##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011.
 OR
 o
    
    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.
  Delaware
    
    13-3725229(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)521 East Morehead Street, Suite 500Charlotte, North Carolina
    
    28202(Address of Principal Executive Offices)
    
    (Zip Code)
 (704) 344-8150
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
 þ o
  None
 
 *
    
    The registrant is not currently required to submit electronically and post Interactive Data
Files in accordance with Rule 405 of Regulation S-T.




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##### 



INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2011 (Successor Company)
(Unaudited) and December 31, 2010 (Predecessor Company)
    
    
    5Condensed Consolidated Statements of Operations for the sixty-six days ended March
31, 2011 (Successor Company), the twenty-four days ended January 24, 2011
(Predecessor Company) and the three months ended March 31, 2010 (Predecessor
Company) (Unaudited)
    
    
    6Condensed Consolidated Statement of Stockholders Equity (Deficit) for the sixty-six
days ended March 31, 2011 (Successor Company) and the twenty-four days ended January
24, 2011 (Predecessor Company) (Unaudited)
    
    
    7Condensed Consolidated Statements of Comprehensive (Loss) Income for the sixty-six
days ended March 31, 2011 (Successor Company), the twenty-four days ended January
24, 2011 (Predecessor Company) and the three months ended March 31, 2010
(Predecessor Company) (Unaudited)
    
    
    8Condensed Consolidated Statements of Cash Flows for the sixty-six days ended March
31, 2011 (Successor Company), the twenty-four days ended January 24, 2011
(Predecessor Company) and the three months ended March 31, 2010 (Predecessor
Company) (Unaudited)
    
    
    9Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    43Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    56Item 4.
    
    Controls and Procedures
    
    
    58PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    60Item 1A.
    
    Risk Factors
    
    
    60Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    60Item 3.
    
    Defaults Upon Senior Securities
    
    
    60Item 4.
    
    (Removed and Reserved)
    
    
    60Item 5.
    
    Other Information
    
    
    60Item 6.
    
    Exhibits
    
    
    60Signatures
    
    
    61EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I
 CAUTIONARY NOTE REGARDING FORWARD-LOOKING 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.
  3




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Except as otherwise required by the context, references in this Quarterly Report 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.
 4




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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 March 31, 2011 and December 31, 2010
 (in thousands, except share data)
 Successor Company
    
    
    
    Predecessor CompanyMarch 31,
    
    
    
    December 31,2011
    
    
    
    2010(unaudited)AssetsCurrent assets:Cash
    $
    
    15,416
    
    
    $
    
    105,497Restricted cash
    
    
    60,542
    
    
    
    
    2,420Accounts receivable, net
    
    
    113,322
    
    
    
    
    125,170Materials and supplies
    
    
    1,024
    
    
    
    
    22,193Prepaid expenses
    
    
    17,231
    
    
    
    
    18,841Other current assets
    
    
    1,223
    
    
    
    
    6,092Deferred income tax, net
    
    
    33,972
    
    
    
    
    31,400Total current assets
    
    
    242,730
    
    
    
    
    311,613Property, plant and equipment, net
    
    
    1,792,944
    
    
    
    
    1,859,700Goodwill
    
    
    255,967
    
    
    
    
    595,120Intangibles assets, net
    
    
    155,091
    
    
    
    
    189,247Prepaid pension asset
    
    
    3,620
    
    
    
    
    2,960Debt issue costs, net
    
    
    2,256
    
    
    
    
    119Restricted cash
    
    
    1,619
    
    
    
    
    1,678Other assets
    
    
    9,342
    
    
    
    
    13,357Total assets
    $
    
    2,463,569
    
    
    $
    
    2,973,794Liabilities and Stockholders Equity (Deficit)Liabilities not subject to compromise:Current portion of long-term debt
    $
    
    2,500
    
    
    $
    
    Current portion of capital lease obligations
    
    
    1,235
    
    
    
    
    1,321Accounts payable
    
    
    70,028
    
    
    
