Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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;

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;

future performance generally and our share price as a result thereof;

restrictions imposed by the agreements governing our indebtedness;

our ability to satisfy certain financial covenants included in the agreements governing our indebtedness;

financing sources and availability, and future interest expense;

our ability to refinance our indebtedness on commercially reasonable terms, if at all;

anticipated business development activities and future capital expenditures;

the effects of regulation, including restrictions and obligations imposed by federal and state regulators as a condition to the approval of the Merger (as defined herein) and the Plan (as defined herein);

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;

material technological developments and changes in the communications industry, including disruption of our third party suppliers’ provisioning of critical products or services;

the effects of competition on the markets we serve;

use by customers of alternative technologies and the loss of access lines;

availability and levels of regulatory support payments;

availability of net operating loss (“NOL”) carryforwards to offset anticipated tax liabilities;

our ability to meet obligations to our Company-sponsored pension plans and post-retirement healthcare plans; and

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.

Current assets:

Cash

Restricted cash

Accounts receivable, net

Materials and supplies

Prepaid expenses

Other current assets

Deferred income tax, net

 

 

Property, plant and equipment, net

Goodwill

Intangibles assets, net

Prepaid pension asset

Debt issue costs, net

Restricted cash

Other assets

 

 

 

Liabilities not subject to compromise:

Current portion of long-term debt

Current portion of capital lease obligations

Accounts payable

Claims payable and estimated claims accrual

Accrued interest payable

Other accrued liabilities

 

 

 

Capital lease obligations

Accrued pension obligation

Employee benefit obligations

Deferred income taxes

Unamortized investment tax credits

Other long-term liabilities

Long-term debt, net of current portion

 

 

 

 

Liabilities subject to compromise

 

 

 

 

Stockholders’ equity (deficit):

Predecessor Company common stock, $0.01 par value, 200,000,000 shares authorized, issued and outstanding 89,440,334 shares at December 31, 2010

Additional paid-in-capital, Predecessor Company

Successor Company common stock, $0.01 par value, 37,500,000 shares authorized, issued and outstanding 26,197,432 shares at March 31, 2011

Additional paid-in capital, Successor Company

Retained deficit

Accumulated other comprehensive loss

 

 

 

 

 

Operating expenses:

Cost of services and sales, excluding depreciation and amortization

Selling, general and administrative expense, excluding depreciation and amortization

Depreciation and amortization

Reorganization related expense

 

 

 

Other income (expense):

Interest expense

Other

 

Total other expense

 

Reorganization items

 

Income tax benefit (expense)

 

 

 

Weighted average shares outstanding:

Basic

 

Diluted

 

 

(Loss) earnings per share:

Basic

 

Diluted

 

 

Net income

Stock based compensation expense

Employee benefit adjustment to comprehensive income

Cancellation of Predecessor Company Common Stock

Elimination of Predecessor Company accumulated other comprehensive loss

Issuance of Successor Company Common Stock

Issuance of Successor Company warrants

 

 

Net loss

Issuance of Successor Company Common Stock

Stock based compensation expense

 

 

 

 

Other comprehensive income, net of taxes:

Defined benefit pension and post-retirement plans (net of $0, $0.5 million and $1.0 million tax expense, respectively)

 

 

 

 

Cash flows from operating activities:

Net (loss) income

 

Adjustments to reconcile net income to net cash provided by operating activities:

Deferred income taxes

Provision for uncollectible revenue

Depreciation and amortization

Post-retirement accruals

Pension accruals

Other non cash items

Changes in assets and liabilities arising from operations:

Accounts receivable

Prepaid and other assets

Accounts payable and accrued liabilities

Accrued interest payable

Other assets and liabilities, net

Reorganization adjustments:

Non-cash reorganization costs (income)

Claims payable and estimated claims accrual

Restricted cash - cash claims reserve

 

Total adjustments

 

Net cash provided by (used in) operating activities

 

Cash flows from investing activities:

Net capital additions

Distributions from investments

 

Net cash used in investing activities

 

Cash flows from financing activities:

Loan origination costs

Proceeds from issuance of long-term debt

Restricted cash

Repayment of capital lease obligations

 

Net cash (used in) provided by financing activities

 

Net change

Cash, beginning of period

 

Cash, end of period

 

 

Supplemental disclosure of cash flow information:

Capital additions included in accounts payable, claims payable and estimated claims accrual or liabilities subject to compromise at period-end

Reorganization costs paid

     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, voice, 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 March 31, 2011.

