services, including HSD, Internet and other services.
|
|
|
|
|
Other services. We receive
revenues from other services, including video services (including cable television and
video-over-DSL), billing and collection, directory services, public (coin) telephone and
the sale and maintenance of customer premise equipment. |
The following summarizes our revenues and percentage of revenues from these sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Revenue (In thousands) |
|
|
% of Revenue |
|
Voice services |
|
$ |
531,623 |
|
|
$ |
581,653 |
|
|
$ |
747,621 |
|
|
|
50 |
% |
|
|
52 |
% |
|
|
59 |
% |
Access |
|
|
381,089 |
|
|
|
380,502 |
|
|
|
370,809 |
|
|
|
36 |
|
|
|
34 |
|
|
|
29 |
|
Data and Internet services |
|
|
110,223 |
|
|
|
109,942 |
|
|
|
114,906 |
|
|
|
10 |
|
|
|
10 |
|
|
|
9 |
|
Other services |
|
|
48,051 |
|
|
|
46,993 |
|
|
|
41,283 |
|
|
|
4 |
|
|
|
4 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,070,986 |
|
|
$ |
1,119,090 |
|
|
$ |
1,274,619 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes access line equivalents (including voice access lines and HSD
lines, which include DSL, wireless broadband, cable modem and fiber-to-the-premises):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Access Line Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential access lines |
|
|
712,591 |
|
|
|
802,668 |
|
|
|
926,610 |
|
Business access lines |
|
|
327,812 |
|
|
|
357,605 |
|
|
|
392,496 |
|
Wholesale access lines(1) |
|
|
87,142 |
|
|
|
97,161 |
|
|
|
107,243 |
|
|
|
|
|
|
|
|
|
|
|
Total switched access lines |
|
|
1,127,545 |
|
|
|
1,257,434 |
|
|
|
1,426,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSD subscribers |
|
|
289,745 |
|
|
|
288,542 |
|
|
|
295,360 |
|
|
|
|
|
|
|
|
|
|
|
Total access line equivalents |
|
|
1,417,290 |
|
|
|
1,545,976 |
|
|
|
1,721,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Wholesale access lines include residential and business resale lines and unbundled network
element platform (UNEP) lines. |
Operating Expenses
Our operating expenses consist of cost of services and sales, selling, general and
administrative expenses, and depreciation and amortization.
|
|
|
Cost of Services and Sales. Cost of services and sales includes the following
costs directly attributable to a service or product: salaries and wages, benefits,
materials and supplies, contracted services, network access and transport costs, customer
provisioning costs, computer systems support and cost of products sold. Aggregate
customer care costs, which include billing and service provisioning, are allocated
between cost of services and sales and selling, general and administrative expenses. |
|
|
|
|
Selling, General and Administrative Expense. Selling, general and administrative
expense includes salaries and wages and benefits not directly attributable to a service
or product, bad debt charges, taxes other than income, advertising and sales commission
costs, customer billing, call center and information technology costs, professional
service fees and rent for administrative space. Also included in selling, general and
administrative expenses are non-cash expenses related to stock based compensation. Stock
based compensation consists of compensation charges incurred in connection with the
employee stock options, stock units and non-vested restricted stock granted to executive
officers, other employees and directors.
|
53
|
|
|
Depreciation and amortization. Depreciation and amortization includes depreciation
of our communications network and equipment and amortization of intangible assets. |
Because the Verizon Northern New England business had been operating as the LEC of Verizon in
Maine, New Hampshire and Vermont, and not as a standalone telecommunications provider, the
historical operating results of the Verizon Northern New England business for the three months
ended March 31, 2008 include approximately $58.0 million of expenses for services provided by the
Verizon Group, including information systems and information technology, shared assets including
office space outside of New England, supplemental customer sales and service and operations. During
the one month ended January 2009 and nine months ended December 31, 2008, we operated under the
Transition Services Agreement, under which we incurred $15.9 million and $148.6 million of
expenses, respectively. Subsequent to January 30, 2009, we performed those services internally or
obtained them from third-party service providers and not from Verizon.
Acquisitions and Dispositions
On March 31, 2008, we completed the Merger with Spinco. The Merger of Legacy FairPoint and
Spinco was accounted for as a reverse acquisition of Legacy FairPoint by Spinco under the purchase
method of accounting because Verizons stockholders owned at least a majority of the shares of the
combined Company following the Merger. The Merger consideration was $316.3 million. Spinco was a
wholly-owned subsidiary of Verizon that owned Verizons local exchange and related business
activities in Maine, New Hampshire and Vermont. Spinco was spun off from Verizon immediately prior
to the Merger. Spinco served approximately 1,562,000 access line equivalents as of the date of
acquisition.
Results of Operations
The following table sets forth the percentages of revenues represented by selected items
reflected in our consolidated statements of operations. The year to year comparisons of financial
results are not necessarily indicative of future results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Year Ended December 31, |
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
% of revenue |
|
|
2009 |
|
|
% of revenue |
|
|
2008 |
|
|
% of revenue |
|
Revenues |
|
$ |
1,070,986 |
|
|
|
100.0 |
% |
|
$ |
1,119,090 |
|
|
|
100.0 |
% |
|
$ |
1,274,619 |
|
|
|
100.0 |
% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
525,728 |
|
|
|
49.1 |
|
|
|
515,394 |
|
|
|
46.1 |
|
|
|
576,786 |
|
|
|
45.3 |
|
Selling, general and
administrative expense |
|
|
365,373 |
|
|
|
34.1 |
|
|
|
417,512 |
|
|
|
37.3 |
|
|
|
384,388 |
|
|
|
30.2 |
|
Depreciation and amortization |
|
|
289,824 |
|
|
|
27.1 |
|
|
|
275,334 |
|
|
|
24.6 |
|
|
|
255,032 |
|
|
|
20.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,180,925 |
|
|
|
110.3 |
|
|
|
1,208,240 |
|
|
|
108.0 |
|
|
|
1,216,206 |
|
|
|
95.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(109,939 |
) |
|
|
(10.3 |
) |
|
|
(89,150 |
) |
|
|
(8.0 |
) |
|
|
58,413 |
|
|
|
4.5 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(140,896 |
) |
|
|
(13.2 |
) |
|
|
(204,919 |
) |
|
|
(18.3 |
) |
|
|
(162,040 |
) |
|
|
(12.7 |
) |
Gain (loss) on derivative
instruments |
|
|
|
|
|
|
|
|
|
|
12,320 |
|
|
|
1.1 |
|
|
|
(11,800 |
) |
|
|
(0.9 |
) |
Gain on early retirement of debt |
|
|
|
|
|
|
|
|
|
|
12,357 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
2,715 |
|
|
|
0.3 |
|
|
|
2,000 |
|
|
|
0.2 |
|
|
|
3,494 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(138,181 |
) |
|
|
(12.9 |
) |
|
|
(178,242 |
) |
|
|
(15.9 |
) |
|
|
(170,346 |
) |
|
|
(13.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before reorganization items
and income taxes |
|
|
(248,120 |
) |
|
|
(23.2 |
) |
|
|
(267,392 |
) |
|
|
(23.9 |
) |
|
|
(111,933 |
) |
|
|
(8.8 |
) |
Reorganization items |
|
|
(41,120 |
) |
|
|
(3.8 |
) |
|
|
(53,018 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(289,240 |
) |
|
|
(27.0 |
) |
|
|
(320,410 |
) |
|
|
(28.6 |
) |
|
|
(111,933 |
) |
|
|
(8.8 |
) |
Income tax benefit |
|
|
7,661 |
|
|
|
0.7 |
|
|
|
79,014 |
|
|
|
7.0 |
|
|
|
43,408 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(281,579 |
) |
|
|
(26.3 |
)% |
|
$ |
(241,396 |
) |
|
|
(21.6 |
)% |
|
$ |
(68,525 |
) |
|
|
(5.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Revenues
Revenues decreased $48.1 million to $1,071.0 million in 2010 compared to 2009. Revenues in
each of our revenue categories have been impacted by continued weakness of the economy during 2010,
which has caused a decrease in discretionary consumer spending and resulted in an increase in
access line losses and a decrease in usage. Our voice revenues have also been adversely impacted
by the effects of competition and the use of alternative technologies. Additionally, because of
Cutover issues that prevented us from executing fully on our operating plan for 2009, as well as
detrimental effects of the Chapter 11 Cases, our revenue has continued to decline. We derived our
revenues from the following sources:
Voice services. Voice services revenues decreased $50.0 million to $531.6 million in 2010.
This decrease consists of a $30.8 million decrease in long distance services revenues and an $19.2
million decrease in local calling services revenues and is primarily attributable to a 10.3%
decline in total voice access lines in service at December 31, 2010 compared to December 31, 2009,
largely offset by a $14.3 million decline in SQI penalties in
addition to a $12.7 million reduction of an accrual for
forgiveness of fiscal 2008 and 2009 SQI penalties in New Hampshire and Vermont. SQI penalties are
settled by crediting customer accounts and are recorded as a reduction to revenue. The decrease in
the number of voice access lines is due to an increase in competition from technology substitution
and the weakness of the economy.
Access. Access revenues were steady in 2010, increasing $0.6 million to $381.1 million in
2010 compared to 2009. Of this increase, $12.2 million is attributable to an increase in
interstate access revenues, largely offset by an $11.6 million decrease in intrastate access
revenues. Decreases of $7.4 million (9.9%) and $10.4 million (9.7%) in switched access revenues
and end user revenues, respectively, were primarily attributable to a 10.3% decline in total voice
access lines in service at December 31, 2010 compared to December 31, 2009. However, these
declines were more than offset by an $18.3 million (10.4%) increase in special access revenues
driven by increased efforts to sell our excess network capacity to other carriers as well as the
availability of such excess capacity resulting from the build-out of our Next Generation Network.
Data and Internet services. Data and Internet services revenues increased $0.3 million to
$110.2 million in 2010 compared to 2009. This increase is primarily attributable to an increase in
HSD subscribers resulting from our bundling and other marketing efforts.
Other services. Other services revenues increased $1.1 million to $48.1 million in 2010
compared to 2009.
Operating Expenses
Cost of services and sales. Cost of services and sales increased $10.3 million to $525.7
million in 2010 compared to 2009. This increase is primarily attributable to the write-off of
abandoned projects in 2010 of approximately $15.1 million. Cost of services and sales was also
impacted by certain non-recurring items totaling approximately $13.3 million.
Excluding the abandonment charges and the prior year expenses, cost of services and sales would
have declined approximately $18.1 million.
Selling, general and administrative. Selling, general and administrative expenses decreased
$52.1 million to $365.4 million in 2010 compared to 2009. The decrease is primarily attributable
to a $27.9 million reduction in bad debt expense due to improved cash collections during 2010 and
settlements with CLECs related to the Chapter 11 Cases. Additionally, prior to the Petition
Date, all expenses related to restructuring activities were classified as selling, general and
administrative expenses. During the Chapter 11 Cases, such expenses have been classified as
Reorganization items. Accordingly, the year ended December 31, 2009 included $11.1 million in
restructuring expenses as compared to zero for the year ended December 31, 2010.
Depreciation and amortization. Depreciation and amortization increased $14.5 million to
$289.8 million in 2010 compared to 2009, due primarily to significant capital expenditures in 2010
and the placement of plant assets into service.
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Included in operating expenses are non-cash stock based compensation expenses associated
with the award of restricted stock and stock units. Stock based compensation expenses totaled $0.5
million and $2.1 million for the years ended December 31, 2010 and 2009, respectively.
Other Results
Interest expense. Interest expense decreased $64.0 million to $140.9 million in 2010 compared
to 2009. Upon the filing of the Chapter 11 Cases, in accordance with the Reorganizations Topic of
the ASC, we ceased the accrual of interest expense on the Pre-Petition Notes and the interest rate
swap agreements under the ISDA Master Agreement with Wachovia Bank, N.A., dated as of December 12,
2000, as amended and restated as of February 1, 2008, and the ISDA Master Agreement with Morgan
Stanley Capital Services Inc., dated as of February 1, 2005 (collectively, the Swaps) as it was
unlikely that such interest expense would be paid or would become an allowed priority secured or
unsecured claim, resulting in a significant decrease in 2010 interest expense. We continued to
accrue interest expense on the Pre-Petition Credit Facility, as such interest is considered an
allowed claim pursuant to the Plan.
Gain (loss) on derivative instruments. Gain (loss) on derivative instruments represents net
gains and losses recognized on the change in fair market value of interest rate swap derivatives.
During the year ended December 31, 2009 we recognized a net non-cash gain of $12.3 million related
to our derivative financial instruments. In connection with the filing of the Chapter 11 Cases,
the Swaps were terminated by the counterparties and have been recorded on the consolidated balance
sheet at the termination values provided by the counterparties. Accordingly, we recognized no gain
or loss on derivative instruments during the year ended December 31, 2010.
Gain on early retirement of debt. Gain on early retirement of debt represents $13.2 million
net gains recognized on the repurchase of $19.9 million aggregate principal amount of the Old Notes
during the year ended December 31, 2009, partially offset by a loss of $0.8 million attributable to
writing off a portion of the unamortized debt issue costs associated with the Pre-Petition Credit
Facility. We did not retire any debt during the year ended December 31, 2010 and thus did not
recognize any gain or loss on early retirement of debt during such period.
Other income (expense). Other income (expense) includes non-operating gains and losses
such as those incurred on sale or disposal of equipment. Other income was $2.7 million in 2010
compared to other income of $2.0 million in 2009. This increase is primarily attributable to a
$3.0 million lease contract settlement with a vendor that occurred during the third quarter of
2010.
Reorganization items. Reorganization items represent expense or income amounts that have been
recognized as a direct result of the Chapter 11 Cases. For more information, see note 2 to the
consolidated financial statements.
Income taxes. The effective income tax rate is the provision for income taxes stated as a
percentage of income before the provision for income taxes. The effective income tax rate for the
years ended December 31, 2010 and 2009 was 2.6% benefit and 24.7% benefit, respectively. The
effective tax rate for the year ended December 31, 2010 was impacted by a one-time, non-cash income
tax charge of $6.8 million, as a result of the enactment of Patient Protection and Affordable Care
Act and the Health Care and Education Reconciliation Act of 2010, both of which became law in March
2010 (collectively, the Health Care Act). The effective tax rate was also impacted by
non-deductible restructuring charges and post-petition interest, as well as a significant increase
in our valuation allowance for deferred tax assets due to our inability, by rule, to rely on future
earnings to offset our NOLs during the Chapter 11 Cases. Upon the Effective Date, our NOLs will be
substantially reduced by the recognition of gains on the discharge of certain debt pursuant to the
Plan. Further, our ability to utilize our NOL carryforwards will be limited by Section 382 of the
Internal Revenue Code of 1986, as amended, upon emergence as the debt restructuring constitutes an
ownership change. We expect to pay minimal cash taxes in 2011.
Net loss. Net loss for the year ended December 31, 2010 was $(281.6) million compared to net
loss of $(241.4) million for the year ended December 31, 2009. The difference in net loss between
2010 and 2009 is a result of the factors discussed above.
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Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
Revenues
Revenues decreased $155.5 million to $1,119.1 million in 2009 compared to 2008. The
acquisition of the Telecom Group contributed $245.5 million and $196.7 million to total revenues in
the years ended December 31, 2009 and 2008, respectively. Excluding the acquisition of the Telecom
Group, combined total revenue would have decreased $204.3 million. Revenues in each of our revenue
categories were impacted by the weakness of the economy during 2008 and 2009, which caused a
decrease in discretionary consumer spending and resulted in an increase in access line losses and a
decrease in usage. Our revenues have also been adversely impacted by the effects of competition
and the use of alternative technologies. Additionally, because of Cutover issues that prevented us
from executing fully on our operating plan for 2009, as well as detrimental effects of the Chapter
11 Cases, our revenue has continued to decline. We derived our revenues from the following
sources:
Voice services. Voice service revenues decreased $166.0 million to $581.7 million in 2009.
The Telecom Group contributed $98.4 million and $84.6 million to voice service revenue for the
years ended December 31, 2009 and 2008, respectively. Excluding the acquisition of the Telecom
Group, voice service revenues would have decreased $179.8 million. This decrease consists of a
$137.0 million decrease in local calling services revenues and a $42.8 million decrease in long
distance services revenues. The decrease is partially attributable to a reduction in revenue
totaling $26.0 million for the year ended December 31, 2009 for service quality penalties incurred
in the northern New England states coupled with an 11.8% decline in total voice access lines in
service at December 31, 2009 compared to December 31, 2008. The revenue decline was mainly driven
by the effects of competition and technology substitution, partially offset by increased revenue
from bundled product offerings designed to retain customers and generate more revenue.
Access. Access revenues increased $9.7 million to $380.5 million in 2009 compared to 2008.
The Telecom Group contributed $93.5 million and $71.4 million to access revenues for the years
ended December 31, 2009 and 2008, respectively. Excluding the acquisition of the Telecom Group,
access revenues would have decreased $12.4 million. Of this decrease, $9.5 million is attributable
to a decrease in interstate access revenues and $2.9 million is attributable to a decrease in
intrastate access revenues. Decreases in interstate and intrastate access revenues are
attributable to decreases in access rates and minutes of use compared to 2008, reflecting the
impact of access line loss and technology substitution as well as weakness of the economy.
Data and Internet services. Data and Internet services revenues decreased $5.0 million to
$109.9 million in 2009 compared to 2008. The Telecom Group contributed $36.6 million and $27.6
million to data and Internet services revenues in the years ended December 31, 2009 and 2008,
respectively. Excluding the acquisition of the Telecom Group, data and Internet services would
have decreased $14.0 million. This decrease is primarily due to a slowing in our HSD subscriber
growth, caused by the absence of promotional advertising on our data and Internet products due to
Cutover issues as well as the weakness of the economy.
Other services. Other services revenues increased $5.7 million to $47.0 million in 2009
compared to 2008. The Telecom Group contributed $16.9 million and $13.1 million to other services
revenues in the years ended December 31, 2009 and 2008, respectively. Excluding the acquisition of
the Telecom Group, other services revenue would have increased $1.9 million.
Operating Expenses
Cost
of services and sales. Cost of services and sales decreased $61.4 million to $515.4
million in 2009 compared to 2008. The Telecom Group contributed $88.7 million and $80.5 million to
cost of services and sales in the years ended December 31, 2009 and 2008, respectively. Also
included in cost of services and sales for the years ended December 31, 2009 and 2008 are $6.1
million and $56.7 million, respectively, of expenses related to the Transition Services Agreement,
which was terminated on January 30, 2009. Excluding the acquisition of the Telecom Group and the
Transition Services Agreement, cost of services and sales would have declined $19.0 million. The
decline reflects the elimination of costs allocated from Verizon affiliates prior to the closing of
the Merger and the methodology utilized by Verizon to allocate certain expenses to cost of services
and sales prior to the Cutover to our own operating systems, which have more than offset direct
costs incurred by us to operate our Northern New England operations.
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Selling, general and administrative. Selling, general and administrative expenses increased
$33.1 million to $417.5 million in 2009 compared to 2008. The Telecom Group contributed $79.2
million and $38.1 million to selling, general and administrative expenses in the years ended
December 31, 2009 and 2008, respectively. Included in selling, general and administrative expenses
in the years ended December 31, 2009 and 2008 are $9.8 million and $91.9 million, respectively, of
expenses related to the Transition Services Agreement, and $28.0 million and $52.2 million,
respectively, of non-recurring Cutover related costs. Excluding the acquisition of the Telecom
Group and the Transition Services Agreement, selling, general and administrative expenses would
have increased $98.3 million. The increase is primarily due to a $23.2 million increase in bad
debt expense, increases in other operating expenses, some of which are attributable to the
methodology utilized by Verizon to allocate certain expenses to selling, general and administrative
expenses prior to the Cutover to our own operating systems, as well as $11.1 million in costs
incurred to effect a restructuring of our capital structure prior to filing bankruptcy.
Depreciation and amortization. Depreciation and amortization increased $20.3 million to
$275.3 million in 2009 compared to 2008. The Telecom Group contributed $36.7 million and $27.8
million to depreciation and amortization expense in the years ended December 31, 2009 and 2008,
respectively. Excluding the acquisition of the Telecom Group, depreciation and amortization
expense would have increased $11.4 million, due primarily to increased gross plant asset balances,
including capitalized software placed into service upon termination of the Transition Services
Agreement. Also contributing to the increase in depreciation and amortization expense in 2009 is
an increase of $5.6 million in amortization expense on intangible assets acquired in the Merger, as
no such amortization was recognized during the first quarter of 2008, prior to the Merger.
Included in operating expenses are non-cash stock based compensation expenses associated with
the award of restricted stock and restricted units. Stock based compensation expenses totaled $2.1
million and $4.4 million for the years ended December 31, 2009 and 2008, respectively.
Other Results
Interest expense. Interest expense increased $42.9 million to $204.9 million in 2009 compared
to 2008. This increase is due to the debt that we incurred upon and subsequent to the closing of
the Merger. Accrued and unpaid interest on the Old Notes exchanged in connection with our offer to
exchange the Old Notes for the New Notes (the Exchange Offer) through July 28, 2009 was paid on
July 29, 2009 in the form of additional New Notes totaling $18.9 million. Accrued and unpaid
interest on the New Notes from July 29, 2009 through September 30, 2009 was payable in the form of
additional New Notes totaling $12.2 million. This $31.1 million interest expense paid or payable
in the form of New Notes has been treated as non-cash for purposes of our financial debt covenants
under the Pre-Petition Credit Facility. Additionally, upon the filing of the Chapter 11 Cases, in
accordance with the Reorganizations Topic of the ASC, we ceased the accrual of interest expense on
the Pre-Petition Notes and the Swaps as it was unlikely that such interest expense would be paid or
would become an allowed priority, secured or unsecured claim. We continued to accrue interest
expense on the Pre-Petition Credit Facility, as such interest is considered an allowed claim
pursuant to the Plan.
Gain (loss) on derivative instruments. Gain (loss) on derivative instruments represents net
gains and losses recognized on the change in fair market value of interest rate swap derivatives.
During the years ended December 31, 2009 and 2008, respectively, we recognized a net non-cash gain
of $12.3 million and a net non-cash loss of $11.8 million related to our derivative financial
instruments. In connection with the filing of the Chapter 11 Cases, the Swaps were terminated by
the counterparties and have been recorded on the consolidated balance sheet at the termination
values provided by the counterparties.
Gain on early retirement of debt. Gain on early retirement of debt represents $13.2 million
net gains recognized on the repurchase of $19.9 million aggregate principal amount of the Old Notes
during the year ended December 31, 2009, partially offset by a loss of $0.8 million attributable to
writing off a portion of the unamortized debt issue costs associated with the Pre-Petition Credit
Facility.
Other income (expense). Other income (expense) includes non-operating gains and losses such
as those incurred on sale of equipment. Other income decreased $1.5 million to $2.0 million in
2009 compared to 2008.
Reorganization items. Reorganization items represent expense or income amounts that have been
recognized as a direct result of the Chapter 11 Cases. For more information, see note 2 to the
consolidated financial statements.
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Income taxes. The effective income tax rate is the provision for income taxes stated as a
percentage of income before the provision for income taxes. The effective income tax rate for the
year ended December 31, 2009 and 2008 was 24.7% benefit and 38.8% benefit, respectively. The
significant decrease in the effective tax rate is due primarily to an increase in our deferred tax
valuation allowance, as well as non-deductible restructuring charges and post-petition interest.
Net income (loss). Net loss for the year ended December 31, 2009 was $(241.4) million
compared to net loss of $(68.5) million for the year ended December 31, 2008. The difference in net
loss between 2009 and 2008 is a result of the factors discussed above.
Liquidity and Capital Resources
Our short-term and long-term liquidity needs arise primarily from: (i) interest and principal
payments on our indebtedness; (ii) capital expenditures; and (iii) working capital requirements as
may be needed to support and grow our business. Our current and future liquidity is greatly dependent upon our operating results. We expect that our primary
sources of liquidity will be cash flow from operations, cash on hand and funds available under the
Exit Credit Agreement.
Based on our current and anticipated levels of operations and conditions in our markets, we
believe that cash on hand (including amounts available under our Exit Credit Agreement) as well as
cash flow from operations will enable us to meet our working capital, capital expenditure, debt
service and other funding requirements for at least the next 12 months. We expect to be in
compliance with the covenants contained in our financing agreements in 2011. However, our
anticipated results are subject to significant uncertainty and our ability to comply with this
limitation may be affected by events beyond our control, including prevailing economic, financial
and industry conditions. The breach of certain covenants set forth in our financing agreements
could result in an event of default thereunder. An event of default would permit the lenders under
a defaulted financing agreement to declare all indebtedness thereunder to be due and payable prior
to maturity. Moreover, the lenders under our Exit Revolving Facility under our Exit Credit
Agreement would have the option to terminate their commitments to make further extensions of
revolving credit thereunder. If we are unable to repay our obligations under our Exit Credit
Agreement, the lenders could proceed against any assets that were pledged to secure such facility.
Cash and cash equivalents at December 31, 2010 totaled $105.5 million compared to $109.4
million at December 31, 2009, excluding restricted cash of $4.1 million and $4.0 million,
respectively.
On the Effective Date, we significantly reduced our cash on hand by approximately $91.0
million to establish a cash reserve (the Claims Reserve) from which outstanding bankruptcy claims
and various other bankruptcy related fees will be paid. Tax related claims were not included in
the Claims Reserve. As of the Effective Date, cash and cash equivalents totaled $15.7 million,
excluding Claims Reserve of $77.9 million, following payment of $13.1 million in claims on the
Effective Date. In accordance with the Plan, to the extent that claims are settled for amounts
lower than estimated in the Claims Reserve, we could reclaim restricted cash of up to $32.6
million.
Net cash provided by operating activities was $191.6 million, $150.3 million and $57.5 million
for the years ended December 31, 2010, 2009 and 2008, respectively.
Net cash used in investing activities was $197.3 million, $177.4 million and $283.3 million
for the years ended December 31, 2010, 2009 and 2008, respectively. These cash flows primarily
reflect capital expenditures of $197.8 million, $178.8 million and $297.0 million for the years
ended December 31, 2010, 2009 and 2008, respectively. Net cash used in investing activities also
includes acquired cash of $11.4 million for the year ended December 31, 2008.
Net cash provided by financing activities was $1.8 million, $66.1 million and $296.2 million
for the years ended December 31, 2010, 2009 and 2008, respectively. For the year ended December 31,
2010, we drew down $5.5 million on letters of credit under the Pre-Petition Credit Facility and
incurred $1.5 million of loan origination costs on the DIP Credit Agreement. For the year ended
December 31, 2009, net proceeds from our issuance of long-term debt were $50.0 million, repayment
of long-term debt was $20.8 million and dividends paid to stockholders was $23.0 million.
Additionally, $65.1 million was released from restricted cash during the year ended December 31,
2009. For the year ended December 31, 2008, net proceeds from our issuance of long-term debt were
$1,930.0 million, repayment of long-term debt was $687.5 million and dividends to stockholders was
$1,220.0 million, of which $1,160.0 million was paid to Verizon by Spinco as a dividend in
connection with the Merger.
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We expect our capital expenditures will be approximately $180 million to $200 million in 2011.
We anticipate that we will fund these expenditures through cash flows from operations, cash on
hand and funds available under the Exit Credit Agreement.
We have a five year contract with our primary IT vendor which was executed in 2009. In 2010,
we spent approximately $28.3 million for services under such contract, of which approximately $12.9
million was capitalized in accordance with the Intangibles Goodwill and Other Topic and the
Interest Topic of the ASC and approximately $15.4 million was included in operating expenses. Our
contract includes a baseline spend in 2011 with this vendor of approximately $22.1 million, which
will be allocated between capital expenditures and operating expenses depending on the type of
activities performed. While the contract term is five years, we have the ability to reduce the
amount we spend with this vendor below the baseline amount by either in-sourcing certain work
functions or finding alternate vendors. In order to reduce our spend below the contractual amount,
we are required to provide six months notice to the vendor for the work functions we wish to move
or eliminate.
We expect our contributions to our Company sponsored employee pension plans and
post-retirement healthcare plans will be approximately $9.3 million in 2011.
Exit Credit Agreement
On the Effective Date, FairPoint Communications and FairPoint Logistics entered into the Exit
Credit Agreement. The Exit Credit Agreement is comprised of the Exit Revolving Facility and the
Exit Credit Agreement Loans. On the Effective Date, we paid to the lenders providing the Exit
Revolving Facility an aggregate fee equal to $1.5 million. Interest on the Exit Credit Agreement
Loans accrues at an annual rate equal to either (a) LIBOR plus 4.50%, with a minimum LIBOR floor of
2.00% for the Exit Term Loan, or (b) a base rate plus 3.50% per annum in which base rate is equal
to the highest of (x) Bank of Americas prime rate, (y) the federal funds effective rate plus 0.50%
and (z) LIBOR (with minimum LIBOR floor of 2.00%) plus 1.00%. In addition, we are required to pay a
0.75% per annum commitment fee on the average daily unused portion of the Exit Revolving Facility.
The entire outstanding principal amount of the Exit Credit Agreement Loans is due on the Exit
Maturity Date; provided that on the third anniversary of the Effective Date, we must elect (subject
to the absence of events of default under the Exit Credit Agreement) to continue the maturity of
the Exit Revolving Facility and must pay a continuation fee of $0.75 million and, on the fourth
anniversary of the Effective Date, we must elect (subject to the absence of events of default under
the Exit Credit Agreement) to continue the maturity of the Exit Revolving Facility and must pay a
second continuation fee of $0.75 million. The Exit Credit Agreement requires quarterly repayments
of principal of the Exit Term Loan after the first anniversary of the Effective Date. In the second
and third years following the Effective Date, such quarterly payments shall each be in an amount
equal to $2.5 million; during the fourth year following the Effective Date, such quarterly payments
shall each be in an amount equal to $6.25 million; and for the first three quarters during the
fifth year following the Effective Date, such quarterly payments shall each be in an amount equal
to $12.5 million, with all remaining outstanding amounts owed in respect of the Exit Term Loan
being due and payable on the Exit Maturity Date.
The Exit Credit Agreement Loans are guaranteed by all of our current and future direct and
indirect subsidiaries, other than (x) any subsidiary that is prohibited by applicable law from
guaranteeing the obligations under the Exit Credit Agreement Loans and/or providing any security
therefor without the consent of a state public utilities commission, and (y) the Exit Financing
Loan Parties. The Exit Credit Agreement Loans as a whole are secured by liens upon substantially
all existing and after-acquired assets of the Exit Financing Loan Parties, with first lien and
payment waterfall priority for the Exit Revolving Facility and second lien priority for the Exit
Term Loan.
The Exit Credit Agreement contains customary representations, warranties and affirmative
covenants. In addition, the Exit Credit Agreement contains restrictive covenants that limit, among
other things, the ability of the Exit Financing Loan Parties to incur indebtedness, create liens,
engage in mergers, consolidations and other fundamental changes, make investments or loans, engage
in transactions with affiliates, pay dividends, make capital expenditures and repurchase capital
stock. The Exit Credit Agreement also contains minimum interest coverage and maximum total leverage
maintenance covenants, along with a maximum senior leverage covenant measured upon the incurrence
of certain types of debt. The Exit Credit Agreement contains certain events of default, including
failure to make payments, breaches of covenants and representations, cross defaults to other
material indebtedness, unpaid and uninsured judgments, changes of control and bankruptcy events of
default. The lenders commitments to fund amounts under the Exit Credit Agreement are subject to
certain customary conditions.
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The above summary of the material terms of the Exit Credit Agreement Loans does not purport to
be complete and is qualified in its entirety by reference to the text of (i) the Exit Credit
Agreement, (ii) the Pledge Agreement, dated as of the Effective Date, made by the pledgors party
thereto in favor of Bank of America, N.A., as administrative agent, for the benefit of certain
secured parties, (iii) the Security Agreement, dated as of the Effective Date, by and among
FairPoint Communications, FairPoint Logistics, our subsidiaries party thereto and Bank of America,
N.A., as administrative agent, for the benefit of certain secured parties and (iv) the Continuing
Guaranty Agreement, dated as of the Effective Date, made by and among the guarantors party thereto
in favor of Bank of America, N.A., as administrative agent, for the benefit of certain secured
parties.
Our DIP Facility
In connection with the Chapter 11 Cases, the DIP Borrowers, on October 27, 2009, entered into
the DIP Credit Agreement with the DIP Lenders and the DIP Administrative Agent. The DIP Credit
Agreement provided for a revolving facility in an aggregate principal amount of up to $75.0
million, of which up to $30.0 million was also available in the form of one or more letters of
credit that may be issued to third parties for our account (the DIP Financing). Pursuant to an
Order of the Bankruptcy Court, dated October 28, 2009 (the Interim Order), the DIP Borrowers were
authorized to enter into and immediately draw upon the DIP Credit Agreement on an interim basis in
an aggregate amount of $20.0 million, pending a final hearing before the Bankruptcy Court. Pursuant
to a final order of the Bankruptcy Court, dated March 11, 2010 (the Final DIP Order), the DIP Borrowers were
permitted access to the total $75.0 million of the DIP Financing, subject to the terms and
conditions of the DIP Credit Agreement and related orders of the Bankruptcy Court. As of December
31, 2010 and 2009, we had not borrowed any amounts under the DIP Credit Agreement other than
letters of credit totaling $18.7 million and $1.6 million, respectively, that had been issued and
were outstanding under the DIP Credit Agreement.
The DIP Financing matured and was repayable in full on the earlier to occur of (i) January 31,
2011, which date could have been extended for up to an additional two months with the consent of
the Required Lenders (as defined in the DIP Credit Agreement) for no additional fee, (ii) the
Effective Date, (iii) the voluntary reduction by the DIP Borrowers to zero of all commitments to
lend under the DIP Credit Agreement, or (iv) the date on which the obligations under the DIP
Financing were accelerated by the non-defaulting DIP Lenders holding a majority of the aggregate
principal amount of the outstanding loans and letters of credit plus unutilized commitments under
the DIP Financing upon the occurrence and during the continuance of certain events of default.
On the Effective Date, the DIP Credit Agreement was converted into the new $75.0 million Exit
Revolving Facility with a five-year term.
Our Pre-Petition Credit Facility
Our $2,030.0 million Pre-Petition Credit Facility consisted of a non-amortizing revolving
facility in an aggregate principal amount of $200.0 million, a senior secured term loan A facility
in an aggregate principal amount of $500.0 million (the Term Loan A Facility), a senior secured
term loan B facility in the aggregate principal amount of $1,130.0 million (the Term Loan B
Facility and, together with the Term Loan A Facility, the Term Loan) and a delayed draw term
loan facility in an aggregate principal amount of $200.0 million (the Delayed Draw Term Loan).
Spinco drew $1,160.0 million under the Term Loan immediately prior to being spun off by Verizon,
and then FairPoint drew $470.0 million under the Term Loan and $5.5 million under the Delayed Draw
Term Loan concurrently with the closing of the Merger.
Subsequent to the Merger, we borrowed the remaining $194.5 million available under the Delayed
Draw Term Loan. These funds were used for certain capital expenditures and other expenses
associated with the Merger.
On October 5, 2008, the administrative agent under our Pre-Petition Credit Facility (the
administrative agent) filed for bankruptcy. The administrative agent accounted for thirty
percent of the loan commitments under the Revolving Credit Facility. On January 21, 2009, we
entered into an amendment to our Pre-Petition Credit Facility (the Pre-Petition Credit Facility
Amendment) under which, among other things, the administrative agent resigned and was replaced by
a new administrative agent. In addition, the resigning administrative agents undrawn commitments
under the Revolving Credit Facility, totaling $30.0 million, were terminated and were thus no
longer available to us.
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The Revolving Credit Facility had a swingline subfacility in the amount of $10.0 million and a
letter of credit subfacility in the amount of $30.0 million, which allowed for issuances of standby
letters of credit for our account. Our Pre-Petition Credit Facility also permitted interest rate
and currency exchange swaps and similar arrangements that we may have entered into with the lenders
under our Pre-Petition Credit Facility and/or their affiliates.
As of December 31, 2010, we had borrowed $155.5 million under the Revolving Credit Facility
and there were no outstanding letters of credit. Upon the event of default under the Pre-Petition
Credit Facility relating to the Chapter 11 Cases described herein, the commitments under the
Revolving Credit Facility were automatically terminated. Accordingly, as of December 31, 2010, no
funds remained available under the Revolving Credit Facility.
The Term Loan B Facility and the Delayed Draw Term Loan would have matured in March 2015 and
the Revolving Credit Facility and the Term Loan A Facility would have matured in March 2014. Each
of the Term Loan A Facility, the Term Loan B Facility and the Delayed Draw Term Loan were repayable
in quarterly installments in the manner set forth in our Pre-Petition Credit Facility.
Borrowings under our Pre-Petition Credit Facility bore interest at variable interest rates.
Interest rates for borrowings under our Pre-Petition Credit Facility were, at our option, for the
Revolving Credit Facility and for the Term Loans, at either (a) the Eurodollar rate, as defined in
the Pre-Petition Credit Facility, plus an applicable margin or (b) the base rate, as defined in the
Pre-Petition Credit Facility, plus an applicable margin.
Our Pre-Petition Credit Facility contained customary affirmative covenants and also contained
negative covenants and restrictions, including, among others, with respect to the redemption or
repurchase of our other indebtedness, loans and investments, additional indebtedness, liens,
capital expenditures, changes in the nature of our business, mergers, acquisitions, asset sales and
transactions with affiliates.
Scheduled amortization payments on our Pre-Petition Credit Facility began in 2009. No
principal payments were due on the Pre-Petition Notes prior to their maturity. Following the
filing of the Chapter 11 Cases, we did not make any additional principal or interest payments on
our pre-petition debt.
For the year ended December 31, 2009, we repaid $8.4 million of principal under the Term Loan
A Facility and $6.1 million of principal under the Term Loan B Facility.
On the Effective Date, the Pre-Petition Credit Facility and all obligations thereunder (except
that the Pre-Petition Credit Facility continues in effect solely for the purposes of allowing
creditors under the Pre-Petition Credit Facility to receive distributions under the Plan and to
preserve certain rights of the administrative agent) were terminated.
Our Pre-Petition Notes
Spinco issued, and we assumed in the Merger, $551.0 million aggregate principal amount of the
Old Notes. The Old Notes were to mature on April 1, 2018 and were not redeemable at our option
prior to April 1, 2013. Interest was payable on the Old Notes semi-annually, in cash, on April 1
and October 1. The Old Notes bore interest at a fixed rate of 13 1/8% and principal was due at
maturity. The Old Notes were issued at a discount and, accordingly, at the date of their
distribution, the Old Notes had a carrying value of $539.8 million (principal amount at maturity of
$551.0 million less discount of $11.2 million). Following the filing of the Chapter 11 Cases, $9.9
million of discount on the Pre-Petition Notes was written off in order to adjust the carrying
amount of our pre-petition debt to the Bankruptcy Court approved amount of the allowed claims for
our pre-petition debt.
Pursuant to the Exchange Offer, on July 29, 2009, we exchanged $439.6 million in aggregate
principal amount of the Old Notes (which amount was equal to approximately 83% of the then
outstanding Old Notes) for $458.5 million in aggregate principal amount of the New Notes (which
amount included New Notes issued to tendering noteholders as payment for accrued and unpaid
interest on the exchanged Old Notes up to, but not including, the Settlement Date). The New Notes
were to mature on April 2, 2018 and bore
62
interest
at a fixed rate of
131/8%, payable in cash, except that the New Notes bore interest at a rate of 15% for the period from July 29, 2009 through and
including September 30, 2009. In addition, we were permitted to pay the interest payable on the
New Notes for the Initial Interest Payment Period in the form of cash, by capitalizing such
interest and adding it to the principal amount of the New Notes or a combination of both cash and
such capitalization of interest, at our option.
Upon the consummation of the Exchange Offer and the corresponding consent solicitation,
substantially all of the restrictive covenants in the indenture governing the Old Notes were
deleted or eliminated and certain of the events of default and various other provisions contained
therein were modified.
In connection with the Exchange Offer and the corresponding consent solicitation, we also paid
a cash consent fee of $1.6 million in the aggregate to holders of Old Notes who validly delivered
and did not revoke consents in the consent solicitation prior to a specified early consent
deadline.
The New Indenture limited, among other things, our ability to incur additional indebtedness,
issue certain preferred stock, repurchase our capital stock or subordinated debt, make certain
investments, create certain liens, sell certain assets or merge or consolidate with or into other
companies, incur restrictions on the ability of our subsidiaries to make distributions or transfer
assets to us and enter into transactions with affiliates.
The New Indenture also restricted our ability to pay dividends on or repurchase our common
stock under certain circumstances.
Following the filing of the Chapter 11 Cases, we made no payments on our pre-petition debt.
During the year ended December 31, 2009, we repurchased $19.9 million in aggregate principal amount
of the Old Notes for an aggregate purchase price of $6.3 million in cash. In total, including
amounts repaid under the Term Loan A Facility and Term Loan B Facility, we retired $34.5 million of
outstanding debt during the year ended December 31, 2009.