    
    66,557Claims payable and estimated claims accrual
    
    
    67,807
    
    
    
    
    Accrued interest payable
    
    
    181
    
    
    
    
    3Other accrued liabilities
    
    
    63,394
    
    
    
    
    63,279Total current liabilities
    
    
    205,145
    
    
    
    
    131,160Capital lease obligations
    
    
    3,617
    
    
    
    
    3,943Accrued pension obligation
    
    
    87,465
    
    
    
    
    92,246Employee benefit obligations
    
    
    337,997
    
    
    
    
    344,463Deferred income taxes
    
    
    334,700
    
    
    
    
    67,381Unamortized investment tax credits
    
    
    
    
    
    
    
    4,310Other long-term liabilities
    
    
    22,295
    
    
    
    
    12,398Long-term debt, net of current portion
    
    
    997,500
    
    
    
    
    Total long-term liabilities
    
    
    1,783,574
    
    
    
    
    524,741Total liabilities not subject to compromise
    
    
    1,988,719
    
    
    
    
    655,901Liabilities subject to compromise
    
    
    
    
    
    
    
    2,905,311Total liabilities
    
    
    1,988,719
    
    
    
    
    3,561,212Stockholders 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
    
    
    
    
    
    
    
    894Additional paid-in-capital, Predecessor Company
    
    
    
    
    
    
    
    725,786Successor Company common stock, $0.01 par value, 37,500,000 shares
authorized, issued and outstanding 26,197,432 shares at
March 31, 2011
    
    
    262
    
    
    
    
    Additional paid-in capital, Successor Company
    
    
    499,011
    
    
    
    
    Retained deficit
    
    
    (24,423
    )
    
    
    
    (1,101,294
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    
    (212,804
    )Total stockholders equity (deficit)
    
    
    474,850
    
    
    
    
    (587,418
    )Total liabilities and stockholders equity (deficit)
    $
    
    2,463,569
    
    
    $
    
    2,973,794
  5




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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
 Sixty-Six Days ended March 31, 2011, Twenty-Four Days ended January 24, 2011
 and Three Months ended March 31, 2010
 (Unaudited)
 (in thousands, except per share data)
 Successor Company
    
    
    Predecessor CompanySixty-Six
    
    
    Twenty-Four
    
    Three MonthsDays Ended
    
    
    Days Ended
    
    EndedMarch 31, 2011
    
    
    January 24, 2011
    
    March 31, 2010(Restated)Revenues
    $
    
    188,402
    
    
    $
    
    66,378
    
    $
    
    270,801Operating expenses:Cost of services and sales, excluding depreciation
and amortization
    
    
    87,173
    
    
    
    
    38,766
    
    
    
    137,469Selling, general and administrative expense, excluding
depreciation and amortization
    
    
    63,482
    
    
    
    
    27,161
    
    
    
    93,584Depreciation and amortization
    
    
    62,779
    
    
    
    
    21,515
    
    
    
    71,382Reorganization related expense
    
    
    2,736
    
    
    
    
    -
    
    
    
    -Total operating expenses
    
    
    216,170
    
    
    
    
    87,442
    
    
    
    302,435Loss from operations
    
    
    (27,768)

    
    
    
    (21,064)

    
    
    (31,634)Other income (expense):Interest expense
    
    
    (12,491)

    
    
    
    (9,321)

    
    
    (34,630)Other
    
    
    481
    
    
    
    
    (132)

    
    
    26Total other expense
    
    
    (12,010)

    
    
    
    (9,453)

    
    
    (34,604)Loss before reorganization items and income taxes
    
    
    (39,778)

    
    
    
    (30,517)

    
    
    (66,238)Reorganization items
    
    
    
    
    
    
    
    897,313
    
    
    
    (16,591)(Loss) income before income taxes
    
    
    (39,778)

    
    
    
    866,796
    
    
    
    (82,829)Income tax benefit (expense)
    