     On October 26, 2009 (the “Petition Date”), 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 Company’s Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as 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.

     Upon the Effective Date, the Company adopted fresh start accounting in accordance with guidance under the applicable reorganization accounting rules, pursuant to which the Company’s 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 has been reflected as goodwill, which is subject to periodic evaluation for impairment. In addition to fresh start accounting, the Company’s future consolidated financial statements will reflect all effects of the transactions contemplated by the Plan. Accordingly, the Company’s future condensed consolidated statements of financial position and condensed consolidated statements of operations will not be comparable in many respects to the Company’s condensed consolidated statements of financial position and condensed consolidated statements of operations for periods prior to the adoption of fresh start accounting and prior to accounting for the effects of the reorganization. See note 3 for a presentation of the impact of emergence from reorganization and fresh start accounting on the Company’s financial position.

     On the Petition Date, the Debtors filed the Chapter 11 Cases.

     On January 13, 2011, the Bankruptcy Court entered into 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 Plan.

      On the Effective Date, the Company substantially consummated its reorganization through a series of transactions contemplated by the Plan, and the Plan became effective pursuant to its terms.

      General

      The Plan provided for the cancellation and extinguishment on the Effective Date of all of the Company’s equity interests outstanding on or prior to the Effective Date, including but not limited to all outstanding shares of the Company’s 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:

(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 the Company arising under the Pre-Petition Credit Facility or ancillary agreements (including swap agreements) (collectively, the “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”);

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 (the “Warrants”) issued by the Company in connection with a Warrant Agreement (the “Warrant Agreement”) that the Company entered into with The Bank of New York Mellon, as warrant agent, on the Effective Date; and

Holders of allowed unsecured claims against the Company’s subsidiaries and holders of certain unsecured convenience claims against the Company to receive payment in full in cash in the amount of their allowed claims.

      In addition, the Plan also provided for:

Certain of the Company’s employees and a consultant to receive (a) cash bonuses made pursuant to the FairPoint 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

Members of the Company’s board 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:

Except as otherwise provided in the Plan, all existing claims against, and equity interests in, the Company that arose prior to the Effective Date were released, terminated, extinguished and discharged;

In consideration of the services of the Released Parties (as defined in the Plan), the Company and all persons who held, or may have held, claims against, or equity interests in, the Company prior to the Effective Date released the Released Parties (as defined in the Plan) from claims, causes of action and liabilities related to the Company;

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

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.

      On the Effective Date, in accordance with the Plan, the Company terminated, among others, the following material agreements:

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;

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 the Company 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

The 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 (as defined herein), and all notes, security agreements and other agreements related to the DIP 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, and the Exit Term Loan (collectively, the “Exit Credit Agreement Loans”). On the Effective Date, the Company 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 America’s 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, the Company is 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, the Company 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, the Company 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 the Company’s 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 therefore 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 FairPoint Communications 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 Company 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. As of March 31, 2011, the Company had no subordinate 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.

     Pursuant to the Plan, on the Effective Date, the Company filed with the Secretary of State of the State of Delaware the Ninth Amended and Restated Certificate of Incorporation of FairPoint Communications and adopted the Second Amended and Restated By-laws (the “By-laws”).