Prior to the filing of the Chapter 11 Cases, we failed to make the October 1, 2009 interest
payment on the Pre-Petition Notes. The failure to make the interest payment on the Pre-Petition
Notes constituted an event of default under the Pre-Petition Notes upon the expiration of a thirty day grace period. An event of default under the Pre-Petition Notes
permitted the holders of the Pre-Petition Notes to accelerate the maturity of the Pre-Petition
Notes. In addition, the filing of the Chapter 11 Cases constituted an event of default under the
New Notes.
In addition, as a result of the 2009 Restatement, we determined that we were not in compliance
with the interest coverage ratio maintenance covenant and the leverage ratio maintenance covenant
under our Pre-Petition Credit Facility for the measurement period ended June 30, 2009, which
constituted an event of default under each of the Pre-Petition Credit Facility and the Swaps, and
may have constituted an event of default under the Pre-Petition Notes, in each case at June 30,
2009.
On the Effective Date, all outstanding obligations under the Pre-Petition Notes and the
indentures governing the Pre-Petition Notes were terminated.
Other Pre-Petition Agreements
As a condition to the approval of the Merger and related transactions by state regulatory
authorities we agreed to make certain capital expenditures following the completion of the Merger.
The Merger Orders have been modified by Regulatory Settlements agreed to with representatives for
each of Maine, New Hampshire and Vermont, and approved by the applicable regulatory authorities in
Maine, New Hampshire and Vermont, and approved by the Bankruptcy Court as part of the Plan. For a
description of these capital expenditure requirements, see Item 1. Business Regulatory
Environment State Regulation Regulatory Conditions to the Merger, as Modified in Connection
with the Plan.
We are required to make certain capital expenditures pursuant to the Regulatory Settlements.
For more information regarding the Regulatory Settlements, see Item 1. Business State Regulation
- Regulatory Conditions to the Merger, as Modified in Connection with the Plan.
63
On January 30, 2009, we entered into the Transition Agreement with Verizon in connection with
the Cutover of certain back-office systems, as contemplated by the Transition Services Agreement.
The Transition Services Agreement and related agreements had required us to make payments totaling
approximately $45.4 million to Verizon in the first quarter of 2009, including a one-time fee of
$34.0 million due at Cutover, with the balance related to the purchase of certain Internet access
hardware. The settlement set forth in the Transition Agreement resulted in a $22.7 million
improvement in our cash flow for the year ended December 31, 2009.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Summary of Contractual Obligations
The tables set forth below contain information with regard to disclosures about contractual
obligations and commercial commitments.
The following table discloses aggregate information about our contractual obligations as of
December 31, 2010 and the periods in which payments are due and does not give effect to the Plan
transactions which occurred on the Effective Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
|
(Dollars in thousands) |
|
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt,
including current
maturities (a) |
|
$ |
2,520,959 |
|
|
$ |
58,725 |
|
|
$ |
351,600 |
|
|
$ |
1,560,638 |
|
|
$ |
549,996 |
|
Interest payments on
long-term debt
obligations (b)(c) |
|
|
518,034 |
|
|
|
135,355 |
|
|
|
254,150 |
|
|
|
128,529 |
|
|
|
|
|
Capital lease obligations |
|
|
6,669 |
|
|
|
1,893 |
|
|
|
3,178 |
|
|
|
1,598 |
|
|
|
|
|
Operating leases |
|
|
38,229 |
|
|
|
10,442 |
|
|
|
16,292 |
|
|
|
7,672 |
|
|
|
3,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations |
|
$ |
3,083,891 |
|
|
$ |
206,415 |
|
|
$ |
625,220 |
|
|
$ |
1,698,437 |
|
|
$ |
553,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $550.0 million of the Pre-Petition Notes. Long-term debt
maturities represent the normal contractual payment schedule.
Following the filing of the Chapter 11 Cases, we did not make any
payments on our pre-petition debt. All obligations under the
Pre-Petition Credit Facility and the Pre-Petition Notes have been
classified as liabilities subject to compromise in the consolidated
financial statements as of December 31, 2010 and 2009. See note 9 to
the consolidated financial statements for more information. |
|
(b) |
|
Excludes amortization of estimated capitalized debt issuance costs. |
|
(c) |
|
Interest payments on long-term debt represent the normal contractual
interest payment schedule, based on default rates as defined in the
Pre-Petition Credit Facility. Following the filing of the Chapter 11
Cases, we did not make any payments on our pre-petition debt. |
On the Effective Date our Pre-Petition Credit Facility and our DIP Facility were terminated
and we entered into the Exit Credit Agreement. Our long-term debt obligations were reduced to $1.0
billion. In addition, as of the Effective Date we had letters of credit totaling $18.7 million
outstanding under the Exit Credit Facility. See Part 1 Item 1. Business Emergence from
Chapter 11 Proceedings Exit Credit Agreement for details.
64
The following table discloses aggregate information about our derivative financial instruments
as of December 31, 2010, the source of carrying value of these instruments and their maturities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value of Contracts at Period End |
|
|
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
More than 5 years |
|
|
|
(Dollars in thousands) |
|
Source of fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments(1)(2) |
|
$ |
(98,833 |
) |
|
$ |
(98,833 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Upon filing for Chapter 11 bankruptcy protection, the derivative
financial instruments were terminated by the counterparties.
Accordingly, the carrying value of the Swaps at December 31, 2010
represents the termination value of the Swaps as determined by the
respective counterparties following the event of default described
herein. See note 8 to the consolidated financial statements for more
information. |
|
(2) |
|
The Swaps have been classified as liabilities subject to compromise in
the consolidated financial statements. See note 8 to the consolidated
financial statements for more information. |
Critical Accounting Policies
Our critical accounting policies are as follows:
|
|
|
Revenue recognition; |
|
|
|
|
Allowance for doubtful accounts; |
|
|
|
|
Accounting for pension and other post-retirement benefits; |
|
|
|
|
Accounting for income taxes; |
|
|
|
|
Depreciation of property, plant and equipment; |
|
|
|
|
Valuation of long-lived assets, including goodwill; |
|
|
|
|
Accounting for software development costs; and |
|
|
|
|
Purchase accounting. |
Revenue Recognition. We recognize service revenues based upon usage of our local exchange
network and facilities and contract fees. Fixed fees for voice services, Internet services and
certain other services are recognized in the month the service is provided. Revenue from other
services that are not fixed fee or that exceed contracted amounts is recognized when those services
are provided. Non-recurring customer activation fees, along with the related costs up to, but not
exceeding, the activation fees are deferred and amortized over the customer relationship period.
SQI penalties and certain PAP penalties are settled by crediting customer accounts and are recorded as a
reduction to revenue. We make estimated adjustments, as necessary, to revenue or accounts
receivable for billing errors, including certain disputed amounts. At December 31, 2010 and 2009,
we recorded revenue reserves of $19.6 million and $22.6 million, respectively. See note 3(b) to
the consolidated financial statements for further information.
65
Allowance for Doubtful Accounts. In evaluating the collectability of our accounts receivable,
we assess a number of factors, including a specific customers or carriers ability to meet its
financial obligations to us, the length of time the receivable has been past due and historical
collection experience. Based on these assessments, we record both specific and general reserves for
uncollectible accounts receivable to reduce the related accounts receivable to the amount we
ultimately expect to collect from customers and carriers. If circumstances change or economic
conditions worsen such that our past collection experience is no longer relevant, our estimate of
the recoverability of our accounts receivable could be further reduced from the levels reflected in
our accompanying consolidated balance sheet.
Accounting for Pension and Other Post-retirement Benefits. Some of our employees participate
in our pension plans and other post-retirement benefit plans. In the aggregate, the pension plan
benefit obligations exceed the fair value of pension plan assets, resulting in expense. Other
post-retirement benefit plans have larger benefit obligations than plan assets, resulting in
expense. Significant pension and other post-retirement benefit plan assumptions, including the
discount rate used, the long-term rate-of-return on plan assets, and medical cost trend rates are
periodically updated and impact the amount of benefit plan income, expense, assets and obligations.
Accounting for Income Taxes. Our current and deferred income taxes are affected by events and
transactions arising in the normal course of business, as well as in connection with the adoption
of new accounting standards and non-recurring items. Assessment of the appropriate amount and
classification of income taxes is dependent on several factors, including estimates of the timing
and realization of deferred income tax assets and the timing of income tax payments. Actual
payments may differ from these estimates as a result of changes in tax laws, as well as
unanticipated future transactions affecting related income tax balances. We account for tax
benefits taken or expected to be taken in our tax returns in accordance with the Income Taxes Topic
of the ASC, which requires the use of a two step approach for recognizing and measuring tax
benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in
income tax positions.
Depreciation of Property, Plant and Equipment. We recognize depreciation on property, plant
and equipment principally on the composite group remaining life method and straight-line composite
rates over estimated useful lives ranging from three to 50 years. This method provides for the
recognition of the cost of the remaining net investment in telephone plant, less anticipated net
salvage value (if any), over the remaining asset lives. This method requires the periodic revision
of depreciation rates. Changes in the estimated useful lives of property, plant and equipment or
depreciation methods could have a material effect on our results of operations.
Valuation of Long-lived Assets, Including Goodwill. We review our long-lived assets,
including goodwill, for impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. In addition, we review goodwill and non-amortizable
intangible assets for impairment on an annual basis. Several factors could trigger an impairment
review such as:
|
|
|
significant underperformance relative to expected historical or projected future
operating results; |
|
|
|
|
significant regulatory changes that would impact future operating revenues; |
|
|
|
|
significant negative industry or economic trends; and |
|
|
|
|
significant changes in the overall strategy in which we operate our overall
business. |
Goodwill was $595.1 million at December 31, 2010. We have recorded intangible assets related
to the acquired companies customer relationships and trade name of $251.3 million as of December
31, 2010. As of December 31, 2010, there was $62.1 million of accumulated amortization recorded.
The customer relationships are being amortized over a weighted average life of approximately 9.7
years. The trade name has an indefinite life and is, therefore, not amortized. The intangible
assets are included in intangible assets on our consolidated balance sheet.
We are required to perform an impairment review of goodwill and non-amortizable intangible
assets as required by the Intangibles-Goodwill and Other Topic of the ASC annually or when
impairment indicators are noted. Goodwill impairment is determined using a two-step process. Step
one compares the estimated fair value of our single wireline reporting unit (calculated using the market
66
approach and the income approach) to its carrying amount, including goodwill. The market
approach compares our fair value, as measured by our market capitalization, to our carrying amount,
which represents our shareholders equity balance. As of December 31, 2010, shareholders deficit
totaled $587.4 million. The income approach compares our fair value, as measured by discounted
expected future cash flows, to our carrying amount. If our carrying amount exceeds our estimated
fair value, there is a potential impairment and step two must be performed.
Step two compares the implied fair value of our goodwill (i.e., our fair value less the fair
value of our assets and liabilities, including identifiable intangible assets) to our goodwill
carrying amount. If the carrying amount of our goodwill exceeds the implied fair value of our
goodwill, the excess is required to be recorded as an impairment.
We performed step one of our annual goodwill impairment assessment as of October 1, 2010 and
concluded that there was no indication of impairment at that time.
Our only non-amortizable intangible asset is the trade name of Legacy FairPoint acquired in
the Merger. Consistent with the valuation methodology used to value the trade name at the Merger,
we assess the fair value of the trade name based on the relief from royalty method. If the
carrying amount of our trade name exceeds its estimated fair value, the asset is considered
impaired. We performed our annual non-amortizable intangible asset impairment assessment as of
October 1, 2010 and concluded that there was no indication of
impairment at that time. As of December 31, 2010, as a result of
changes to our financial projections related to the Chapter 11
Cases, we determined that a possible
impairment of our non-amortizable intangible assets was indicated. We
performed an interim non-amortizable intangible asset impairment
assessment as of December 31, 2010 and determined that our trade name
was not impaired.
For
our non-amortizable intangible asset impairment assessments at
December 31, and October 1, 2010, we made
certain assumptions including an estimated royalty rate, a long-term growth rate, an effective tax
rate and a discount rate, and applied these assumptions to projected future cash flows of our
consolidated FairPoint business, exclusive of cash flows associated with wholesale revenues as
these revenues are not generated through brand recognition. Changes in one or more of these
assumptions may have resulted in the recognition of an impairment loss.
We determined as of December 31, 2009 that a possible impairment of long-lived assets was
indicated by the filing of the Chapter 11 Cases as well as a significant decline in the fair value
of our common stock. In addition, as of December 31, 2010, as a result of changes to our
financial projections related to the Chapter 11
Cases, we determined that a possible impairment of long-lived assets was indicated.
In accordance with the Property, Plant, and Equipment Topic of the ASC, we performed recoverability
tests, based on undiscounted projected future cash flows associated with our long-lived assets, at
each of these dates and determined that long-lived assets were not impaired at December 31, 2010 or
2009.
While no impairment charges resulted from the analyses performed at December 31, and October
1, 2010 and December 31, 2009, asset values may be adjusted in the future due to the application of
fresh start accounting upon our emergence from Chapter 11.
Accounting for Software Development Costs. We capitalize certain costs incurred in connection
with developing or obtaining internal use software in accordance with the Intangibles-Goodwill and
Other Topic of the ASC. Capitalized costs include direct development costs associated with internal
use software, including direct labor costs and external costs of materials and services. Costs
incurred during the preliminary project stage, as well as maintenance and training costs, are
expensed as incurred.
Purchase Accounting. Prior to the adoption of the ASC we recognized the acquisition of
companies in accordance with SFAS No. 141, Accounting for Business Combinations (SFAS 141). The
cost of an acquisition is allocated to the assets acquired and liabilities assumed based on their
fair values as of the close of the acquisition, with amounts exceeding the fair value being
recorded as goodwill. All future business combinations will be recognized in accordance with the
Business Combinations Topic of the ASC.
New Accounting Standards
On January 1, 2010, we adopted the accounting standard update (ASU) regarding fair value
measurements and disclosures, which requires additional disclosures regarding assets and
liabilities measured at fair value. The adoption of this accounting standard update had no impact
on our consolidated results of operations and financial position.
67
In October 2009, the FASB issued an ASU regarding revenue recognition for multiple deliverable
arrangements. This method allows a vendor to allocate revenue in an arrangement using its best
estimate of selling price if neither vendor specific objective evidence nor third party evidence of
selling price exists. Accordingly, the residual method of revenue allocation will no longer be
permissible. This ASU must be adopted no later than the beginning of the first fiscal year
beginning on or after June 15, 2010. It is not yet known what impact this ASU will have on our
financial statements.
Effective 2011, we will adopt the ASU regarding when to perform Step 2 of the goodwill
impairment test for reporting units with zero or negative carrying amounts. This ASU modifies Step
1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For
those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if
it is more likely than not that a goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, an entity should consider whether there are any
adverse qualitative factors indicating an impairment may exist. The qualitative factors are
consistent with the existing guidance, which requires that goodwill of a reporting unit be tested
for impairment between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. For public
entities, the amendments in this ASU are effective for fiscal year, and interim periods within
those years, beginning after December 15, 2010. Early adoption is not permitted. It is not yet
known what impact this ASU will have on our financial statements.
Inflation
We do not believe inflation has a significant effect on our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2010, we had total debt of $2,521.0 million, consisting of both fixed rate
and variable rate debt with interest rates ranging from 6.750% to 13.125% per annum, including
applicable margins. As of December 31, 2010, the fair value of our debt was approximately $1,539.7
million. Our Term Loan A Facility and Revolving Credit Facility mature in 2014, our Term Loan B
Facility and Delayed Draw Term Loan mature in 2015 and the Pre-Petition Notes mature in 2018.
On the Effective Date the Pre-Petition Credit Facility and DIP Facility were terminated, and
the Exit Borrowers entered into the Exit Credit Agreement. Our $1,075.0 million Exit Credit
Agreement consists of the Exit Revolving Facility and the Exit Term Loans. We drew the full
$1,000.0 million under the Exit Term Loans immediately upon emergence on the Effective Date. The
Exit Revolving Loans include a $30.0 million sublimit available for the issuance of letters of
credit. Letters of credit outstanding under the DIP Credit Agreement on the Effective Date were
rolled into the Exit Credit Agreement. As of the Effective Date, we had approximately $1,000.0
million of total debt outstanding. In addition, as of the Effective Date, we had $56.3 million, net
of outstanding letters of credit, available for additional borrowing under our Exit Revolving Loan.
Interest payments on the Exit Term Loan are subject to a LIBOR floor of 2.00%. While LIBOR
remains below 2.00% we will incur interest costs above market rates.
We use variable rate debt to finance our operations, capital expenditures and acquisitions.
The variable rate debt obligations expose us to variability in interest payments due to changes in
interest rates. We believe it is prudent to limit the variability of a portion of our interest
payments. To meet this objective, from time to time, we have entered into interest rate swap
agreements to manage fluctuations in cash flows resulting from interest rate risk. These Swaps
effectively changed the variable rate on the debt obligations to a fixed rate. Under the terms of
the Swaps, we made a payment if the variable rate was below the fixed rate, or we received a
payment if the variable rate was above the fixed rate. Pursuant to our Pre-Petition Credit
Facility, we were required to reduce the risk of interest rate volatility with respect to at least
50% of our Term Loan borrowings.
In connection with the Chapter 11 Cases, all of the Swaps were terminated by the respective
counterparties thereto.
We do not hold or issue derivative financial instruments for trading or speculative purposes.
We are also exposed to market risk from changes in the fair value of our pension plan assets.
For the year ended December 31, 2010, the actual gain on the pension plan assets was approximately
11.2%. Net periodic benefit cost for 2010 assumes a weighted average annualized expected return on plan assets of approximately 8.3%. Should our actual return on plan assets become
significantly lower than our expected return assumption, our net periodic benefit cost may
increase in future periods and we may be required to contribute additional funds to our pension
plans.
68
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES: |
| | | |
|
| | 70 | |
|
| | 71 | |
|
| | | |
|
| | 72 | |
|
| | 73 | |
|
| | 74 | |
|
| | 75 | |
|
| | 76 | |
|
| | 77 | |
69
Report of Management on Internal Control Over Financial Reporting
We, the management of FairPoint Communications, Inc., are responsible for establishing and
maintaining adequate internal control over financial reporting of the Company. Management has
evaluated internal control over financial reporting of the Company using the criteria for effective
internal control established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Based on such evaluation, management determined that the Companys internal control over financial
reporting was not effective as of December 31, 2010 because the following material weaknesses in
internal control over financial reporting existed during 2010:
|
1. |
|
Our information technology controls were not adequate. Change management
processes were not consistently followed to ensure all changes were appropriately
approved. Also, access to our information systems was not appropriately restricted. |
|
|
2. |
|
Our management oversight and review procedures designed to monitor the accuracy
of period-end accounting activities were ineffective. Specifically, our account
reconciliation processes were not adequate to properly identify and resolve
discrepancies between our billing system and our general ledger in a timely manner. In
addition, project accounting controls were not adequate to ensure charges to capital
projects were appropriate or that projects were closed in a timely manner. Also,
procedures for the review of our income tax provision and supporting schedules were not
adequate to identify and correct errors in a timely manner. |
|
|
|
|
|
|
|
/s/ Paul H. Sunu
|
|
Paul H. Sunu |
|
Chief Executive Officer |
|
|
|
|
/s/ Ajay Sabherwal
|
|
Ajay Sabherwal |
|
Executive Vice President and Chief Financial Officer |
|
70
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of FairPoint Communications, Inc.
We have audited the accompanying consolidated balance sheets of FairPoint Communications, Inc.
(Debtors-in-Possession) (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of operations, stockholders deficit, comprehensive loss and cash flows
for each of the three years in the period ended December 31, 2010. These financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company at December 31, 2010 and 2009, and the
consolidated results of its operations and its cash flows for each of the three years in the period
ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Charlotte, North Carolina
March 31, 2011
71
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
(Debtors-In-Possession)
Consolidated Balance Sheets
December 31, 2010 and 2009
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
105,497 |
|
|
$ |
109,355 |
|
Restricted cash |
|
|
2,420 |
|
|
|
2,558 |
|
Accounts receivable, net |
|
|
125,170 |
|
|
|
154,095 |
|
Materials and supplies |
|
|
22,193 |
|
|
|
18,884 |
|
Prepaid expenses |
|
|
18,841 |
|
|
|
15,198 |
|
Other
current assets |
|
|
6,092 |
|
|
|
8,844 |
|
Deferred income tax, net |
|
|
31,400 |
|
|
|
75,713 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
311,613 |
|
|
|
384,647 |
|
|
|
|
|
|
|
|
Property, plant, and equipment, net |
|
|
1,859,700 |
|
|
|
1,950,435 |
|
Goodwill |
|
|
595,120 |
|
|
|
595,120 |
|
Intangibles assets, net |
|
|
189,247 |
|
|
|
211,819 |
|
Prepaid pension asset |
|
|
2,960 |
|
|
|
8,808 |
|
Debt issue costs, net |
|
|
119 |
|
|
|
680 |
|
Restricted cash |
|
|
1,678 |
|
|
|
1,478 |
|
Other assets |
|
|
13,357 |
|
|
|
19,135 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,973,794 |
|
|
$ |
3,172,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit |
|
|
|
|
|
|
|
|
Liabilities not subject to compromise: |
|
|
|
|
|
|
|
|
Current portion of capital lease obligations |
|
$ |
1,321 |
|
|
$ |
|
|
Accounts payable |
|
|
66,557 |
|
|
|
61,681 |
|
Accrued interest payable |
|
|
3 |
|
|
|
36 |
|
Other accrued liabilities |
|
|
63,279 |
|
|
|
44,004 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
131,160 |
|
|
|
105,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
3,943 |
|
|
|
|
|
Accrued pension obligation |
|
|
92,246 |
|
|
|
51,438 |
|
Employee benefit obligations |
|
|
344,463 |
|
|
|
261,420 |
|
Deferred income taxes |
|
|
67,381 |
|
|
|
115,742 |
|
Unamortized investment tax credits |
|
|
4,310 |
|
|
|
4,788 |
|
Other long-term liabilities |
|
|
12,398 |
|
|
|
15,100 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
524,741 |
|
|
|
448,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities not subject to compromise |
|
|
655,901 |
|
|
|
554,209 |
|
|
|
|
|
|
|
|
|
|
Liabilities subject to compromise |
|
|
2,905,311 |
|
|
|
2,836,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,561,212 |
|
|
|
3,390,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficit: |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 200,000,000 shares
authorized, issued and outstanding 89,440,334 and 90,002,026
shares at December 31, 2010 and 2009, respectively |
|
|
894 |
|
|
|
900 |
|
Additional paid-in capital |
|
|
725,786 |
|
|
|
725,312 |
|
Retained deficit |
|
|
(1,101,294 |
) |
|
|
(819,715 |
) |
Accumulated other comprehensive loss |
|
|
(212,804 |
) |
|
|
(124,924 |
) |
|
|
|
|
|
|
|
Total stockholders deficit |
|
|
(587,418 |
) |
|
|
(218,427 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders deficit |
|
$ |
2,973,794 |
|
|
$ |
3,172,122 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
72
FAIRPOINT
COMMUNICATIONS, INC. AND SUBSIDIARIES
(Debtors-In-Possession)
Consolidated Statements of Operations
Years ended December 31, 2010, 2009 and 2008
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
1,070,986 |
|
|
$ |
1,119,090 |
|
|
$ |
1,274,619 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales, excluding depreciation and amortization |
|
|
525,728 |
|
|
|
515,394 |
|
|
|
576,786 |
|
Selling, general and administrative expense, excluding depreciation
and amortization |
|
|
365,373 |
|
|
|
417,512 |
|
|
|
384,388 |
|
Depreciation and amortization |
|
|
289,824 |
|
|
|
275,334 |
|
|
|
255,032 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,180,925 |
|
|
|
1,208,240 |
|
|
|
1,216,206 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(109,939 |
) |
|
|
(89,150 |
) |
|
|
58,413 |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(140,896 |
) |
|
|
(204,919 |
) |
|
|
(162,040 |
) |
Gain (loss) on derivative instruments |
|
|
|
|
|
|
12,320 |
|
|
|
(11,800 |
) |
Gain on early retirement of debt |
|
|
|
|
|
|
12,357 |
|
|
|
|
|
Other
income, net |
|
|
2,715 |
|
|
|
2,000 |
|
|
|
3,494 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(138,181 |
) |
|
|
(178,242 |
) |
|
|
(170,346 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before reorganization items and income taxes |
|
|
(248,120 |
) |
|
|
(267,392 |
) |
|
|
(111,933 |
) |
Reorganization items |
|
|
(41,120 |
) |
|
|
(53,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(289,240 |
) |
|
|
(320,410 |
) |
|
|
(111,933 |
) |
Income tax benefit |
|
|
7,661 |
|
|
|
79,014 |
|
|
|
43,408 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(281,579 |
) |
|
$ |
(241,396 |
) |
|
$ |
(68,525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
89,424 |
|
|
|
89,271 |
|
|
|
80,443 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
89,424 |
|
|
|
89,271 |
|
|
|
80,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(3.15 |
) |
|
$ |
(2.70 |
) |
|
$ |
(0.85 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
(3.15 |
) |
|
|
(2.70 |
) |
|
|
(0.85 |
) |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
73
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
(Debtors-In-Possession)
Consolidated Statements of Stockholders Equity (Deficit)
Years ended December 31, 2010, 2009 and 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Retained |
|
|
other |
|
|
Total |
|
|
|
Common Stock |
|
|
paid-in |
|
|
earnings |
|
|
comprehensive |
|
|
stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
(deficit) |
|
|
loss |
|
|
equity (deficit) |
|
Balance at December 31, 2007 |
|
|
53,761 |
|
|
$ |
538 |
|
|
$ |
484,383 |
|
|
$ |
634,241 |
|
|
$ |
|
|
|
$ |
1,119,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,525 |
) |
|
|
|
|
|
|
(68,525 |
) |
Acquisition of FairPoint |
|
|
35,265 |
|
|
|
352 |
|
|
|
315,938 |
|
|
|
|
|
|
|
|
|
|
|
316,290 |
|
Exercise of restricted units |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock cancelled for withholding
tax |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted shares |
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
4,408 |
|
|
|
|
|
|
|
|
|
|
|
4,408 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(69,010 |
) |
|
|
|
|
|
|
|
|
|
|
(69,010 |
) |
Return of capital to Verizon |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,160,000 |
) |
|
|
|
|
|
|
(1,160,000 |
) |
Issuance of bonds to Verizon |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(539,831 |
) |
|
|
|
|
|
|
(539,831 |
) |
Contributions by Verizon |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
381,890 |
|
|
|
|
|
|
|
381,890 |
|
Net liabilities contributed back to Verizon |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,439 |
|
|
|
|
|
|
|
124,439 |
|
Employee benefit adjustment to
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,467 |
|
|
|
(134,504 |
) |
|
|
(85,037 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
88,996 |
|
|
$ |
890 |
|
|
$ |
735,719 |
|
|
$ |
(578,319 |
) |
|
$ |
(134,504 |
) |
|
$ |
23,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(241,396 |
) |
|
|
|
|
|
|
(241,396 |
) |
Issuance of 2008 Interim Awards |
|
|
502 |
|
|
|
5 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares |
|
|
524 |
|
|
|
5 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock cancelled for withholding
tax |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted units cancelled for withholding
tax |
|
|
|
|
|
|
|
|
|
|
(430 |
) |
|
|
|
|
|
|
|
|
|
|
(430 |
) |
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
2,052 |
|
|
|
|
|
|
|
|
|
|
|
2,052 |
|
Net assets contributed back to Verizon |
|
|
|
|
|
|
|
|
|
|
(12,019 |
) |
|
|
|
|
|
|
|
|
|
|
(12,019 |
) |
Employee benefit adjustment to
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,580 |
|
|
|
9,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
90,002 |
|
|
$ |
900 |
|
|
$ |
725,312 |
|
|
$ |
(819,715 |
) |
|
$ |
(124,924 |
) |
|
$ |
(218,427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(281,579 |
) |
|
|
|
|
|
|
(281,579 |
) |
Restricted stock cancelled for withholding
tax |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted shares |
|
|
(549 |
) |
|
|
(6 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
468 |
|
Employee benefit adjustment to
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,880 |
) |
|
|
(87,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
89,440 |
|
|
$ |
894 |
|
|
$ |
725,786 |
|
|
$ |
(1,101,294 |
) |
|
$ |
(212,804 |
) |
|
$ |
(587,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
74
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
(Debtors-In-Possession)
Consolidated Statements of Comprehensive Loss
Years ended December 31, 2010, 2009 and 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net loss |
|
$ |
(281,579 |
) |
|
$ |
(241,396 |
) |
|
$ |
(68,525 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and post-retirement plans (net of $4.6 million tax expense,
$5.4 million tax expense and $56.4 million tax benefit, respectively) |
|
|
(87,880 |
) |
|
|
9,580 |
|
|
|
(134,504 |
) |
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income |
|
|
(87,880 |
) |
|
|
9,580 |
|
|
|
(134,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(369,459 |
) |
|
$ |
(231,816 |
) |
|
$ |
(203,029 |
) |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
75
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
(Debtors-In-Possession)
Consolidated Statements of Cash Flows
Years ended December 31, 2010, 2009 and 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(281,579 |
) |
|
$ |
(241,396 |
) |
|
$ |
(68,525 |
) |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities excluding impact of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
(7,915 |
) |
|
|
(78,722 |
) |
|
|
(33,466 |
) |
Provision for uncollectible revenue |
|
|
20,525 |
|
|
|
48,402 |
|
|
|
25,234 |
|
Depreciation and amortization |
|
|
289,824 |
|
|
|
275,334 |
|
|
|
255,032 |
|
Non-cash interest expense |
|
|
|
|
|
|
31,137 |
|
|
|
|
|
Post-retirement expenses |
|
|
33,216 |
|
|
|
34,151 |
|
|
|
37,782 |
|
Pension expenses |
|
|
10,017 |
|
|
|
24,274 |
|
|
|
906 |
|
(Gain) loss on derivative instruments |
|
|
|
|
|
|
(12,320 |
) |
|
|
11,800 |
|
Gain on early retirement of debt, excluding cash fees |
|
|
|
|
|
|
(12,477 |
) |
|
|
|
|
Loss on abandoned projects |
|
|
15,132 |
|
|
|
|
|
|
|
|
|
Non-cash reorganization items |
|
|
(20,004 |
) |
|
|
43,964 |
|
|
|
|
|
Other non cash items |
|
|
4,045 |
|
|
|
4,468 |
|
|
|
(20,577 |
) |
Changes in assets and liabilities arising from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
12,706 |
|
|
|
(24,799 |
) |
|
|
(34,693 |
) |
Prepaid and other assets |
|
|
(6,834 |
) |
|
|
19,063 |
|
|
|
(12,713 |
) |
Accounts payable and accrued liabilities |
|
|
(10,802 |
) |
|
|
(12,435 |
) |
|
|
(110,264 |
) |
Accrued interest payable |
|
|
137,111 |
|
|
|
61,312 |
|
|
|
18,562 |
|
Other assets and liabilities, net |
|
|
(3,816 |
) |
|
|
(9,633 |
) |
|
|
4,648 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(16,221 |
) |
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
473,205 |
|
|
|
391,719 |
|
|
|
126,030 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
191,626 |
|
|
|
150,323 |
|
|
|
57,505 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquired cash balance, net |
|
|
|
|
|
|
|
|
|
|
11,401 |
|
Net capital additions |
|
|
(197,795 |
) |
|
|
(178,752 |
) |
|
|
(296,992 |
) |
Net proceeds from sales of investments and other assets |
|
|
527 |
|
|
|
1,361 |
|
|
|
2,259 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(197,268 |
) |
|
|
(177,391 |
) |
|
|
(283,332 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan origination costs |
|
|
(1,475 |
) |
|
|
(3,046 |
) |
|
|
(29,238 |
) |
Proceeds from issuance of long-term debt |
|
|
5,513 |
|
|
|
50,000 |
|
|
|
1,930,000 |
|
Repayments of long-term debt |
|
|
|
|
|
|
(20,848 |
) |
|
|
(687,491 |
) |
Contributions from Verizon |
|
|
|
|
|
|
|
|
|
|
373,590 |
|
Restricted
cash |
|
|
(62 |
) |
|
|
65,114 |
|
|
|
(68,503 |
) |
Repayment of capital lease obligations |
|
|
(2,192 |
) |
|
|
(2,126 |
) |
|
|
(2,247 |
) |
Dividends paid to stockholders |
|
|
|
|
|
|
(22,996 |
) |
|
|
(1,219,959 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,784 |
|
|
|
66,098 |
|
|
|
296,152 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(3,858 |
) |
|
|
39,030 |
|
|
|
70,325 |
|
Cash, beginning of period |
|
|
109,355 |
|
|
|
70,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
105,497 |
|
|
$ |
109,355 |
|
|
$ |
70,325 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest |
|
$ |
1,005 |
|
|
$ |
106,861 |
|
|
$ |
124,721 |
|
Income taxes paid, net of refunds |
|
|
361 |
|
|
|
(563 |
) |
|
|
(9,313 |
) |
Non-cash equity consideration |
|
|
|
|
|
|
|
|
|
|
316,290 |
|
Non-cash issuance of senior notes |
|
|
|
|
|
|
18,911 |
|
|
|
551,000 |
|
Capital additions included in accounts payable or liabilities
subject to compromise at period-end |
|
|
1,961 |
|
|
|
31,621 |
|
|
|
|
|
Reorganization costs paid |
|
|
41,699 |
|
|
|
1,182 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
76
FairPoint Communications, Inc. and Subsidiaries
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
Except as otherwise required by the context, references in notes to the consolidated financial
statements to:
|
|
|
FairPoint Communications refers to FairPoint Communications, Inc., excluding its
subsidiaries; |
|
|
|
|
FairPoint, the Company, we, us or our refer to the combined business of
FairPoint Communications, Inc. and all of its subsidiaries after giving effect to the
merger on March 31, 2008, with Northern New England Spinco Inc. (Spinco), a subsidiary of
Verizon Communications Inc. (Verizon), which transaction is referred to herein as the
Merger; |
|
|
|
|
Northern New England operations refers to the local exchange business acquired from
Verizon and all of its subsidiaries after giving effect to the Merger; |
|
|
|
|
Legacy FairPoint or Telecom Group refers to FairPoint, exclusive of our acquired
Northern New England operations; and |
|
|
|
|
Verizon Northern New England business refers to the local exchange business of Verizon
New England Inc. (Verizon New England) in Maine, New Hampshire and Vermont and the
customers of Verizon and its subsidiaries (other than Cellco Partnership) (collectively,
the Verizon Group) related long distance and Internet service provider business in those
states prior to the Merger. |
(1) ORGANIZATION, PRINCIPLES OF CONSOLIDATION & LIQUIDITY; CHAPTER 11 CASES
(a) Organization
FairPoint is a leading provider of communications services in rural and small urban
communities, primarily in northern New England, offering an array of services, including high speed
data (HSD), Internet access, television and broadband product offerings, to both residential and
business customers. FairPoint operates in 18 states with approximately 1.4 million access line
equivalents (including voice access lines and HSD, which include digital subscriber lines (DSL),
wireless broadband, cable modem and fiber-to-the-premises) as of December 31, 2010.
(b) Principles of Consolidation and Basis of Presentation
On March 31, 2008, FairPoint completed the acquisition of 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 the Verizon
Group transferred certain specified assets and liabilities of the local exchange businesses of
Verizon New England in Maine, New Hampshire and Vermont and the customers of the related voice and
Internet service provider businesses in those states to subsidiaries of Spinco. The Merger was
accounted for as a reverse acquisition of Legacy FairPoint by Spinco under the purchase method of
accounting because Verizon stockholders owned a majority of the shares of the consolidated Company
following the Merger and, therefore, Spinco is treated as the acquirer for accounting purposes.
The financial statements reflect the transaction as if Spinco had issued consideration to FairPoint
shareholders. As a result, for the year ended December 31, 2008, the statement of operations and
the financial information derived from the statement of operations in this Annual Report reflect
the consolidated financial results of the Company by including the financial results of the Verizon
New England business in Maine, New Hampshire and Verizon Group related long distance and Internet
service provider business in those states prior to the Merger. Verizon Northern New England
business for the three months ended March 31, 2008 and the combined financial results of Spinco and
Legacy FairPoint for the nine months ended December 31, 2008. The statement of operations and the
financial information derived from the statement of operations for all periods prior to April 1,
2008 in this Annual Report reflect the actual results of the Verizon Northern New England business
for such periods. The balance sheet and financial information derived from the balance sheet in
this Annual
77
Report reflect the consolidated assets and liabilities of Legacy FairPoint and Spinco
at December 31, 2010 and 2009. Certain assets and liabilities of the Verizon Northern New England
business (principally related to pension, other post-employment benefits, and
associated deferred taxes) were not distributed to Spinco prior to the Merger and for
accounting purposes were effectively contributed back to Verizon. The assets and liabilities of
the Verizon Northern New England business that were effectively contributed back to Verizon are
reflected as net liabilities contributed back to Verizon on the statement of stockholders equity
contained herein. The statement of operations in this Annual Report may not be indicative of the
Companys future results.
In order to effect the Merger described above, the Company issued 53,760,623 shares to Verizon
stockholders for their interest in Spinco. Accordingly the number of common shares outstanding,
par value, paid in capital and per share information included herein has been retroactively
restated to give effect to the Merger.
Historical Verizon Northern New England business
The Verizon Northern New England business, prior to the Merger, was comprised of carved-out
components from each of Verizon New England, NYNEX Long Distance Company and Bell Atlantic
Communications (collectively, VLD), Verizon Internet Services Inc. and GTE.Net LLC (collectively,
VOL), and Verizon Select Services Inc. (VSSI and, together with Verizon New England, VLD and
VOL, the Verizon Companies).
Prior to the Merger, financial statements were not prepared for the Verizon Northern New
England business, as it was not operated as a separate business. The Verizon Northern New England
business financial statements for all periods prior to the Merger have been prepared in accordance
with U.S. generally accepted accounting principles using specific information where available and
allocations where data was not maintained on a state-specific basis within the Verizon Northern New
England business books and records.
The Verizon Northern New England business financial statements for all periods prior to the
Merger include the wireline-related businesses, Internet access, long-distance and customer
premises equipment services provided by the Verizon Northern New England business to customers in
the states of Maine, New Hampshire and Vermont. All significant intercompany transactions have been
eliminated. The financial statements prior to the Merger also include the assets, liabilities and
expenses related to employees who support the Verizon Northern New England business, some of whom
remain employees of the Verizon Northern New England business following the acquisition of the
Verizon Northern New England business by FairPoint.
The preparation of financial information related to Verizon New Englands, VLDs, VOLs and
VSSIs operations in the states of Maine, New Hampshire and Vermont, which are included in the
balance sheet and statements of operations of the Verizon Northern New England business for all
periods prior to the Merger, was based on the following:
Verizon New England: For the balance sheet, property, plant and equipment, accumulated
depreciation, intangible assets, materials and supplies and certain other assets and liabilities
were determined based upon state specific records; accounts receivable were allocated based upon
applicable billing system data; short-term investments, prepaid pension assets, accrued payroll
related liabilities and employee benefit obligations were allocated based on employee headcount;
and accounts payable were allocated based upon applicable operating expenses. The remaining assets
and liabilities were primarily allocated based upon the percentage of the Verizon Northern New
England business revenues, operating expenses and headcount to the total revenues, operating
expenses and headcount of Verizon New England. For the statements of operations, operating revenues
and operating expenses were based on state specific records.
VLD: For the balance sheet, receivables were allocated based on the applicable operating
revenues and accounts payable were allocated based on applicable operating expenses. For the
statements of operations, operating revenues were determined using applicable billing system data;
cost of services and sales and selling, general and administrative expenses were allocated based on
the percentage of the Verizon Northern New England business revenues related to the VLD component
to the total VLD revenues applied to operating expenses for total VLD.
VOL: For the balance sheet, receivables were allocated based on applicable operating
revenues; other current assets were determined using applicable billing system data; accounts
payable were allocated based on the applicable operating expenses; and other current liabilities,
which consisted of advanced billings, were allocated based on applicable operating revenues. For
the
78
statements of operations, operating revenues were determined using applicable billing system
data and average access lines in service; cost of services and sales, selling, general and
administrative expenses and interest expense were allocated based on the
percentage of the Verizon Northern New England business revenues related to the VOL component
to the total VOL revenues applied to operating expenses and interest expense for total VOL.
VSSI: For the balance sheet, receivables were allocated based on the applicable operating
revenues and accounts payable were allocated based on applicable operating expenses. For the
statements of operations, operating revenues were identified using applicable system data; cost of
services and sales and selling, general and administrative expenses were allocated based on the
percentage of the Verizon Northern New England business revenues related to the VSSI component to
the total VSSI revenues applied to operating expenses for total VSSI.
Management believes the allocations used to determine selected amounts in the financial
statements are appropriate methods to reasonably reflect the related assets, liabilities, revenues
and expenses of the Verizon Northern New England business for periods prior to the Merger.