    
    15,355
    
    
    
    
    (279,889)

    
    
    (3,501)Net (loss) income
    $
    
    (24,423)

    
    $
    
    586,907
    
    $
    
    (86,330)Weighted average shares outstanding:Basic
    
    
    25,633
    
    
    
    
    89,424
    
    
    
    89,424Diluted
    
    
    25,633
    
    
    
    
    89,695
    
    
    
    89,424(Loss) earnings per share:Basic
    $
    
    (0.95)

    
    $
    
    6.56
    
    $
    
    (0.97)Diluted
    $
    
    (0.95)

    
    $
    
    6.54
    
    $
    
    (0.97)
  6




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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statement of Stockholders (Deficit) Equity
 Sixty-Six Days ended March 31, 2011 and Twenty-Four Days ended January 24, 2011
 (Unaudited)
 (in thousands)
 AccumulatedAdditional

    
    
    
    
    
    other

    
    TotalCommon Stock

    
    paid-in

    
    Retained

    
    comprehensive

    
    stockholdersShares

    
    Amount
    

    capital
    

    deficit
    

    loss
    

    (deficit) equityBalance at December 31, 2010(Predecessor Company)
    
    
    89,440
    
    $
    
    894
    
    $
    
    725,786
    
    $
    
    (1,101,294)
    
    $
    
    (212,804)
    
    $
    
    (587,418)Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    586,907
    
    
    
    
    
    
    
    586,907Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    18Employee benefit adjustment to
comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    493
    
    
    
    493Cancellation of Predecessor Company
Common Stock
    
    
    (89,440)
    
    
    
    (894)
    
    
    
    (725,804)
    
    
    
    726,698
    
    
    
    
    
    
    
    Elimination of Predecessor Company
accumulated other
comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (212,311)
    
    
    
    212,311
    
    
    
    Issuance of Successor Company
Common Stock
    
    
    25,660
    
    
    
    257
    
    
    
    481,879
    
    
    
    
    
    
    
    
    
    
    
    482,136Issuance of Successor Company
warrants
    
    
    
    
    
    
    
    
    
    
    16,350
    
    
    
    
    
    
    
    
    
    
    
    16,350Balance at January 24, 2011(Successor Company)
    
    
    25,660
    
    $
    
    257
    
    $
    
    498,229
    
    $
    
    
    
    $
    
    
    
    $
    
    498,486Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,423)
    
    
    
    
    
    
    
    (24,423)Issuance of Successor Company
Common Stock
    
    
    537
    
    
    
    5
    
    
    
    (5)
    
    
    
    
    
    
    
    
    
    
    
    Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    787
    
    
    
    
    
    
    
    
    
    
    
    787Balance at March 31, 2011(Successor Company)
    
    
    26,197
    
    $
    
    262
    
    $
    
    499,011
    
    $
    
    (24,423)
    
    $
    
    
    
    $
    
    474,850
  7




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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Comprehensive Income (Loss)
 Sixty-Six Days ended March 31, 2011, Twenty-Four Days ended January 24, 2011 and
 Three Months ended March 31, 2010
 (Unaudited)
 (in thousands, except per share data)
 Successor Company
    
    
    Predecessor CompanySixty-Six
    
    
    Twenty-Four
    
    Three MonthsDays Ended
    
    
    Days Ended
    
    EndedMarch 31, 2011
    
    
    January 24, 2011
    
    March 31, 2010(Restated)Net (loss) income
    $
    
    (24,423)

    
    $
    
    586,907
    
    $
    
    (86,330)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)
    
    
    -
    
    
    
    
    493
    
    
    
    1,502Total other comprehensive income
    
    
    -
    
    
    
    
    493
    
    
    
    1,502Comprehensive (loss) income
    $
    
    (24,423)

    
    $
    
    587,400
    
    $
    
    (84,828)
  8




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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
 Sixty-Six Days ended March 31, 2011, Twenty-Four Days ended January 24, 2011 and
 Three months ended March 31, 2010
 (Unaudited)
 (in thousands)
 Successor Company
    