     Pursuant to the Plan, as of the Effective Date, the following directors ceased to serve on the Company’s 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 New Board and Mr. Horowitz was appointed to serve as chair of the New Board. Paul H. Sunu, the Company’s Chief Executive Officer, became a director of the Company effective as of August 24, 2010 and continues 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.

     On the Effective Date, the Company 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.

     On the Effective Date, the Company entered into the Warrant Agreement with the Bank of New York Mellon, as Warrant Agent. Pursuant to the Warrant Agreement, the Company 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.

     On the Effective Date, the Company 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, as amended (the “Merger Agreement”). Pursuant to the Plan, the Company 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, the Company 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 the Company following the Effective Date; provided, that (i) any such additional funding will be subject to the approval of the New Board in its sole discretion, (ii) after giving effect to such additional funding, the Company’s 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. As of March 31, 2011, the money in the Litigation Trust bank account has not been distributed and is included in Restricted Cash on the condensed consolidated balance sheet.

     As contemplated by the Plan, on the Effective Date, the Company was deemed to have adopted the Long Term Incentive Plan and the Success Bonus Plan.

     On the Effective Date, in accordance with the Plan, (i) certain of the Company’s employees and a consultant of the Company 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 the Company’s 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 the Company’s employees, a consultant of the Company, 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 the Company, with 120,000 restricted shares issued to the Company’s Chief Executive Officer, 34,000 restricted shares issued to the Company’s Chief Financial Officer, 161,800 restricted shares issued to other members of the Company’s senior management and 66,794 unrestricted shares issued to David L. Hauser, the Company’s former Chief Executive Officer, who was a consultant through the Effective Date, (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 the Company’s Chief Executive Officer, 42,000 options to purchase New Common Stock granted to the Company’s Chief Financial Officer and 236,500 options to purchase New Common Stock granted to other members of the Company’s 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 holder’s 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 holder’s employment after the first year after the Effective Date) or due to the award holder’s 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. Hauser’s shares were 100% vested on the Effective Date.

     In connection with the Chapter 11 Cases, the Company 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”). The Company agreed to regulatory settlements with the representatives for each of Maine, New Hampshire and Vermont regarding modification of each state’s Merger Order (each a “Regulatory Settlement,” and collectively, the “Regulatory Settlements”) which have since been approved by the regulatory authorities in these states.

     In connection with the Chapter 11 Cases, regardless of the Effective Date having occurred, the Company is 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, The Company believes 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 the Company with the SEC.

     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 the Company or its 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 the Company, 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.

     The Company’s NOLs will be substantially reduced by the recognition of gains on the discharge of certain debt pursuant to the Plan. Further, the Company’s 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. The Company plans 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 case is 4.10%, multiplied by the lesser of (i) the value of the Company’s stock immediately after, rather than immediately before, the ownership change, and (ii) the value of the Company’s 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.

     In its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Annual Report”), the Company restated its unaudited condensed consolidated financial statements for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010.

     The Company’s previously filed Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (the “March 31, 2010 Quarterly Report”), which was impacted by the restatement, was not amended. Accordingly, the Company cautions you that certain information contained in the March 31, 2010 Quarterly Report should no longer be relied upon, including the Company’s previously issued and filed March 31, 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 March 31, 2010 interim consolidated financial statements and which were filed or otherwise released prior to the filing of the 2010 Annual Report with the SEC, should no longer be relied upon. All financial information in this Quarterly Report for the quarter ended March 31, 2010 affected by the restatement adjustments reflect such financial information as restated.

The restated March 31, 2010 interim consolidated financial statements were corrected for the following errors:

     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 the restatement of the March 31, 2010 interim consolidated financial statements, 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 were material when aggregated with the two 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 aggregate impact of these adjustments resulted in an increase to the Company’s previously reported pre-tax loss for the three month period ended March 31, 2010 of approximately $10.7 million, which is mainly attributable to a reduction to reported revenues of approximately $3.6 million and an increase to the Company’s previously reported operating expenses of approximately $7.2 million. The aggregate impact of the adjustments for the three months ended March 31, 2010 resulted in an increase in net loss of approximately $10.7 million, net of taxes, and a decrease in the Company’s reported capital expenditures of approximately $4.7 million.