Financial Reporting in Reorganization
On October 26, 2009, the Company and substantially all of its direct and indirect subsidiaries
(collectively, the Debtors) filed voluntary petitions for relief under Chapter 11 of title 11 of
the United States Code (the Bankruptcy Code or Chapter 11) in the United States Bankruptcy
Court for the Southern District of New York (the Bankruptcy Court). The cases are being jointly
administered under the caption In re FairPoint Communications, Inc., Case No. 09-16335 (the
Chapter 11 Cases). On January 13, 2011, the bankruptcy judge confirmed the Plan and on January
24, 2011 (the Effective Date) the Company emerged from Chapter 11 protection.
The Company has applied the Reorganizations Topic of the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) effective as of the Petition Date. See note 2.
(2) REORGANIZATION
The Reorganizations Topic of the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (the ASC), which is applicable to companies in Chapter 11, generally does
not change the manner in which financial statements are prepared. However, it does require that
the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish
transactions and events that are directly associated with the reorganization from the ongoing
operations of the business. Amounts that can be directly associated with the reorganization and
restructuring of the business must be reported separately as reorganization items in the statements
of operations beginning in the quarter ending December 31, 2009. The balance sheet must
distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities
that are not subject to compromise and from post-petition liabilities. Liabilities that may be
affected by a plan of reorganization must be reported at the amounts expected to be allowed, even
if they may be settled for lesser amounts. In addition, cash provided by and used for
reorganization items must be disclosed separately.
The accompanying consolidated financial statements have been prepared in accordance with the
Reorganizations Topic of the ASC. All pre-petition liabilities subject to compromise have been
segregated in the consolidated balance sheets and classified as liabilities subject to compromise
at the estimated amount of the allowable claims. Liabilities not subject to compromise are
separately classified as current or noncurrent. The Companys consolidated statements of operations
for the years ended December 31, 2010 and 2009 include the results of operations during the Chapter
11 Cases. As such, any revenues, expenses, and gains and losses realized or incurred that are
directly related to the bankruptcy case are reported separately as reorganization items due to the
bankruptcy.
The Company received approval from the Bankruptcy Court to pay or otherwise honor certain of
its pre-petition obligations, including employee related obligations such as accrued vacation and
pension related benefits. As such, these obligations have been excluded from liabilities subject
to compromise as of December 31, 2010 and 2009.
79
Reorganization Items
Reorganization items represent expense or income amounts that have been recognized as a direct
result of the Chapter 11 Cases and are presented separately in the consolidated statements of
operations pursuant to the Reorganizations Topic of the ASC. Such items consist of the following
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Professional fees (a) |
|
$ |
(59,870 |
) |
|
$ |
(8,365 |
) |
Success bonus (b) |
|
|
(1,111 |
) |
|
|
(689 |
) |
Non-cash allowed claim adjustments (c) |
|
|
(977 |
) |
|
|
(43,964 |
) |
Cancellation of debt income, net (d) |
|
|
20,838 |
|
|
|
|
|
|
|
|
|
|
|
|
Total reorganization items |
|
$ |
(41,120 |
) |
|
$ |
(53,018 |
) |
|
|
|
|
|
|
|
|
|
|
(a) |
|
Professional fees relate to legal, financial advisory and other professional costs directly
associated with the reorganization process. |
|
(b) |
|
Success bonus represents charges incurred relating to the Success Bonus Plan in accordance
with the plan of reorganization and terms of the Term Sheet. |
|
(c) |
|
The carrying values of certain liabilities subject to compromise were adjusted to the value
of the claim allowed by the Bankruptcy Court. |
|
(d) |
|
Net gains associated with the settlement of liabilities subject to compromise. |
Liabilities Subject to Compromise
Liabilities subject to compromise refer to liabilities incurred prior to October 26, 2009 (the
Petition Date) for which the Company has not received approval from the Bankruptcy Court to pay
or otherwise honor. The amounts of the various categories of liabilities that are subject to
compromise are set forth below. These amounts represent the estimates of known or potential
pre-Petition Date claims that are likely to be resolved in connection with the Chapter 11 Cases.
Such claims remain subject to future adjustments. Adjustments may result from negotiations, actions
of the Bankruptcy Court, rejection of the executory contracts and unexpired leases, the
determination of the value securing claims, proofs of claim or other events.
Liabilities subject to compromise at December 31, 2010 and 2009 consisted of the following
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Senior secured credit facility |
|
$ |
1,970,963 |
|
|
$ |
1,965,450 |
|
Senior Notes |
|
|
549,996 |
|
|
|
549,996 |
|
Interest rate swap |
|
|
98,833 |
|
|
|
98,833 |
|
Accrued interest |
|
|
211,550 |
|
|
|
74,406 |
|
Accounts payable |
|
|
57,640 |
|
|
|
93,049 |
|
Other accrued liabilities |
|
|
16,129 |
|
|
|
42,461 |
|
Capital lease obligations |
|
|
|
|
|
|
7,627 |
|
Other long-term liabilities |
|
|
200 |
|
|
|
787 |
|
Employee benefit obligations |
|
|
|
|
|
|
3,731 |
|
|
|
|
|
|
|
|
Liabilities subject to compromise |
|
$ |
2,905,311 |
|
|
$ |
2,836,340 |
|
|
|
|
|
|
|
|
80
Liabilities not subject to compromise include: (1) liabilities incurred after the Petition
Date; (2) pre-Petition Date liabilities that the Company expects to pay in full such as medical or
retirement benefits; and (3) pre-Petition Date liabilities that have been approved for payment by
the Bankruptcy Court and that the Company expects to pay (in advance of a plan of reorganization)
in the ordinary course of business, including certain employee-related items such as salaries and
vacation pay.
The classification of liabilities not subject to compromise versus liabilities subject to
compromise is based on currently available information and analysis. As the Chapter 11 Cases
proceed and additional information and analysis is completed, or as the Bankruptcy Court rules on
relevant matters, the classification of amounts between these two categories may change. The amount
of any such change could be significant.
Magnitude of Potential Claims
The Company has filed with the Bankruptcy Court schedules and statements of financial affairs
setting forth, among other things, the Companys assets and liabilities, subject to the assumptions
filed in connection therewith. All of the schedules are subject to amendment or modification.
Bankruptcy Rule 3003(c)(3) requires the Bankruptcy Court to set the time within which
proofs of claim must be filed in a Chapter 11 case. The Bankruptcy Court established March 18, 2010
at 5:00 p.m. Eastern Time (the General Bar Date) as the last date and time for all
non-governmental entities to file a proof of claim against the Debtors and April 26, 2010 at 5:00
p.m. Eastern Time (the Governmental Bar Date, and together with the General Bar Date, the Bar
Dates) as the last date and time for all governmental entities to file a proof of claim against
the Company. Subject to certain exceptions, the Bar Dates apply to all claims against the Debtors
that arose prior to the Petition Date.
As of March 22, 2011, claims totaling $4.9 billion have been filed with the Bankruptcy Court
against the Company, $3.8 billion of which have been settled. In light of the Companys emergence
from bankruptcy on the Effective Date, the Company does not anticipate a significant number of new
and amended claims to be filed in the future. The Company has identified, and expects to continue
to identify, many claims that the Company believes should be disallowed by the Bankruptcy Court
because they are duplicative, have been later amended or superseded, are without merit or are
overstated or for other reasons. As of March 22, 2011, the Bankruptcy Court has disallowed $1.1
billion of these claims and has not yet ruled on the Companys other objections to claims, the
disputed portions of which aggregate to an additional $7.0 million. Additionally, $10.4 million of
these claims have been withdrawn by the respective creditors. The Company expects to continue to
file objections in the future. Because the process of analyzing and objecting to claims will be
ongoing, the amount of disallowed claims may increase significantly in the future.
On the Effective Date,
the Company distributed cash, entered into the Exit Credit Agreement, and issued shares of New Common Stock and warrants
to purchase shares of New Common Stock to satisfy $2.8 billion of claims. In addition, on the Effective Date, the Company
established a cash reserve of $77.9 million and reserved 72,754 shares
of New Common Stock and warrants to purchase 124,012 shares of New Common Stock for satisfaction of
pending claims. Subsequent to the Effective Date, the Company has made additional cash distributions from
its reserve to satisfy claims as they are resolved. As a result of these distributions, the cash reserve as of March 22,
2011, has been decreased to $64.6 million. As of March 22, 2011, 72,754 shares of New Common Stock and warrants to purchase
124,012 shares of New Common Stock remain to be distributed in
satisfaction of pending claims.
Through the claims resolution process, differences in amounts scheduled by the Company
and claims filed by creditors will be investigated and resolved, including through the filing of
objections with the Bankruptcy Court where appropriate. In light of the substantial number and
amount of claims filed, the claims resolution process may take considerable time to complete, and
we expect that it will continue after the Companys emergence from Chapter 11. Accordingly, the
ultimate number and amount of allowed claims is not presently known, nor is the exact recovery with
respect to allowed claims presently known.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP), which require management to make estimates and
assumptions that affect reported amounts and disclosures.
81
Actual results could differ from those
estimates. The consolidated financial statements reflect all adjustments that are necessary for a
fair presentation of results of operations and financial condition for the periods shown, including
normal recurring accruals and other items. The Company has reclassified certain prior period
amounts in the consolidated financial statements to be consistent with current period presentation.
These reclassifications were made to correct the classification of performance assurance plans
(PAP) penalties from selling, general and administrative expenses to contra-revenue and to
correct the allocation of certain employee and general computer expenses between cost of services
and selling, general and administrative expenses. Correction of these
classification errors resulted in a decrease of $7.7 million to revenue, an increase of $0.5
million to cost of services, and a decrease of $8.1 million to selling, general and administrative
expenses for the year ended December 31, 2009. Correction of these classification errors had no
impact on loss from operations or net loss.
Examples of significant estimates include the allowance for doubtful accounts, revenue
reserves, the recoverability of plant, property and equipment, valuation of intangible assets,
pension and post-retirement benefit assumptions and income taxes. In addition, estimates have been
made in determining the amounts and classification of certain liabilities subject to compromise.
(b) Revenue Recognition
Revenues are recognized as services are rendered and are primarily derived from the usage of
the Companys networks and facilities or under revenue-sharing arrangements with other
communications carriers. Revenues are primarily derived from: access, pooling, voice services,
Universal Service Fund receipts, Internet and broadband services, and other miscellaneous services.
Local access charges are billed to local end users under tariffs approved by each states Public
Utilities Commission (PUC). Access revenues are derived for the intrastate jurisdiction by
billing access charges to interexchange carriers and to other local exchange carriers (LECs).
These charges are billed based on toll or access tariffs approved by the local states PUC. Access
charges for the interstate jurisdiction are billed in accordance with tariffs filed by the National
Exchange Carrier Association or by the individual company and approved by the Federal
Communications Commission (the FCC).
Revenues are determined on a bill-and-keep basis or a pooling basis. If on a bill-and-keep
basis, the Company bills the charges to either the access provider or the end user and keeps the
revenue. If the Company participates in a pooling environment (interstate or intrastate), the toll
or access billed is contributed to a revenue pool. The revenue is then distributed to individual
companies based on their company-specific revenue requirement. This distribution is based on
individual state PUCs (intrastate) or the FCCs (interstate) approved separation rules and rates
of return. Distribution from these pools can change relative to changes made to expenses, plant
investment, or rate-of-return. Some companies participate in federal and certain state universal
service programs that are pooling in nature but are regulated by rules separate from those
described above. These rules vary by state. Revenues earned through the various pooling
arrangements are initially recorded based on the Companys estimates.
Long-distance retail and wholesale services are usage sensitive and are billed in arrears and
recognized when earned. Internet and data services revenues are substantially all recurring
revenues and are billed one month in advance and deferred until
earned. As of December 31, 2010 and 2009, unearned revenue of $15.3
million and $13.2 million, respectively, was included in other accrued
liabilities on the consolidated balance sheet. The majority of the
Companys miscellaneous revenue is provided from billing and collection and directory services. The
Company earns revenue from billing and collecting charges for toll calls on behalf of interexchange
carriers. The interexchange carrier pays a certain rate per each minute billed by the Company. The
Company recognizes revenue from billing and collection services when the services are provided.
Internet and broadband services and certain other services are recognized in the month the
service is provided.
Non-recurring customer activation fees, along with the related costs up to, but not exceeding
the activation fees, are deferred and amortized over the customer relationship period.
SQI
penalties and certain PAP penalties are settled by crediting customer
accounts and recorded as a reduction to revenue.
Revenue
is recognized net of tax collected from customers and remitted to governmental
authorities.
Management makes estimated adjustments, as necessary, to revenue or accounts receivable for
billing errors, including certain disputed amounts. At December 31, 2010 and 2009, the Company
recorded revenue reserves of $19.6 million and $22.6 million, respectively.
82
(c) Maintenance and Repairs
The cost of maintenance and repairs, including the cost of replacing minor items not
constituting substantial betterments, is charged primarily to cost of services and sales as these
costs are incurred.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
(e) Restricted Cash
As of March 31, 2008, the closing date of the Merger, the Company had $80.9 million of
restricted cash (the Merger Restricted Cash). The Company is required to use these funds to (i)
pay for the removal of dual poles in Vermont, which is estimated to cost $6.7 million, (ii) pay for
certain service quality improvements under a performance enhancement plan in Vermont totaling $25.0
million, and (iii) pay for network improvements in New Hampshire totaling $49.2 million (the New
Hampshire Funds). During the three months ended June 30, 2009, the Company requested that the New
Hampshire Funds be made available for general working capital purposes. By letter dated May 12,
2009, the New Hampshire Public Utilities Commission (the NHPUC) approved the Companys request,
conditioned upon the Companys commitment to invest funds on certain NHPUC approved network
improvements in New Hampshire on the following schedule: $15.0 million by the end of 2010, an
additional $20.0 million by the end of 2011 and an additional $30.0 million by the end of 2012 (the
NH Investment Commitment). The NH Investment Commitment is inclusive of the $50.0 million
previously required by the NHPUC. In addition, upon NHPUC approval of the Regulatory Settlement
for New Hampshire (the New Hampshire Regulatory Settlement), the NH Investment Commitment was
reduced by $10.0 million, with such funds being reallocated to recurring maintenance capital
expenditures to be spent on or before March 31, 2013.
As of December 31, 2010, the Company had released $79.7 million of the restricted cash for
approved expenditures under the required projects, including $1.4 million in interest earned on
such restricted cash. As of December 31, 2010 $2.7 million of the Merger Restricted Cash remains
for removal of dual poles in Vermont. In addition, the Company also had $1.4 million of cash
restricted for other purposes.
In total, the Company had $4.1 million of restricted cash at December 31, 2010 of which $2.4
million is shown in current assets and $1.7 million is shown as a non-current asset on the
condensed consolidated balance sheet. Subsequent to December 31, 2010, the Merger Restricted Cash
for removal of dual poles in Vermont was moved to an escrow account.
(f) Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is the Companys best estimate of the amount of probable credit
losses in the Companys existing accounts receivable. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific customers, historical
trends, and other information. Receivable balances are reviewed on an aged basis and account
balances are written off against the allowance after all means of collection have been exhausted
and the potential for recovery is considered remote.
The following is activity in the Companys allowance for doubtful accounts receivable for
the years ended December 31, 2010, 2009 and 2008 (in thousands). Activity for the year ended
December 31, 2009 has been recast to reflect the reclassification of certain PAP penalties from bad
debt expense to a reduction of revenue (see note 3(a) for further information):
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance, beginning of period |
|
$ |
58,358 |
|
|
$ |
20,340 |
|
|
$ |
25,585 |
|
Acquisition of Legacy FairPoint |
|
|
|
|
|
|
|
|
|
|
1,832 |
|
Contributed back to Verizon |
|
|
|
|
|
|
|
|
|
|
(9,356 |
) |
Provision charged to expense |
|
|
20,525 |
|
|
|
48,402 |
|
|
|
25,234 |
|
Provision charged to other accounts (a) |
|
|
(586 |
) |
|
|
(91 |
) |
|
|
5,419 |
|
Amounts
written off, net of recoveries |
|
|
(37,689 |
) |
|
|
(10,293 |
) |
|
|
(28,374 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
40,608 |
|
|
$ |
58,358 |
|
|
$ |
20,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Provision charged to other accounts includes accruals charged to
accounts payable for anticipated uncollectible charges on purchase of
accounts receivable from others which were billed by the Company. |
(g) Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk,
consist principally of cash and trade receivables. The Company places its cash with high-quality
financial institutions. Concentrations of credit risk with respect to trade receivables are
principally related to receivables from other interexchange carriers and are otherwise limited to
the Companys large number of customers in several states.
The Company sponsors pension and post-retirement healthcare plans for certain employees. Plan
assets are held by a third party trustee. The Companys plans hold debt and equity securities for
investment purposes. The value of these plan assets is dependent on the financial condition of
those entities issuing the debt and equity securities. A significant decline in the fair value of
plan assets could result in additional contributions to the plans by the Company in order to meet
funding requirements under ERISA.
(h) Materials and Supplies
Materials and supplies include new and reusable supplies and network equipment, which are
stated principally at average original cost, except that specific costs are used in the case of
large individual items.
(i) Property, Plant, and Equipment
Property, plant and equipment is recorded at cost. Depreciation expense is principally based
on the composite group remaining life method and straight-line composite rates. This method
provides for the recognition of the cost of the remaining net investment in telephone plant,
property and equipment less anticipated positive net salvage value, over the remaining asset lives.
This method requires the periodic revision of depreciation rates.
At December 31, 2010 and 2009, accumulated depreciation for property, plant and equipment was
$4.4 billion and $4.2 billion, respectively.
The estimated asset lives used are presented in the following table:
|
|
|
|
|
|
|
Average Lives
(In Years) |
|
|
Buildings |
|
|
45 |
|
Central office equipment |
|
|
5 11 |
|
Outside communications plant |
|
|
|
|
Copper cable |
|
|
15 18 |
|
Fiber cable |
|
|
25 |
|
Poles and conduit |
|
|
30 50 |
|
Furniture, vehicles and other |
|
|
3 15 |
|
84
When depreciable telephone plant used in the Companys wireline network is replaced or
retired, the carrying amount of such plant is deducted from the respective accounts and charged to
accumulated depreciation. No gain or loss is recognized on disposition of such assets.
Network software purchased or developed in connection with related plant assets is
capitalized. The Company also capitalizes interest associated with the acquisition or construction
of network related assets. Capitalized interest is reported as part of the cost of the network
related assets and as a reduction in interest expense. See note 3(k).
Periodically, the Company reviews the estimated useful lives of property, plant, and equipment
along with the associated depreciation rates. Effective January 1, 2009, the depreciation rates of
copper cable and certain central office equipment were decreased to reflect the change in
distribution of assets within these classes. As a result, depreciation expense decreased by
approximately $28.0 million in 2009 compared to 2008.
Effective January 1, 2008, the life of fiber cable was increased to 25 years from a previous
life of 20 years. As a result, depreciation expense decreased by approximately $2.4 million in
2008 compared to 2007. This change was based on a review of the physical mortality of fiber cable
and the Companys long-term strategy for use of fiber cable, as well as a lack of technology-driven
substitutes.
The Company believes that current estimated useful asset lives are reasonable, although they
are subject to regular review and analysis. In the evaluation of asset lives, multiple factors are
considered, including, but not limited to, the ongoing network deployment, technology upgrades and
enhancements, planned retirements and the adequacy of reserves.
(j) Long-Lived Assets
Property, plant and equipment and intangible assets subject to amortization are reviewed for
impairment as required by the Property, Plant, and Equipment Topic of the ASC and the Intangibles
Topic of the ASC. These assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. An impairment charge is
recognized for the amount, if any, by which the carrying value of the asset exceeds its fair value.
The Company determined as of December 31, 2009 that a possible impairment of long-lived assets
was indicated by the filing of the Chapter 11 Cases as well as a significant decline in the fair
value of the Old Common Stock. In addition, as of December 31, 2010, as a result of changes to the
Companys financial projections related to the Chapter 11
Cases, the Company determined that a possible impairment of long-lived
assets was indicated. In accordance with the Property, Plant, and Equipment Topic of the ASC, the
Company performed recoverability tests, based on undiscounted projected future cash flows
associated with its long-lived assets, at each of these dates and determined that long-lived assets
were not impaired at December 31, 2010 or 2009.
While no impairment charges resulted from the analyses performed at December 31, 2010 and
2009, asset values may be adjusted in the future due to the application of fresh start accounting
upon the Companys emergence from Chapter 11.
(k) Computer Software and Interest Costs
The Company capitalizes certain costs incurred in connection with developing or obtaining
internal use software which has a useful life in excess of one year in accordance with the
Intangibles-Goodwill and Other Topic of the ASC. Capitalized costs include direct development costs
associated with internal use software, including direct labor costs and external costs of materials
and services.
Subsequent additions, modifications or upgrades to internal-use software are capitalized only
to the extent that they allow the software to perform a task it previously did not perform.
Software maintenance and training costs are expensed in the period in which they are incurred.
85
In addition, the Company capitalizes the interest cost associated with the period of time over
which the Companys internal use software is developed or obtained in accordance with the Interest
Topic of the ASC. The Company has not capitalized interest costs incurred subsequent to the filing
of the Chapter 11 Cases, as payments on all interest obligations have been stayed as a result of
the filing of the Chapter 11 Cases. Upon entry into the $1,075.0 million senior secured credit
facility with a syndicate of lenders and Bank of America, N.A., as the administrative agent for the
lenders, arranged by Banc of America Securities LLC (the Exit Credit Agreement) on the Effective
Date, the Company resumed capitalization of interest costs.
On January 15, 2007, FairPoint entered into the Master Services Agreement (the MSA), with
Capgemini U.S. LLC. Through the MSA, the Company replicated and/or replaced certain existing
Verizon systems during a phased period through January 2009. As of June 30, 2009, the Company had
completed the application development stage of the project and was no longer capitalizing costs in
accordance with the Intangibles-Goodwill and Other Topic of the ASC. The Company has recognized
both external and internal service costs associated with the MSA based on total labor incurred
through the completion of the application development stage. As of December 31, 2010, the Company
had capitalized $107.0 million of MSA costs and an additional $6.9 million of interest costs.
In addition to the MSA, the Company has other agreements and projects for which costs are
capitalized in accordance with the Intangibles Goodwill and Other Topic and the Interest Topic
of the ASC. During the years ended December 31, 2010 and 2009,
the Company capitalized $12.6
million and $19.4 million, respectively, in software costs in addition to those capitalized under
the MSA. During the year ended December 31, 2009, the Company capitalized $2.5 million in interest
costs in addition to those capitalized under the MSA. The Company did not capitalize any interest
costs during the year ended December 31, 2010.
As
of December 31, 2010 and 2009, the Company had capitalized $139.0 million and $126.4
million, respectively, of costs under the Intangibles Goodwill and Other Topic of the ASC and
$9.4 million of interest costs under the Interest Topic of the ASC.
(l) Debt Issue Costs
On March 31, 2008, immediately prior to the Merger, Legacy FairPoint and Spinco entered into
the Credit Agreement, dated as of March 31, 2008 (Pre-Petition Credit Facility), consisting of
the Revolving Credit Facility, the Term Loan (defined as a senior secured term loan A facility in
an aggregate principal amount of $500.0 million (the Term Loan A Facility) and a senior secured
term loan B facility in the aggregate principal amount of $1,130.0 million (the Term Loan B
Facility)) and the delayed draw term loan facility in an aggregate principal amount of $200.0
million (the Delayed Draw Term Loan). The Company incurred $29.2 million of debt issue costs
associated with these credit facilities and began to amortize these costs over the life of the
related debt, ranging from 6 to 7 years using the effective interest method.
On January 21, 2009, the Company entered into an amendment to our Pre-Petition Credit Facility
(the Pre-Petition Credit Facility Amendment) under which, among other things, the administrative
agent resigned and was replaced by a new administrative agent. In addition, the resigning
administrative agents undrawn loan commitments under the Revolving Credit Facility, totaling $30.0
million, were terminated and are no longer available to the Company. The Company incurred $0.5
million of debt issue costs associated with the Pre-Petition Credit Facility Amendment and began to
amortize these costs over the remaining life of the loan.
Concurrent with the Pre-Petition Credit Facility Amendment, the Company wrote off $0.8 million
of the unamortized debt issue costs associated with the original Pre-Petition Credit Facility, in
accordance with the Debt Modifications and Extinguishments Topic of the ASC.
In connection with the accrued and unpaid interest on the 13 1/8% Senior Notes due April 1,
2018 (the Old Notes) exchanged in connection with the Companys offer to exchange the Old Notes
for the 13 1/8% Senior Notes due April 2, 2018 (the New Notes) (the Exchange Offer) consummated
on July 29, 2009, the Company paid a cash consent fee of $1.6 million in the aggregate to holders
of the Old Notes who validly delivered and did not revoke consents in the related consent
solicitation prior to a specified early consent deadline, which amount was equal to $3.75 in cash
per $1,000 aggregate principal amount of the Old Notes exchanged in the Exchange Offer. Pursuant
to the Debt Topic of the ASC, this consent fee was capitalized and the Company began to amortize
these costs over the life of the New Notes using the effective interest method.
86
Concurrent with the filing of the Chapter 11 Cases, on October 26, 2009 the Company wrote off
all remaining debt issue and offering costs related to its pre-petition debt in accordance with the
Reorganizations Topic of the ASC.
The Company entered into the Debtor-in-Possession Credit Agreement (as amended, the DIP
Credit Agreement) on October 27, 2009. The Company incurred $0.9 million of debt issue costs
associated with the DIP Credit Agreement and began to amortize these costs over the nine-month life
of the DIP Credit Agreement using the effective interest method. Concurrent with the final order
of the Bankruptcy Court, dated March 11, 2010 (the Final DIP Order), the Company incurred an
additional $1.1 million of debt issue costs associated with the DIP Credit Agreement and began to
amortize these costs over the remaining life of the DIP Credit Agreement using the effective
interest method. On October 22, 2010, the Company incurred an additional $0.4 million of debt
issue costs to extend the DIP Credit Agreement through January 2011. The Company has amortized
these costs over the extended life of the DIP Credit Agreement.
As of December 31, 2010 and 2009, the Company had capitalized debt issue costs of $0.1 million
and $0.7 million, respectively, net of amortization.
(m) Advertising Costs
Advertising costs are expensed as they are incurred.
(n) Goodwill and Other Intangible Assets
Goodwill consists of the difference between the purchase price incurred in the acquisition of
Legacy FairPoint using the purchase method of accounting and the fair value of net assets acquired.
In accordance with the Intangibles-Goodwill and Other Topic of the ASC, goodwill is no longer
amortized, but instead is assessed for impairment at least annually. During this assessment,
management relies on a number of factors, including operating results, business plans, and
anticipated future cash flows.
Goodwill impairment is determined using a two-step process. Step one compares the estimated
fair value of the Companys single wireline reporting unit (calculated using both the market
approach and the income approach) to its carrying amount, including goodwill. The market approach
compares the fair value of the Company, as measured by its market capitalization, to the carrying
amount of the Company, which represents its shareholders equity balance. As of December 31, 2010,
shareholders deficit totaled $587.4 million. The income approach compares the fair value of the
Company, as measured by discounted expected future cash flows, to the carrying amount of the
Company. If the Companys carrying amount exceeds its estimated fair value, there is a potential
impairment and step two of the analysis must be performed.
Step two compares the implied fair value of the Companys goodwill (i.e. the fair value of the
Company less the fair value of the Companys assets and liabilities, including identifiable
intangible assets) to its goodwill carrying amount. If the carrying amount of the Companys
goodwill exceeds the implied fair value of the goodwill, the excess is required to be recorded as
an impairment.
The Company performed step one of its annual goodwill impairment assessment as of October 1,
2010 and concluded that there was no impairment at that time.
As of December 31, 2010, the Company had goodwill of $595.1 million.
The Companys only non-amortizable intangible asset is the trade name of Legacy FairPoint
acquired in the Merger. Consistent with the valuation methodology used to value the trade name at
the Merger, the Company assesses the fair value of the trade name based on the relief from royalty
method. If the carrying amount of the trade name exceeds its estimated fair value, the asset is
considered impaired. The Company performed its annual non-amortizable intangible asset impairment
assessment as of October 1, 2010 and concluded that there was no indication of impairment at that
time. As of December 31, 2010, as a result of changes to the
Companys financial projections related to the Chapter 11
Cases, the Company determined that a
possible impairment of its non-amortizable intangible assets was
indicated. The Company performed an interim non-amortizable
intangible asset impairment assessment as of December 31, 2010 and
determined that the trade name was not impaired.
For its non-amortizable
intangible asset impairment assessments at December 31, and October 1, 2010, the Company
made certain assumptions including an estimated royalty rate, a long-term growth rate, an effective
tax rate and a discount rate, and applied these assumptions to projected future cash flows of the
consolidated FairPoint Communications business, exclusive of cash flows associated with wholesale
87
revenues as these revenues are not generated through brand recognition. Changes in one or more of
these assumptions may have resulted in the recognition of an impairment loss.
While no impairment charges resulted from the analyses performed at October 1, 2010, asset
values may be adjusted in the future due to the application of fresh start accounting upon the
Companys emergence from Chapter 11.
The Companys amortizable intangible assets consist of customer lists and a non-compete
agreement. Amortizable intangible assets must be reviewed for impairment whenever indicators of
impairment exist. See note 3(j) above.
(o) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
FairPoint files a consolidated income tax return with its subsidiaries. FairPoint has a
tax-sharing agreement in which all subsidiaries are participants. All intercompany tax transactions
and accounts have been eliminated in consolidation.
The Income Taxes Topic of the ASC requires applying a more likely than not threshold to the
recognition and de-recognition of tax positions. The Companys unrecognized tax benefits totaled
$5.4 million as of January 1, 2010 and $5.4 million as of December 31, 2010, of which $2.0 million
would impact its effective tax rate, if recognized.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. During
non-bankruptcy periods, the ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become
deductible. Management determines its estimates of future taxable income based upon the scheduled
reversal of deferred tax liabilities, projected future taxable income exclusive of reversing
temporary differences, and tax planning strategies. The Company establishes valuation allowances
for deferred tax assets when it is estimated to be more likely than not that the tax assets will
not be realized. Based upon the Chapter 11 reorganization, management believes it can support the
realizability of its deferred tax asset only by the scheduled reversal of its deferred tax
liabilities and can no longer rely upon the projection of future taxable income.
(p) Stock-based Compensation Plans
The Company accounts for its stock-based compensation plans in accordance with the
Compensation-Stock Compensation Topic of the ASC, which establishes accounting for stock-based
awards granted in exchange for employee services. Accordingly, for employee awards which are
expected to vest, stock-based compensation cost is measured at the grant date, based on the fair
value of the award, and is recognized as expense on a straight-line basis over the requisite
service period, which generally begins on the date the award is granted through the date the award
vests. The Company elected to adopt the provisions of the Compensation-Stock Compensation Topic of
the ASC using the prospective application method for awards granted prior to becoming a public
company and valued using the minimum value method, and using the modified prospective application
method for awards granted subsequent to becoming a public company.
(q) Employee Benefit Plans
The Company accounts for pensions and other post-retirement benefit plans in accordance with
the Compensation-Retirement Benefits Topic of the ASC. This Topic requires the recognition of a
defined benefit post-retirement plans funded status as either an asset or liability on the balance
sheet. This Topic also requires the immediate recognition of the unrecognized actuarial gains and
losses and prior service costs and credits that arise during the period as a component of other
accumulated comprehensive income, net
88
of applicable income taxes. Amounts recognized through
accumulated comprehensive income are amortized into current income in accordance with the
Compensation-Retirement Benefits Topic of the ASC. Additionally, a company must determine the fair
value of plan assets as of the companys year end.
(r) Business Segments
Management views its business of providing video, data and voice communication services to
residential and business customers as one business segment as defined in Segment Reporting Topic of
the ASC. The Company consists of retail and wholesale telecommunications services, including
voice, high speed Internet, and other services in 18 states. The Companys chief operating
decision maker assesses operating performance and allocates resources based on the consolidated
results.
(s) Purchase Accounting
Prior to the adoption of the Business Combinations Topic of the ASC, the Company recognized
the acquisition of companies in accordance with SFAS No. 141, Accounting for Business Combinations
(SFAS 141). The cost of an acquisition was allocated to the assets acquired and liabilities
assumed based on their fair values as of the close of the acquisition, with amounts exceeding the
fair value being recorded as goodwill. All future business combinations will be recognized in
accordance with the Business Combinations Topic of the ASC.
(t) New Accounting Pronouncements
On January 1, 2010, the Company adopted the accounting standard update (ASU) regarding fair
value measurements and disclosures, which requires additional disclosures regarding assets and
liabilities measured at fair value. The adoption of this accounting standard update had no impact
on the Companys consolidated results of operations and financial position.
In October 2009, the FASB issued an ASU regarding revenue recognition for multiple deliverable
arrangements. This method allows a vendor to allocate revenue in an arrangement using its best
estimate of selling price if neither vendor specific objective evidence nor third party evidence of
selling price exists. Accordingly, the residual method of revenue allocation will no longer be
permissible. This ASU must be adopted no later than the beginning of the first fiscal year
beginning on or after June 15, 2010. It is not yet known what impact this ASU will have on the
Companys financial statements.
Effective 2011, the Company will adopt the ASU regarding when to perform Step 2 of the
goodwill impairment test for reporting units with zero or negative carrying amounts. This ASU
modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. In determining
whether it is more likely than not that a goodwill impairment exists, an entity should consider
whether there are any adverse qualitative factors indicating an impairment may exist. The
qualitative factors are consistent with the existing guidance, which requires that goodwill of a
reporting unit be tested for impairment between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. For public entities, the amendments in this ASU are effective for fiscal year, and
interim periods within those years, beginning after December 15, 2010. Early adoption is not
permitted. It is not yet known what impact this ASU will have on the Companys financial
statements.
(4) Certain Transactions
(a) Merger
On March 31, 2008, FairPoint completed the acquisition of 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 the Verizon
Group transferred certain specified assets and liabilities of the local exchange businesses of
Verizon New England in Maine, New Hampshire and Vermont and the customers of the related voice and
Internet service provider businesses in those states to subsidiaries of Spinco. The Merger was
accounted for as a reverse acquisition of Legacy FairPoint by Spinco under
89
the purchase method of
accounting because Verizon stockholders owned a majority of the shares of the consolidated Company
following the Merger and, therefore, Spinco is treated as the acquirer for accounting purposes.
In order to effect the Merger described above, the Company issued 53,760,623 shares to Verizon
stockholders for their interest in Spinco. Accordingly the number of common shares outstanding,
par value, paid in capital and per share information included herein has been retroactively
restated to give effect to the Merger.
(b) Dividends
On December 5, 2008, the Company declared a dividend of $0.2575 per share of common stock,
which was paid on January 16, 2009 to holders of record as of December 31, 2008. In 2008, the
Company declared dividends totaling $69.0 million, or $0.773 per share of common stock. Prior to
the Merger, Legacy FairPoint declared a dividend totaling $14.0 million, or $0.39781 per share of
common stock, which was paid on April 16, 2008 to Legacy FairPoint holders of record as of March
30, 2008.
On March 4, 2009, the Companys board of directors voted to suspend the quarterly dividend on
the Companys common stock. The Company currently does not expect to reinstate the payment of
dividends.
(5) Acquisitions and Dispositions
On March 31, 2008, the Company completed the Merger with Northern New England Spinco, Inc., or
Spinco. The Merger of FairPoint and Spinco was accounted for as a reverse acquisition of FairPoint
by Spinco under the purchase method of accounting because Verizons stockholders owned a majority
of the shares of the combined Company following the Merger. The Merger consideration was $316.3
million. Goodwill resulting from this transaction will not be deductible for income tax purposes.
Spinco was a wholly-owned subsidiary of Verizon that owned Verizons local exchange and related
business activities in Maine, New
Hampshire and Vermont. Spinco was spun off from Verizon immediately prior to the Merger.
Spinco served approximately 1,562,000 access line equivalents as of the date of acquisition.
Prior to the Merger, the Verizon Group engaged in a series of restructuring transactions to
effect the transfer of specified assets and liabilities of the local exchange business of Verizon
New England in Maine, New Hampshire and Vermont and the customers of the Verizon Groups related
voice and Internet service provider businesses in those states to Spinco and the entities
(including an entity formed for holding Vermont property) that became Spincos subsidiaries. In
connection with these restructuring transactions, and immediately prior to closing of the Merger on
March 31, 2008, the Verizon Group contributed certain of those assets and all of the direct and
indirect equity interests of those entities to Spinco in exchange for:
|
|
|
the issuance of additional shares of Spinco common stock that were distributed in a
spin-off, referred to as the distribution; |
|
|
|
|
a special cash payment of $1,160.0 million to the Verizon Group; and |
|
|
|
|
the issuance by Spinco to the Verizon Group of the Old Notes. |
As a result of these transactions, the Verizon Group received $1.7 billion of combined cash
and principal amount of Old Notes.
The Verizon Group also contributed approximately $316.0 million in cash to Spinco at the time
of the spin-off, in addition to the amount of working capital, subject to adjustment, that it was
required to contribute pursuant to the distribution agreement that was in effect prior to the
Merger. During the third quarter of 2008, the Company settled the working capital adjustment with
Verizon, resulting in an additional contribution to the Company of approximately $29.0 million from
Verizon. In connection with this working capital settlement, the Company paid Verizon $66.3
million for certain payables (offset by any receivables) owed to Verizon affiliates.
After the contribution and immediately prior to the Merger, Verizon spun off Spinco by
distributing all of the shares of Spinco common stock to a third-party distribution agent to be
held collectively for the benefit of Verizon stockholders. We refer collectively to the
transactions described above as the spin-off.
90
The Merger was accounted for using the purchase method of accounting for business combinations
and, accordingly, the acquired assets and liabilities of Legacy FairPoint were recorded at their
estimated fair values as of the date of acquisition, and Legacy FairPoints results of operations
have been included in the Companys consolidated financial statements from the date of acquisition.
During the first quarter of 2009, the Company recorded an adjustment to its deferred tax account
which decreased the excess of the purchase price over fair value by $24.3 million. Based upon the
Companys purchase price allocation, the excess of the purchase price over the fair value of the
net tangible assets acquired was approximately $846.8 million. The Company recorded an intangible
asset related to the acquired customer relationships of $208.5 million, an intangible asset related
to trade names of $42.8 million and an intangible asset related to a non-compete agreement of $0.4
million. The remaining $595.1 million was recognized as goodwill. The estimated weighted average
useful lives of the intangible assets are 9.7 years for the customer relationships, one year for
the non-compete agreement and trade names have an indefinite useful life.
The allocation of the total net purchase price of the Merger is shown in the table below (in
thousands):
|
|
|
|
|
Cash |
|
$ |
11,401 |
|
Current assets |
|
|
57,178 |
|
Property, plant, and equipment |
|
|
303,261 |
|
Investments |
|
|
8,748 |
|
Excess cost over fair value of net assets acquired |
|
|
595,120 |
|
Intangible assets |
|
|
251,678 |
|
Other assets |
|
|
127,034 |
|
Current liabilities |
|
|
(179,146 |
) |
Long-term debt |
|
|
(687,491 |
) |
Other liabilities |
|
|
(171,493 |
) |
|
|
|
|
Total net purchase price |
|
$ |
316,290 |
|
|
|
|
|
The following unaudited pro forma information presents the combined results of operations of
the Company as though the Merger and related transactions had been consummated on January 1, 2008.
These results include certain adjustments, mainly associated with increased interest expense on
debt and amortization of intangible assets related to the acquisitions and the related income tax
effects. The pro forma financial information does not necessarily reflect the actual results of
operations had the Merger been consummated at the beginning of the period or which may be attained
in the future (in thousands, except per share data).
|
|
|
|
|
|
|
Pro forma |
|
|
|
year ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
|
(unaudited) |
|
Revenue |
|
$ |
1,341,623 |
|
Net loss |
|
$ |
(87,582 |
) |
|
|
|
|
|
Loss per common share: |
|
|
|
|
Basic |
|
$ |
(1.09 |
) |
Diluted |
|
$ |
(1.09 |
) |
(6) Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill were as follows (in thousands):
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
619,372 |
|
|
|
|
|
Adjustment to deferred income taxes |
|
|
(24,252 |
) |
Balance, December 31, 2009 |
|
$ |
595,120 |
|
|
|
|
|
No adjustment |
|
|
|
|
Balance, December 31, 2010 |
|
$ |
595,120 |
|
|
|
|
|
91
The Companys intangible assets consist of customer lists, non-compete agreement and trade
names as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Customer lists (weighted average 9.7 years): |
|
|
|
|
|
|
|
|
Gross carrying amount |
|
$ |
208,504 |
|
|
$ |
208,504 |
|
Less accumulated amortization |
|
|
(62,073 |
) |
|
|
(39,501 |
) |
|
|
|
|
|
|
|
Net customer lists |
|
|
146,431 |
|
|
|
169,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names (indefinite life): |
|
|
|
|
|
|
|
|
Gross carrying amount |
|
|
42,816 |
|
|
|
42,816 |
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
$ |
189,247 |
|
|
$ |
211,819 |
|
|
|
|
|
|
|
|
The estimated weighted average useful lives of the intangible assets are 9.7 years for the
customer relationships and an indefinite useful life for trade names. Amortization expense was
$22.6 million, $22.6 million and $17.2 million for the years ended December 31, 2010, 2009 and
2008, respectively, and is expected to be approximately $22.6 million per year.
(7) Property, Plant, and Equipment
A summary of property, plant, and equipment is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
December 31, |
|
|
|
life |
|
|
2010 |
|
|
2009 |
|
|
|
(in years) |
|
|
|
|
|
|
|
|
|
Land |
|
|
|
|
|
$ |
23,880 |
|
|
$ |
23,871 |
|
Buildings and leasehold improvements |
|
|
2 45 |
|
|
|
328,822 |
|
|
|
313,766 |
|
Central office equipment |
|
|
5 11 |
|
|
|
2,467,286 |
|
|
|
2,388,216 |
|
Outside communications plant |
|
|
15 50 |
|
|
|
3,009,886 |
|
|
|
2,908,287 |
|
Furniture, vehicles and other work
equipment |
|
|
3 15 |
|
|
|
350,242 |
|
|
|
326,157 |
|
Plant under construction |
|
|
|
|
|
|
50,619 |
|
|
|
144,541 |
|
Other |
|
|
|
|
|
|
43,877 |
|
|
|
35,359 |
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant, and
equipment |
|
|
|
|
|
|
6,274,612 |
|
|
|
6,140,197 |
|
Accumulated depreciation |
|
|
|
|
|
|
(4,414,912 |
) |
|
|
(4,189,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net property, plant, and equipment |
|
|
|
|
|
$ |
1,859,700 |
|
|
$ |
1,950,435 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense, excluding amortization of intangible assets, for the years ended
December 31, 2010, 2009, and 2008 was $267.3 million, $252.7 million, and $237.8 million,
respectively. Depreciation expense includes amortization of assets recorded under capital leases.
(8) Interest Rate Swap Agreements
The Company assesses interest rate cash flow risk by continually identifying and monitoring
changes in interest rate exposures that may adversely impact expected future cash flows and by
evaluating hedging opportunities. The Company maintains risk management control systems to monitor
interest rate cash flow risk attributable to both the Companys outstanding and forecasted debt
obligations. The risk management control systems involve the use of analytical techniques,
including cash flow sensitivity analysis, to estimate the expected impact of changes in interest
rates on the Companys future cash flows.
The Company uses variable-rate debt to finance its operations, capital expenditures and
acquisitions. The variable-rate debt obligations expose the Company to variability in interest
payments due to changes in interest rates. The Company believes it is
92
prudent to limit the
variability of a portion of its interest payments. To meet this objective, from time to time, the
Company entered into interest rate swap agreements to manage fluctuations in cash flows resulting
from interest rate risk. The Swaps effectively changed the variable rate on the debt obligations to
a fixed rate. Under the terms of the Swaps, the Company was required to make a payment if the
variable rate was below the fixed rate, or it received a payment if the variable rate was above the
fixed rate.
The Company failed to make payments of $14.0 million due under the Swaps on September 30,
2009, which failure resulted in an event of default under the Swaps upon the expiration of a three
business day grace period.
The filing of the Chapter 11 Cases constituted a termination event under the Swaps.
Subsequent to the filing of the Chapter 11 Cases, the Company received notification from the
counterparties to the Swaps that the Swaps had been terminated. However, the Company believes that
any efforts to enforce payment obligations under such debt instruments are stayed as a result of
the filing of the Chapter 11 Cases. See note 1.
In addition, as a result of the restatement of the interim condensed consolidated financial
statements contained in the Amendments (the 2009 Restatement), the Company determined that the
Company was not in compliance with the interest coverage ratio maintenance covenant and the
leverage ratio maintenance covenant under the Pre-Petition Credit Facility for the measurement
period ended June 30, 2009, which constituted an event of default under each of the Pre-Petition
Credit Facility and the Swaps, and may have constituted an event of default under the New Notes
together with the Old Notes (the Pre-Petition Notes), in each case at June 30, 2009.
As a result of the Merger, the Company reassessed the accounting treatment of the Swaps and
determined that, beginning on April 1, 2008, the Swaps did not meet the criteria for hedge
accounting. Therefore, the changes in fair value of the Swaps subsequent to the Merger have been
recorded as other income (expense) on the consolidated statement of operations. At December 31,
2010 and 2009, the carrying value of the Swaps was a net liability of approximately $98.8 million,
all of which has been included in liabilities subject to compromise as a result of the filing of
the Chapter 11 Cases. The carrying value of the Swaps at December 31, 2010 and 2009 represents the
termination value of the Swaps as determined by the respective counterparties following the event
of default described above. The Company has recognized no gain or loss on derivative instruments
on the consolidated statement of operations during the year ended December 31, 2010. The Company
recognized a $12.3 million gain on derivative as a result of changes in the fair value of the Swaps
during the year ended December 31, 2009. In addition, during the year ended December 31, 2009, the
Company recognized a loss of approximately $10.3 million through reorganization items related to
the termination of the swaps as a result of the event of default described above.
93
(9) Long-term Debt
Long-term debt for the Company at December 31, 2010 and 2009 is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Senior secured Pre-Petition Credit Facility,
variable rates ranging from 6.75% to 7.00%
(weighted average rate of 6.94%) at December
31, 2010, due 2014 to 2015 |
|
$ |
1,970,963 |
|
|
$ |
1,965,450 |
|
Senior Notes, 13.125%, due 2018 |
|
|
549,996 |
|
|
|
549,996 |
|
|
|
|
|
|
|
|
Total outstanding long-term debt |
|
$ |
2,520,959 |
|
|
$ |
2,515,446 |
|
|
|
|
|
|
|
|
As a result of the filing of the Chapter 11 Cases (see note 1), all pre-petition debts owed by
the Company under the Pre-Petition Credit Facility and the Pre-Petition Notes have been classified
as liabilities subject to compromise in the consolidated balance sheet as of December 31, 2010 and
2009.
The estimated fair value of the Companys long-term debt at December 31, 2010 and 2009 was
approximately $1,539.7 million and $1,619.9 million respectively, based on market prices of the
Companys debt securities at the respective balance sheet dates.
The Company failed to make the September 30, 2009 principal and interest payments required
under the Pre-Petition Credit Facility. Failure to make the principal payment on the due date and
failure to make the interest payment within five days of the due date constituted events of default
under the Pre-Petition Credit Facility, which permitted the lenders to accelerate the maturity of
the loans outstanding thereunder, seek foreclosure upon any collateral securing such loans and
terminate any remaining commitments to lend to the Company. In addition, the incurrence of an
event of default on the Pre-Petition Credit Facility constituted an event of default under the
Swaps at September 30, 2009, which failure resulted in an event of default under the Swaps upon the
expiration of a three business day grace period. Also, the failure to make the October 1, 2009
interest payment on the Pre-Petition Notes within thirty days of the due date constituted an event
of default under the Pre-Petition Notes. An event of default under the Pre-Petition Notes
permitted the holders of the Pre-Petition Notes to accelerate the maturity of the Pre-Petition
Notes. Filing of the Chapter 11 Cases constituted an event of default on the New Notes. In
addition, as a result of the 2009 Restatement, the Company determined that the Company was not in
compliance with the interest coverage ratio maintenance covenant and the leverage ratio maintenance
covenant under the Pre-Petition Credit Facility for the measurement period ended June 30, 2009,
which constituted an event of default under each of the Pre-Petition Credit Facility and the Swaps,
and may have constituted an event of default under the Pre-Petition Notes, in each case at June 30,
2009.
On September 25, 2009, the Company entered into forbearance agreements with the lenders under
the Pre-Petition Credit Facility and the Swaps under which the lenders agreed to forbear from
exercising their rights and remedies under the respective agreements with respect to any events of
default through October 30, 2009. On October 26, 2009, the Company filed the Chapter 11 Cases.
The filing of the Chapter 11 Cases constituted an event of default under each of the Pre-Petition
Credit Facility, the New Notes and the Swaps. However, the Company believes that any efforts to
enforce payment obligations under these agreements are stayed as a result of the filing of the
Chapter 11 Cases. For additional information about the impact of the Chapter 11 Cases, see note 1.
The approximate aggregate maturities of long-term debt for each of the five years subsequent
to December 31, 2010 are as follows (in thousands):
|
|
|
|
|
Year ending December 31, |
|
|
|
|
2011 |
|
$ |
58,725 |
|
2012 |
|
|
63,300 |
|
2013 |
|
|
288,300 |
|
2014 |
|
|
134,450 |
|
2015 |
|
|
1,426,188 |
|
Thereafter |
|
|
549,996 |
|
|
|
|
|
|
|
$ |
2,520,959 |
|
|
|
|
|
94
Pursuant to the Plan, the Company did not make any principal or interest payments on its
pre-petition debt during the pendency of the Chapter 11 Cases. In accordance with the
Reorganizations Topic of the ASC, as interest on the Pre-Petition Notes subsequent to the Petition
Date was not expected to be an allowed claim, the Company had not accrued interest expense on the
Pre-Petition Notes subsequent to the Petition Date. Accordingly, $72.2 million and $13.4 million
of interest on unsecured debts, at the stated contractual rates, was not accrued for this reason during the year ended December 31, 2010 and 2009,
respectively. The Company had continued to accrue interest expense on the Pre-Petition Credit
Facility, as such interest is considered an allowed claim per the Plan.
All pre-petition debt was terminated on the Effective Date.
Prior to March 31, 2008, debt held by the Verizon Northern New England business was recorded
at the Verizon consolidated level and interest expense was allocated to the Verizon Northern New
England business.
Pre-Petition Credit Facility
On March 31, 2008, immediately prior to the Merger, FairPoint and Spinco entered into the
Pre-Petition Credit Facility consisting of the Revolving Credit Facility, the Term Loan and the
Delayed Draw Term Loan. Spinco drew $1,160.0 million under the Term Loan immediately prior to the
spin-off, and then the Company drew $470.0 million under the Term Loan and $5.5 million under the
Delayed Draw Term Loan concurrently with the closing of the Merger. Subsequent to the Merger, the
Company had drawn an additional $194.5 million under the Delayed Draw Term Loan. These funds were
used for certain capital expenditures and other expenses associated with the Merger.
On October 5, 2008 the administrative agent under the Pre-Petition Credit Facility filed for
bankruptcy. The administrative agent accounted for thirty percent of the loan commitments under
the Revolving Credit Facility. On January 21, 2009, the Company entered into the Pre-Petition
Credit Facility Amendment under which, among other things, the administrative agent resigned and
was replaced by a new administrative agent. In addition, the resigning administrative agents
undrawn loan commitments under the Revolving Credit Facility, totaling $30.0 million, were
terminated and are no longer available to the Company.
The Revolving Credit Facility has a swingline subfacility in the amount of $10.0 million and a
letter of credit subfacility in the amount of $30.0 million, which will allow issuances of standby
letters of credit by the Company. The Pre-Petition Credit Facility also permitted interest rate and
currency exchange swaps and similar arrangements that the Company may enter into with the lenders
under the Pre-Petition Credit Facility and/or their affiliates.
As of December 31, 2010, the Company had borrowed $155.5 million under the Revolving Credit
Facility. Upon the event of default under the Pre-Petition Credit Facility relating to the Chapter
11 Cases described herein, the commitments under the Revolving Credit Facility were automatically
terminated. Accordingly, as of December 31, 2010, no funds remained available under the Revolving
Credit Facility.
The Term Loan B Facility and the Delayed Draw Term Loan will mature in March 2015 and the
Revolving Credit Facility and the Term Loan A Facility will mature in March 2014. Each of the Term
Loan A Facility, the Term Loan B Facility and the Delayed Draw Term Loan, collectively referred to
as the Term Loans, are repayable in quarterly installments in the manner set forth in the
Pre-Petition Credit Facility beginning June 30, 2009.
Borrowings under our Pre-Petition Credit Facility bear interest at variable interest rates.
Interest rates for borrowings under the Pre-Petition Credit Facility are, at the Companys option,
for the Revolving Credit Facility and for the Term Loans at either (a) the Eurodollar rate, as
defined in the Pre-Petition Credit Facility, plus an applicable margin or (b) the base rate, as
defined in the Pre-Petition Credit Facility, plus an applicable margin.
The Companys Term Loan B debt is subject to a LIBOR floor of 3.00%. As a result, the Company
incurs interest expense at above-market levels when LIBOR rates are below 3.00%.
95
The Pre-Petition Credit Facility provided for payment to the lenders of a commitment fee on
the average daily unused portion of the Revolving Credit Facility commitments, payable quarterly in
arrears on the last business day of each calendar quarter and on the date upon which the commitment
is terminated. The Pre-Petition Credit Facility also provided for payment to the lenders of a
commitment fee from the closing date of the Pre-Petition Credit Facility up through and including
the twelve month anniversary thereof on the unused portion of the Delayed Draw Term Loan, payable
quarterly in arrears, and on the date upon which the Delayed Draw Term Loan is terminated, as well
as other fees.
The Pre-Petition Credit Facility required the Company first to prepay outstanding Term Loan A
loans in full, including any applicable fees, interest and expenses and, to the extent that no Term
Loan A loans remain outstanding, Term Loan B loans, including any applicable fees, interest and
expenses, with, subject to certain conditions and exceptions, 100% of the net cash proceeds the
Company receives from any sale, transfer or other disposition of any assets, subject to
certain reinvestment rights, 100% of net casualty insurance proceeds, subject to certain
reinvestment rights and 100% of the net cash proceeds the Company receives from the issuance of
debt obligations and preferred stock. In addition, the Pre-Petition Credit Facility required it
to prepay outstanding Term Loans on the date the Company delivered a compliance certificate
pursuant to the Pre-Petition Credit Facility beginning with the fiscal quarter ended June 30, 2009
demonstrating that the Companys leverage ratio for the preceding quarter was greater than 3.50 to
1.00, with an amount equal to the greater of (i) $11,250,000 or (ii) 90% of the Companys excess
cash flow calculated after its permitted dividend payment and less its amortization payments made
on the Term Loans pursuant to the Pre-Petition Credit Facility. Notwithstanding the foregoing, the
Company may have designated the type of loans which were to be prepaid and the specific borrowings
under the affected facility pursuant to which any amounts mandatorily prepaid would have been
applied in forward order of maturity of the remaining amortization payments.
Voluntary prepayments of borrowings under the Term Loan facilities and optional reductions of
the unutilized portion of the revolving facility commitments would have been permitted upon payment
of an applicable payment fee, which shall only be applicable to certain prepayments of borrowings
as described in the Pre-Petition Credit Facility.
Under the Pre-Petition Credit Facility, the Company was required to meet certain financial
tests, including a minimum cash interest coverage ratio and a maximum total leverage ratio. The
Pre-Petition Credit Facility contained customary affirmative covenants. The Pre-Petition Credit
Facility also contained negative covenants and restrictions, including, among others, with respect
to redeeming and repurchasing the Companys other indebtedness, loans and investments, additional
indebtedness, liens, capital expenditures, changes in the nature of the Companys business,
mergers, acquisitions, asset sales and transactions with affiliates. The Pre-Petition Credit
Facility contained customary events of default, including, but not limited to, failure to pay
principal, interest or other amounts when due (subject to customary grace periods), breach of
covenants or representations, cross-defaults to certain other indebtedness in excess of specified
amounts, judgment defaults in excess of specified amounts, certain ERISA defaults, the failure of
any guaranty or security document supporting the Pre-Petition Credit Facility and certain events of
bankruptcy and insolvency.
Scheduled amortization payments on our Pre-Petition Credit Facility began in 2009. No
principal payments were due on the Pre-Petition Notes prior to their maturity. As a result of the
Chapter 11 Cases, the Company has not made any additional principal or interest payments on its
pre-petition debt.
For the year ended December 31, 2009, the Company repaid $8.4 million of principal under the
Term Loan A Facility and $6.1 million of principal under the Term Loan B Facility.
Prior to the filing of the Chapter 11 Cases, the Company failed to make principal and interest
payments due under the Pre-Petition Credit Facility on September 30, 2009. The failure to make the
principal payment on the due date and failure to make the interest payment within five days of the
due date constituted events of default under the Pre-Petition Credit Facility. An event of default
under the Pre-Petition Credit Facility permitted the lenders under the Pre-Petition Credit Facility
to accelerate the maturity of the loans outstanding thereunder, seek foreclosure upon any
collateral securing such loans and terminate any remaining commitments to lend to the Company. The
occurrence of an event of default under the Pre-Petition Credit Facility constituted an event of
default under the Swaps. In addition, the Company failed to make payments due under the Swaps on
September 30, 2009, which failure resulted in an event of default under the Swaps upon the
expiration of a three business day grace period.
96
In addition, as a result of the 2009 Restatement, the Company determined that the Company was
not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-Petition Credit Facility for the measurement period ended June
30, 2009, which constituted an event of default under each of the Pre-Petition Credit Facility and
the Swaps, and may have constituted an event of default under the Pre-Petition Notes, in each case
at June 30, 2009.
The Pre-Petition Credit Facility also contained restrictions on the Companys ability to pay
dividends on its common stock.
The Pre-Petition Credit Facility was guaranteed, jointly and severally, by all existing and
subsequently acquired or organized wholly owned first-tier domestic subsidiaries of the Company
that are holding companies. No guarantee was required of a subsidiary that is an operating company.
Northern New England Telephone Operations LLC, Telephone Operating Company of Vermont LLC and
Enhanced Communications of Northern New England Inc. are regulated operating subsidiaries and,
accordingly, are not guarantors under the Pre-Petition Credit Facility.
The Pre-Petition Credit Facility was secured by a first priority perfected security interest
in all of the stock, equity interests, promissory notes, partnership interests and membership
interests owned by the Company.
The Pre-Petition Credit Facility was terminated on the Effective Date.
Old Notes
On March 31, 2008, Spinco issued $551.0 million aggregate principal amount of the Old Notes.
The Old Notes were set to mature on April 1, 2018 and were not redeemable at the Companys option
prior to April 1, 2013. Interest was payable on the Old Notes semi-annually in cash on April 1 and
October 1 of each year. The Old Notes bear interest at a fixed rate of 13 1/8% and principal was
due at maturity. The Old Notes were issued at a discount and, accordingly, at the date of their
distribution, the Old Notes had a carrying value of $539.8 million (principal amount at maturity of
$551.0 million less discount of $11.2 million). Following the filing of the Chapter 11 Cases, $9.9
million of discount on the Pre-Petition Notes was written off in order to adjust the carrying
amount of the Companys pre-petition debt to the Bankruptcy Court approved amount of the allowed
claims for the Companys pre-petition debt.
Upon the consummation of the Exchange Offer and the corresponding consent solicitation,
substantially all of the restrictive covenants in the indenture governing the Old Notes were
deleted or eliminated and certain of the events of default and various other provisions contained
therein were modified.
Prior to the filing of the Chapter 11 Cases, the Company failed to make the October 1, 2009
interest payment on the Pre-Petition Notes. The failure to make the interest payment on the
Pre-Petition Notes constituted an event of default under the Pre-Petition Notes upon the expiration
of a thirty day grace period. An event of default under the Pre-Petition Notes permits the holders
of the Pre-Petition Notes to accelerate the maturity of the Pre-Petition Notes.
In addition, as a result of the 2009 Restatement, the Company determined that the Company was
not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-Petition Credit Facility for the measurement period ended June
30, 2009, which constituted an event of default under each of the Pre-Petition Credit Facility and
the Swaps, and may have constituted an event of default under the Pre-Petition Notes, in each case
at June 30, 2009.
Issuance of New Notes and Payment of Consent Fee
On July 29, 2009, the Company successfully consummated the Exchange Offer. On the Settlement
Date, the Proposed Amendments became operative and $439.6 million in aggregate principal amount of
the Old Notes (which amount was equal to approximately 83% of the then outstanding Old Notes) were
exchanged for $439.6 million in aggregate principal amount of the New Notes. In addition, pursuant
to the terms of the Exchange Offer, an additional $18.9 million in aggregate principal amount of
New Notes was issued to holders who tendered their Old Notes in the Exchange Offer as payment for
accrued and unpaid interest on the exchanged Old Notes up to, but not including, the Settlement
Date.
97
The New Notes mature on April 2, 2018 and bear interest at a fixed rate of 13?%, payable in
cash, except that the New Notes bore interest at a rate of 15% for the period from July 29, 2009
through and including September 30, 2009. In addition, the Company was permitted to pay the
interest payable on the New Notes for the Initial Interest Payment Period in the form of cash, by
capitalizing such interest and adding it to the principal amount of the New Notes or a combination
of both cash and such capitalization of interest, at its option. The Company intended to make the
$12.2 million interest payments due on October 1, 2009 on the New Notes by capitalizing such
interest and adding it to the principal amount of the New Notes. As the Pre-Petition Notes have
been classified as subject to compromise as of December 31, 2009, the Company has classified the
accrued interest on the exchanged Old Notes as of December 31, 2009 of $12.2 million as subject to
compromise on the consolidated balance sheet. In accordance with the Reorganizations Topic of the
ASC, as interest on the Pre-Petition Notes subsequent to the Petition Date is not expected to be an
allowed claim, the Company has not accrued interest expense on the Pre-Petition Notes subsequent to
the Petition Date.
The Indenture, dated as of July 29, 2009, by and between FairPoint Communications, Inc. and
U.S. Bank National Association (the New Indenture) limits, among other things, the Companys
ability to incur additional indebtedness, issue certain preferred stock, repurchase its capital
stock or subordinated debt, make certain investments, create certain liens, sell certain assets or
merge or consolidate with or into other companies, incur restrictions on the ability of the
Companys subsidiaries to make distributions or transfer assets to the Company and enter into
transactions with affiliates.
The New Indenture also restricts the Companys ability to pay dividends on or repurchase its
common stock under certain circumstances.
As a result of the Chapter 11 Cases, the Company did not make any principal or interest
payments on its pre-petition debt during the year ended December 31, 2010. During the year ended
December 31, 2009, the Company repurchased $19.9 million in aggregate principal amount of the Old
Notes for an aggregate purchase price of $6.3 million in cash. In total, including amounts repaid
under the Term Loan A Facility and Term Loan B Facility, the Company retired $34.5 million of
outstanding debt during the year ended December 31, 2009.
In connection with the Exchange Offer and the corresponding consent solicitation, the Company
also paid a cash consent fee of $1.6 million in the aggregate to holders of Old Notes who validly
delivered and did not revoke consents in the consent solicitation prior to a specified early
consent deadline, which amount was equal to $3.75 in cash per $1,000 aggregate principal amount of
Old Notes exchanged in the Exchange Offer.
Prior to the filing of the Chapter 11 Cases, the Company failed to make the October 1, 2009
interest payment on the Pre-Petition Notes. The failure to make the interest payment on the
Pre-Petition Notes constituted an event of default under the Pre-Petition Notes upon the expiration
of a thirty day grace period. An event of default under the Pre-Petition Notes permits the holders
of the Pre-Petition Notes to accelerate the maturity of the Pre-Petition Notes. In addition, the
filing of the Chapter 11 Cases constituted an event of default under the New Notes.
In addition, as a result of the 2009 Restatement, the Company determined that the Company was
not in compliance with the interest coverage ratio maintenance covenant and the leverage ratio
maintenance covenant under the Pre-Petition Credit Facility for the measurement period ended June
30, 2009, which constituted an event of default under each of the Pre-Petition Credit Facility and
the Swaps, and may have constituted an event of default under the Pre-Petition Notes, in each case
at June 30, 2009.
The Pre-Petition Notes were terminated on the Effective Date.
Debtor-in-Possession Financing
DIP Credit Agreement
In connection with the Chapter 11 Cases, the FairPoint Communications and FairPoint Logistics,
Inc. (FairPoint Logistics, and together with FairPoint Communications, the DIP Borrowers)
entered into the Debtor-in-Possession Credit Agreement, dated as of October 27, 2009 (DIP Credit
Agreement) with certain financial institutions (DIP Lenders) and the Administrative Agent. The
98
DIP Credit Agreement provided for DIP Financing. Pursuant to the Order of the Bankruptcy Court,
dated October 28, 2009 (the Interim Order), the DIP Borrowers were authorized to enter into and
immediately draw upon the DIP Credit Agreement on an interim basis, pending a final hearing before
the Bankruptcy Court, in an aggregate amount of $20.0 million. On March 11, 2010 the Bankruptcy
Court entered the final order of the Bankruptcy Court (the Final DIP Order), permitting the DIP
Borrowers access to the total $75.0 million of the DIP Financing, subject to the terms and
conditions of the DIP Credit Agreement and related orders of the Bankruptcy Court. As of December
31, 2010, the Company had not borrowed any amounts under the DIP Credit Agreement and letters of
credit totaling $18.7 million had been issued under the DIP Credit Agreement.
The DIP Financing (defined as the revolving facility with an aggregate principal amount of up
to $75.0 million, of which up to $30.0 million was also available in the form of one or more
letters of credit that may be issued to third parties for our account) matured and was repayable in
full on the earlier to occur of (i) January 31, 2011, which date could have been extended for up to
an additional two months with the consent of the Required Lenders (as defined in the DIP Credit
Agreement) for no additional fee, (ii) the Effective Date, (iii) the voluntary reduction by the DIP
Borrowers to zero of all commitments to lend under the DIP Credit Agreement, or (iv) the date on
which the obligations under the DIP Financing were accelerated by the non-defaulting DIP Lenders
holding a majority of the aggregate principal amount of the outstanding loans and letters of credit
plus unutilized commitments under the DIP Financing upon the occurrence and during the continuance
of certain events of default.
Other material provisions of the DIP Credit Agreement included the following:
Interest Rate and Fees. Interest rates for borrowings under the DIP Credit Agreement were, at
the DIP Borrowers option, at either (i) the Eurodollar rate plus a margin of 4.5% or (ii) the base
rate plus a margin of 3.5%, payable monthly in arrears on the last business day of each month.
Interest accrued from and including the date of any borrowing up to but excluding the date of
any repayment thereof and was payable (i) in respect of each base rate loan, monthly in arrears on
the last business day of each month, (ii) in respect of each
Eurodollar loan, on the last day of each interest period applicable thereto (which shall be a
period of one month) and (iii) in respect of each such loan, on any prepayment or conversion (on
the amount prepaid or converted), at maturity (whether by acceleration or otherwise) and, after
such maturity, on demand. The DIP Credit Agreement provided for the payment to the Administrative
Agent, for the pro rata benefit of the DIP Lenders, of an upfront fee in the aggregate principal
amount of $1.5 million, which upfront fee was payable in two installments: (1) the first
installment of $0.4 million was due and payable on October 28, 2009, the date on which the Interim
Order was entered by the Bankruptcy Court, and (2) the remainder of the upfront fee was due and
payable on the date the Final DIP Order was entered by the Bankruptcy Court. The DIP Credit
Agreement also provided for an unused line fee of 0.50% on the unused revolving commitment, payable
monthly in arrears on the last business day of each month (or on the date of maturity, whether by
acceleration or otherwise), and a letter of credit facing fee of 0.25% per annum calculated daily
on the stated amount of all outstanding letters of credit, payable monthly in arrears on the last
business day of each month (or on the date of maturity, whether by acceleration or otherwise), as
well as certain other fees.
Voluntary Prepayments. Voluntary prepayments of borrowings and optional reductions of the
unutilized portion of the commitments were permitted without premium or penalty (subject to payment
of breakage costs in the event Eurodollar loans are prepaid prior to the end of an applicable
interest period).
Covenants. Under the DIP Credit Agreement, the DIP Borrowers were required to maintain
compliance with certain covenants, including maintaining minimum EBITDAR (earnings before interest,
taxes, depreciation, amortization, restructuring charges and certain other non-cash costs and
charges, as set forth in the DIP Credit Agreement) and not exceeding maximum permitted capital
expenditure amounts. Covenants related to EBITDAR and capital expenditures were removed under the
15th Amendment to the DIP Credit Agreement, effective October 22, 2010. The DIP Credit
Agreement also contained customary affirmative and negative covenants and restrictions, including,
among others, with respect to investments, additional indebtedness, liens, changes in the nature of
the business, mergers, acquisitions, asset sales and transactions with affiliates. As of December
31, 2010, the DIP Borrowers were in compliance with all covenants under the DIP Credit Agreement.
99
Events of Default. The DIP Credit Agreement contained customary events of default, including,
but not limited to, failure to pay principal, interest or other amounts when due, breach of
covenants, failure of any representations to have been true in all material respects when made,
cross-defaults to certain other indebtedness in excess of specific amounts (other than obligations
and indebtedness created or incurred prior to the filing of the Chapter 11 Cases), judgment
defaults in excess of specified amounts, certain ERISA defaults and the failure of any guaranty or
security document supporting the DIP Credit Agreement to be in full force and effect, the
occurrence of a change of control and certain matters related to the Interim Order, the Final DIP
Order and other matters related to the Chapter 11 Cases.
DIP Pledge Agreement
The DIP Borrowers and the DIP Pledgors entered into the DIP Pledge Agreement with Bank of
America N.A., as the DIP Collateral Agent, as required under the terms of the DIP Credit Agreement.
Pursuant to the DIP Pledge Agreement, the DIP Pledgors provided the DIP Pledge Agreement
Collateral to the DIP Collateral Agent for the secured parties identified therein.
DIP Subsidiary Guaranty
The DIP Guarantors entered into the DIP Subsidiary Guaranty with the Administrative Agent, as
required under the terms of the DIP Credit Agreement. Pursuant to the DIP Subsidiary Guaranty, the
DIP Guarantors agreed to jointly and severally guarantee the full and prompt payment of all fees,
obligations, liabilities and indebtedness of the DIP Borrowers, as borrowers under the DIP
Financing. Pursuant to the terms of the DIP Subsidiary Guaranty, the DIP Guarantors further
agreed to subordinate any indebtedness of the DIP Borrowers held by such DIP Guarantor to the
indebtedness of the DIP Borrowers held by the secured parties under the DIP Financing.
DIP Security Agreement
The DIP Grantors entered into the DIP Security Agreement with the DIP Collateral Agent, as
required under the terms of the DIP Credit Agreement. Pursuant to the DIP Security Agreement, the
DIP Grantors provided to the DIP Collateral Agent for the benefit of the secured parties identified
therein, a security interest in all assets other than the DIP Pledge Agreement Collateral, any
causes of action arising under Chapter 5 of the Bankruptcy Code and FCC licenses and authorizations
by state regulatory authorities to the extent that any DIP Grantor is prohibited from granting a
lien and security interest therein pursuant to applicable law.
As of December 31, 2010, the Company had not borrowed any amounts under the DIP Credit
Agreement, however letters of credit had been issued under the DIP Credit Agreement for $18.7
million. Accordingly, as of December 31, 2010, the amount available under the DIP Credit Agreement
was $56.3 million.
The DIP Credit Agreement was terminated on January 24, 2011 (the Effective Date). All
letters of credit outstanding under the DIP Credit Agreement were transferred to the Exit Credit
Agreement on the Effective Date.
Exit Credit Agreement
On the Effective Date the Exit Borrowers entered into the $1,075.0 million senior secured
credit facility with a syndicate of lenders and Bank of America, N.A., as the administrative agent
for the lenders, arranged by Banc of America Securities LLC (the Exit Credit Agreement). The
Companys $1,075.0 million Exit Credit Agreement consists of a non-amortizing revolving facility
(the Exit Revolving Loan) in an aggregate principal amount of $75.0 million and a senior secured
term loan facility in an aggregate principal amount of $1,000.0 million (the Term Loan Facility).
The Company drew the full $1,000.0 million under the Term Loan Facility immediately upon emergence
on the Effective Date. The Exit Revolving Loan includes a $30.0 million sublimit available for the
issuance of letters of credit. Letters of credit outstanding under the DIP Credit Agreement on the
Effective Date were rolled into the Exit Revolving Loan. As of the Effective Date, the Company had
approximately $1,000.0 million of total debt outstanding. In addition, as of the Effective Date,
the Company had $56.3 million, net of outstanding letters of credit, available for additional
borrowing under the Exit Revolving Loan.
100
(10) Employee Benefit Plans
The Company remeasured its pension and other post-employment benefit assets and liabilities as
of December 31, 2010 and 2009, in accordance with the CompensationRetirement Benefits Topic of
the ASC. These measurements were based on weighted average discount rates of 5.61% and 6.07% as of
December 31, 2010 and 2009, respectively, as well as certain other valuation assumption
modifications.
Prior to the Merger, the Verizon Northern New England business participated in Verizons
benefit plans. Verizon maintained noncontributory defined benefit pension plans for many of its
employees. The postretirement health care and life insurance plans for the Verizon Northern New
England business retirees and their dependents were both contributory and noncontributory and
included a limit on the Companies share of cost for recent and future retirees. The Verizon
Northern New England business also sponsored defined contribution savings plans to provide
opportunities for eligible employees to save for retirement on a tax-deferred basis. A measurement
date of December 31 was used for the pension and postretirement health care and life insurance
plans.
The structure of Verizons benefit plans did not provide for the separate attribution of the
related pension and postretirement assets and obligations at the Verizon Northern New England
business level. Because there was not a separate plan for the Verizon Northern New England
business, the annual income and expense related to such assets and obligations were allocated to
the Verizon Northern New England business and are reflected as prepaid pension assets and employee
benefit obligations in the balance sheet prior to the Merger.
After June 30, 2006, Verizon management employees, including management employees of the
Verizon Northern New England business, ceased to earn pension benefits or earn service towards the
company retiree medical subsidy. In addition, new management employees hired after December 31,
2005 were not eligible for pension benefits and managers with less than 13.5 years of service as of
June 30, 2006 were not eligible for company-subsidized retiree healthcare or retiree life insurance
benefits. Beginning July 1, 2006, Verizon Northern New England business management employees
received an increased company match on their savings plan contributions.
101
Obligations and funded status
A summary of plan assets, projected benefit obligation and funded status of the plans are as
follows for the years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Pension |
|
|
Post-retirement Healthcare |
|
|
|
Year ended December 31, |
|
|
Year ended December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Fair value of plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
162,604 |
|
|
$ |
184,300 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
18,180 |
|
|
|
26,339 |
|
|
|
(1 |
) |
|
|
|
|
Plan settlements |
|
|
|
|
|
|
(47,857 |
) |
|
|
|
|
|
|
|
|
Employer contributions |
|
|
|
|
|
|
|
|
|
|
1,735 |
|
|
|
389 |
|
Benefits paid |
|
|
(4,310 |
) |
|
|
(178 |
) |
|
|
(1,520 |
) |
|
|
(389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
176,474 |
|
|
|
162,604 |
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
205,234 |
|
|
$ |
222,393 |
|
|
$ |
260,330 |
|
|
$ |
221,286 |
|
Service cost |
|
|
11,187 |
|
|
|
10,923 |
|
|
|
14,321 |
|
|
|
13,020 |
|
Interest cost |
|
|
12,963 |
|
|
|
13,269 |
|
|
|
16,347 |
|
|
|
13,889 |
|
Plan amendments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan settlements |
|
|
|
|
|
|
(47,857 |
) |
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(4,310 |
) |
|
|
(178 |
) |
|
|
(1,520 |
) |
|
|
(389 |
) |
Actuarial loss |
|
|
40,686 |
|
|
|
6,684 |
|
|
|
55,423 |
|
|
|
12,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year |
|
|
265,760 |
|
|
|
205,234 |
|
|
|
344,901 |
|
|
|
260,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets less than projected benefit obligation |
|
$ |
(89,286 |
) |
|
$ |
(42,630 |
) |
|
$ |
(344,687 |
) |
|
$ |
(260,330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation |
|
$ |
265,688 |
|
|
$ |
204,946 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
$ |
2,960 |
|
|
$ |
8,808 |
|
|
$ |
|
|
|
$ |
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
(2,515 |
) |
|
|
(961 |
) |
Non-current liabilities |
|
|
(92,246 |
) |
|
|
(51,438 |
) |
|
|
(342,172 |
) |
|
|
(259,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(89,286 |
) |
|
$ |
(42,630 |
) |
|
$ |
(344,687 |
) |
|
$ |
(260,330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
$ |
(17,141 |
) |
|
$ |
(18,665 |
) |
|
$ |
(29,426 |
) |
|
$ |
(33,715 |
) |
Net actuarial loss |
|
|
(117,749 |
) |
|
|
(80,666 |
) |
|
|
(127,660 |
) |
|
|
(75,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in accumulated other
comprehensive loss |
|
$ |
(134,890 |
) |
|
$ |
(99,331 |
) |
|
$ |
(157,086 |
) |
|
$ |
(109,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plan assets at December 31, 2009 include an additional transfer of assets from Verizon
of $33.3 million, which was received on February 5, 2010, as well as a pending transfer of assets
from Verizon estimated as of December 31, 2009 to be $0.2 million. As of December 31, 2009, a
disputed amount was pending final validation by a third-party actuary of the census information and
related actuarial calculations in accordance with relevant statutory and regulatory guidelines and
the Employee Matters
102
Agreement, dated January 15, 2007 between Verizon and the Company (the
Employee Matters Agreement). The disputed amount was not included in the Companys pension plan
assets at December 31, 2009. By letter dated July 29, 2010, the third-party actuary appointed to
perform the review and validation determined that an additional $2.5 million, adjusted for gains or
losses since the date of the original transfer, should be transferred from Verizons defined
benefit plans trusts to the Companys represented employees
pension plan trust. This transfer was received in the amount of $2.4 million on September 1,
2010, at which time the Companys net pension obligation was decreased by this amount.
The plans portfolio strategy emphasizes a long-term equity orientation, significant global
diversification and financial and operating risk controls. The plans diversification seeks to
minimize the concentration of risk. Assets are allocated according to long-term risk and return
estimates. Both active and passive management approaches are used depending on perceived market
efficiencies and various other factors.
The fair values for the pension plans by asset category at December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Cash and cash equivalents |
|
$ |
5,111 |
|
|
$ |
5,111 |
|
|
$ |
|
|
|
$ |
|
|
Equity securities |
|
|
85,886 |
|
|
|
85,886 |
|
|
|
|
|
|
|
|
|
Fixed income securities |
|
|
63,546 |
|
|
|
21,823 |
|
|
|
41,723 |
|
|
|
|
|
Hedge funds |
|
|
21,931 |
|
|
|
|
|
|
|
|
|
|
|
21,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
176,474 |
|
|
$ |
112,820 |
|
|
$ |
41,723 |
|
|
$ |
21,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values for the pension plans by asset category at December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Cash and cash equivalents |
|
$ |
18,972 |
|
|
$ |
18,972 |
|
|
$ |
|
|
|
$ |
|
|
Equity securities |
|
|
41,569 |
|
|
|
41,569 |
|
|
|
|
|
|
|
|
|
Fixed income securities |
|
|
52,045 |
|
|
|
|
|
|
|
52,045 |
|
|
|
|
|
Hedge funds |
|
|
14,202 |
|
|
|
|
|
|
|
|
|
|
|
14,202 |
|
Funds receivable from Verizon |
|
|
33,553 |
|
|
|
|
|
|
|
|
|
|
|
33,553 |
|
Other assets |
|
|
2,263 |
|
|
|
|
|
|
|
|
|
|
|
2,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
162,604 |
|
|
$ |
60,541 |
|
|
$ |
52,045 |
|
|
$ |
50,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
A reconciliation of the beginning and ending balance of pension plan assets that are measured
at fair value using significant unobservable (Level 3) inputs as of December 31, 2010 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds Receivable |
|
|
|
|
|
|
|
(In thousands) |
|
Hedge Funds |
|
|
from Verizon |
|
|
Other Assets |
|
|
Total |
|
Balance at December 31, 2008 |
|
$ |
|
|
|
$ |
32,094 |
|
|
$ |
|
|
|
$ |
32,094 |
|
Actual gain (loss) on plan assets |
|
|
(798 |
) |
|
|
1,459 |
|
|
|
|
|
|
|
661 |
|
Purchases and sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in and/or out of Level 3 |
|
|
15,000 |
|
|
|
|
|
|
|
2,263 |
|
|
|
17,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
14,202 |
|
|
$ |
33,553 |
|
|
$ |
2,263 |
|
|
$ |
50,018 |
|
Actual gain (loss) on plan assets |
|
|
(171 |
) |
|
|
|
|
|
|
68 |
|
|
|
(103 |
) |
Purchases and sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in and/or out of Level 3 |
|
|
7,900 |
|
|
|
(33,553 |
) |
|
|
(2,331 |
) |
|
|
(27,984 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
21,931 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents include short-term investment funds, primarily in diversified
portfolios of investment grade money market instruments and are valued using quoted market prices,
and thus classified within Level 1 of the fair value hierarchy.
Equity securities are investments in common stock of domestic and international corporations
in a variety of industry sectors and are valued using quoted market prices, and are classified
within Level 1 of the fair value hierarchy.