     The Company expects that these adjustments will not have a material impact on the Company’s overall liquidity in the future.

     The Reorganizations Topic of 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 condensed consolidated financial statements have been prepared in accordance with the Reorganizations Topic of the ASC through the Effective Date. All pre-petition liabilities subject to compromise have been segregated in the condensed 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 Company’s condensed consolidated statements of operations for the twenty-four days ended January 24, 2011 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.

Professional fees (a)

Success bonus (b)

Non-cash allowed claim adjustments (c)

Cancellation of debt income (d)

Goodwill adjustment (e)

Intangible assets adjustment (e)

Property, plant and equipment adjustment (e)

Pension and post-retirement healthcare
adjustment (e)

Other assets and liabilities adjustment (e)

Tax account adjustments (e)

Other (f)

 

 

Senior secured credit facility

Senior Notes

Interest rate swap

Accrued interest

Accounts payable

Other accrued liabilities

Other long-term liabilities

 

Liabilities subject to compromise

 

 

Current assets:

Cash

Restricted cash

Accounts receivable, net

Materials and supplies

Prepaid expenses

Other current assets

Deferred income tax, net

 

 

Property, plant, and equipment net

Goodwill

Intangible assets, net

Prepaid pension asset

Debt issue costs, net

Restricted cash

Other assets

 

 

 

Liabilities not subject to compromise:

Current portion of long-term debt

Current portion of capital lease obligations

Accounts payable

Claims payable and estimated claims accrual

Other accrued liabilities

 

 

 

Capital lease obligations

Accrued pension obligation

Employee benefit obligations

Deferred income taxes

Unamortized investment tax credits

Other long-term liabilities

Long-term debt, net of current portion

 

 

 

Liabilities subject to compromise

 

 

 

 

Stockholders’ equity (deficit):

Predecessor Company common stock

Additional paid-in capital, Predecessor Company

Successor Company common stock

Additional paid-in capital, Successor Company

Retained deficit

Accumulated other comprehensive loss

 

 

 

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 Stock and warrants to purchase New Common Stock, designation of restricted cash to satisfy allowed claims and the cancellation of predecessor Old Common Stock resulting in a pre-tax gain of approximately $1,351.0 million on extinguishment of obligations pursuant to the Plan and the related tax effects. The following reflects the calculation of the pre-tax gain (in thousands, unaudited):

Liabilities subject to compromise

Less: Transfer to claims reserve

 

Remaining liabilities subject to compromise

Less: Issuance of debt and equity

New long-term debt

Successor common stock (at par value)

Successor additional paid-in capital

Successor warrants

 

 

Represents the adjustments of assets and liabilities to fair value or other measurement in conjunction with adoption of fresh start accounting.

Records the Claims Reserve and the Cash Claims Reserve restricted for satisfaction of the reserve. The following reflects the components of the Claims Reserve (in thousands, unaudited):

Liabilities subject to compromise to be satisfied in cash

Professional and restructuring fees

Other

 

 

Less: Professional and restructuring fee payments

 

 

The decrease in cash of $91.4 million at emergence is comprised of a reclassification of $82.8 million of operating cash to the Cash Claims Reserve within restricted cash to satisfy the Claims Reserve, $1.5 million of fees paid relating to debt financing and cash payments of $7.1 million for professional and restructuring fees. Tax claims were included in the Claims Reserve but were not included in the Cash Claims Reserve, because it was not required.

Records the issuance of senior secured debt and related debt financing. Debt issuance costs of $2.4 million ($1.5 million paid in cash on the Effective Date) related to the Exit Credit agreement loans are recorded in Debt issue costs, net and will be amortized over the terms of the respective agreements.