Fixed income securities are investments in corporate bonds and in publicly traded mutual funds
that invest in corporate bonds. The fair values of corporate bonds are based on observable prices
and are classified within Level 2 of the fair value hierarchy. Pricing of publicly traded mutual
funds is readily available and, therefore, these funds are classified within Level 1 of the fair
value hierarchy.
Hedge funds seek to maximize absolute returns using a broad range of strategies to enhance
returns and provide diversification. The fair values of hedge funds are estimated using net asset
value per share (NAV) of the investments. The Company has the ability to redeem these investments
at NAV on a limited basis, and thus has classified hedge funds within Level 3 of the fair value
hierarchy.
Other assets represent cash and cash equivalents held in a short-term investment fund. Due to
limitations on the liquidity of assets within this fund, the Company has classified these assets
within Level 3 of the fair value hierarchy.
Funds receivable from Verizon represent the estimated pending transfer of funds from Verizon
following final actuarial settlement. Concurrent with the closing of the Merger, Verizon
transferred 80% of the value of the pension plans to the Company. During the three months ended
March 31, 2010, $33.3 million was transferred from Verizons defined benefit pension plans trusts
to the Companys pension plan trust. As of December 31, 2009, a disputed amount was pending final
validation by a third-party actuary of the census information and related actuarial calculations in
accordance with relevant statutory and regulatory guidelines and the Employee Matters Agreement.
The disputed amount was not included in the Companys pension plan assets at December 31, 2009. By
letter dated July 29, 2010, the third-party actuary appointed to perform the review and validation
determined that an additional $2.5 million, adjusted for gains or losses since the date of the
original transfer, should be transferred from Verizons defined benefit plans trusts to the
Companys represented employees pension plan trust. This transfer was received in the amount of
$2.4 million on September 1, 2010, at which time the Companys net pension obligation was decreased
by this amount.
104
Net periodic benefit costComponents of the net periodic benefit (income) cost related to the
Companys pension and post-retirement healthcare plans for the years ended December 31, 2010 and
2009 and the nine months ended December 31, 2008 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Pension |
|
|
Post-retirement Healthcare |
|
|
|
|
|
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
|
|
|
|
Nine months |
|
|
|
Year ended December 31, |
|
|
ended December 31, |
|
|
Year ended December 31, |
|
|
ended
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
11,187 |
|
|
$ |
10,923 |
|
|
$ |
6,741 |
|
|
$ |
14,321 |
|
|
$ |
13,020 |
|
|
$ |
7,018 |
|
Interest cost |
|
|
12,963 |
|
|
|
13,269 |
|
|
|
9,383 |
|
|
|
16,347 |
|
|
|
13,889 |
|
|
|
8,196 |
|
Expected return on plan
assets |
|
|
(16,664 |
) |
|
|
(20,575 |
) |
|
|
(15,745 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Amortization of prior
service cost |
|
|
1,524 |
|
|
|
1,452 |
|
|
|
632 |
|
|
|
4,289 |
|
|
|
4,293 |
|
|
|
3,219 |
|
Amortization of
actuarial loss |
|
|
2,087 |
|
|
|
813 |
|
|
|
|
|
|
|
3,474 |
|
|
|
3,487 |
|
|
|
261 |
|
Settlement loss |
|
|
|
|
|
|
18,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
11,097 |
|
|
$ |
24,302 |
|
|
$ |
1,011 |
|
|
$ |
38,428 |
|
|
$ |
34,689 |
|
|
$ |
18,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net periodic benefit (income) cost related to the Companys pension plans was $0.9 million
for the year ended December 31, 2008, of which ($0.1) million related to net periodic benefit
income for the three months ended March 31, 2008. The net periodic benefit cost related to the
Companys post-retirement healthcare plans was $41.2 million for the year ended December 31, 2008,
of which $22.5 million related to net periodic benefit cost for the three months ended March 31,
2008.
Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive
(income) loss are as follows for the years ended December 31, 2010 and 2009 and the nine months
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Pension |
|
|
Post-retirement Healthcare |
|
|
|
|
|
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
|
|
|
|
Nine months |
|
|
|
Year ended December 31, |
|
|
ended
December 31, |
|
|
Year ended December 31, |
|
|
ended
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Amounts recognized
in other
comprehensive income
(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New prior service
cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
13,454 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
123 |
|
Net loss arising
during the year |
|
|
39,170 |
|
|
|
920 |
|
|
|
94,340 |
|
|
|
55,427 |
|
|
|
12,524 |
|
|
|
37,675 |
|
Amortization or
curtailment of
prior service
cost |
|
|
(1,524 |
) |
|
|
(1,452 |
) |
|
|
(632 |
) |
|
|
(4,289 |
) |
|
|
(4,293 |
) |
|
|
(3,219 |
) |
Amortization or
settlement
recognition of net
loss |
|
|
(2,087 |
) |
|
|
(19,233 |
) |
|
|
|
|
|
|
(3,474 |
) |
|
|
(3,487 |
) |
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount
recognized in other
comprehensive loss |
|
$ |
35,559 |
|
|
$ |
(19,765 |
) |
|
$ |
107,162 |
|
|
$ |
47,664 |
|
|
$ |
4,744 |
|
|
$ |
34,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amounts
that will be
amortized from
accumulated other
comprehensive loss
in the next fiscal
year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
$ |
(126 |
) |
|
$ |
(1,524 |
) |
|
$ |
(1,452 |
) |
|
$ |
(357 |
) |
|
$ |
(4,290 |
) |
|
$ |
(4,292 |
) |
Net actuarial
loss |
|
|
(365 |
) |
|
|
(1,115 |
) |
|
|
(623 |
) |
|
|
(475 |
) |
|
|
(3,110 |
) |
|
|
(2,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount
estimated to be
amortized from
accumulated other
comprehensive loss
in the next fiscal
year |
|
$ |
(491 |
) |
|
$ |
(2,639 |
) |
|
$ |
(2,075 |
) |
|
$ |
(832 |
) |
|
$ |
(7,400 |
) |
|
$ |
(6,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2010 and 2009, the Company did not make a contribution to
the qualified pension plans, but did incur $1.5 million and $0.4 million, respectively, in
post-retirement healthcare plan expenditures. In 2011, the Company expects to make contributions
of $6.8 million and $2.5 million to its qualified pension plans and post-retirement healthcare
plans, respectively.
105
Assumptions
The weighted average assumptions used in determining benefit obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Qualified Pension |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.56 |
% |
|
|
6.00 |
% |
Rate of future increases in compensation |
|
|
3.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
Post-retirement Healthcare |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.65 |
% |
|
|
6.13 |
% |
Rate of future increases in compensation |
|
|
4.00 |
% |
|
|
4.00 |
% |
The weighted average assumptions used in determining net periodic cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
Nine months ended |
|
|
|
2010 |
|
|
2009 |
|
|
December 31, 2008 |
|
Qualified Pension |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
5.94 |
% |
|
|
6.80 |
% |
Expected return on plan assets |
|
|
8.32 |
% |
|
|
8.32 |
% |
|
|
8.38 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement Healthcare |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.13 |
% |
|
|
5.95 |
% |
|
|
6.80 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
Healthcare cost trend rate assumed for participants
under 65 next year |
|
|
7.70 |
% |
|
|
8.00 |
% |
|
|
9.50 |
% |
Healthcare cost trend rate assumed for participants
over 65 next year |
|
|
8.20 |
% |
|
|
8.50 |
% |
|
|
10.50 |
% |
Rate that the cost trend rates ultimately declines to |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
5.00 |
% |
Year that the rates reach the terminal rate |
|
|
2029 |
|
|
|
2029 |
|
|
|
2014 |
|
Prior to the Merger, the weighted average assumptions used in determining net periodic cost
for the three months ended March 31, 2008 were as follows:
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, 2008 |
|
Qualified Pension |
|
|
|
|
Discount rate |
|
|
6.50 |
% |
Expected return on plan assets |
|
|
8.50 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
|
|
|
Post-retirement Healthcare |
|
|
|
|
Discount rate |
|
|
6.00 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
106
In developing the expected long-term rate-of-return assumption, the Company evaluated
historical investment performance and input from its investment advisors. Projected returns by
such advisors were based on broad equity and bond indices. The expected long-term rate-of-return
on qualified pension plan assets is based on target allocations of 50% equity and 50% fixed income
securities for the management plan and 70% equity and 30% fixed income securities for the associate
plan. The asset allocation at December 31, 2010 for the Companys qualified pension plan assets
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Plan |
|
|
Associate Plan |
|
|
Total Pension |
|
Cash and cash equivalents (1) |
|
|
1.3 |
% |
|
|
0.8 |
% |
|
|
0.9 |
% |
Equity securities |
|
|
41.9 |
% |
|
|
69.8 |
% |
|
|
63.1 |
% |
Fixed income securities |
|
|
56.8 |
% |
|
|
29.4 |
% |
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
(1) |
|
Cash and cash equivalents includes only those amounts that are held in the respective
plans trusts as cash and cash equivalent instruments. Amounts pending purchase or settlement of
equity or fixed income securities are classified within equity securities or fixed income
securities, as appropriate. |
For the years ended December 31, 2010 and 2009, the actual return on the pension plan assets
was approximately 11.2% and 17.3%, respectively. Net periodic benefit cost for 2010 assumes a
weighted average annualized expected return on plan assets of approximately 8.3%. Should the
Companys actual return on plan assets become significantly lower than the expected return
assumption, the net periodic benefit cost may increase in future periods and the Company may be
required to contribute additional funds to its pension plans.
A 1% change in the medical trend rate assumed for post-retirement healthcare benefits would
have the following effects at December 31, 2010:
|
|
|
|
|
|
|
Post-retirement |
|
(In thousands) |
|
Healthcare |
|
1% increase in the medical trend rate: |
|
|
|
|
Effect on
total service cost and interest cost components |
|
$ |
7,278 |
|
Effect on benefit obligation |
|
$ |
80,342 |
|
|
|
|
|
|
1% decrease in the medical trend rate: |
|
|
|
|
Effect on
total service cost and interest cost components |
|
$ |
(5,589 |
) |
Effect on benefit obligation |
|
$ |
(61,572 |
) |
107
The impact of the Medicare Drug Act of 2003 subsidy on the post-retirement health benefits at
December 31, 2010 is as follows:
|
|
|
|
|
|
|
Post-retirement |
|
(In thousands) |
|
Healthcare |
|
Change in projected benefit obligation |
|
|
|
|
|
|
$ |
(20,794 |
) |
Change in each component of net periodic cost: |
|
|
|
|
Service cost |
|
$ |
(866 |
) |
Interest cost |
|
|
(947 |
) |
Net amortization and deferral of prior service cost |
|
|
16 |
|
Net amortization and deferral of actuarial loss |
|
|
(349 |
) |
|
|
|
|
Total change in net periodic cost |
|
$ |
(2,146 |
) |
|
|
|
|
Estimated future benefit payments
Estimated future employer contributions, benefit payments and Medicare prescription drug
subsidies expected to offset the future post-retirement healthcare benefit payments are as follows
as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement |
|
(In thousands) |
|
Qualified Pension |
|
|
Healthcare |
|
Expected employer contributions for 2011 |
|
$ |
6,821 |
|
|
$ |
2,515 |
|
|
|
|
|
|
|
|
|
|
Expected benefit payments: |
|
|
|
|
|
|
|
|
2011 |
|
$ |
9,815 |
|
|
$ |
2,515 |
|
2012 |
|
|
3,444 |
|
|
|
3,356 |
|
2013 |
|
|
12,667 |
|
|
|
4,371 |
|
2014 |
|
|
13,909 |
|
|
|
5,320 |
|
2015 |
|
|
4,802 |
|
|
|
6,641 |
|
2016-2020 |
|
|
43,077 |
|
|
|
59,159 |
|
|
|
|
|
|
|
|
|
|
Expected subsidy: |
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
$ |
12 |
|
2012 |
|
|
|
|
|
|
21 |
|
2013 |
|
|
|
|
|
|
33 |
|
2014 |
|
|
|
|
|
|
52 |
|
2015 |
|
|
|
|
|
|
82 |
|
2016-2020 |
|
|
|
|
|
|
1,321 |
|
401(k) savings plans
The Company and its subsidiaries sponsor four voluntary 401(k) savings plans that, in the
aggregate, cover substantially all eligible Legacy FairPoint employees, and two voluntary 401(k)
savings plans that cover in the aggregate substantially all eligible Northern New England
operations employees (collectively, the 401(k) Plans). Each 401(k) Plan year, the Company
contributes to the 401(k) Plans an amount of matching contributions determined by the Company at
its discretion. For the 401 (k) Plan years ended December 31, 2010 and 2009, the Company matched
100% of each employees contribution up to 5% of compensation. For the 401(k) Plan year ended
December 31, 2008, the Company generally matched in the Legacy FairPoint 401(k) plans 100% of each
employees contribution up to 3% of compensation and 50% of additional contributions up to 6% or as
otherwise required by relevant collective
108
bargaining agreement; in the Northern New England 401(k)
management plan an amount equal to 100% of each employees contribution up to 6% of base
compensation, plus, depending on Company performance, an additional discretionary match of up to
50% of the next 3% of base compensation; and in the Northern New England 401(k) plan for union
associates an amount equal to 82% of each employees contribution up to 6% of base compensation.
Total Company contributions to all 401(k) Plans were $10.4 million, $9.8 million, and $10.9 million
for the years ended December 31, 2010, 2009 and 2008, respectively.
(11) Income Taxes
Income tax (expense) benefit for the years ended December 31, 2010, 2009 and 2008 consists of
the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
8,027 |
|
State and local |
|
|
(732 |
) |
|
|
(240 |
) |
|
|
1,498 |
|
|
|
|
|
|
|
|
|
|
|
Total current income tax (expense) benefit |
|
|
(732 |
) |
|
|
(240 |
) |
|
|
9,525 |
|
|
|
|
|
|
|
|
|
|
|
Investment tax credits |
|
|
478 |
|
|
|
532 |
|
|
|
417 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
3,246 |
|
|
|
69,704 |
|
|
|
30,269 |
|
State and local |
|
|
4,669 |
|
|
|
9,018 |
|
|
|
3,197 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax benefit |
|
|
7,915 |
|
|
|
78,722 |
|
|
|
33,466 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit |
|
$ |
7,661 |
|
|
$ |
79,014 |
|
|
$ |
43,408 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit was different than that computed by applying U.S. Federal income tax
rates to income before income taxes for the years ended December 31, 2010, 2009 and 2008. The 2.6%
effective tax (benefit) rate for the year ended December 31, 2010 was impacted by a one-time,
non-cash income tax charge of $6.8 million during the first quarter of 2010, as a result of the
enactment of Patient Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010, both of which became law in March 2010 (collectively, the Health Care
Act). Under the Health Care Act, beginning in 2013, the Company will no longer receive a federal
income tax deduction for the expenses incurred in connection with providing the subsidized coverage
under Medicare Part D for retiree prescription drug coverage to the extent of the subsidy the
Company receives for providing that coverage. Because future anticipated retiree prescription drug
plan liabilities and related subsidies are already reflected in the Companys financial statements,
this change required the Company to reduce the value of the related tax benefits recognized in its
financial statements in the period during which the Health Care Act was enacted. Our effective tax
rate for the year ended December 31, 2010 was also impacted by non-deductible restructuring charges
and post-petition interest, as well as a significant increase in our valuation allowance for
deferred tax assets due to our inability, by rule, to rely on future earnings to offset our NOLs
during the Chapter 11 Cases.
A reconciliation of the Companys statutory tax rate to its effective tax rate is presented
below (in percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Statutory
Federal income tax (benefit) rate |
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
State income tax (expense) benefit, net
of Federal income tax expense |
|
|
(2.9 |
) |
|
|
(2.9 |
) |
|
|
(2.7 |
) |
Post-petition interest |
|
|
16.6 |
|
|
|
2.7 |
|
|
|
|
|
Investment tax credits |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.4 |
) |
Medicare subsidy |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
(1.0 |
) |
Restructuring charges |
|
|
2.6 |
|
|
|
1.3 |
|
|
|
|
|
Medicare subsidy impact of law change |
|
|
2.4 |
|
|
|
|
|
|
|
|
|
Other, net |
|
|
0.2 |
|
|
|
1.0 |
|
|
|
0.3 |
|
Valuation allowance |
|
|
14.0 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax (benefit) rate |
|
|
(2.6 |
)% |
|
|
(24.7 |
)% |
|
|
(38.8 |
)% |
|
|
|
|
|
|
|
|
|
|
109
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities as of December 31, 2010 and 2009 are presented below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Federal and state tax loss
carryforwards |
|
$ |
230,398 |
|
|
$ |
165,982 |
|
Employee benefits |
|
|
179,904 |
|
|
|
136,242 |
|
Allowance for doubtful accounts |
|
|
16,288 |
|
|
|
26,539 |
|
Investment tax credits |
|
|
1,729 |
|
|
|
1,925 |
|
Alternative minimum tax and other state
credits |
|
|
7,315 |
|
|
|
6,095 |
|
Basis in interest rate swaps |
|
|
7,087 |
|
|
|
33,181 |
|
Bond issuance costs |
|
|
10,980 |
|
|
|
13,154 |
|
Service quality rebate reserve |
|
|
8,333 |
|
|
|
11,044 |
|
Other, net |
|
|
15,008 |
|
|
|
9,009 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
477,042 |
|
|
|
403,171 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant, and equipment |
|
|
319,244 |
|
|
|
321,856 |
|
Goodwill and other intangible
assets |
|
|
81,165 |
|
|
|
88,011 |
|
Other, net |
|
|
7,060 |
|
|
|
6,119 |
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities |
|
|
407,469 |
|
|
|
415,986 |
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) before
valuation allowance |
|
|
69,573 |
|
|
|
(12,815 |
) |
Valuation allowance |
|
|
(105,554 |
) |
|
|
(27,214 |
) |
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(35,981 |
) |
|
$ |
(40,029 |
) |
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
determines its estimates of future taxable income based upon the scheduled reversal of deferred tax
liabilities, projected future taxable income exclusive of reversing temporary differences, and tax
planning strategies. The Company establishes valuation allowances for deferred tax assets when it
is estimated to be more likely than not that the tax assets will not be realized.
Based upon the level of projections for future taxable income at December 31, 2008, management
believed it was more likely than not the Company would realize the full benefits of these
deductible differences. However, as a result of the change in facts and circumstances during 2009
in which the Company filed for Chapter 11 reorganization, the Company reassessed the likelihood
that its deferred tax assets will be realized as of December 31, 2009. Based upon the change in
circumstances, management believes it can support the realizability of its deferred tax asset only
by the scheduled reversal of its deferred tax liabilities and can no longer rely upon the
projection of future taxable income. At December 31, 2010 and 2009, the Company established a
valuation allowance of $105.6 million and $27.2 million, respectively, against its deferred tax
assets which consists of a $85.1 million and $21.7 million Federal allowance, respectively, and a
$20.5 million and $5.5 million state allowance, respectively.
In addition to the impact of the change in valuation allowance, the effective tax rate for the
years ended December 31, 2010 and 2009 is impacted by post-petition interest on debts that is not
expected to be paid and, therefore, not expected to result in a future tax deduction, as well as
non-deductible costs incurred related to the Chapter 11 Cases.
At
December 31, 2010, the Company had federal and state NOL carryforwards of $597.5 million
that will expire from 2019 to 2030. At December 31, 2010, the Company has alternative minimum tax
credits of $3.8 million that may be carried forward indefinitely. Legacy FairPoint completed an
initial public offering on February 8, 2005, which resulted in an ownership change within the
meaning of the U.S. Federal income tax laws addressing NOL carryforwards, alternative minimum tax
credits, and other similar tax attributes. The Merger also resulted in an ownership change. As a
result of these ownership changes, there are specific
110
limitations on the Companys ability to use
its NOL carryfowards and other tax attributes. It is the Companys belief that it can use the NOLs
even with these restrictions in place.
During the year ended December 31, 2010, the Company excluded from taxable income $21.6
million of income from the discharge of indebtedness as defined under Internal Revenue Code (IRC)
Section 108. IRC Section 108 excludes from taxable income the amount of indebtedness discharged under a Chapter 11 case. IRC Section 108 also
requires a reduction of tax attributes equal to the amount of excluded taxable income to be made on
the first day of the tax year following the emergence from bankruptcy. These tax attributes will
primarily consist of a reduction to the NOL carryforward and tax
basis of other assets, and accordingly, the Company has reduced its
NOL carryforward by $21.6 million and its related deferred tax asset
by $8.2 million.
The Income Taxes Topic of the ASC requires the use of a two-step approach for recognizing and
measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding
uncertainties in income tax positions. The unrecognized tax benefits under the Income Taxes Topic
of the ASC are similar to the income tax reserves reflected prior to adoption under SFAS No. 5,
Accounting for Contingencies, whereby reserves were established for probable loss contingencies
that could be reasonably estimated. The adoption of the uncertainties in income tax positions
provisions of the Income Taxes Topic of the ASC (formerly FIN 48) did not have a material impact on
the Companys financial position or results of operations. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
Balance as of December 31, 2008 |
|
$ |
8,594 |
|
|
|
|
|
Additions for tax positions related to the current year |
|
|
|
|
Additions for tax positions related to acquired companies |
|
|
|
|
Additions for tax positions of prior years |
|
|
|
|
Reductions for tax positions of prior years |
|
|
|
|
Reductions as a result of audit settlements |
|
|
(3,219 |
) |
Reductions due to lapse of statute of limitations |
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
$ |
5,375 |
|
|
|
|
|
Additions for tax positions related to the current year |
|
|
|
|
Additions for tax positions related to acquired companies |
|
|
|
|
Additions for tax positions of prior years |
|
|
|
|
Reductions for tax positions of prior years |
|
|
|
|
Reductions as a result of audit settlements |
|
|
|
|
Reductions due to lapse of statute of limitations |
|
|
|
|
|
|
|
|
Balance as of December 31, 2010 |
|
$ |
5,375 |
|
|
|
|
|
As
of the Effective Date, the Company expects that its unrecognized tax
benefits will be reduced to approximately $1.0 million as a result of
the termination of the Tax Sharing Agreements with Verizon. Of the $5.4 million of unrecognized
tax benefits at December 31, 2010, $2.0 million would impact the Companys effective tax rate, if
recognized.
The Company recognizes any interest and penalties accrued related to unrecognized tax benefits
in income tax expense. During the years ended December 31, 2010 and 2009, the Company did not make
any payment of interest and penalties. During the year ended December 31, 2008, the Company
recognized $0.2 million (after-tax) for the payment of interest and penalties. The Company had $1.0
million and $0.8 million (after-tax) for the payment of interest and penalties accrued in the
consolidated balance sheet at December 31, 2010 and 2009, respectively.
The Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and with various state and local governments. The Company is no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years
prior to 2004. During the quarter ending June 30, 2009, Verizon received notification from the IRS
that a tax position taken on their returns for the years 2000 through 2003 relating to FairPoints
acquired business was settled through acceptance of the filing position. During the quarter ending
June 30, 2008, Verizon effectively settled the IRS examination for fiscal years 2000 through 2003.
Due to the executed Tax Sharing Agreement, the settlement of the IRS audit resulted in an amount
due to Verizon from FairPoint in the amount of $1.5 million relating to adjustments of temporary
differences and $0.1 million of interest. As of December 31, 2010, the Company does not have any
significant additional jurisdictional tax audits.
111
Prior to the Merger, Verizon and its domestic subsidiaries, including the operations of the
Verizon Companies, filed a consolidated federal income tax return and combined state income tax
returns in the states of Maine, New Hampshire and Vermont. The operations of the Verizon Companies,
including the Verizon Northern New England business, for periods prior to the Merger were included
in a Tax Sharing Agreement with Verizon and were allocated tax payments based on the respective tax
liability as if they were filing on a separate company basis. Current and deferred tax expense was
determined by applying the provisions of the Income Taxes Topic of the ASC to each company as if it
were a separate taxpayer.
The Verizon Northern New England business used the deferral method of accounting for
investment tax credits earned prior to the repeal of investment tax credits by the Tax Reform Act
of 1986. The Verizon Northern New England business also deferred certain
transitional credits earned after the repeal and amortized these credits over the estimated
service lives of the related assets as a reduction to the provision for income taxes.
(12) Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive income were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2010 |
|
|
2009 |
|
Accumulated other comprehensive loss, net of taxes: |
|
|
|
|
|
|
|
|
Defined benefit pension and post-retirement healthcare plans |
|
$ |
(212,804 |
) |
|
$ |
(124,924 |
) |
|
|
|
|
|
|
|
Total other accumulated comprehensive loss |
|
$ |
(212,804 |
) |
|
$ |
(124,924 |
) |
|
|
|
|
|
|
|
Defined benefit pension and post-retirement healthcare plan activity during 2008 included
$49.5 million (net of $32.8 million taxes) in connection with the Merger, which is reflected as a
reduction to Accumulated Other Comprehensive Loss. This amount represents the allocation of
previously existing plan assets, obligations and prior service costs to the surviving benefit plans
upon Merger. Other Comprehensive Loss for the years ended December 31, 2010, 2009 and 2008 also
includes amortization of defined benefit pension and post-retirement healthcare plan related prior
service costs and actuarial gains and losses included in Accumulated Other Comprehensive Loss.
(13) Earnings Per Share
Earnings per share has been computed in accordance with the Earnings Per Share Topic of the
ASC. Basic earnings per share is computed by dividing net income by the weighted average number of
shares of common stock outstanding for the period. Except when the effect would be anti-dilutive,
the diluted earnings per share calculation calculated using the treasury stock method includes the
impact of stock units, shares of non-vested common stock and shares that could be issued under
outstanding stock options. The weighted average number of common shares outstanding for all periods
presented have been restated to reflect the issuance of 53,760,623 shares to the stockholders of
Spinco in connection with the Merger.
112
The following table provides a reconciliation of the common shares used for basic
earnings per share and diluted earnings per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year
ended
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Weighted average number of common shares used for basic
earnings per share |
|
|
89,424 |
|
|
|
89,271 |
|
Effect of potential dilutive shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and potential
dilutive shares used for diluted earnings per share |
|
|
89,424 |
|
|
|
89,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from the above reconciliation |
|
|
983 |
|
|
|
2,750 |
|
As the Company incurred a loss for the years ended December 31, 2010 and 2009, all potentially
dilutive securities are anti-dilutive and are, therefore, excluded from the determination of
diluted earnings per share.
(14) Stockholders Deficit
On March 31, 2008, FairPoint completed the acquisition of Spinco, pursuant to which Spinco
merged with and into FairPoint, with FairPoint continuing as the surviving corporation for legal
purposes. In order to effect the Merger, the Company issued 53,760,623 shares of common stock, par
value $.01 per share, to Verizon stockholders for their interest in Spinco. At the time of the
Merger, Legacy FairPoint had 35,264,945 shares of common stock outstanding. Upon consummation of
the Merger, the combined Company had 89,025,568 shares of common stock outstanding. At December
31, 2010, there were 89,440,334 shares of common stock outstanding and 200,000,000 shares of common
stock were authorized.
As a result of the Chapter 11 Cases, on the Effective Date, the Old Common Stock was
cancelled.
(15) Stock-Based Compensation
Pursuant to the Plan, all outstanding equity interests of the Company, including
but not limited to all outstanding shares of Common Stock, options and contractual or other rights
to acquire any equity interests, were cancelled and extinguished on the Effective Date.
Upon consummation of the Merger, the Company inherited several stock based compensation plans
that had been adopted by Legacy FairPoint prior to the Merger. As these plans were inherited on
March 31, 2008, there is no impact reflected in the consolidated balance sheets or consolidated
statements of operations for periods prior to March 31, 2008.
Effective on January 1, 2006, the Company adopted the provisions of SFAS 123(R). At December
31, 2010, the Company had $0.3 million of total unearned compensation cost related to non-vested
share-based payment arrangements granted under the Companys five stock-based compensation plans.
That cost was expected to be recognized over a weighted average period of 1.0 year, but was
recognized in full as a component of reorganization costs on the Effective Date. Compensation cost
for awards is recognized on a straight-line basis over the requisite service period of each award.
Any future share awards under any of these plans will be made using newly issued shares. Amounts
recognized in the financial statements with respect to these plans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Amounts charged against income, before
income tax benefit |
|
$ |
468 |
|
|
$ |
2,052 |
|
|
$ |
4,408 |
|
Amount of
related income tax benefit recognized in income |
|
|
(188 |
) |
|
|
(825 |
) |
|
|
(1,758 |
) |
|
|
|
|
|
|
|
|
|
|
Total net income impact |
|
$ |
280 |
|
|
$ |
1,227 |
|
|
$ |
2,650 |
|
|
|
|
|
|
|
|
|
|
|
113
(a) 1998 Stock Incentive Plan
In August 1998, the Company adopted the FairPoint Communications, Inc. (formerly MJD
Communications, Inc.) Stock Incentive Plan (the 1998 Plan). The 1998 Plan provided for grants of
up to 1,317,425 nonqualified stock options to executives and members of
management, at the discretion of the compensation committee of the board of directors. Options
vest in 25% increments on the second, third, fourth, and fifth anniversaries of an individual
grant. All options have a term of 10 years from date of grant. In the event of a change in control,
outstanding options will vest immediately. Effective in February 2005, the Company may no longer
grant awards under the 1998 Plan.
Pursuant to the terms of the grant, options granted in 1998 and 1999 would have become
exercisable only in the event that the Company was sold, an initial public offering of the
Companys common stock resulted in the principal shareholders holding less than 10% of their
original ownership, or other changes in control, as defined, were to have occurred. The number of
options that would have become ultimately exercisable also depended upon the extent to which the
price per share obtained in the sale of the Company would exceed a minimum selling price of $22.59
per share. The initial public offering did not trigger exercisability of these options.
In February 2007, all the options outstanding under the 1998 Plan were cancelled, except the
47,373 options with a $36.94 exercise price. This cancellation was triggered by certain events
noted in the 1998 Plan.
These stock options were granted by the Company prior to becoming a public company and
therefore the Company is accounting for these options under the prospective method under SFAS
123(R). As of December 31, 2010, options to purchase 47,373 shares of common stock were outstanding
with a weighted average exercise price of $36.94. These remaining options outstanding are
time-based vesting only and are fully vested and exercisable as of December 31, 2010.
Stock option activity under the 1998 Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
Options |
|
|
exercise |
|
|
|
outstanding |
|
|
price |
|
Outstanding at March 31, 2008 |
|
|
47,373 |
|
|
$ |
36.94 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
47,373 |
|
|
$ |
36.94 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
47,373 |
|
|
$ |
36.94 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
47,373 |
|
|
$ |
36.94 |
|
|
|
|
|
|
|
|
|
Stock options available for grant at
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Options exercisable |
|
|
|
|
|
|
Aggregate |
|
|
|
|
Number |
|
Remaining |
|
Intrinsic |
|
Number |
|
|
outstanding at |
|
contractual |
|
Value |
|
exercisable at |
Exercise price |
|
December 31, 2010 |
|
life (years) |
|
(In thousands) |
|
December 31, 2010 |
$36.94
|
|
47,373
|
|
1.0
|
|
|
|
47,373 |
114
The outstanding options have no aggregate intrinsic value based on the closing price of the
Companys stock of $0.02 on December 31, 2010.
(b) 2000 Employee Stock Incentive Plan
In May 2000, the Company adopted the FairPoint Communications, Inc. 2000 Employee Stock
Incentive Plan (the 2000 Employee Stock Incentive Plan). The 2000 Employee Stock Incentive Plan
provided for grants to members of management of up to 1,898,521 options to purchase common stock,
at the discretion of the compensation committee. During 2002, the Company amended the 2000 Employee
Stock Incentive Plan to limit the number of shares available for grant to 448,236. In December
2003, the Company amended the 2000 Employee Stock Incentive Plan to allow for the grant to members
of management of up to 1,898,521 shares of stock units in addition to shares available for stock
options. Options granted under the 2000 Employee Stock Incentive Plan may be of two types: (i)
incentive stock options and (ii) non-statutory stock options. Unless the compensation committee
shall otherwise specify at the time of grant, any option granted under the 2000 Employee Stock
Incentive Plan shall be a non-statutory stock option. Effective in February 2005, the Company may
no longer grant awards under the 2000 Employee Stock Incentive Plan.
Under the 2000 Employee Stock Incentive Plan, unless otherwise determined by the compensation
committee at the time of grant, participating employees were granted options to purchase common
stock at exercise prices not less than the market value of the Companys common stock at the date
of grant. Options have a term of 10 years from date of grant. Options vest in increments of 10% on
the first anniversary, 15% on the second anniversary, and 25% on the third, fourth, and fifth
anniversaries of an individual grant. Stock units vest in increments of 33% on each of the third,
fourth, and fifth anniversaries of the award. Subject to certain provisions, the Company can cancel
each option in exchange for a payment in cash of an amount equal to the excess of the fair value of
the shares over the exercise price for such option. The Company has not previously exercised this
right and does not currently intend to exercise this right in the future.
The 2000 Employee Stock Incentive Plan stock options and stock units were granted by the
Company prior to becoming a public company and therefore the Company is accounting for these awards
under the prospective method under SFAS 123(R).
Stock option activity under the 2000 Employee Stock Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
Options |
|
|
exercise |
|
|
|
outstanding |
|
|
price |
|
Outstanding at March 31, 2008 |
|
|
208,687 |
|
|
$ |
36.94 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
208,687 |
|
|
$ |
36.94 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(77,752 |
) |
|
$ |
36.94 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
130,935 |
|
|
$ |
36.94 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
130,935 |
|
|
$ |
36.94 |
|
|
|
|
|
|
|
|
|
Stock
options available for grant at December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining contractual life for the options outstanding at December 31, 2010 was 1.8 years,
and 130,935 options were exercisable. Based upon the fair market value of the stock as of December
31, 2010 of $0.02, these options do not have any intrinsic value.
115
As of March 31, 2008, there were 6,957 stock units outstanding with a grant date fair value
per share of $32.51. During 2008, 1,703 stock units were forfeited and 5,254 stock units vested and
were converted to common shares. No unvested awards remained as of December 31, 2008. The
intrinsic value of the 5,254 stock units that vested during 2008 was $0.1 million.
(c) 2005 Stock Incentive Plan
In February 2005, the Company adopted the FairPoint Communications, Inc. 2005 Stock Incentive
Plan (the 2005 Stock Incentive Plan). The 2005 Stock Incentive Plan provides for the grant of up
to 947,441 shares of non-vested stock, stock units and stock options to members of the Companys
board of directors and certain key members of the Companys management. Shares granted to employees
under the 2005 Stock Incentive Plan vest over periods ranging from three to four years and certain
of these shares pay current dividends. At December 31, 2010, up to 79,781 additional shares of
common stock may be issued in the future pursuant to awards authorized under the 2005 Stock
Incentive Plan.
In March 2006, the Companys board of directors approved the grant of an additional 100,000
shares to the Companys chief executive officer. These shares were granted under the 2005 Stock
Incentive Plan in two installments of 50,000 shares each on January 1, 2007 and January 1, 2008.
These shares are considered to have been granted in March 2006 under SFAS 123(R) at a grant date
fair value of $14.02 per share.
In 2005, the Companys board of directors approved an annual award to each of the Companys
non-employee directors in the form of non-vested stock or stock units, at the recipients option,
issued under the 2005 Stock Incentive Plan. The non-vested stock and stock units will vest in four
equal quarterly installments on the first day of each of the first four calendar quarters following
the grant date and the holders thereof will be entitled to receive dividends from the date of
grant, whether or not vested. The following table presents information regarding stock units
granted to non-employee directors under the 2005 Stock Incentive Plan (including stock units
granted in lieu of dividends):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average grant |
|
|
|
Units |
|
|
date fair value |
|
Stock units |
|
outstanding |
|
|
per share |
|
Outstanding at March 31, 2008 |
|
|
29,544 |
|
|
$ |
15.04 |
|
Granted |
|
|
43,965 |
|
|
|
9.86 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
73,509 |
|
|
$ |
11.94 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
6,272 |
|
|
|
3.02 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
79,781 |
|
|
$ |
11.24 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
79,781 |
|
|
$ |
11.24 |
|
|
|
|
|
|
|
|
|
The fair value of the awards is calculated as the fair value of the shares on the date of
grant. Beginning on January 1, 2006, the Company adopted the provisions of SFAS 123(R) using the
modified prospective method for the awards under the 2005 Stock Incentive Plan as all awards were
granted subsequent to the Company becoming public. Under this methodology, the Company is required
to estimate expected forfeitures related to these grants and, for the non-dividend paying shares,
the compensation expense is reduced by the present value of the dividends which were not paid on
those shares prior to their vesting.
116
The following table presents information regarding non-vested stock granted to employees under
the 2005 Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average grant |
|
|
|
Shares |
|
|
date fair value |
|
Non-vested stock |
|
outstanding |
|
|
per share |
|
Non-vested at March 31, 2008 |
|
|
412,807 |
|
|
$ |
16.88 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(164,296 |
) |
|
|
18.28 |
|
Forfeited |
|
|
(85,250 |
) |
|
|
17.25 |
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008 |
|
|
163,261 |
|
|
$ |
15.27 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(101,269 |
) |
|
|
15.92 |
|
Forfeited |
|
|
(11,993 |
) |
|
|
17.76 |
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2009 |
|
|
49,999 |
|
|
$ |
13.36 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(20,451 |
) |
|
|
13.52 |
|
Forfeited |
|
|
(12,882 |
) |
|
|
13.52 |
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2010 |
|
|
16,666 |
|
|
$ |
13.02 |
|
|
|
|
|
|
|
|
|
The weighted average fair value of the 20,451 shares that vested in 2010 was $0.03.
(d) 2008 Long Term Incentive Plan
In March 2008, the Company adopted the FairPoint Communications, Inc. 2008 Long Term Incentive
Plan (the 2008 Long Term Incentive Plan). The 2008 Long Term Incentive Plan provides for the
grant of up to 9,500,000 shares of non-vested stock, stock units and stock options to members of
the Companys board of directors and certain key members of the Companys management. Shares
granted to employees under the 2008 Long Term Incentive Plan vest over periods ranging from two to
three years and certain of these shares pay current dividends. At December 31, 2010, up to
8,980,363 additional shares of common stock may be issued in the future pursuant to awards
authorized under the 2008 Long Term Incentive Plan.
On March 27, 2008, the Companys compensation committee approved the award of performance
units under the Plan for the performance period beginning April 1, 2008 and ending December 31,
2008 and for the performance period beginning April 1, 2008 and ending December 31, 2009, in each
case to certain key employees. On March 6, 2009, 502,764 common shares were issued, and 265,957
performance units were forfeited to satisfy tax withholdings, for the performance period beginning
April 1, 2008 and ending December 31, 2008. The Company failed to meet the threshold performance
conditions for issuance of shares related to the performance period beginning April 1, 2008 and
ending December 31, 2009. As such, all performance units under this grant were forfeited as of
December 31, 2009.
On June 18, 2008, the Companys compensation committee approved the award of performance units
under the Plan for the performance period beginning April 1, 2008 and ending December 31, 2010 to
certain key employees. The Company failed to meet the threshold performance conditions for
issuance of shares related to the performance period beginning April 1, 2008 and ending December
31, 2010. As such, all performance units under this grant were forfeited as of December 31, 2010.
On March 3, 2009, the Companys compensation committee approved the award of performance units
under the Plan for the performance period beginning January 1, 2009 and ending December 31, 2011 to
certain key employees. As of December 31, 2010, no shares of common stock had been issued pursuant
to this grant.
In 2008, the Companys board of directors approved an annual award to each of the Companys
non-employee directors in the form of non-vested stock or stock units, at the recipients option,
issued under the 2008 Long Term Incentive Plan. The non-vested stock and stock units will vest in
four equal quarterly installments on the first day of each of the first four calendar quarters
following the grant date and the holders thereof will be entitled to receive dividends from the
date of grant, whether or not vested. The following
117
table presents information regarding stock
units granted to non-employee directors under the 2008 Plan (including stock units granted in lieu
of dividends):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average grant |
|
|
|
Units |
|
|
date fair value |
|
Stock units |
|
outstanding |
|
|
per share |
|
Outstanding at March 31, 2008 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
175,352 |
|
|
|
1.79 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
175,352 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
175,352 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
The fair value of the awards is calculated as the fair value of the shares on the date of
grant. Beginning on January 1, 2006, the Company adopted the provisions of SFAS 123(R) using the
modified prospective method for the awards under the 2005 Stock Incentive Plan as all awards were
granted subsequent to the Company becoming public. Under this methodology, the Company is required
to estimate expected forfeitures related to these grants and, for the non-dividend paying shares,
the compensation expense is reduced by the present value of the dividends which were not paid on
those shares prior to their vesting.
The following table presents information regarding non-vested stock granted to employees under
the 2008 Long Term Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average grant |
|
|
|
Shares |
|
|
date fair value |
|
Non-vested stock |
|
outstanding |
|
|
per share |
|
Non-vested at March 31, 2008 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
50,000 |
|
|
|
8.45 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008 |
|
|
50,000 |
|
|
$ |
8.45 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(16,873 |
) |
|
|
8.45 |
|
Forfeited |
|
|
(8,127 |
) |
|
|
8.45 |
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2009 |
|
|
25,000 |
|
|
$ |
8.45 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(25,000 |
) |
|
|
8.45 |
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
No shares vested in 2010.