Pre-tax gain from cancellation and satisfaction of
predecessor debt

Income tax impact

Other

 

 

 

Cancellation of predecessor common stock and additional
paid-in capital

 

 

 

Reflects the fair values of property, plant and equipment in connection with fresh start accounting. Fair value estimates were based on the following valuation methods:

Land was valued using a combination of the market approach, which was primarily based on pertinent local sales and listings data, and the indirect cost approach, in which market trending indices were applied to the historical capital cost.

Other real property such as buildings, building improvements and leasehold improvements were valued using either: 1) current market cost to construct improvements where information regarding size, age, construction type, etc. was available and 2) current market trending indices applied to historical capital costs where such detailed information was not available.

Network assets (including central office and outside communications plant equipment) were valued using a combination of the direct replacement cost approach to value outside communications plant assets and an indirect cost approach in which current market trending indices were applied to the historical capital cost.

Other personal property such as furniture, fixtures and other equipment were valued using a combination of a “percent of cost” market approach and an indirect cost approach based on replacement costs and current market trending indices.

The indices utilized are selected from industry accepted and published cost indices including the Bureau of Labor Statistics, Marshall Valuation Service, Consumer Price Indices, NACREIF Property Index and AUS Telephone Plant Index.

Reflects the fair value of identifiable intangible assets in connection with fresh start accounting. The Company recognized a $99.0 million customer list intangible asset, a $58.0 million trade name intangible asset related to the FairPoint Communications trade name and a $0.4 million favorable leasehold agreement intangible asset.

The customer list asset was valued based on a cost method which utilized average cost to acquire a new line multiplied by the number of existing lines within the FairPoint network.

The trade name was valued based on the relief-from-royalty method which utilized projected revenue (excluding wholesale revenue), the royalty rate that would be charged by an asset licensor to an unrelated licensee, and a discount rate.

An adjustment of $22.1 million (net) was recorded to measure the pension and other postretirement employee benefit obligations as of the Effective Date. This adjustment primarily reflects the change in the weighted average discount rate

applied to projected benefit obligations from the prior measurement date to the Effective Date. The discount rates applied to projected obligations changed as follows:

Pension Discount Rate – Management

Pension Discount Rate – Associate

Post-retirement Healthcare Discount
Rate – Management

Post-retirement Healthcare Discount
Rate – Associate

Reconciliation of enterprise value to the reorganization value of FairPoint assets, determination of goodwill and reconciliation of reorganization value of FairPoint assets to the Successor Company equity (in thousands, unaudited):

Plus: Non-debt liabilities

 

Fair value of FairPoint assets (excluding goodwill)

 

 

 

Reorganization Value of FairPoint Assets

Less: Non-debt liabilities

Debt

 

 

Reflects the re-measurement of the Company’s deferred tax assets and liabilities, unrecognized tax benefits and other tax related accounts as a result of implementing the plan of reorganization and fresh start accounting in accordance with accounting guidance.

Reflects the adjustment of assets and liabilities to fair value or other measurement as specified in accounting guidance related to business combinations as follows (in thousands, unaudited):

Elimination of predecessor goodwill

Elimination of predecessor intangible assets

Property, plant and equipment adjustment

Successor unfavorable agreement liabilities

Successor intangible assets

Successor goodwill

Pension and post-retirement health actuarial gain

Income tax impact

Other adjustments

 

Elimination of accumulated other comprehensive loss

 

 

In conjunction with fresh start accounting, management of the Successor Company has changed its accounting policy to classify certain items relating to future use in capital projects with property, plant and equipment. As a result of this change in policy, management reclassified $24.1 million from materials and supplies and $3.3 million from other long-term assets to property, plant and equipment.

Buildings

Central office equipment

Outside communications plant

Copper cable

Fiber cable

Poles and conduit

Furniture, vehicles and other

Gross carrying amount

Less accumulated amortization

 

Net customer lists

 

 

Gross carrying amount

 

 

Gross carrying amount

Less accumulated amortization