(e) 2009 CEO Compensation Plan
On June 10, 2009, the Companys compensation committee approved the award of certain equity
incentives to David L. Hauser, the Companys new Chairman and Chief Executive Officer, as an
inducement to accept employment with the Company (the Inducement Awards). As provided in Mr.
Hausers employment agreement, dated June 11, 2009, the Inducement Awards include:
118
(i) the
Inducement Options; (ii) the Inducement Restricted Stock; and (iii) performance units for two
performance periods beginning on July 1, 2009 and ending on December 31, 2010 and December 31,
2011, respectively (the Inducement Performance Units). The Inducement Options, totaling
1,600,000, were granted on July 1, 2009, at an exercise price of $0.95 per share. The Inducement
Options will vest and become exercisable in three equal annual installments commencing on July 1,
2010, provided that Mr. Hauser remains employed by the Company through each such date. The
Inducement Restricted Stock will be awarded in the following three installments: (i) $500,000 on
July 1, 2009; (ii) $1,750,000 on July 1, 2010; and (iii) $1,750,000 on July 1, 2011, and will be
valued based on the average closing prices of the Companys common stock during the thirty calendar
days immediately preceding the applicable award date. Accordingly, on July 1, 2009, 523,810 shares
of restricted stock were awarded to Mr. Hauser. The Inducement Restricted Stock will become fully
vested on July 1, 2012, provided that Mr. Hauser remains employed by the Company through such date.
The Inducement Performance Units will be earned and paid in shares of the Companys common stock,
based on the Companys performance during the performance periods, with a target amount of 200% of
Mr. Hausers base salary and a maximum of 400% of Mr. Hausers base salary. The number of shares
subject to the Inducement Options and the option exercise price would have been
adjusted, and additional shares of Inducement Restricted Stock would have been awarded, as
necessary, to preserve the value of the Inducement Options and the Inducement Restricted Stock
awarded on July 1, 2009 if, prior to December 31, 2010, the Company had completed a restructuring
of its indebtedness.
The grant date fair value of the Inducement Options was determined using the Black-Scholes
model. Key assumptions used for determining the fair value of the Inducement Options were as
follows: risk-free rate3.54%; expected term10 years; expected volatility5.70%.
All of Mr. Hausers non-vested Inducement Options and Inducement Restricted Stock were
cancelled upon his resignation, effective August 24, 2010. The following table presents information
regarding non-vested stock granted to Mr. Hauser under the FairPoint Communications Inc. 2009 CEO
Compensation Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average grant |
|
|
|
Shares |
|
|
date fair value |
|
Non-vested stock |
|
outstanding |
|
|
per share |
|
Non-vested at December 31, 2008 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
523,810 |
|
|
|
0.64 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2009 |
|
|
523,810 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(523,810 |
) |
|
|
0.64 |
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
(f) Verizon Northern New England Business Stock-based Compensations Plans
Prior to the Merger, the Verizon Northern New England business participated in the Verizon
Communications Long Term Incentive Plan (the Verizon Plan). The Verizon Plan permitted the granting
of nonqualified stock options, incentive stock options, restricted stock, restricted stock units,
performance shares, performance share units and other awards.
Restricted Stock Units
The Verizon Plan provided for grants of restricted stock units (RSUs) that vested at the end
of the third year of the grant. The RSUs are classified as liability awards in the balance sheets
for all periods prior to the Merger, because the RSUs were paid in cash upon vesting. The RSU award
liability is measured at its fair value at the end of each reporting period prior to the Merger
and, therefore, fluctuated based on the price of Verizons stock.
119
Performance Share Units
The Verizon Plan also provided for grants of performance share units (PSUs) that vested at
the end of the third year after the grant. The target award was determined at the beginning of the
period and could increase (to a maximum 200% of the target) or decrease (to zero) based on Total
Shareholder Return (TSR). At the end of the period, the PSU payment was determined by comparing
Verizons TSR to the TSR of a predetermined peer group and the S&P 500 companies. All payments were
subject to approval by the Verizon Boards Human Resources Committee. The PSUs are classified as
liability awards in the balance sheets for all periods prior to the Merger, because the PSU awards
were paid in cash upon vesting. The PSU award liability is measured at its fair value at the end of
each reporting period prior to the Merger and, therefore, fluctuated based on the price of
Verizons stock as well as Verizons TSR relative to the peer groups TSR and S&P 500 TSR.
Stock Options
The Verizon Plan provided for grants of stock options to employees at an option price per
share of 100% of the fair market value of Verizon stock on the date of grant. Each grant had a
10-year life, vesting equally over a three-year period, starting at the date of the grant. The
Verizon Northern New England business has not granted new stock options since 2004.
The structure of Verizons stock incentive plans did not provide for the separate
determination of certain disclosures for the Verizon Northern New England business. The costs
associated with such plans were allocated to the Verizon Northern New England business as part of
the general allocations and were not relevant on a participant basis. The disclosures omitted are
the rollforward of stock option activity, the assumptions used in the Black-Scholes valuation and
information about the range of exercise prices for outstanding and exercisable options.
(16) Transactions with Affiliates
(a) Construction Services
The Company hired Gilbane Building Company to construct a new data center in Manchester, New
Hampshire and to perform restoration services on a flooded building in Raymond, New Hampshire.
Thomas F. Gilbane, Jr., a director of FairPoint as of December 31, 2010, is Chairman and Chief
Executive Officer of Gilbane Building Company. Gilbane Building Company was hired by the Company
for both projects prior to Mr. Gilbanes designation to the board of directors. The Company did
not pay any fees to Gilbane Building Company in the year ended December 31, 2010. The Company paid
Gilbane Building Company fees of $ $0.8 million and $2.8 million in the years ended December 31,
2009 and 2008, respectively.
(b) Verizon Northern New England business transactions with Affiliates
The Verizon Northern New England business financial statements for periods prior to the
Merger include the following transactions with Verizon and related subsidiaries:
The Verizon Northern New England business operating revenue includes transactions with
Verizon for the provision of local telephone services, network access, billing and collection
services, interconnection agreements and the rental of facilities and equipment. These services
were reimbursed by Verizon based on tariffed rates, market prices, negotiated contract terms that
approximated market rates, or actual costs incurred by the Verizon Northern New England business.
The Verizon Northern New England business reimbursed Verizon for specific goods and services
it provided to, or arranged for, the Verizon Northern New England business based on tariffed rates,
market prices or negotiated terms that approximated market rates. These goods and services included
items such as communications and data processing services, office space, professional fees and
insurance coverage.
The Verizon Northern New England business also reimbursed Verizon for the Verizon Northern New
England business share of costs incurred by Verizon to provide services on a common basis to all
of its subsidiaries. These costs included allocations for legal,
120
security, treasury, tax and audit
services. The allocations were based on actual costs incurred by Verizon and periodic studies that
identified employees or groups of employees who were totally or partially dedicated to performing
activities that benefited the Verizon Northern New England business, in activities such as investor
relations, financial planning, marketing services and benefits administration. These allocations
were based on actual costs incurred by Verizon, as well as on the size of the Verizon Northern New
England business relative to other Verizon subsidiaries. The Company believes that these cost
allocations are reasonable for the services provided. The Company also believes that these cost
allocations are consistent with the nature and approximate amount of the costs that the Verizon
Northern New England business would have incurred on a stand-alone basis.
The Verizon Northern New England business also recognized an allocated portion of interest
expense in connection with contractual agreements between the Verizon Companies and Verizon for the
provision of short-term financing and cash management services. Verizon issues commercial paper and
obtains bank loans to fund the working capital requirements of Verizons subsidiaries, including
the Verizon Companies, and invests funds in temporary investments on their behalf. The Verizon
Companies also recognized interest expense related to a promissory note held by Verizon.
The affiliate operating revenue and expense amounts do not include affiliate transactions
between Verizon and VLDs, VOLs and VSSIs operations in Maine, New Hampshire and Vermont. Because
the Verizon Northern New England business operating expenses associated with VLD, VOL, and VSSI
were determined predominantly through allocations, separate identification of the affiliate
transactions was not readily available.
(17) Quarterly Financial Information (Unaudited)
Overview of Restatement
In this Annual Report on Form 10-K for our fiscal year ended December 31, 2010 (this Annual
Report), FairPoint Communications, Inc. (the Company) is restating its unaudited quarterly
financial statements for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010
(collectively, the 2010 Interim Consolidated Financial Statements).
The Companys previously filed Quarterly Reports on Form 10-Q for the quarters ended March 31,
2010, June 30, 2010 and September 30, 2010 (collectively, the 2010 Quarterly Reports) impacted by
the restatement have not been and will not be amended. Accordingly, the Company cautions you that
certain information contained in the 2010 Quarterly Reports should no longer be relied upon,
including the Companys previously issued and filed 2010 Interim Consolidated Financial Statements
and any financial information derived therefrom. In addition, the Company cautions you that other
communications or filings related to the 2010 Interim Consolidated Financial Statements should no
longer be relied upon. All of the Companys Quarterly Reports on Form 10-Q that will be filed for
fiscal year 2011 will include restated results for the corresponding interim periods of 2010. All
amounts in this Annual Report affected by the restatement adjustments reflect such amounts as
restated.
Background of the Restatement
As previously disclosed in the Companys Current Report on Form 8-K filed with the Securities
and Exchange Commission (SEC) on March 22, 2011, management of the Company, with the concurrence
of the Audit Committee of the Companys Board of Directors (the Audit Committee), concluded that
the Company would restate the 2010 Interim Consolidated Financial Statements.
In connection with the preparation of the Companys audited financial statements for the year
ended December 31, 2010, management has discovered accounting errors that impact the accuracy of
the Companys previously issued 2010 Interim Consolidated Financial Statements. These errors were
detected in areas in which the Company had previously identified and disclosed material weaknesses
in internal controls.
121
The restated financial statements correct the following errors:
Project Abandonment Adjustment
Certain
capital projects, principally a wireless broadband fixed asset
project, had been abandoned but the write-off of all of the related capitalized costs had not occurred in a timely
manner.
Costs Capitalized to Property, Plant and Equipment Adjustment
Due to a backlog of capital projects not yet closed, certain costs (principally labor
expenses) remained capitalized to property, plant and equipment rather than expensed.
Application of Overhead Costs Adjustment
An error was discovered in the application of overhead costs to capital projects.
Each of the errors noted above resulted in an understatement of operating expenses and an
overstatement of property, plant and equipment.
Other Adjustments
In addition, as part of this restatement, the Company also adjusted other items, including
certain adjustments to revenue that were identified in connection with the preparation of the
consolidated financial statements for the year ended December 31, 2010, which individually were not
considered to be material, but are material when aggregated with the three adjustments noted above.
These adjustments are primarily related to (a) errors in the calculation of certain regulatory
penalties, and (b) errors in revenue associated with certain customer billing, special project
billings and intercompany/official lines. The restatement only affects the first three quarterly periods of
2010.
The Company is currently reviewing the design of its controls and procedures in order to
remediate the material weakness that prevented these accounting errors from being detected in a
timely manner. While the Company implements a system solution, the Company has increased the
resources devoted to manual processes to compensate for the material weakness. The material
weakness has been identified and is further described in Part II Item 9A Controls and
Procedures.
The aggregate impact of these adjustments will result in an increase to the Companys
previously reported pre-tax loss for the nine month period ended September 30, 2010 of
approximately $28.4 million, which is mainly attributable to a reduction to reported revenues of
approximately $3.9 million, an increase to the Companys previously reported expenses of
approximately $26.8 million, a decrease in other expense of
approximately $3.2 million and a $0.9 million increase of
expense to reorganization items. The
aggregate impact of the adjustments for the nine months ended
September 30, 2010 will result in a reduction in net income of $28.4
million, net of taxes, and a decrease in the Companys reported
capital expenditures of approximately $15.4 million.
Cash, as previously reported, for the nine months ended September 30, 2010 was not impacted by
these adjustments.
Except as required to reflect the effects of the restatement for the items set forth above, no
additional modifications or updates have been made to the 2010 Interim Consolidated Financial
Statements or the 2010 Quarterly Reports. For example, this Annual Report does not give effect to
any subsequent events that may impact the 2010 Interim Consolidated Financial Statements or the
2010 Quarterly Reports. Other information not affected by the restatement remains unchanged and
continues to reflect the disclosures made at the time of the original filing of the 2010 Quarterly
Reports.
The quarterly information presented below represents selected quarterly financial results for
the quarters ended March 31, June 30, September 30 and December 31, 2010 and 2009. Results for the
quarters ended March 31, June 30, and September 30, 2010 reflect restated amounts as noted above.
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
|
(in thousands, except per share data) |
|
|
|
Restated |
|
|
Restated |
|
|
Restated |
|
|
|
|
|
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
270,801 |
|
|
$ |
271,563 |
|
|
$ |
260,630 |
|
|
$ |
267,992 |
|
Net loss |
|
$ |
(86,330 |
) |
|
$ |
(54,178 |
) |
|
$ |
(66,084 |
) |
|
$ |
(74,987 |
) |
Loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.97 |
) |
|
$ |
(0.61 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.84 |
) |
Diluted |
|
$ |
(0.97 |
) |
|
$ |
(0.61 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
|
(in thousands, except per share data) |
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (1) |
|
$ |
298,200 |
|
|
$ |
282,506 |
|
|
$ |
268,194 |
|
|
$ |
270,190 |
|
Net Loss |
|
$ |
(22,305 |
) |
|
$ |
(28,163 |
) |
|
$ |
(75,202 |
) |
|
$ |
(115,726 |
) |
Loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.25 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.84 |
) |
|
$ |
(1.29 |
) |
Diluted |
|
$ |
(0.25 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.84 |
) |
|
$ |
(1.29 |
) |
|
|
|
(1) |
|
Activity for the year ended December 31, 2009 has been recast to reflect the
reclassification of certain PAP penalties from bad debt expense to a reduction of revenue
(see note 3(a) for further information). |
123
For the quarters ended March 31,
and June 30, 2010, the Company has reclassified certain prior period amounts in the interim consolidated financial
statements to be consistent with current period presentation. These reclassifications were made to correct the
classification of PAP penalties from selling, general and administrative expenses to contra-revenue and to correct
the allocation of certain employee and general computer expenses between cost of services and selling, general and
administrative expenses. Correction of these classification errors resulted in decreases of $0.8 million and
$0.1 million to revenue, a decrease of $0.2 million and an increase of $2.4 million to cost of services, and
decreases of $0.6 million and $2.5 million to selling, general and administrative expenses for the three month
periods ended March 31, and June 30, 2010, respectively. Correction of these classification errors had no impact
on loss from operations or net loss.
The revisions applied to the individual line items in the interim consolidated income
statements are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
recasted |
|
|
Adjustments |
|
|
Restated |
|
|
|
(in thousands, except per share data) |
|
Revenues |
|
$ |
274,368 |
|
|
$ |
(3,567 |
) |
|
$ |
270,801 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales,
excluding depreciation and
amortization |
|
|
130,435 |
|
|
|
7,034 |
|
|
|
137,469 |
|
Selling, general and administrative
expense, excluding depreciation
and amortization |
|
|
94,483 |
|
|
|
(899 |
) |
|
|
93,584 |
|
Depreciation and amortization |
|
|
70,345 |
|
|
|
1,037 |
|
|
|
71,382 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
295,263 |
|
|
|
7,172 |
|
|
|
302,435 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(20,895 |
) |
|
|
(10,739 |
) |
|
|
(31,634 |
) |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(34,630 |
) |
|
|
|
|
|
|
(34,630 |
) |
Other
income, net |
|
|
26 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(34,604 |
) |
|
|
|
|
|
|
(34,604 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before reorganization items and income taxes |
|
|
(55,499 |
) |
|
|
(10,739 |
) |
|
|
(66,238 |
) |
Reorganization items |
|
|
(16,591 |
) |
|
|
|
|
|
|
(16,591 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(72,090 |
) |
|
|
(10,739 |
) |
|
|
(82,829 |
) |
Income tax expense |
|
|
(3,501 |
) |
|
|
|
|
|
|
(3,501 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(75,591 |
) |
|
$ |
(10,739 |
) |
|
$ |
(86,330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
89,424 |
|
|
|
|
|
|
|
89,424 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
89,424 |
|
|
|
|
|
|
|
89,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.85 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.97 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.85 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.97 |
) |
|
|
|
|
|
|
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2010 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
recasted |
|
|
Adjustments |
|
|
Restated |
|
|
|
(in thousands, except per share data) |
|
Revenues |
|
$ |
273,992 |
|
|
$ |
(2,429 |
) |
|
$ |
271,563 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales,
excluding depreciation and
amortization |
|
|
114,480 |
|
|
|
18,731 |
|
|
|
133,211 |
|
Selling, general and administrative
expense, excluding depreciation and amortization |
|
|
98,454 |
|
|
|
(1,392 |
) |
|
|
97,062 |
|
Depreciation and amortization |
|
|
70,559 |
|
|
|
913 |
|
|
|
71,472 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
283,493 |
|
|
|
18,252 |
|
|
|
301,745 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(9,501 |
) |
|
|
(20,681 |
) |
|
|
(30,182 |
) |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(35,721 |
) |
|
|
|
|
|
|
(35,721 |
) |
Other income
(expense), net |
|
|
(3,138 |
) |
|
|
3,243 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(38,859 |
) |
|
|
3,243 |
|
|
|
(35,616 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before reorganization items and income taxes |
|
|
(48,360 |
) |
|
|
(17,438 |
) |
|
|
(65,798 |
) |
Reorganization items |
|
|
1,549 |
|
|
|
(174 |
) |
|
|
1,375 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(46,811 |
) |
|
|
(17,612 |
) |
|
|
(64,423 |
) |
Income tax
benefit |
|
|
10,245 |
|
|
|
|
|
|
|
10,245 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(36,566 |
) |
|
$ |
(17,612 |
) |
|
$ |
(54,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
89,424 |
|
|
|
|
|
|
|
89,424 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
89,424 |
|
|
|
|
|
|
|
89,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.41 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.61 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.41 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.61 |
) |
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2010 |
|
|
|
As originally |
|
|
|
|
|
|
|
|
|
reported |
|
|
Adjustments |
|
|
Restated |
|
|
|
(in thousands, except per share data) |
|
Revenues |
|
$ |
258,510 |
|
|
$ |
2,120 |
|
|
$ |
260,630 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales,
excluding depreciation and
amortization |
|
|
115,914 |
|
|
|
2,851 |
|
|
|
118,765 |
|
Selling, general and administrative
expense, excluding depreciation
and amortization |
|
|
99,523 |
|
|
|
(111 |
) |
|
|
99,412 |
|
Depreciation and amortization |
|
|
73,693 |
|
|
|
(1,329 |
) |
|
|
72,364 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
289,130 |
|
|
|
1,411 |
|
|
|
290,541 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(30,620 |
) |
|
|
709 |
|
|
|
(29,911 |
) |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(35,358 |
) |
|
|
|
|
|
|
(35,358 |
) |
Other
income, net |
|
|
2,207 |
|
|
|
|
|
|
|
2,207 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(33,151 |
) |
|
|
|
|
|
|
(33,151 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income before reorganization items and income taxes |
|
|
(63,771 |
) |
|
|
709 |
|
|
|
(63,062 |
) |
Reorganization items |
|
|
(9,635 |
) |
|
|
(717 |
) |
|
|
(10,352 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(73,406 |
) |
|
|
(8 |
) |
|
|
(73,414 |
) |
Income tax
benefit |
|
|
7,330 |
|
|
|
|
|
|
|
7,330 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(66,076 |
) |
|
$ |
(8 |
) |
|
$ |
(66,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
89,424 |
|
|
|
|
|
|
|
89,424 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
89,424 |
|
|
|
|
|
|
|
89,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.74 |
) |
|
$ |
|
|
|
$ |
(0.74 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.74 |
) |
|
$ |
|
|
|
$ |
(0.74 |
) |
|
|
|
|
|
|
|
|
|
|
(18) Fair Value Measurements
The Fair Value Measurements and Disclosures Topic of the ASC (formerly SFAS No. 157, Fair
Value Measurements (SFAS No. 157)) defines fair value, establishes a framework for measuring fair
value and establishes a hierarchy that categorizes and prioritizes the sources to be used to
estimate fair value. The Fair Value Measurements and Disclosures Topic of the ASC also expands
financial statement disclosures about fair value measurements.
The carrying value of the Swaps at December 31, 2010 and 2009 represents the termination value
of the swaps as determined by the respective counterparties following the event of default
described herein. See note 8 for more information.
The Company does not measure any financial assets or liabilities at fair value as of December
31, 2010 and 2009, however at the Effective Date, all assets and liabilities will be remeasured at
fair value under fresh start accounting. See note 21.
126
(19) Revenue Concentrations
As of December 31, 2010, approximately 85% of the Companys access line equivalents were
located in Maine, New Hampshire and Vermont. As a result of this geographic concentration, the
Companys financial results will depend significantly upon economic conditions in these markets. A
deterioration or recession in any of these markets could result in a decrease in demand for the
Companys services and resulting loss of access line equivalents which could have a material
adverse effect on the Companys business, financial condition, results of operations, liquidity and
the market price of the Companys Common Stock.
In addition, if state regulators in Maine, New Hampshire or Vermont were to take an action
that is adverse to the Companys operations in those states, the Company could suffer greater harm
from that action by state regulators than it would from action in other states because of the
concentration of operations in those states.
(20) Commitments and Contingencies
(a) Leases
Future minimum lease payments under capital leases and non-cancelable operating leases as of
December 31, 2010 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
Leases |
|
|
Leases |
|
Year ending December 31: |
|
|
|
|
|
|
|
|
2011 |
|
$ |
1,893 |
|
|
$ |
10,442 |
|
2012 |
|
|
1,679 |
|
|
|
8,889 |
|
2013 |
|
|
1,499 |
|
|
|
7,403 |
|
2014 |
|
|
1,493 |
|
|
|
5,100 |
|
2015 |
|
|
105 |
|
|
|
2,572 |
|
Thereafter |
|
|
|
|
|
|
3,823 |
|
|
|
|
|
|
|
|
Total minimum lease
payments |
|
$ |
6,669 |
|
|
$ |
38,229 |
|
|
|
|
|
|
|
|
|
Less interest and executory cost |
|
|
(1,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
5,264 |
|
|
|
|
|
Less current installments |
|
|
(1,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations at December 31, 2010 |
|
$ |
3,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rent expense was $15.6 million, $16.7 million and $30.1 million in 2010, 2009 and
2008, respectively.
The Company does not have any leases with contingent rental payments or any leases with
contingency renewal, purchase options, or escalation clauses.
(b) Legal Proceedings
From time to time, the Company is involved in litigation and regulatory proceedings arising
out of its operations. With the exception of the Chapter 11 Cases, the Companys management
believes that it is not currently a party to any legal or regulatory proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material adverse effect on the
Companys financial position or results of operations. To the extent the Company is currently
involved in any litigation and/or regulatory proceedings, such proceedings have been stayed as a
result of the filing of the Chapter 11 Cases.
On the Petition Date FairPoint Communications and substantially all of its direct and indirect
subsidiaries filed voluntary petitions for relief under the Chapter 11 Cases.
127
On
January 13, 2011, the Bankruptcy Court entered an Order Confirming Debtors Third Amended
Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated as of December 29, 2010
(the Confirmation Order), which confirmed the Companys Third Amended Joint Plan of
Reorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the Plan).
On the Effective Date, the Company substantially consummated the reorganization through a
series of transactions contemplated by the Plan, and the Plan became effective pursuant to its
terms.
(c) Service Quality Penalties
The Company is subject to certain service quality requirements in the states of Maine, New
Hampshire and Vermont. Failure to meet these requirements in any of these states may result in
penalties being assessed by the respective state regulatory body. As of December 31, 2010, the
Company has recognized an estimated liability for service quality penalties based on metrics
defined by the state regulatory authorities in Maine, New Hampshire and Vermont. The Merger Orders
provide that any penalties assessed by the states be paid by the Company in the form of credits
applied to customer bills. Based on the Companys current estimate of its service quality
penalties in these states, an increase of $11.7 million in the estimated liability was recorded as
a reduction to revenue for the year ended December 31, 2010. The amount recorded during the year
ended December 31, 2010 includes $2.1 million related to prior periods. During the year ended
December 31, 2010, the Company paid out $5.8 million of service quality index (SQI) penalties in
the form of customer rebates, all of which were related to Maine fiscal 2008 and 2009 penalties.
The Company has recorded a total liability of $20.8 million and $27.5 million on the consolidated
balance sheets at December 31, 2010 and 2009, respectively of which $12.5 million and $0.8 million, respectively, is
included in other accrued liabilities and the remainder is
included in liabilities subject to compromise.
During February 2010, the Company entered into regulatory settlements with the representatives
for each of Maine, New Hampshire and Vermont regarding modification of each states Merger Order
(each a Regulatory Settlement, and collectively, the Regulatory Settlements), which have since
been approved by the regulatory authorities in these states. The Regulatory Settlements in New
Hampshire and Vermont deferred fiscal 2008 and 2009 SQI penalties until December 31, 2010 and
include a clause whereby such penalties will be forgiven in part or in whole if the Company met
certain metrics for the twelve-month period ending December 31, 2010. As a result of improvements
on certain SQI metrics, the Company expects to receive waivers of 60% in New Hampshire and at
least 80% in Vermont under this clause, and, accordingly,
has reduced its accrual by $12.7 million in the three months ended
December 31, 2010. The Companys SQI penalties in the state of New Hampshire are currently subject to an audit
ordered by the NHPUC. SQI penalties in Maine and Vermont may also be subject to audit, as
determined by the MPUC and the Vermont Board, respectively. In addition, the Regulatory Settlement for Maine
deferred the Companys fiscal 2008 and 2009 SQI penalties until March 2010. Beginning in March
2010, the Company began to issue SQI rebates related to the Maine 2008 and 2009 SQI penalties to
customers over a twelve month period.
(d) Performance Assurance Plan Credits
As part of the Merger Orders, the Company adopted certain PAPs in the states of Maine, New
Hampshire and Vermont. Failure to meet specified performance standards in any of these states may
result in performance credits being assessed in accordance with the provisions of the PAP in each
state. As of
December 31, 2010, the Company has recorded a reserve for the estimated amount of PAP credits based
on metrics defined by the PAP. Credits assessed in Maine and New Hampshire are recorded as a reduction to accounts
receivable since they are paid by the Company in the form of credits applied to CLEC bills. Certain credits assessed in Vermont are recorded to other accrued
liabilities as they are paid to the Vermont Universal Service Fund, while the remaining credits
assessed in Vermont are paid by the Company in the form of credits applied to CLEC bills. Based on
the Companys current estimate of its PAP credits in these states, an increase of $2.7 million in
the estimated reserve was recorded as a reduction to revenue for the year ended December 31, 2010.
During the year ended December 31, 2010 the Company paid out $7.9 million of PAP credits. The
Company has recorded a total reserve of $8.4 million and $13.7 million on the consolidated balance
sheets at December 31, 2010 and 2009, respectively.
The NHPUC has ordered an audit of the Companys PAP credits in the state of New Hampshire.
PAP credits in Maine and Vermont may also be subject to audit, as determined by the MPUC and the
Vermont Board, respectively.
(e) Capital Expenditure Obligations
Under regulatory settlements in
each of Maine, New Hampshire and Vermont, the Company is required to make certain capital expenditures in each of these
states. Beginning from the date of the Merger, the Company is required to spend $141.0 million through March 31, 2011 in
Maine, $350.4 million through March 31, 2015 in New Hampshire and $120.0 million through March 31, 2011 in Vermont. The
Company is in compliance with the expenditure requirements with a deadline of March 31, 2011 in Maine and Vermont.
128
(f) Volume Purchase Commitment
On June 1, 2010, the Bankruptcy Court approved the Companys motion to assume an amended
volume product purchase and sale agreement with Occam Networks, Inc (Occam). This motion
includes a commitment by the Company to purchase at least $12.0 million worth of products from
Occam during the initial five-year term of the amended agreement, which term ends on April 1, 2013.
As of December 31, 2010, the Company has met this
purchase commitment.
(21) Reorganization and Fresh Start Accounting Pro Forma Adjustments (Unaudited)
Upon confirmation of the Plan by the Bankruptcy Court and satisfaction of the remaining
material contingencies to complete the implementation of the Plan, fresh start accounting
principles are to be applied pursuant to the provisions of the Reorganizations Topic of the ASC.
The Company will apply fresh start accounting on the Emergence Date. The financial statements as
of January 24, 2011 and for subsequent periods will report the results of a new entity with no
beginning retained earnings. Any presentation of the new reporting entity represents the financial
position and results of operations of a new reporting entity and is not comparable to prior
periods.
The Reorganizations Topic of the ASC provides, among other things, for a determination of the
value to be assigned to the assets of the reorganized FairPoint as of a date selected for financial
reporting purposes. In accordance with the Reorganizations Topic of the ASC, the results of
operations of FairPoint prior to January 24, 2011 (the predecessor) will include (i) a
pre-emergence gain of approximately $1,341.0 million resulting from the discharge of liabilities
under the Plan; (ii) pre-emergence charges to earnings to be recorded as reorganization items
resulting from certain costs and expenses relating to the Plan becoming effective; and (iii) a
pre-emergence decrease in earnings of approximately $387.3 million resulting from the aggregate
changes to the net carrying value of our pre-emergence assets and liabilities to reflect their fair
values under fresh start accounting.
The Companys reorganization value is estimated to be approximately $2.5 billion. In
accordance with fresh start accounting, the reorganization value was allocated to the Companys
assets based on their respective fair values in conformity with the acquisition method of
accounting for business combinations in the Business Combinations Topic of the ASC. The
reorganization value represents the amount which approximates the fair value of the Companys
assets.
The valuations required to determine the fair value of certain of the Companys assets as
presented below represent the Companys preliminary estimates.
The adjustments presented below are presented on an unaudited pro-forma basis as of December
31, 2010 even though the actual date of emergence is January 24, 2011. Accordingly, these estimates
are preliminary and subject to further revisions and adjustments, based on any updated valuations,
actual amounts and applicable economic conditions as of January 24, 2011. The Companys actual
fresh start accounting adjustments may vary significantly from those presented below.
The unaudited pro forma adjustments presented below summarize the impact of the Plan and the
adoption of fresh start accounting as if the Effective Date had occurred on December 31, 2010.
129
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Pro Forma Reorganized Condensed Consolidated Balance Sheet
As of December 31, 2010
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
Reorganization |
|
|
Fresh Start |
|
|
Reorganized |
|
|
|
December 31, 2010 |
|
|
Adjustments |
|
|
Adjustments |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
105,497 |
|
|
|
(92,559) |
(a) |
|
|
|
|
|
$ |
12,938 |
|
Restricted cash |
|
|
2,420 |
|
|
|
77,882 |
(a) |
|
|
|
|
|
|
80,302 |
|
Accounts receivable, net |
|
|
125,170 |
|
|
|
|
|
|
|
|
|
|
|
125,170 |
|
Materials and supplies |
|
|
22,193 |
|
|
|
|
|
|
|
(1,665) |
(c) |
|
|
20,528 |
|
Prepaid
expenses |
|
|
18,841 |
|
|
|
|
|
|
|
(2,347) |
(c) |
|
|
16,494 |
|
Other
current assets |
|
|
6,092 |
|
|
|
|
|
|
|
(4,672) |
(c) |
|
|
1,420 |
|
Deferred income tax, net |
|
|
31,400 |
|
|
|
|
|
|
|
|
|
|
|
31,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
311,613 |
|
|
|
(14,677 |
) |
|
|
(8,684 |
) |
|
|
288,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net |
|
|
1,859,700 |
|
|
|
|
|
|
|
(83,600) |
(c) |
|
|
1,776,100 |
|
Goodwill |
|
|
595,120 |
|
|
|
|
|
|
|
(322,781) |
(c,d) |
|
|
272,339 |
|
Intangible assets, net |
|
|
189,247 |
|
|
|
|
|
|
|
(31,837) |
(c) |
|
|
157,410 |
|
Prepaid pension asset |
|
|
2,960 |
|
|
|
|
|
|
|
|
|
|
|
2,960 |
|
Debt issue costs, net |
|
|
119 |
|
|
|
2,248 |
(a,b) |
|
|
|
|
|
|
2,367 |
|
Restricted cash |
|
|
1,678 |
|
|
|
|
|
|
|
|
|
|
|
1,678 |
|
Other assets |
|
|
13,357 |
|
|
|
|
|
|
|
(776) |
(c) |
|
|
12,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,973,794 |
|
|
|
(12,429 |
) |
|
|
(447,678 |
) |
|
$ |
2,513,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
(Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities not subject to compromise: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of capital lease obligations |
|
$ |
1,321 |
|
|
|
|
|
|
|
|
|
|
$ |
1,321 |
|
Accounts payable |
|
|
66,557 |
|
|
|
(6,457) |
(a) |
|
|
|
|
|
|
60,100 |
|
Claims payable and estimated claims accrual |
|
|
|
|
|
|
93,583 |
(a) |
|
|
|
|
|
|
93,583 |
|
Accrued interest payable |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Other accrued liabilities |
|
|
63,279 |
|
|
|
(1,800) |
(a) |
|
|
(4,671) |
(c) |
|
|
56,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
131,160 |
|
|
|
85,326 |
|
|
|
(4,671 |
) |
|
|
211,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
3,943 |
|
|
|
|
|
|
|
|
|
|
|
3,943 |
|
Accrued pension obligation |
|
|
92,246 |
|
|
|
|
|
|
|
|
|
|
|
92,246 |
|
Employee benefit obligations |
|
|
344,463 |
|
|
|
|
|
|
|
|
|
|
|
344,463 |
|
Deferred income taxes |
|
|
67,381 |
|
|
|
336,401 |
(a) |
|
|
(61,265) |
(c,e) |
|
|
342,517 |
|
Unamortized investment tax credits |
|
|
4,310 |
|
|
|
|
|
|
|
(4,310) |
(c,e) |
|
|
|
|
Other long-term liabilities |
|
|
12,398 |
|
|
|
(2,094) |
(a) |
|
|
9,914 |
(c) |
|
|
20,218 |
|
Long-term debt, net of current portion |
|
|
|
|
|
|
1,000,000 |
(a,b) |
|
|
|
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
524,741 |
|
|
|
1,334,307 |
|
|
|
(55,661 |
) |
|
|
1,803,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities not subject to compromise |
|
|
655,901 |
|
|
|
1,419,633 |
|
|
|
(60,332 |
) |
|
|
2,015,202 |
|
Liabilities subject to compromise |
|
|
2,905,311 |
|
|
|
(2,905,311) |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,561,212 |
|
|
|
(1,485,678 |
) |
|
|
(60,332 |
) |
|
|
2,015,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, predecessor |
|
|
894 |
|
|
|
(894) |
(a) |
|
|
|
|
|
|
|
|
Additional paid-in capital, predecessor |
|
|
725,786 |
|
|
|
(725,786) |
(a) |
|
|
|
|
|
|
|
|
Common stock, successor |
|
|
|
|
|
|
253 |
(a) |
|
|
|
|
|
|
253 |
|
Additional paid-in capital, successor |
|
|
|
|
|
|
481,882 |
(a) |
|
|
|
|
|
|
481,882 |
|
Warrants, successor |
|
|
|
|
|
|
16,350 |
(a) |
|
|
|
|
|
|
16,350 |
|
Retained deficit |
|
|
(1,101,294 |
) |
|
|
1,701,444 |
(a) |
|
|
(600,150) |
(c) |
|
|
|
|
Accumulated other comprehensive loss |
|
|
(212,804 |
) |
|
|
|
|
|
|
212,804 |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(587,418 |
) |
|
|
1,473,249 |
|
|
|
(387,346 |
) |
|
|
498,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity (deficit) |
|
$ |
2,973,794 |
|
|
|
(12,429 |
) |
|
|
(447,678 |
) |
|
$ |
2,513,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents amounts recorded for the implementation of the Plan on the Effective Date.
This includes the settlement of liabilities subject to compromise, distributions of cash,
authorization and partial distribution of shares of New Common |
|
130
|
|
|
|
|
Stock, designation of restricted cash to satisfy allowed claims, the cancellation of
predecessor Old Common Stock resulting in a gain of approximately $1,341.0 million on
extinguishment of obligations pursuant to the Plan and the related
tax effects. |
|
(b) |
|
Records the issuance of senior secured debt and related debt financing. Debt issuance
costs of $2.4 million related to both the Exit Term Loan and the Exit Revolving Facility
are recorded in Debt issue costs, net and will be amortized over the terms of the
respective agreements. |
|
(c) |
|
Records the adjustments for fresh start accounting. This includes the adjustment of
inventory and property, plant and equipment to appraised values. Fresh start adjustments
for intangible assets, goodwill, and stockholders equity are also included and are based
on valuation studies. The fresh start adjustments also include the elimination of the
predecessor retained deficit and accumulated other comprehensive loss. |
|
(d) |
|
The goodwill of the predecessor has been eliminated and the reorganization value of the
assets and liabilities in excess of fair market value has been allocated to long-term
assets as shown above. The excess of the Companys reorganization value over the fair
value of its assets is estimated to be approximately $272.3 million and is recorded as
goodwill. |
|
(e) |
|
Records the impact of fresh
start accounting on the Companys deferred taxes. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, we carried out an evaluation, under
the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act). Our management, including our
principal executive officer and principal financial officer, concluded that our disclosure controls
and procedures were not effective as of December 31, 2010 because of the material weaknesses
described below.
(b) Material Weaknesses in Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal
control over financial reporting is a process designed by, or under the supervision of, our
principal executive officer and principal financial officer, and effected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP.
A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement
in the reporting companys annual or interim financial statements will not be prevented or detected
on a timely basis.
131
Our management evaluated the effectiveness of our internal control over financial reporting as
of December 31, 2010 based upon criteria in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation,
management determined that our internal control over financial reporting was not effective as of
December 31, 2010 because the following material weaknesses in internal control over financial
reporting existed during 2010:
|
1. |
|
Our information technology controls were not adequate. Specifically, our change
management processes were not consistently followed to ensure all changes were
appropriately authorized. In addition, access to our information systems was not
appropriately restricted. |
|
|
2. |
|
Our management oversight and review procedures designed to monitor the accuracy
of period-end accounting activities were ineffective. Specifically, our account
reconciliation processes were not adequate to properly identify and resolve
discrepancies between our billing system and our general ledger in a timely manner. In
addition, project accounting controls were not adequate to ensure charges to capital
projects were appropriate or that projects were closed in a timely manner. Furthermore,
procedures for the review of our income tax provision and supporting schedules were not
adequate to identify and correct errors in a timely manner. |
Our management has initiated steps to address these issues and we believe the planned process
improvements will adequately remediate the material weaknesses described above and will strengthen
our internal controls over financial reporting. We are committed to continuing to improve our
internal control processes and will continue to review our financial reporting controls and
procedures. As we continue to evaluate and work to improve our internal control over financial
reporting, we may identify additional measures to address these material weaknesses or determine to
modify certain of the remediation procedures described above. Our management, with the oversight of
the audit committee of our board of directors, will continue to assess and take steps to enhance
the overall design and capability of our control environment in the future.
(c) Changes in Internal Control Over Financial Reporting
A number of control improvements have been implemented during 2010 and the subsequent period
prior to this report. These improvements were designed to lessen the severity of the material
weaknesses identified in prior periods and include:
|
|
|
Improved controls over system access requests to ensure all requests are appropriately approved prior to processing. |
|
|
|
|
Enhanced password requirements related to the Oracle system to be in compliance with established guidelines. |
|
|
|
|
Improved reconciliation procedures over inventory, accounts payable, and payroll. |
The following changes were implemented subsequent to year-end:
|
|
|
Limited access to the privileged system account for our retail billing system. |
|
|
|
|
Revised user access responsibilities within the HR module of the Oracle system to
eliminate segregation of duties issues in that module. |
We continue to refine our processes to improve control and process effectiveness and
efficiency. Such process refinements have been applied to virtually all processes for the Northern
New England operations, including information technology, order provisioning, customer billing,
payment processing, credit and collections, inventory management, accounts payable, payroll, human
resource administration, tax and general ledger accounting.
With the exception of the foregoing, there have been no changes in our internal control over
financial reporting during the year ended December 31, 2010 that have materially affected or are
reasonably likely to materially affect our internal control over financial reporting. We do note
however that subsequent to the year ended December 31, 2010, we implemented the remediation
described above to partially address the material weaknesses in our internal control over financial
reporting.
132
ITEM 9B. OTHER INFORMATION
Not applicable.
133
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our board of directors currently consists of eight directors. Paul H. Sunu was appointed as
our Chief Executive Officer and a member of our board of directors effective August 24, 2010. The
remaining seven members of our board of directors were appointed in accordance with the Plan on the
Effective Date. On the Effective Date, Edward D. Horowitz was appointed as the Chairman of our
board of directors.
As of December 31, 2010, our board of directors consisted of five directors. David L. Hauser
served as our Chief Executive Officer and Chairman of our board of directors until his resignation
effective August 24, 2010. At that time, Jane E. Newman was appointed as Chairman of our board of
directors. Mr. Hausers resignation reduced our board of directors from six members to five
members.
We do not intend to hold an annual meeting of stockholders during 2011. In accordance with
the Second Amended and Restated By-Laws, the initial members of the New Board are expected to hold
office until the first annual meeting of stockholders which will be held following the one year
anniversary of the Effective Date. Thereafter, members of the board of directors of the Company
are expected to have one year terms, so that their terms will expire at each annual meeting of
stockholders.
Director Independence
The board of directors considered transactions and relationships between each director or any
member of his or her immediate family and the Company and its subsidiaries and affiliates. Our
board of directors has determined that, other than Paul H. Sunu, all of our directors are
independent under the criteria for independence set forth in the listing standards of the NASDAQ,
and accordingly are independent directors with no material relationship to the Company other than
being a director or stockholder of FairPoint Communications.
Directors
The following sets forth selected biographical information for our directors.
Edward D. Horowitz - Chairman of the Board of Directors Mr. Horowitz currently serves as
the chairman of EdsLink LLC, a New York City based venture capital firm, which he founded in 2000.
Mr. Horowitz served as president and chief executive officer, SESAmericom, a communications
satellite operator, and as a member of the executive committee of its parent company, SES (SESG,
Lux.) from 2005 to 2008. Before founding EdsLink LLC, Mr. Horowitz was executive vice president of
Advanced Development at Citigroup from 1997 through 2000 and was the founder and chairman of
e-Citi. Prior to joining Citigroup, from 1989 to 1997, Mr. Horowitz was a senior vice president of
Viacom Inc. and a member of the operating committee. Mr. Horowitz serves as a director of On Line
Resources Corporation (NASDAQ: ORCC), the Kenan Institute of Ethics at Duke University and is a
trustee of the New York Hall of Science. He received a Bachelor of Science degree in physics from
the City College of New York and a Master of Business Administration degree from the Columbia
University School of Business.
Todd W. Arden Mr. Arden joined Angelo, Gordon & Co. in 2000, and is currently a managing
director in its distressed securities group. Prior to joining Angelo, Gordon, Mr. Arden served as
a portfolio manager/analyst within AIG SunAmerica Inc.s high yield group from 1998 to 2000.
Previously, he was a senior equity analyst at Troubh Partners from 1995 to 1997. Mr. Arden began
his career as a manager in Arthur Andersen LLPs financial consulting services practice from 1989
to 1995, concentrating in the distressed/litigation support area. Arden is a chartered financial
analyst and holds a Bachelor of Arts degree from Northwestern University and a Master of Business
Administration degree from the Columbia University School of Business.
Dennis J. Austin - Mr. Austin has served as an independent telecommunications consultant since
2002. Mr. Austin previously served as a consultant at BearingPoint, formerly KPMG Consulting and
formerly KPMG LLP, from 1995 to 2002, and as vice
134
president at San Francisco Consulting Group (SFCG) from 1985 to 1995. Prior to joining SFCG, Mr. Austin was vice president of engineering
with Dataspeed Inc. from 1983 to 1985 and director of switch engineering, network planning and
design at GTE Sprint from 1977 to 1983. Prior to joining GTE Sprint, Mr. Austin served as a member
of the technical staff with Bell Telephone Laboratories from 1966 to 1977. Mr. Austin holds a
Ph.D. in electrical engineering from Stanford University.
Michael J. Mahoney - Mr. Mahoney previously served as president and chief executive officer of
Commonwealth Telephone Enterprises, Inc. (Commonwealth Telephone) from 2000 to 2007. Prior to
joining Commonwealth Telephone, Mr. Mahoney served as president and chief operating officer of RCN
Corporation from 1997 to 2000 and as president and chief operating officer of C-TEC Corporation
from 1993 to 1997. Mr. Mahoney currently serves as a director of Level 3 Communications and as a
trustee of Wilkes University. He received a Bachelor of Science degree in accounting from Villanova
University.
Michael K. Robinson - Mr. Robinson has served as president and chief executive officer since
2005 and as a director since 2009, of Broadview Networks. Mr. Robinson previously served as
executive vice president and chief financial officer of US LEC (which is now part of PAETEC) from
1998 to 2005. Prior to 1998, Mr. Robinson spent 10 years as an executive at Alcatel (now Alcatel
Lucent). Mr. Robinson received a bachelors degree in Business and Economics from Emory & Henry
College and a Master of Business Administration degree from Wake Forest University.
Paul H. Sunu Mr. Sunu has served as chief executive officer of FairPoint Communications
Inc. since August 2010, prior to which he was chief financial officer of Hargray Communications
Group, Inc., a position he had held since 2008. Mr. Sunu was chief financial officer of Hawaiian
Telcom from 2007 to 2008 and a managing director and chief financial officer of Madison River
Communications from 1996 to 2007. He currently serves as a director of Integra Telecom and is a
former board member of Madison River Communications Corp., Merscom and Centennial Communications
Corp. He received a Bachelor of Arts degree in public administration from the University of
Illinois and a J.D. from the University of Illinois College of Law.
David L. Treadwell - Mr. Treadwell has served as president and chief executive officer of EP
Management Corporation, formerly known as EaglePicher Corporation, since 2006. Treadwell was
EaglePicher Incorporateds chief operating officer from 2005 to 2006 and served as chief executive
officer of Oxford Automotive through its restructuring in 2004 to 2005. Mr. Treadwell currently
serves as lead director of Flagstar Bank and chairman of the board of C&D Technologies. He received
a Bachelor of Business Administration degree from the University of Michigan, Ann Arbor.
Wayne Wilson Mr. Wilson, a New Hampshire resident, has been an independent business advisor
since 2002. From 1995 to 2002, Mr. Wilson served in various roles as president, chief operating
officer and chief financial officer of PC Connection, Inc., a Fortune 1000 direct marketer of
information technology products and services. From 1986 to 1995, Mr. Wilson was a partner in the
assurance and advisory services practice of Deloitte & Touche LLP. Mr. Wilson currently serves as
a director of ARIAD Pharmaceuticals, Inc., Edgewater Technology, Inc. and Hologic, Inc. He
previously served as a director of Cytyc Corporation. Mr. Wilson received a Bachelor of Arts degree
in political science from Duke University, and a Masters of Business Administration degree from the
University of North Carolina at Chapel Hill. He is a certified public accountant in New Hampshire
and North Carolina.
Committees of the Board of Directors
Our board of directors has four separately designated standing committees: an audit committee,
a compensation committee, a corporate governance and nominating committee and a regulatory
committee.
Audit Committee
As of the Effective Date, our audit committee consists of Michael J. Mahoney, Michael K.
Robinson and Wayne Wilson. Mr. Wilson is the chair of our audit committee. All such audit
committee members satisfy the independence criteria set forth in the listing standards of the
NASDAQ and the applicable provisions of the Exchange Act. Mr. Wilson is qualified as an audit
committee financial expert within the meaning of item 407(d)(5)(ii) of Regulation S-K under the
Exchange Act and our board of directors has determined that he has the requisite accounting and related financial management expertise within the
meaning of the listing standards of the NASDAQ. The SEC has determined that the audit committee
financial expert designation does not impose on the person with that
135
designation any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such
person as a member of the audit committee of the board of directors in the absence of such
designation.
Our audit committee during 2010 consisted of Thomas F. Gilbane, Jr., Robert S. Lilien and
Claude C. Lilly, and met seven times during 2010. Claude C. Lilly was the chair of our audit
committee during 2010. All such audit committee members satisfied the independence criteria set
forth in the listing standards of the NYSE and the applicable provisions of the Exchange Act. Mr.
Lilien was qualified as an audit committee financial expert within the meaning of item
407(d)(5)(ii) of Regulation S-K under the Exchange Act and our board of directors has determined
that he has the requisite accounting and related financial management expertise within the meaning
of the listing standards of the NYSE. The SEC has determined that the audit committee financial
expert designation does not impose on the person with that designation any duties, obligations or
liability that are greater than the duties, obligations or liability imposed on such person as a
member of the audit committee of the board of directors in the absence of such designation.
Among other functions, the principal duties and responsibilities of our audit committee are to
select and appoint our independent registered public accounting firm, oversee the quality and
integrity of our financial reporting and the audit of our financial statements by our independent
registered public accounting firm and, in fulfilling its obligations, our audit committee reviews
with our management and independent registered public accounting firm the scope and results of the
annual audit, our accounting firms independence and our accounting policies.
The audit committee is required to report regularly to our board of directors to discuss any
issues that arise with respect to the quality or integrity of our financial statements, our
compliance with legal or regulatory requirements, the performance and independence of our
independent registered public accounting firm, and the performance of the internal audit function.
A copy of our audit committee charter can be found on our website at www.fairpoint.com on the
Investors page, under the Corporate Governance caption. In addition, a copy of our audit
committee charter is available free of charge upon request directed to our secretary at: Secretary,
FairPoint Communications, Inc., 521 East Morehead Street, Suite 500, Charlotte, North Carolina
28202.
Compensation Committee
As of the Effective Date, our compensation committee consists of Todd W. Arden, Edward D.
Horowitz and David L. Treadwell. Mr. Horowitz is the chair of our compensation committee. All
such compensation committee members satisfy the independence criteria set forth in the listing
standards of the NASDAQ.
Our compensation committee during 2010 consisted of Thomas F. Gilbane, Jr., Jane E. Newman,
and Michael R. Tuttle and met six times during 2010. Thomas F. Gilbane, Jr. was the chair of our
compensation committee during fiscal 2010. All such compensation committee members satisfied the
independence criteria set forth in the listing standards of the NYSE. Among other functions, our
compensation committee oversees the compensation of our Chief Executive Officer and other executive
officers, including plans and programs relating to cash compensation, incentive compensation,
equity based awards and other benefits and perquisites and administers any such plans or programs
as required by the terms thereof.
A copy of our compensation committee charter can be found on our website at www.fairpoint.com
on the Investors page, under the Corporate Governance caption. In addition, a copy of our
compensation committee charter is available free of charge upon request directed to our secretary
at: Secretary, FairPoint Communications, Inc., 521 East Morehead Street, Suite 500, Charlotte,
North Carolina 28202.
Corporate Governance and Nominating Committee
As of the Effective Date, our corporate governance and nominating committee consists of Edward
D. Horowitz, David L. Treadwell and Wayne Wilson. Mr. Treadwell is the chair of our corporate
governance committee. All such corporate governance committee members satisfy the independence
criteria set forth in the listing standards of the NASDAQ.
136
Our corporate governance committee during 2010 consisted of Claude C. Lilly, Jane E. Newman
and Michael R. Tuttle, and met once during 2010. Michael R. Tuttle was the chair of our corporate
governance and nominating committee during fiscal 2010. All such corporate governance committee
members satisfied the independence criteria set forth in the listing standards of the NYSE. Among
other functions, the principal duties and responsibilities of our corporate governance committee
are to identify qualified individuals to become board members, recommend to our board of directors
individuals to be designated as nominees for election as directors at the annual meetings of
stockholders, and develop and recommend to our board of directors our corporate governance
guidelines.
A copy of our corporate governance and nominating committee charter can be found on our
website at www.fairpoint.com on the Investors page, under the Corporate Governance caption. In
addition, a copy of our corporate governance and nominating committee charter is available free of
charge upon request directed to our secretary at: Secretary, FairPoint Communications, Inc., 521
East Morehead Street, Suite 500, Charlotte, North Carolina 28202.
Regulatory Committee
Effective as of the Effective Date, our board of directors has chartered a regulatory
committee to oversee the Companys compliance with regulatory requirements and reporting.
As of the Effective Date, our regulatory committee consists of Dennis J. Austin, Michael J.
Mahoney and Michael K. Robinson. Mr. Mahoney is the chair of our regulatory committee.
A copy of our regulatory committee charter can be found on our website at www.fairpoint.com on
the Investors page, under the Corporate Governance caption. In addition, a copy of our
regulatory committee charter is available free of charge upon request directed to our secretary at:
Secretary, FairPoint Communications, Inc., 521 East Morehead Street, Suite 500, Charlotte, North
Carolina 28202.
Attendance of Directors
During 2010, the board of directors held twenty-three meetings. Each then-current director
attended at least 75% of the aggregate of the total number of meetings held by the board of
directors and the total number of meetings held by all committees of the board of directors on
which he or she served, which meetings were held when he or she was a director.
Security Ownership of Certain Beneficial Owners
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and
persons who own, or are part of a group that owns, more than ten percent of a registered class of
our equity securities, to file reports of ownership and changes in ownership with the SEC and if
listed on a national exchange, such national exchange. Officers, directors and beneficial owners of
more than 10% of our common stock are required by regulation of the SEC to furnish us with copies
of all Section 16(a) forms they file. See Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters Security Ownership of Certain Beneficial
Owners.
Corporate Governance
Code of Business Conduct and Ethics. We have adopted a code of business conduct and ethics
that applies to all of our employees, including our principal executive officer, principal
financial officer and principal accounting officer. This code of business conduct and ethics is
designed to comply with the SEC regulations and the Nasdaq listing standards related to codes of
conduct and ethics and is posted on our corporate website at www.fairpoint.com on the Investors
page, under the Corporate Governance caption. A copy of our code of business conduct and ethics
is available free of charge upon request directed to our secretary at: Secretary, FairPoint
Communications, Inc., 521 East Morehead Street, Suite 500, Charlotte, North Carolina 28202.
137
Code of Ethics for Financial Professionals. We have also adopted a code of ethics for
financial professionals as required by the SEC under Section 406 of the Sarbanes-Oxley Act. This
code sets forth written standards that are designed to deter wrongdoing and to promote honest and
ethical conduct by our senior financial officers, including our Chief Executive Officer, and is a
supplement to our code of business conduct and ethics. In addition to applying to our Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer, and Treasurer, this code
applies to all of the other persons employed by us who have significant responsibility for
preparing or overseeing the preparation of our financial statements and the other financial data
included in our periodic reports to the SEC and in other public communications made by us that are
designated from time to time by our Chief Financial Officer as senior financial professionals. Our
code of ethics for financial professionals is posted on our corporate website at www.fairpoint.com
on the Investors page, under the Corporate Governance caption.
Corporate Governance Guidelines. We have also adopted corporate governance guidelines to
advance the functioning of our board of directors and its committees and to set forth our board of
directors expectations as to how it should perform its functions. Our corporate governance
guidelines are posted on our corporate website at www.fairpoint.com on the Investors page, under
the Corporate Governance caption. A copy of our corporate governance guidelines is available free
of charge upon request directed to our secretary at: Secretary, FairPoint Communications, Inc. 521
East Morehead Street, Suite 500, Charlotte, North Carolina 28202.
Policies Relating to our Board of Directors
Nomination and Selection of Directors
Our corporate governance and nominating committee identifies and evaluates potential director
candidates in a variety of ways. Recommendations may come from current members of our board of
directors, professional search firms, members of management, stockholders or other persons. In
assessing the qualifications of potential nominees, the corporate governance and nominating
committee may rely on personal interviews or discussions with the candidate and others familiar
with the candidates professional background, on third-party background and reference checks and on
such other due diligence information as is reasonably available. The corporate governance committee
must be satisfied that the candidate possesses the highest professional and personal ethics and
values and has broad experience at the policy-making level in business, government, education or
public interest before the corporate governance and nominating committee will recommend a candidate as
a nominee to our board of directors.
Communications with Board of Directors
Our board of directors has adopted policies with respect to the consideration of candidates
recommended by stockholders for election as well as for director and stockholder communications
with the board of directors.
Stockholders
may recommend nominees for consideration by the corporate governance
and nominating
committee by submitting the names and the following supporting information to our secretary at:
Secretary, Stockholder Nominations, FairPoint Communications, Inc., 521 East Morehead Street, Suite
500, Charlotte, North Carolina 28202. The submissions should include a current resume of the
candidate and a statement describing the candidates qualifications and contact information for the
candidate. The submission should also include the name and address of the stockholder who is
submitting the nominee, the number of shares which are owned of record or beneficially by the
submitting stockholder and a description of all arrangements or understandings between the
submitting stockholder and the nominee.
Stockholders and other interested parties may communicate directly with our board of directors
or the non-management directors. All communications should be in writing and should be directed to
our secretary at: Secretary, Stockholder Communications, FairPoint Communications, Inc., 521 East
Morehead Street, Suite 500, Charlotte, North Carolina 28202. The sender should indicate in the
address whether it is intended for the entire board of directors, the non-management directors as a
group or an individual director. Each communication intended for the board of directors or
non-management directors received by the secretary will be forwarded to the intended recipients in
accordance with the submitted instructions.
The full text of the stockholder nominations and communications policy is available on our
corporate website at www.fairpoint.com on the Investors page, under the Corporate Governance
caption.
138
Lead Director and Private Sessions
During the period of time that our Chief Executive Officer served as the Chairman of our board
of directors, the non-management directors regularly met in private session without our Chairman
and Chief Executive Officer. Our lead director presided at these non-management executive sessions.
Jane E. Newman served as our lead director in 2010, prior to becoming the Chairman of our board of
directors on August 24, 2010. As of the Effective Date, Edward D. Horowitz, our non-employee
Chairman of our board of directors, presides over all meetings.
Director Attendance at Annual Meeting of Stockholders
We do not have a formal policy regarding attendance by directors at our annual meeting of
stockholders but invite and encourage all directors to attend. The annual meeting of stockholders
is also generally held in conjunction with a regularly scheduled board of directors meeting to
encourage director attendance. We did not hold an annual meeting of stockholders in 2010.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
General Program Objectives
The compensation committees principal objective in designing compensation policies is to
develop and administer a comprehensive program to attract, motivate and retain outstanding
executives who are likely to enhance our profitability and create value for our stockholders.
Within this overall compensation philosophy, the compensation committee seeks to: (1) recognize and
reward sustained superior performance by individual officers and key employees; (2) pay for
performance on both an individual and corporate level; (3) align stockholder and executive
interests by placing a significant portion of executive compensation at risk; (4) tie executive
compensation to the achievement of certain short-term and long- term performance objectives of the
Company; and (5) offer a total compensation program that takes into account the compensation
practices of comparable companies.
The compensation committee intends to provide our named executive officers (NEOs) with an
executive compensation program that emphasizes performance. The program therefore combines a
competitive base salary component with a significant amount of variable compensation in the form of
performance based annual and long-term incentives. The compensation committee believes this
emphasis on performance aligns the compensation of our NEOs with the long-term interests of our
stockholders.
The compensation committee, in 2010, had engaged and regularly consulted an independent
consultant, Findley Davies, Inc., to review the competitiveness and structure of the executive
compensation program and each component of the program, and to assist the compensation committee in
ensuring that the executive compensation program achieves the compensation committees objectives.
Findley Davies, Inc. does not provide any services to the Company other than the services it
provides to the compensation committee.
During 2010, the compensation committee also engaged Mercer HR Consulting to assist with
the design and terms of the new 2010 Long Term Incentive Plan and the Success Bonus Plan, each of
which became effective as of the Effective Date. Mercer HR Consulting has been retained by the
Company to provide actuarial and employee benefit consulting services for the Companys retirement
and group medical plans. The aggregate fees paid to Mercer in 2010 were $125,000 for executive
compensation consulting service and $261,000 for actuarial and employee benefit consulting
services.
139
Specific Principles for Determining Executive Compensation
The table below identifies and explains the reason for each component of our executive
compensation program. See Executive Compensation Decisions for 2010 for amounts and further
detail.
|
|
|
Element: |
|
Reason for Element |
|
|
The compensation committee
establishes the base salaries for
our NEOs as fixed amounts to
provide a reliable indication of
the minimum amount of
compensation each NEO will
receive in a given year. |
|
|
|
|
|
We maintain an Annual Incentive
Plan under which our NEOs and
other key employees may earn
annual cash incentives based on
corporate and individual
performance. The Annual Incentive
Plan is designed to provide an
incentive for executives to
attain short-term goals. The
compensation committee
establishes and approves the
goals of the Chief Executive
Officer and the Chief Executive
Officer approves the goals of the
other NEOs and the compensation
committee reviews them. |
|
|
|
Long Term Incentives/Equity Awards
|
|
We adopted the 2010 Long Term
Incentive Plan effective as of
the Effective Date that allows
for a variety of stock-based
awards to link employee
compensation to stockholders
interests and encourage the
creation of long-term value for
our stockholders by increasing
the retention of qualified key
employees. |
|
|
|
|
|
We have maintained a
Non-Qualified Deferred
Compensation Plan, which we refer
to as the NQDC Plan, which covers
certain employees. The NQDC Plan
allows senior management
employees to defer additional
compensation beyond the
contribution limitations of the
401(k) plan. Company matching
contributions are made according
to the same percentage of
deferrals as is made under our
401(k) plan, but only with
respect to compensation that
exceeds the limits for the 401(k)
plan, up to the maximum allowed
contribution. |
|
|
|
|
|
We provide, on equal terms for
all employees, group term life
insurance, group health
insurance, and short-term and
long-term disability insurance. |
|
|
|
|
|
Retirement. We maintain a 401(k)
retirement savings plan that in
2010 included an employer
matching contribution up to an
amount equal to 5% of each
participants compensation. |
|
|
|
|
|
Severance and Change in Control
Benefits. We provide severance
benefits to certain NEOs at
levels that we consider
conservative yet competitive when
compared to those offered by our
peers. We believe that such
benefits are necessary and
appropriate in order to attract
and retain qualified NEOs. |
|
|
|
|
|
We adopted the Success Bonus Plan
effective as of the Effective
Date that allowed us to pay
one-time cash bonuses to our NEOs
and other key employees based on
certain performance measures,
subject to upward or downward
adjustment to reflect the timing
of the Effective Date. |
140
Method for Determining Amounts
Base Salary
The compensation committee determines the level of base salary for our Chief Executive Officer
and the other executive officers with the general goal of providing competitive salaries. In making
its decisions, the compensation committee considers independent studies and surveys prepared by
consultants based on publicly available information with respect to other comparable communications
companies. In addition, with respect to each executive officer, including the Chief Executive
Officer, the compensation committee considers the individuals performance, including that
individuals total level of experience in the communications industry, his or her record of
performance and contribution to our success relative to his or her job responsibilities and annual
goals, as well as his or her overall service to the Company.
Annual Incentive Compensation Awards
The annual incentive awards are based on a combination of corporate and individual goals
having specific financial and operational objectives. We generally establish bonus targets and
performance criteria at the end of each year for the following year.
Deferred Compensation
We have maintained a nonqualified deferred compensation plan (the NQDC Plan) for NEOs and
other select senior management to enable them to defer compensation in excess of the limits
applicable to them under our 401(k) plan. Matching contributions are made to the NQDC Plan
according to the same percentage of deferrals as is made under our 401(k) plan, but only with
respect to compensation that exceeds the limits for the 401(k) plan.
Retirement and Welfare Benefits
Our NEOs participate in our broad-based 401(k) and welfare benefit plans, and thereby receive,
for example, group health insurance, group term life insurance and short-term and long-term
disability insurance. The costs of these benefits constitute only a small percentage of each
executive officers total compensation.
Post-employment Severance and Change-in-Control Benefits
We provide post-employment severance and change-in-control benefits to Mr. Sunu, pursuant to
an employment agreement, and to Messrs. Sabherwal and Nixon and Ms. Linn, pursuant to change in
control and severance agreements. See Potential Payments Upon Termination or Change of Control.
We also provide post-employment severance and change-in-control benefits to certain other non-NEO
executives. The severance benefits for these executives are generally paid only if the executives
are terminated without cause and they do not voluntarily resign. The severance benefits are also
provided if any termination of employment occurs because of a change in control.
Executive Compensation Decisions for 2010
Explained below are the key components of the compensation that our NEOs earned in 2010 as
shown in the Summary Compensation Table. Their base salaries generally accounted for between 24%
and 95% of their total potential compensation, while incentive compensation accounted for most of
the remainder of their total potential compensation. In addition, Mr. Hauser received approximately
$1.6 million in 2010 under a consulting agreement with the Company subsequent to his resignation.
The compensation committee believes that the balance described below of 2010 levels for salary,
annual cash incentive awards and other benefits reflect both (i) an appropriate
performance-oriented structure for total compensation, and (ii) a suitable correlation of total NEO
compensation to the Companys financial and business performance in 2010.
Pursuant to the Plan, all outstanding equity interests of the Company, including but not
limited to all outstanding shares of common stock, options and contractual or other rights to
acquire any equity interests, were canceled and extinguished on the Effective
141
Date. In addition, on the Effective Date, the Company was deemed to have adopted the 2010
Long Term Incentive Plan and the Success Bonus Plan without any further action by the Company. On
the Effective Date, in accordance with the Plan, (i) management and other employees of the Company
received certain cash bonuses pursuant to the Success Bonus Plan and (ii) certain equity awards
pursuant to the 2010 Long Term Incentive Plan were made. See Item 1. BusinessEmergence from
Chapter 11 ProceedingsNew Long Term Incentive Plan and Success Bonus Plan.
Base Salary
None of the NEOs received a base salary increase in 2010.
Annual Incentive Compensation Awards
The compensation committee established the 2010 target bonuses and related performance goals
for certain members of our senior management under the FairPoint Communications, Inc. Annual
Incentive Plan, or the Annual Incentive Plan, on March 2, 2010.
The NEOs 2010 performance goals for bonus awards include the following: (i) quarterly
financial performance targets, which are calculated by subtracting Consolidated Capital
Expenditures (CAPEX) (as defined in the Debtor-in-Possession Credit Agreement, dated as of
October 27, 2009, by and among the Company, FairPoint Logistics, Inc., the lenders party thereto
and Bank of America, N.A., as administrative agent (the DIP Credit Agreement)) from Consolidated
EBITDAR (as defined in the DIP Credit Agreement) (the EBITDAR Minus CAPEX Targets), and which are
based on an annual EBITDAR Minus CAPEX Target of $165.6 million for the year ended December 31,
2010; (ii) the Company achieving an average monthly target of 77.5% for customer service calls that
are answered within 20 seconds (the Call Center Service Target) at the Companys consumer,
business, collections and repair call centers in Maine, New Hampshire and Vermont (collectively,
Northern New England); (iii) the Company achieving an average monthly target of 12.0% for
installation appointments in Northern New England that are not met for Company reasons (the
Installation Appointment Target); and (iv) the Company achieving an average on-time target of
90.0% for repair appointments in Northern New England (the Repair Appointment Target). These
same 2010 performance goals are applicable to all non-represented employees and some represented
employees of the Company except commissioned sales employees.
David L. Hauser, the Companys Chief Executive Officer, was eligible for a target bonus of up
to 100% of his 2010 annual base salary. The target bonus for Mr. Hauser was based on the Companys
ability to achieve the following, tested quarterly (weighted as indicated): (i) 67% the EBITDAR
Minus CAPEX Targets; (ii) 11% the Call Center Service Target; (iii) 11% the Installation
Appointment Target; and (iv) 11% the Repair Appointment Target.
Peter G. Nixon, the Companys President, Ajay Sabherwal and Alfred C. Giammarino, each the
Companys Executive Vice President and Chief Financial Officer, Shirley J. Linn, the Companys
Executive Vice President, General Counsel and Secretary, and Raymond C. Allieri, the Companys
Executive Vice President and Chief Strategy Officer, were each eligible for a target bonus of up to
50% of his or her 2010 annual base salary. Lisa R. Hood, the Companys Senior Vice President and
Controller, was eligible for a target bonus of up to 40% of her 2010 annual base salary. The
target bonus for each of these officers was based on the same criteria as set forth above for Mr.
Hauser.
Previously, the Annual Incentive Plan provided for a single lump sum payment of bonus awards.
The compensation committee amended the Annual Incentive Plan to provide for quarterly payments of
bonus awards for 2010. Such quarterly payments were made to the NEOs (and all non-represented
employees of the Company except commissioned sales employees) at 50% of the quarterly target
payment amount provided that the quarterly targets are met, with true-up payments to be included in
bonus awards for the full 2010 year.
Compensation of Messrs. Hauser and Sunu
On August 24, 2010, the Bankruptcy Court approved a proposed (i) consulting agreement with
David L. Hauser, the Companys then Chairman and Chief Executive Officer, and (ii) employment
agreement with Paul H. Sunu. The compensation committee had negotiated the proposed agreements in
connection with the transition of the Chief Executive Officer role from Mr. Hauser to Mr.
142
Sunu. Accordingly, effective as of August 24, 2010, Mr. Hauser resigned as the Companys
Chairman and Chief Executive Officer and as a director and became a consultant to the Company. In
addition, effective as of August 24, 2010, the Board appointed Mr. Sunu to serve as the Companys
Chief Executive Officer and as a director and the Company and Mr. Sunu entered into the employment
agreement.
The consulting agreement sets forth the terms and conditions of Mr. Hausers retention as a
consultant by the Company for a term commencing on August 24, 2010 and expiring on the Effective
Date. Pursuant to the consulting agreement, Mr. Hauser received a cash consulting fee of
$3,450,000 and a one-time grant following the Effective Date of 66,794 shares of the reorganized
Companys common stock pursuant to the terms of the New Long Term Incentive Plan. The shares were
fully vested on the date of grant. In addition, pursuant to the consulting agreement, Mr. Hauser
was eligible to continue participating in the Companys health insurance plan for a period of
ninety days and thereafter received a cash payment equal to the cost of COBRA medical insurance,
group life insurance and long-term disability insurance coverage for an additional period of two
years.
The employment agreement sets forth the terms and conditions of Mr. Sunus employment as Chief
Executive Officer of the Company for a three-year term commencing on August 24, 2010. Pursuant to
the Employment Agreement, Mr. Sunu will receive an annual base salary of $750,000 and a one-time
signing bonus of $500,000. Mr. Sunu will also be eligible to participate in the Companys annual
incentive plan and eligible to earn a performance-based bonus thereunder for annual performance
periods beginning in calendar year 2011. Mr. Sunus maximum bonus under the annual incentive plan
will be 150% of the base salary payable to him during the applicable performance period.
Following the Effective Date, Mr. Sunu was granted 120,000 restricted shares of the
reorganized Companys common stock and options to purchase 125,000 shares of such common stock.
The exercise price of the stock options will be equal to the lesser of (i) $36.03 per share or (ii)
the weighted average trading price of a share of common stock for the first 20 trading days
following the Effective Date, but in no event less than $19.28 per share. The exercise price of the
stock options was set at $24.29 in accordance with the New Long Term Incentive Plan agreement.
Twenty-five percent of each of the restricted shares and the options were vested as of the date of
grant, and the remaining restricted shares and options will vest thereafter in three substantially
equal vesting tranches on each of the first three anniversaries of the Effective Date, subject to
Mr. Sunus continued employment with the Company through each such vesting date.
Mr. Sunu also participated in the FairPoint Communications, Inc. 2010 Success Bonus Plan and
was eligible for a success bonus equal to fifty percent of his annual base salary if the Company
performs at Target performance levels, as such Target is defined under the Success Bonus Plan
approved by the Bankruptcy Court. Mr. Sunu received a payment in accordance with the Success Bonus
Plan in February 2011.
Mr. Sunu will be eligible to participate in the benefits programs generally available to the
Companys other senior executives.
Tax Considerations
Section 162(m) of the Internal Revenue Code (the Code) generally disallows a tax deduction
to public corporations for compensation, other than performance based compensation, over $1.0
million paid for any fiscal year to any of the corporations Chief Executive Officer and three
other highly compensated executive officers as of the end of any fiscal year. The Companys policy
is to qualify its executive officers for deductibility under Section 162(m) to the extent the
compensation committee determines such to be appropriate. In 2010, compensation did not exceed the
deductibility limits of Section 162(m) for any NEO. The compensation committee remains aware of the
Code Section 162(m) limitations and the available exemptions and special rules, and will address
the issue of 162(m) deductibility when and if circumstances warrant the use of such exemptions or
other considerations.
143
Summary Compensation Table
The table below summarizes the total compensation paid or earned by each of the NEOs for the
fiscal years ended December 31, 2010, 2009 and 2008.
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(a) |
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(b) |
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(c) |
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(d) |
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(e) |
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(f) |
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(g) |
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(h) |
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(i) |
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(j) |
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Change in |
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Pension |
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Value and |
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Non-Equity |
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Nonqualified |
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Incentive |
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Deferred |
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Stock |
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Option |
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Plan |
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Compensation |
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All Other |
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Name and Principal |
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Salary |
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Bonus |
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Awards |
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Awards |
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Compensation |
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Earnings |
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Compensation |
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Total |
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Position |
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Year |
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$ |
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$ |
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$(1) |
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$(1) |
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$ |
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$ |
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$(2) |
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$ |
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Paul H. Sunu (3) |
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2010 |
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268,269 |
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507,632 |
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775,901 |
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Chief Executive Officer |
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David L. Hauser (3) |
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2010 |
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523,077 |
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60,923 |
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1,608,472 |
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2,192,472 |
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Chairman of the Board of |
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2009 |
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409,231 |
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1,814,349 |
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55,520 |
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12,602 |
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2,291,702 |
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Directors and Chief
Executive Officer |
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Ajay Sabherwal (4) |
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2010 |
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170,769 |
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5,870 |
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27,183 |
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203,822 |
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Executive Vice
President, Chief
Financial Officer |
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Alfred C. Giammarino (4) |
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2010 |
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114,561 |
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7,026 |
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121,587 |
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Executive Vice President, |
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2009 |
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401,923 |
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236,180 |
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12,634 |
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650,737 |
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Chief Financial Officer |
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2008 |
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109,615 |
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9,591 |
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738,261 |
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23,757 |
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881,224 |
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Peter G. Nixon |
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2010 |
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325,000 |
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19,594 |
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15,392 |
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359,986 |
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President |
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2009 |
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343,750 |
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201,996 |
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19,165 |
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564,911 |
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2008 |
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303,481 |
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103,109 |
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484,155 |
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19,167 |
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909,912 |
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Shirley J. Linn |
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2010 |
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300,000 |
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18,087 |
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17,111 |
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335,198 |
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Executive Vice President, |
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2009 |
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317,308 |
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186,458 |
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17,801 |
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521,567 |
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General Counsel and |
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2008 |
|
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278,291 |
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|
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109,244 |
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445,724 |
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19,116 |
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852,375 |
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Secretary |
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Lisa R. Hood (4) |
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|
2010 |
|
|
|
310,308 |
|
|
|
16,393 |
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7,375 |
|
|
|
334,076 |
|
Senior Vice President and |
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2009 |
|
|
|
243,269 |
|
|
|
|
|
|
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71,476 |
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12,968 |
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327,713 |
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Controller |
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2008 |
|
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223,435 |
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54,047 |
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185,388 |
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14,206 |
|
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|
477,076 |
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Raymond C. Allieri |
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2010 |
|
|
|
250,178 |
|
|
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11,106 |
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321,909 |
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583,193 |
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Executive Vice President
and Chief Strategy Officer |
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(1) |
|
The amounts in columns (e) and (f) are the grant date fair value of the stock and
option awards, adjusted to eliminate the effect of any forfeiture assumption, computed in
accordance with the CompensationStock Compensation Topic of the ASC. Grant date fair value
of awards granted prior to the Merger have been adjusted to reflect the fair value of the
award immediately following the Merger. Please see note 15 to the consolidated
financial statements |
144
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|
for more information about the assumptions FairPoint used to
determine the grant date value of the awards |
|
(2) |
|
The amount shown in column (i) for 2010 reflects the following for each NEO: |
|
|
|
Matching contributions made by FairPoint to its 401(k) retirement savings plan in
the amounts of $5,769 for Mr. Sunu, $12,250 for Mr. Hauser, $2,135 for Mr.
Sabherwal, $5,728 for Mr. Giammarino, $10,619 for Mr. Nixon, $10,379 for Ms. Linn,
$6,306 for Ms. Hood and $11,718 for Mr. Allieri; |
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|
Contributions made by FairPoint to the term life insurance plans it sponsors for
all eligible employees (including our NEOs) in the amounts of $1,863 for Mr. Sunu,
$6,579 for Mr. Hauser, $587 for Mr. Sabherwal, $1,298 for Mr. Giammarino, $4,773 for
Mr. Nixon, $6,732 for Ms. Linn, $1,069 for Ms. Hood and $1,805 for Mr. Allieri; |
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|
|
A one-time signing bonus of $500,000 paid to Mr. Sunu, in accordance with his
employment agreement, upon commencement of his employment. |
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|
|
|
Relocation expenses reimbursed by FairPoint in the amounts of $24,461 for Mr.
Sabherwal and $40,149 for Mr.
Allieri; |
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Severance pay in the amount of $268,237 for Mr. Allieri. |
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Consulting services fees in the amount of $1,589,643 for Mr. Hauser. |
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(3) |
|
Mr. Sunu was appointed as our Chief Executive Officer on August 24, 2010, succeeding Mr.
Hauser, who resigned effective August 24, 2010. |
|
(4) |
|
Mr. Sabherwal was appointed Chief Financial Officer on July 19, 2010, succeeding Ms.
Hood. Ms. Hood was appointed Chief Financial Officer on an interim basis on March 31, 2010,
succeeding Mr. Giammarino, who resigned effective March 30, 2010. |
Grants of Plan-Based Awards
No plan-based awards were granted during the year ended December 31, 2010.
Pursuant to the Plan, all outstanding equity interests of the Company, including but not
limited to all outstanding shares of common stock, options and contractual or other rights to
acquire any equity interests, were cancelled and extinguished on the Effective Date. See Item 1.
BusinessBankruptcyThe PlanNew Long Term Incentive Plan and Success Bonus Plan.
Outstanding Equity Awards at December 31, 2010
The following table shows the equity-based awards held by the NEOs as of December 31, 2010.
Pursuant to the Plan, all outstanding equity interests of the Company, including but not limited to
all outstanding shares of common stock, options and contractual or other rights to acquire any
equity interests, were cancelled and extinguished on the Effective Date. See Item 1.
BusinessBankruptcyThe PlanNew Long Term Incentive Plan and Success Bonus Plan.
145
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Option Awards |
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Stock Awards |
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(a) |
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(b) |
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(c) |
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(d) |
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(e) |
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(f) |
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(g) |
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(h) |
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(i) |
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(j) |
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Equity |
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Incentive |
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Plan |
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Equity |
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Awards: |
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Incentive |
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Market |
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Equity |
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Plan |
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or Payout |
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Incentive |
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Awards: |
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Value of |
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Plan |
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Number of |
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Unearned |
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Awards: |
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Market |
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Unearned |
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Shares, |
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Number of |
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Number of |
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Value of |
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Shares, |
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Units or |
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Number of |
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Number of |
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Securities |
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Shares or |
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Shares or |
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Units or |
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Other |
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Securities |
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Securities |
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Underlying |
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Units of |
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Units of |
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Other |
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Rights |
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Underlying |
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Underlying |
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Unexercised |
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Option |
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Stock That |
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Stock That |
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Rights |
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That |
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Unexercised |
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Unexercised |
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Unearned |
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Exercise |
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Option |
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Have Not |
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Have Not |
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That Have |
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Have Not |
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Grant |
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Options (#) |
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Options (#) |
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Options |
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Price |
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Expiration |
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Vested |
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Vested |
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Not Vested |
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Vested |
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Name |
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Date |
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Exercisable |
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Unexercisable |
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(#) |
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($) |
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Date |
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(#) |
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($) |
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(#) |
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($) |
|
Paul H. Sunu |
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Chief Executive
Officer |
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David L. Hauser |
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7/1/2009 |
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533,334 |
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0.95 |
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7/1/2019 |
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Executive Officer |
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Ajay Sabherwal |
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Executive Vice
President, Chief
Financial Officer |
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Alfred C. Giammarino |
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Executive Vice
President, Chief
Financial Officer |
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Peter G. Nixon |
|
|
3/12/2002 |
|
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8,419 |
|
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36.94 |
|
|
|
3/12/2012 |
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President |
|
|
12/12/2003 |
|
|
|
23,786 |
|
|
|
|
|
|
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|
36.94 |
|
|
|
12/12/2013 |
|
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3/3/2009 |
|
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45,139 |
(2) |
|
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903 |
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|
Shirley J. Linn |
|
|
3/12/2002 |
|
|
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9,209 |
|
|
|
|
|
|
|
|
|
|
|
36.94 |
|
|
|
3/12/2012 |
|
|
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|
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|
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|
|
|
|
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|
Executive Vice |
|
|
12/12/2003 |
|
|
|
14,212 |
|
|
|
|
|
|
|
|
|
|
|
36.94 |
|
|
|
12/12/2013 |
|
|
|
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|
President, General |
|
|
3/3/2009 |
|
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|
41,667 |
(2) |
|
|
833 |
|
Counsel and
Secretary |
|
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|
|
Lisa R. Hood |
|
|
3/12/2002 |
|
|
|
8,791 |
|
|
|
|
|
|
|
|
|
|
|
36.94 |
|
|
|
3/12/2012 |
|
|
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|
Senior Vice |
|
|
12/12/2003 |
|
|
|
6,633 |
|
|
|
|
|
|
|
|
|
|
|
36.94 |
|
|
|
12/12/2013 |
|
|
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|
President and |
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|
3/3/2009 |
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|
15,972 |
(2) |
|
|
319 |
|
Controller |
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|
Raymond C. Allieri |
|
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|
Executive Vice
President and Chief
Strategy Officer |
|
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|
|
(1) |
|
These restricted shares were to vest on July 1, 2012. |
146
|
|
|
(2) |
|
These awards were granted under the FairPoint Communications, Inc. 2008 Long Term
Incentive Plan for the performance period January 1, 2009 through December 31, 2011. Payout
of awards is based 50% on the Companys TSR, as defined in the award agreement, versus its
peer group in the Dow Jones Telecommunications Index and 50% on the Companys Adjusted EBITDA
versus a target set by the compensation committee prior to the beginning of the performance
period. Participants will receive a percentage of their TSR target as follows: TSR greater
than 20% of peer group 40%, TSR greater than 40% of peer group 100%, TSR greater than
60% of peer group 200%. If the Companys TSR is not greater than at least 20% of its peer
group, then participants will receive nothing. Participants will receive a percentage of
their Adjusted EBITDA target according to the Companys Adjusted EBITDA versus its target, as
follows: less than 95% of target 0%, 95% of target 40%, 100% of target 100%, 105% of
target or higher 200%. Amounts listed in column (i) reflect the threshold number of shares
to be issued, as performance to date has not exceeded the threshold. Amounts listed in
column (j) reflect the market value of these awards at December 31, 2010, based on the
closing price of the Companys common stock on December 31, 2010. |
Option Exercises and Stock Vested
None of the NEOs exercised any stock options or had any stock awards vest during the fiscal
year ended December 31, 2010. Pursuant to the Plan, all outstanding equity interests of the
Company, including but not limited to all outstanding shares of common stock, options and
contractual or other rights to acquire any equity interests, were cancelled and extinguished on the
Effective Date. See Item 1. BusinessBankruptcyThe PlanNew Long Term Incentive Plan and
Success Bonus Plan.
147
Nonqualified Deferred Compensation
Pursuant to the NQDC Plan, certain executives, including NEOs, may defer a portion of their
annual salary and bonuses. Deferral elections are made by eligible executives in each year for
amounts to be earned in the following year. An executive can defer up to 50% of his or her annual
salary and up to 100% of his or her annual bonus.
|
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|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
|
Executive |
|
|
Registrant |
|
|
Aggregate |
|
|
Aggregate |
|
|
Aggregate |
|
|
|
Contributions |
|
|
Contributions |
|
|
Earnings |
|
|
Withdrawals/ |
|
|
Balance |
|
|
|
in Last FY |
|
|
in Last FY |
|
|
in Last FY |
|
|
Distributions |
|
|
at Last FYE |
|
Name |
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($)(1) |
|
Paul H. Sunu |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
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|
|
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|
|
|
|
|
David L. Hauser |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman of the Board of Directors and
Chief Executive Officer |
|
|
|
|
|
|
|
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|
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|
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|
|
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|
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|
|
|
|
|
|
|
|
Ajay Sabherwal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Vice President, Chief
Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
|
|
|
|
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|
|
|
|
|
Alfred C. Giammarino |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Vice President, Chief
Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
Peter G. Nixon |
|
|
|
|
|
|
|
|
|
|
8,923 |
|
|
|
|
|
|
|
72,975 |
|
President |
|
|
|
|
|
|
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|
|
|
|
|
Shirley J. Linn |
|
|
|
|
|
|
|
|
|
|
2,161 |
|
|
|
|
|
|
|
19,268 |
|
Executive Vice President,
General Counsel and Secretary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lisa R. Hood |
|
|
|
|
|
|
|
|
|
|
3,783 |
|
|
|
|
|
|
|
44,087 |
|
Senior Vice President and Controller |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond C. Allieri |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Vice President, and Chief
Strategy Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The following table shows the extent to which amounts reported in this column have
been reported in the Summary Compensation Table for the current or previous years: |
|
|
|
|
|
Name |
|
Amount |
|
Paul H. Sunu |
|
|
|
|
David L. Hauser |
|
|
|
|
Ajay Sabherwal |
|
|
|
|
Alfred C. Giammarino |
|
|
|
|
Peter G. Nixon |
|
|
34,278 |
|
Shirley J. Linn |
|
|
29,658 |
|
Lisa R. Hood |
|
|
4,247 |
|
Raymond C. Allieri |
|
|
|
|
148
Potential Payments Upon Termination or Change of Control
FairPoint has an employment agreement with Mr. Sunu and change in control and severance
agreements with Messrs. Sabherwal and Nixon and Ms. Linn. These agreements provide benefits to our
NEOs in the event their employment is terminated under certain circumstances as summarized below.
Mr. Sunu
Under the employment agreement with Mr. Sunu, either party may terminate Mr. Sunus employment
at any time. In the event the Company terminates Mr. Sunus employment without cause (as defined
in the employment agreement), if the Company delivers Mr. Sunu a non-extension notice or if Mr.
Sunu resigns his employment for good reason, Mr. Sunu will receive: (i) any accrued but unpaid base
salary or bonuses, any unpaid or unreimbursed expense reimbursements and any benefits to be
provided under the Companys employee benefits plans upon a termination of employment; (ii) an
amount equal to the sum of (A) two times the amount of Mr. Sunus then-current base salary, (B) two
times the amount of his annual incentive plan bonus for the immediately preceding fiscal year (or
in the event such termination occurs prior to the payment of Mr. Sunus annual incentive plan bonus
for 2011, if any, an amount equal to $1,500,000) and (C) the cost of continued health and
disability insurance coverage for Mr. Sunu and his covered dependents for a period of twenty-four
months.
Messrs. Sabherwal and Nixon and Ms. Linn
We entered into change in control and severance agreements, which we refer to collectively as
the severance agreements, with Mr. Nixon and Ms. Linn, on March 14, 2007, and with Mr. Sabherwal,
on August 24, 2010. Each severance agreement provides, subject to certain other conditions, that we
will pay severance and provide benefits to the subject executive (i) in the event of such
employees termination without cause or following a change in control, or (ii) within two years of
a change in control, upon such employees resignation within 45 days following (A) a significant or
material reduction of such employees key responsibilities or duties, (B) a reduction in such
employees overall compensation opportunities, (C) the diminishment or elimination of such
employees rights to the severance benefits detailed in the severance agreement, or (D) any
material breach by the Company of the severance agreement. The severance payable and benefits
required to be provided include unpaid base salary, lump sum cash payments equal to two times such
employees annual base salary and annual bonus, COBRA premiums and life insurance premiums for 24
months, and the vesting of all non-performance based, non-vested and/or unearned long-term
incentive awards, among others. The severance agreements do not require the Company to provide any
tax gross-up on the benefits paid under the severance agreements. However, if the Company
determines that reducing the benefits to just below the level that would trigger the golden
parachute excise tax payable by the executive will result in a greater after-tax benefit to the
executive, the benefits will be reduced to that level.
The severance agreements also contain provisions pursuant to which the subject employees, for
a period of 12 months following termination of employment, promise to refrain from certain
activities including (1) soliciting any of our employees or consultants to leave us or to perform
services for another company, or (2) accepting any employment or similar arrangements with our
competitors.
149
The following table shows cash compensation that would have been payable under the agreements
with the NEOs (other than Messrs. Hauser and Giammarino, who resigned during 2010) if their
employment had terminated on December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuation of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Awards |
|
|
Continuation of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Market Value of |
|
|
Medical/Welfare |
|
|
Total |
|
|
|
Cash |
|
|
|
|
|
|
Unearned Awards as of |
|
|
Benefits |
|
|
Termination |
|
|
|
Severance |
|
|
Bonus |
|
|
12/31/10) |
|
|
(Present Value) |
|
|
Benefits |
|
Reason for Payment: |
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
Paul H. Sunu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary termination with cause |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or after
change in control |
|
|
1,500,000 |
|
|
|
1,500,000 |
|
|
|
|
|
|
|
28,067 |
|
|
|
3,028,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajay Sabherwal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary termination with cause |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or after
change in control |
|
|
740,000 |
|
|
|
370,000 |
|
|
|
|
|
|
|
38,062 |
|
|
|
1,148,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter G. Nixon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary termination with cause |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or after
change in control |
|
|
650,000 |
|
|
|
39,188 |
|
|
|
903 |
|
|
|
26,710 |
|
|
|
716,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shirley J. Linn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary termination with cause |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or after
change in control |
|
|
600,000 |
|
|
|
36,173 |
|
|
|
833 |
|
|
|
26,631 |
|
|
|
663,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lisa R. Hood
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary termination with cause |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination after change in control |
|
|
|
|
|
|
|
|
|
|
319 |
|
|
|
|
|
|
|
319 |
|
150
Director Compensation
2010 Compensation
We use a combination of cash and stock-based incentive compensation to attract and retain
qualified candidates to serve on our board of directors. In setting director compensation, we
consider the significant amount of time that directors expend in fulfilling their duties to the
Company as well as the skill level required by the members of our board of directors.
In 2010, each non-employee director received an annual fee of $55,000 for serving as a
director. In addition, an annual fee of $10,000 was paid for serving as the chairperson of
FairPoint Communications compensation committee or corporate governance committee and an annual
fee of $20,000 was paid for serving as the chairperson of FairPoints audit committee. An annual
fee of $10,000 was paid to FairPoints lead director. Following Mr. Hausers resignation, Ms.
Newman served as the chair of the board of directors and received a lump sum fee of $50,000.
FairPoints non-employee directors also receive an annual award of approximately $45,000.
Prior to March 31, 2010, this award was paid in the form of restricted stock or restricted units,
at the recipients option, which are issued under FairPoints 2005 Stock Incentive Plan or 2008
Long Term Incentive Plan. These awards vested in four quarterly installments from the grant date,
and the holders thereof were entitled to receive dividends or dividend equivalents on such awards
from the date of grant, whether or not vested. Effective March 31, 2010, this equity award was
changed to a $45,000 annual cash award, payable quarterly.
On September 3, 2008, the corporate governance committee of the board of directors determined
that, from time to time, members of special purpose committees of the board of directors should be
awarded appropriate compensation for their services to such committees. They also determined that
members of the board of directors succession planning committee would receive compensation because
of the time requirements, confidentiality requirements and the importance of the committees work.
The chairperson of the committee received $25,000 for her service and each committee member
received $15,000. One half of this fee was paid in September 2008 and the remainder was paid in
June 2009. During the Chapter 11 Cases, Mr. Lilien was appointed as our restructuring monitor on
behalf of the board of directors and received compensation of $160,000.
FairPoints employee directors do not receive any compensation for serving on the board of
directors.
2010 Summary Director Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
(h) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
|
|
|
|
|
|
|
Fees |
|
|
|
|
|
|
|
|
|
|
Non-equity |
|
|
Value and |
|
|
|
|
|
|
|
|
|
Earned |
|
|
|
|
|
|
|
|
|
|
Incentive |
|
|
Nonqualified |
|
|
|
|
|
|
|
|
|
or Paid |
|
|
Stock |
|
|
Option |
|
|
Plan |
|
|
Deferred |
|
|
All Other |
|
|
|
|
|
|
in Cash |
|
|
Awards |
|
|
Awards |
|
|
Compensation |
|
|
Compensation |
|
|
Compensation |
|
|
Total |
|
Name |
|
($)(1)(2) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
Earnings |
|
|
($) |
|
|
($) |
|
Thomas F. Gilbane, Jr.(3) |
|
|
110,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,000 |
|
Claude C. Lilly |
|
|
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000 |
|
Robert S. Lilien |
|
|
260,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,000 |
|
Jane E. Newman |
|
|
160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,000 |
|
Michael R. Tuttle(3) |
|
|
110,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,000 |
|
|
|
|
(1) |
|
See the discussion preceding this table for the general method used to determine
each non-employee directors cash compensation. For fiscal 2010, the particular components
paid as cash compensation in excess of each non-employee directors $55,000 retainer and
$45,000 annual award were as follows: Gilbane ($10,000 as chair of compensation |
151
|
|
|
|
|
committee); Lilien ($160,000 as restructuring monitor); Lilly ($20,000 as chair of audit
committee); Newman ($10,000 as lead director and $50,000 as chair of the board of directors
following Mr. Hausers resignation); Tuttle ($10,000 as
chair of corporate governance and nominating
committee). |
|
|
|
|
|
(2) |
Fees Earned or Paid in Cash includes amounts accrued but unpaid for services
rendered in the fourth quarter of 2010. |
|
(3) |
Messrs. Gilbane and Tuttle were nominated by Verizon and appointed as directors by
our board of directors effective as of March 31, 2008. |
Compensation Committee Interlocks and Insider Participation
During 2010, decisions on various elements of executive compensation were made by our
compensation committee. No officer, employee or former officer of the Company served as a member
of our compensation committee during 2010. No committee member had any interlocking relationships
requiring disclosure under applicable rules and regulations.
For a description of certain relationships and transactions between us and members of our
board of directors or their affiliates, see Certain Relationships and Related Party Transactions.
Compensation Committee Report
In connection with its duty to review and approve executive compensation, the compensation
committee has: (i) reviewed and discussed the Compensation Discussion and Analysis required by Item
402(b), and (ii) based on this review and discussion, recommended to the board of directors that
the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K. As of the
Effective Date, the FairPoint Communications Compensation Committee consists of Todd W. Arden,
Edward D. Horowitz (chair), and David L. Treadwell.
EXECUTIVE OFFICERS
The following table sets forth the names and positions of our current executive officers and
their ages as of March 31, 2011.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
55 |
|
|
Chief Executive Officer |
|
|
|
58 |
|
|
President |
|
|
|
45 |
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
55 |
|
|
Executive Vice President, Sales and Marketing |
|
|
|
68 |
|
|
Executive Vice President, Operations and Engineering |
|
|
|
60 |
|
|
Executive Vice President, General Counsel and Secretary |
|
|
|
51 |
|
|
Executive Vice President and Chief Information Officer |
|
|
|
57 |
|
|
Senior Vice President, Human Resources |
|
|
|
49 |
|
|
Vice President and Controller |
|
|
|
50 |
|
|
Vice President and Treasurer |
|
|
|
52 |
|
|
Vice President, Integrated Marketing Communications |
|
|
|
50 |
|
|
Vice President, Product and Marketing Management |
The following sets forth selected biographical information for our executive officers who are
not directors.
Peter G. Nixon. In July 2007, Mr. Nixon was appointed as our President. Prior to assuming
this role, Mr. Nixon had served as our Chief Operating Officer since November 2002. Previously, Mr.
Nixon was our Senior Vice President of Corporate Development from February 2002 to November 2002
and President of our Telecom Group from April 2001 to February 2002. Prior to this, Mr. Nixon
served as President of our Eastern Region Telecom Group from June 1999 to April 2001 and President
of Chautauqua and Erie Telephone Corporation, which we refer to as C&E, from July 1997, when we
acquired C&E, to June 1999. From April 1, 1989 to June
152
1997, Mr. Nixon served as Executive Vice President of C&E. From April 1, 1978 to March 31,
1989, Mr. Nixon served as Vice President of Operations for C&E. Mr. Nixon has served as the past
Chairman of the New York State Telecommunications Association from June 1996 to June 1998.
Ajay Sabherwal. In July 2010, Mr. Sabherwal was appointed as our Executive Vice President and
Chief Financial Officer. Previously, Mr. Sabherwal served as Chief Financial Officer for Mendel
Biotechnology from 2009 to 2010, Chief Financial Officer for Aventine Renewable Energy from 2005 to
2009 and Executive Vice President, Finance & Chief Financial Officer for Choice One Communications
from 1999 to 2005.
Jeffrey W. Allen. In July 2009, Mr. Allen was appointed as our Executive Vice
President, Sales and Marketing. Previously, Mr. Allen served as our Executive Vice President,
External Relations from May 2008 to July 2009 and Assistant Vice President, Customer Operations
from June 2007 to May 2008. Prior to joining the Company, Mr. Allen served as General Manager,
Wireless for Datapath, Inc. from December 2005 to June 2007, Chief Executive Officer of Third Rail
Americas, Inc. from January 2005 to December 2005, President, Chief Executive Officer and Chairman
of the Board of Intellispace, Inc. from June 2001 to June 2004 and Chief Operating Officer of
Intellispace, Inc. from April 2000 to June 2001.
Kenneth W. Amburn. In October 2010, Mr. Amburn was appointed as our Executive Vice President,
Operations and Engineering. Prior to joining us, Mr. Amburn served as Chief Operating Officer for
Madison River Communications from September 2000 to April 2007 and as Vice President of Operations
for Madison River Communications from May 1998 to August 2000. Previously, Mr. Amburn served as
Vice President for Network Construction Services from September 1995 to April 1998. He served as
Vice President, East Region for Citizens Utilities from July 1993 to August 1995, Sprint/Centel
Texas from January 1993 to June 1993 and Centel Texas from January 1985 to December 1992.
Shirley J. Linn. In March 2006, Ms. Linn was appointed as our Executive Vice President,
General Counsel and Secretary. Previously, Ms. Linn served as our Senior Vice President, General
Counsel and Secretary from September 2004 to March 2006. Prior thereto, Ms. Linn served as our
General Counsel since October 2000, our Vice President since October 2000, and our Secretary since
December 2000. Prior to joining us, Ms. Linn was a partner, from 1984 to 2000, in the Charlotte,
North Carolina law firm of Underwood Kinsey Warren & Tucker, P.A., where she specialized in general
business matters, particularly mergers and acquisitions.
Kathleen McLean. In March 2010, Ms. McLean was appointed as our Executive Vice President and
Chief Information Officer. Prior to joining us, Ms. McLean served as Senior Vice President,
Customer Service in Verizon Partner Solutions from December 2008 to December 2009. She also served
Verizon as Senior Vice President, Wholesale Sales from December 2007 to December 2008, Senior Vice
President, Customer Care from January 2006 to December 2007, Senior Vice President, Customer
Relationship and Systems Management from December 2002 to December 2005 and Senior Vice President,
Information Technology Group from May 1998 to November 2002. Prior to joining Verizon, Ms. McLean
was a Vice President in the telecommunications industry group of an international consulting firm.
Gary C. Garvey. In March 2008, Mr. Garvey was appointed as our Senior Vice President, Human
Resources. Prior to joining us, Mr. Garvey held senior leadership positions in human resources at
Draka Holding N.V. and Draka Comteq B.V. in Amsterdam from April 2005 to February 2008, at
Lightolier from April 2004 to March 2005 and at Corning Cable Systems/Siecor Corporation April 1983
to December 2002.
John
T. Hogshire. In September 2010, Mr. Hogshire was appointed as our Vice President and
Controller. Mr. Hogshire previously served as the Director of Accounting for Aviat Networks (f/k/a
Harris Stratex Networks) from July 2008 to September 2010, as a Consultant with Aviat Networks from
January 2008 to July 2008 and as Vice President Controller of Madison River Communications from
December 1998 to July 2007.
Thomas E. Griffin. In December 2005, Mr. Griffin was appointed our Treasurer, and, in early
2008, was appointed a Vice President. Mr. Griffin joined us in January 2000 as Assistant Treasurer
and served as our General Manager of Wireless Broadband operations from December 2003 through March
2005. Previously, Mr. Griffin was employed by Sealand Service, Inc. as Assistant Treasurer from
September 1997 to January 2000 where he was responsible for worldwide cash management and as
Director of Financial Planning for Europe for Sealand Service, Inc. from September 1995 to
September 1997.
153
Rose B. Cummings. In December 2010, Ms. Cummings was appointed as our Vice President,
Integrated Marketing Communications. Previously, Ms. Cummings served as Vice President, Corporate
Communications from October 2007 to December 2010. Prior to joining us, Ms. Cummings served as
Executive Director of Corporate Communications for SunCom Wireless (now T-Mobile) from January 2006
to September 2007, Public Affairs Manager for Duke Energy from 1994 to 2006 and Public Information
Director for Mecklenburg County (NC) Government from 1986 to 1994.
Rod Imbriani. In December 2010, Mr. Imbriani was appointed as our Vice President, Product and
Marketing Management. Prior to joining us, Mr. Imbriani served as Vice President of Marketing for
the service division of the Scotts Miracle-Gro Company from June 2008 to February 2010. Prior to
that position, he served as Vice President of Product Operations for CenturyTel, Inc. from April
2006 to June 2008. Mr. Imbriani has also served in marketing positions for Frontier Communications
Corporation, Broadwing Communications LLC, Intermedia Communications, Qwest Communications, MCI and
US West, Inc. Mr. Imbriani began his career as a developer at AT&T Bell Labs.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity SecuritiesSecurities Authorized for Issuance Under Equity Compensation Plans
for the table entitled Equity Compensation Plan Information.
On the Effective Date, pursuant to the Plan, we were deemed to have adopted the Long Term
Incentive Plan and the Success Bonus Plan. See Item 1. Business Emergence from Chapter 11
Proceedings Long Term Incentive Plan and Success Bonus Plan.
Security Ownership of Certain Beneficial Owners
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and
persons who own, or are part of a group that owns, more than ten percent of a registered class of
our equity securities, to file reports of ownership and changes in ownership with the SEC and the
NYSE. Officers, directors and beneficial owners of more than 10% of our common stock are required
by regulation of the SEC to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of Forms 3, 4 and 5 and amendments thereto available to us and
other information obtained from our directors, officers and beneficial owners of more than 10% of
our common stock or otherwise available to us, we believe that no director, officer or beneficial
owner of more than 10% of our common stock failed to file on a timely basis reports required
pursuant to Section 16(a) of the Securities Exchange Act of 1934 for fiscal 2010.
The following table sets forth information regarding beneficial ownership of our Common Stock
as of March 25, 2011, for:
|
|
|
each NEO; |
|
|
|
|
each director; |
|
|
|
|
all executive officers and directors as a group; and |
|
|
|
|
each person known to us to be the beneficial owner of 5% or more of the outstanding shares
of our common stock. |
The information (other than with respect to our directors and executives) is based on a review
of statements filed with the SEC pursuant to Sections 13(d), 13(f) and 13(g) of the Exchange Act
with respect to our Common Stock.
154
The amounts and percentages of Common Stock beneficially owned are reported on the basis of
regulations of the SEC governing the determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a beneficial owner of a security if that person has or
shares voting power, which includes the power to vote or to direct the voting of such security,
or investment power, which includes the power to dispose of or direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of which that person
has a right to acquire beneficial ownership within 60 days. All persons listed have sole voting and
investment power with respect to their shares unless otherwise indicated.
|
|
|
|
|
|
|
|
|
|
|
Common Stock Beneficially |
|
|
|
Owned(1) |
|
Name |
|
Number |
|
|
Percent of Class |
|
Executive Officers and Directors: |
|
|
|
|
|
|
|
|
Paul H. Sunu(2) |
|
|
151,250 |
|
|
|
0.6 |
% |
Ajay Sabherwal(3) |
|
|
44,500 |
|
|
|
0.2 |
% |
Peter G. Nixon(4) |
|
|
35,250 |
|
|
|
0.1 |
% |
Shirley J. Linn(5) |
|
|
35,250 |
|
|
|
0.1 |
% |
Lisa R. Hood(6) |
|
|
9,425 |
|
|
|
* |
|
Todd W. Arden |
|
|
|
|
|
|
* |
|
Dennis J. Austin(7) |
|
|
20,083 |
|
|
|
* |
|
Edward D. Horowitz(8) |
|
|
20,083 |
|
|
|
* |
|
Michael J. Mahoney(9) |
|
|
20,083 |
|
|
|
* |
|
Michael K. Robinson(10) |
|
|
20,083 |
|
|
|
* |
|
David L. Treadwell(11) |
|
|
20,083 |
|
|
|
* |
|
Wayne Wilson(12) |
|
|
20,083 |
|
|
|
* |
|
All directors and executive officers of FairPoint as a group(19 persons)(13) |
|
|
546,598 |
|
|
|
2.1 |
% |
5% Stockholders: |
|
|
|
|
|
|
|
|
Angelo, Gordon & Co., L.P.(14) |
|
|
4,628,325 |
|
|
|
17.7 |
% |
Marathon Asset Management, L.P.(15) |
|
|
2,850,793 |
|
|
|
10.9 |
% |
Chatham Asset Management, LLC (16) |
|
|
1,470,003 |
|
|
|
5.6 |
% |
|
|
|
* |
|
Less than 0.1%. |
|
(1) |
|
Unless otherwise indicated below, the persons and entities named in the table have sole
voting and sole investment power with respect to all shares beneficially owned by them,
subject to community property laws where applicable. The percentage of beneficial ownership
is based on 26,197,432 shares of our common stock outstanding as of March 25, 2011. |
|
(2) |
|
With respect to shares beneficially owned: (i) includes 31,250 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days, (ii) does not include 93,750 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 120,000 shares of restricted stock. |
|
(3) |
|
With respect to shares beneficially owned: (i) includes 10,500 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 31,500 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 34,000 shares of restricted stock. |
|
(4) |
|
With respect to shares beneficially owned: (i) includes 8,250 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 24,750 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 27,000 shares of restricted stock. |
155
|
|
|
(5) |
|
With respect to shares beneficially owned: (i) includes 8,250 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 24,750 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 27,000 shares of restricted stock. |
|
(6) |
|
With respect to shares beneficially owned: (i) includes 4,625 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 13,875 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 4,800 shares of restricted stock. |
|
(7) |
|
With respect to shares beneficially owned: (i) includes 5,500 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 22,002 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 14,583 shares of restricted stock. |
|
(8) |
|
With respect to shares beneficially owned: (i) includes 5,500 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 22,002 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 14,583 shares of restricted stock. |
|
(9) |
|
With respect to shares beneficially owned: (i) includes 5,500 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 22,002 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 14,583 shares of restricted stock. |
|
(10) |
|
With respect to shares beneficially owned: (i) includes 5,500 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 22,002 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 14,583 shares of restricted stock. |
|
(11) |
|
With respect to shares beneficially owned: (i) includes 5,500 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 22,002 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 14,583 shares of restricted stock. |
|
(12) |
|
With respect to shares beneficially owned: (i) includes 5,500 shares of our common stock
issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 22,002 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 14,583 shares of restricted stock. |
|
(13) |
|
With respect to shares beneficially owned: (i) includes 138,500 shares of our common
stock issuable upon exercise of stock options that are either currently exercisable or become
exercisable during the next 60 days (ii) does not include 415,512 shares of our common stock
issuable upon exercise of stock options that are neither currently exercisable nor become
exercisable during the next 60 days and (iii) includes 408,098 shares of restricted stock. |
|
(14) |
|
Other than the information relating to its percentage ownership of our common stock,
based solely on information contained in a Schedule 13D filed with the SEC on February 3,
2011, by Angelo, Gordon & Co., L.P. (address: 245 Park Avenue, 26th Floor, New
York, NY 10167). The Angelo, Gordon & Co., L.P. Schedule 13D reported sole voting power and
sole dispositive power of 4,628,325 shares. |
156
|
|
|
(15) |
|
Other than the information relating to its percentage ownership of our common stock,
based solely on information contained in a Schedule 13G filed with the SEC on February 4,
2011, by Marathon Asset Management, L.P. (address: One Bryant Park, 38th Floor,
New York, NY 10036). The Marathon Asset Management, L.P. Schedule 13G reported sole voting
power and sole dispositive power of 4,121,444 shares, which includes 2,850,793 shares of
common stock and 1,270,651 warrants to purchase common stock at an exercise price of $48.81. |
|
(16) |
|
Other than the information relating to its percentage ownership of our common stock,
based solely on information contained in a Schedule 13G filed with the SEC on January 24,
2011, by Chatham Asset Management, LLC (address: 26 Main Street, Suite 204, Chatham, New
Jersey 07928). The Chatham Asset Management, LLC Schedule 13G reported shared voting power
and shared dispositive power of 2,850,793 shares. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Our code of business conduct and ethics, which is posted on our website at www.fairpoint.com,
prohibits directors and executive officers from engaging in transactions on behalf of us with a
family member, or with a company with which they are or their family member is a significant owner
or associated or employed in a significant role. Our audit committee must review and approve in
advance all material related party transactions or business or professional relationships. All
instances involving potential related party transactions or business or professional relationships
must be reported to our legal department which will assess the materiality of the transaction or
relationship and elevate the matter to the audit committee as appropriate. Any dealings with a
related party must be conducted in such a way as to avoid preferential treatment and assure that
the terms obtained by us are no less favorable than could be obtained from unrelated parties on an
arms-length basis. Directors and officers are not permitted to enter into, develop or continue any
such material transaction or relationship without obtaining prior approval from the audit
committee.
Director Independence
The board of directors considered transactions and relationships between each director who
served on our board in fiscal year 2010 or any member of his or her immediate family and the
Company and its subsidiaries and affiliates. Our board of directors has determined that, other than
David L. Hauser, who resigned from our board on August 24, 2010, and Paul H. Sunu, all of our
directors were independent under the criteria for independence set forth in the listing standards
of the NYSE, and accordingly were independent directors with no material relationship to the
Company other than being a director or stockholder of FairPoint. For more information about
director independence, see Item 10. Directors, Executive Officers and Corporate Governance.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees paid or payable to Ernst & Young LLP, our
independent registered public accounting firm, relating to services rendered for our fiscal years
ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended |
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Audit Fees(1) |
|
$ |
5,379,000 |
|
|
$ |
5,982,000 |
|
Audit Related Fees (2) |
|
|
66,000 |
|
|
|
42,000 |
|
Tax Fees (3) |
|
|
666,000 |
|
|
|
246,000 |
|
All Other Fees |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit Fees include amounts billed to us related to annual financial statement audit work
and quarterly financial statement reviews. These amounts also include the review of documents
filed with the SEC, accounting consultations related to the annual audit and the preparation
of letters for underwriters and other requesting parties with respect to the Merger and
related transactions and application of fresh start accounting. |
|
(2) |
|
Audit Related Fees consist of amounts billed to us related to a review of internal
controls within our revenue process. |
157
|
|
|
(3) |
|
Tax Fees consist of fees for professional services for tax consulting and compliance as
well as reviews of our 2009 and 2010 restructuring costs for tax purposes. |
Audit Committee Pre-Approval Policy
In accordance with our audit committee pre-approval policy, all audit and non-audit services
performed for us by our independent accountants were pre-approved by our audit committee.
Our audit committees pre-approval policy provides that our independent registered public
accounting firm shall not provide services that have the potential to impair or appear to impair
the independence of the audit role. The pre-approval policy requires our independent registered
public accounting firm to provide an annual engagement letter to our audit committee outlining the
scope of the audit services proposed to be performed during the fiscal year. Upon the audit
committees acceptance of and agreement with such engagement letter, the services within the scope
of the proposed audit services shall be deemed pre-approved pursuant to the policy.
The pre-approval policy provides for categorical pre-approval of specified audit and
permissible non-audit services and requires the specific pre-approval by the audit committee, prior
to engagement, of such services, other than audit services covered by the annual engagement letter.
In addition, services to be provided by our independent registered public accounting firm that are
not within the category of pre-approved services must be approved by the audit committee prior to
engagement, regardless of the service being requested or the dollar amount involved.
Requests or applications for services that require specific separate approval by the audit
committee are required to be submitted to the audit committee by both management and the
independent registered public accounting firm, and must include a detailed description of the
services to be provided and a joint statement confirming that the provision of the proposed
services does not impair the independence of the independent registered public accounting firm.
The audit committee may delegate pre-approval authority to one or more of its members. The
member or members to whom such authority is delegated shall report any pre-approval decisions to
the audit committee at its next scheduled meeting. The audit committee is prohibited from
delegating to management its responsibilities to pre-approve services to be performed by our
independent registered public accounting firm.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The financial statements filed as part of this Annual Report are listed in the index to the
financial statements under Item 8. Financial Statements and Supplementary Data in this Annual
Report, which index to the financial statements is incorporated herein by reference.
(b) Exhibits
The exhibits filed as part of this Annual Report are listed in the index to exhibits
immediately preceding such exhibits, which index to exhibits is incorporated herein by reference.
158
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
Fairpoint Communications, Inc.
|
|
Date: March 31, 2011
|
|
|
|
By: |
/s/ Paul H. Sunu
|
|
|
|
Name: |
Paul H. Sunu |
|
|
|
Title: |
Chief Executive Officer and Director |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has
been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
Signatures |
|
Title |
|
Date |
|
/s/ Paul H. Sunu
Paul H. Sunu
|
|
Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 31, 2011 |
|
|
|
|
|
/s/ Ajay Sabherwal
Ajay Sabherwal
|
|
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
|
|
March 31, 2011 |
|
|
|
|
|
/s/ John T. Hogshire
John T. Hogshire
|
|
Vice President and Controller (Principal
Accounting Officer)
|
|
March 31, 2011 |
|
|
|
|
|
/s/ Todd W. Arden
Todd W. Arden
|
|
Director
|
|
March 31, 2011 |
|
|
|
|
|
/s/ Dennis J. Austin
Dennis J. Austin
|
|
Director
|
|
March 31, 2011 |
|
|
|
|
|
/s/ Edward D. Horowitz
Edward D. Horowitz
|
|
Chairman of the Board of Directors
|
|
March 31, 2011 |
|
|
|
|
|
/s/ Michael J. Mahoney
Michael J. Mahoney
|
|
Director
|
|
March 31, 2011 |
|
|
|
|
|
/s/ Michael K. Robinson
Michael K. Robinson
|
|
Director
|
|
March 31, 2011 |
|
|
|
|
|
/s/ David L. Treadwell
David L. Treadwell
|
|
Director
|
|
March 31, 2011 |
|
|
|
|
|
/s/ Wayne Wilson
Wayne Wilson
|
|
Director
|
|
March 31, 2011 |
159
Exhibit Index
|
|
|
Exhibit No. |
|
Description |
2.1
|
|
Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code.(1) |
|
|
|
3.1
|
|
Ninth Amended and Restated Certificate of Incorporation of FairPoint.(2) |
|
|
|
3.2
|
|
Second Amended and Restated By Laws of FairPoint.(2) |
|
|
|
4.1
|
|
Warrant Agreement, dated as of January 24, 2011, by and between FairPoint and The Bank
of New York Mellon.(3) |
|
|
|
4.2
|
|
Specimen Stock Certificate.(2) |
|
|
|
4.3
|
|
Specimen Warrant Certificate.(3) |
|
|
|
10.1
|
|
Credit Agreement, dated as of January 24, 2011, by and among FairPoint, FairPoint
Logistics, Bank of America, N.A., as administrative agent, the other lenders party
thereto and Banc of America Securities LLC, as sole lead arranger and sole book
manager.(3) |
|
|
|
10.2
|
|
Pledge Agreement, dated as of January 24, 2011, made by the pledgors party thereto in
favor of Bank of America, N.A. as administrative agent, for the benefit of certain
secured parties.(3) |
|
|
|
10.3
|
|
Security Agreement, dated as of January 24, 2011, by and among FairPoint, FairPoint
Logistics, the subsidiaries of FairPoint party thereto and Bank of America, N.A., as
administrative agent.(3) |
|
|
|
10.4
|
|
Continuing Guaranty Agreement, dated as of January 24, 2011, made by and among the
guarantors party thereto in favor of Bank of America, N.A., as administrative agent, for
the benefit of certain secured parties.(3) |
|
|
|
10.5
|
|
Registration Rights Agreement, dated as of January 24, 2011, by and between FairPoint
Communications, Inc. and Angelo, Gordon & Co., L.P.(3) |
|
|
|
10.6
|
|
FairPoint Litigation Trust Agreement, dated as of January 24, 2011.(3) |
|
|
|
10.7
|
|
Form of Director Indemnity Agreement.(4) |
|
|
|
10.8
|
|
Amended and Restated Tax Sharing Agreement, dated as of November 9, 2000, by and among
FairPoint and its Subsidiaries.(5) |
|
|
|
10.9
|
|
Employment Agreement, dated as of August 16, 2010, by and between FairPoint and Paul H.
Sunu.(6) |
|
|
|
10.10
|
|
Consulting Agreement, dated as of August 16, 2010, by and between FairPoint and David L.
Hauser.(6) |
|
|
|
10.11
|
|
Change in Control and Severance Agreement, dated as of March 14, 2007, by and between
FairPoint and Peter G. Nixon.(7) |
|
|
|
10.12
|
|
Change in Control and Severance Agreement, dated as of March 14, 2007, by and between
FairPoint and Shirley J. Linn.(7) |
|
|
|
10.13
|
|
Change in Control and Severance Agreement, dated as of September 3, 2008, by and between
FairPoint and Ajay Sabherwal.(6) |
|
|
|
10.14
|
|
FairPoint Communications, Inc. 2010 Long Term Incentive Plan.(1) |
|
|
|
10.15
|
|
FairPoint Communications, Inc. 2010 Success Bonus Plan.(1) |
|
|
|
10.16
|
|
Form of Restricted Share Award AgreementFairPoint Communications, Inc. 2010 Long Term
Incentive Plan.(1) |
|
|
|
10.17
|
|
Stipulation filed with the Maine Public Utilities Commission, dated December 12, 2007.(8) |
|
|
|
10.18
|
|
Amended Stipulation filed with the Maine Public Utilities Commission dated December 21,
2007(9) |
|
|
|
10.19
|
|
Stipulation filed with the Vermont Public Service Board, dated January 8, 2008.(10) |
|
|
|
10.20
|
|
Stipulation filed with the New Hampshire Public Utilities Commission, dated January 23,
2008.(11) |
|
|
|
10.21
|
|
Letter Agreement, dated as of March 30, 2008, by and between the Staff of the New
Hampshire Public Utilities Commission and Verizon Communications Inc.(9) |
|
|
|
10.22
|
|
Letter, dated as of May 12, 2009, from the Staff of the New Hampshire Public Utilities
Commission to FairPoint.(12) |
160
|
|
|
Exhibit No. |
|
Description |
10.23
|
|
Post Filing Regulatory SettlementNew Hampshire, dated as of February 5, 2010, by and
between FairPoint and New Hampshire Public Utilities Commission Staff Advocates.(1) |
|
|
|
10.25
|
|
Post Filing Regulatory SettlementMaine, dated as of February 9, 2010, by and among
FairPoint, Maine Public Utilities Commission and Maine Office of the Public Advocate.(1) |
|
|
|
10.25
|
|
Post Filing Regulatory SettlementVermont, dated as of February 5, 2010, by and between
FairPoint and Vermont Department of Public Service.(1) |
|
|
|
11
|
|
Statement Regarding Computation of Per Share Earnings (included in the financial
statements contained in this Annual Report). |
|
|
|
14.1
|
|
FairPoint Code of Business Conduct and Ethics.* |
|
|
|
14.2
|
|
FairPoint Code of Ethics for Financial Professionals.(13) |
|
|
|
21
|
|
Subsidiaries of FairPoint.* |
|
|
|
23.1
|
|
Consent of Independent
Registered Public Accounting Firm.* |
|
|
|
31.1
|
|
Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
|
|
|
31.2
|
|
Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
|
|
|
32.1
|
|
Certification required by 18 United States Code Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.* |
|
|
|
32.2
|
|
Certification required by 18 United States Code Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.* |
|
|
|
99.1
|
|
Order Confirming Debtors Third Amended Joint Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code, dated as of December 29, 2010.(1) |
|
|
|
99.2
|
|
Order of the Maine Public Utilities Commission, dated February 1, 2008.(14) |
|
|
|
99.3
|
|
Order of the Vermont Public Service Board, dated February 15, 2008.(15) |
|
|
|
99.4
|
|
Order of the New Hampshire Public Utilities Commission, dated February 25, 2008.(16) |
|
|
|
99.5
|
|
FairPoint Insider Trading Policy.* |
|
|
|
* |
|
Filed herewith. |
|
|
|
Indicates a management contract or compensatory plan or arrangement. |
|
|
|
Pursuant to SEC Release No. 33-8238, this certification will be treated as accompanying this
Annual Report on Form 10-K and not filed as part of such report for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this
certification will not be deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference. |
|
(1) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on January 14,
2011. |
|
(2) |
|
Incorporated by reference to the Registration Statement on Form 8-A of FairPoint filed on
January 24, 2011. |
|
(3) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on January 25,
2011, Film Number 11544980. |
|
(4) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on January 25,
2011, Film Number 11544991. |
|
(5) |
|
Incorporated by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended
September 30, 2000. |
|
(6) |
|
Incorporated by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended
September 30, 2010. |
|
(7) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on March 19,
2007. |
|
(8) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on December 13,
2007. |
|
(9) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on April 3, 2008. |
|
(10) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on January 8,
2008. |
161
|
|
|
(11) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on January 24,
2008. |
|
(12) |
|
Incorporated by reference to the Quarterly Report on Form 10-Q of FairPoint for the period
ended June 30, 2009. |
|
(13) |
|
Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended
December 31, 2004. |
|
(14) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on February 6,
2008. |
|
(15) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on February 21,
2008. |
|
(16) |
|
Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on February 25,
2008. |
162