    
    Predecessor CompanySixty-Six
    
    
    Twenty-Four
    
    ThreeDays Ended
    
    
    Days Ended
    
    Months EndedMarch 31, 2011
    
    
    January 24, 2011
    
    March 31, 2010(Restated)Cash flows from operating activities:Net (loss) income
    $
    
    (24,423
    )
    
    $
    
    586,907
    
    $
    
    (86,330
    )Adjustments to reconcile net income to net cash provided by
operating activities:Deferred income taxes
    
    
    (11,996
    )
    
    
    
    276,204
    
    
    
    3,207Provision for uncollectible revenue
    
    
    2,068
    
    
    
    
    3,454
    
    
    
    8,133Depreciation and amortization
    
    
    62,779
    
    
    
    
    21,515
    
    
    
    71,382Post-retirement accruals
    
    
    5,103
    
    
    
    
    2,654
    
    
    
    8,058Pension accruals
    
    
    1,948
    
    
    
    
    986
    
    
    
    2,182Other non cash items
    
    
    (48
    )
    
    
    
    130
    
    
    
    458Changes in assets and liabilities arising from operations:Accounts receivable
    
    
    13,918
    
    
    
    
    (7,752
    )
    
    
    12,812Prepaid and other assets
    
    
    379
    
    
    
    
    (3,423
    )
    
    
    (8,517
    )Accounts payable and accrued liabilities
    
    
    1,236
    
    
    
    
    30,258
    
    
    
    33,583Accrued interest payable
    
    
    180
    
    
    
    
    9,017
    
    
    
    33,810Other assets and liabilities, net
    
    
    (1,141
    )
    
    
    
    177
    
    
    
    (5,901
    )Reorganization adjustments:Non-cash reorganization costs (income)
    
    
    (709
    )
    
    
    
    (917,358
    )
    
    
    977Claims payable and estimated claims accrual
    
    
    (26,485
    )
    
    
    
    (1,096
    )
    
    
    Restricted
cash - cash claims reserve
    
    
    23,888
    
    
    
    
    (82,764
    )
    
    
    Total adjustments
    
    
    71,120
    
    
    
    
    (667,998
    )
    
    
    160,184Net cash provided
by (used in)
operating
activities
    
    
    46,697
    
    
    
    
    (81,091
    )
    
    
    73,854Cash flows from investing activities:Net capital additions
    
    
    (41,248
    )
    
    
    
    (12,477
    )
    
    
    (40,407
    )Distributions from investments
    
    
    3
    
    
    
    
    
    
    
    
    8Net cash used in investing activities
    
    
    (41,245
    )
    
    
    
    (12,477
    )
    
    
    (40,399
    )Cash flows from financing activities:Loan origination costs
    
    
    (866
    )
    
    
    
    (1,500
    )
    
    
    (1,100
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    5,513Restricted cash
    
    
    779
    
    
    
    
    34
    
    
    
    (722
    )Repayment of capital lease obligations
    
    
    (211
    )
    
    
    
    (201
    )
    
    
    (521
    )Net cash (used in) provided by financing activities
    
    
    (298
    )
    
    
    
    (1,667
    )
    
    
    3,170Net change
    
    
    5,154
    
    
    
    
    (95,235
    )
    
    
    36,625Cash, beginning of period
    
    
    10,262
    
    
    
    
    105,497
    
    
    
    109,355Cash, end of period
    $
    
    15,416
    
    
    $
    
    10,262
    
    $
    
    145,980Supplemental 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
    
    
    2,418
    
    
    
    
    1,818
    
    
    
    32,687Reorganization costs paid
    
    
    8,064
    
    
    
    
    11,110
    
    
    
    14,381
  9




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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED
 FINANCIAL STATEMENTS (Unaudited)
 (1)
    
    Organization and Basis of Financial Reporting; Chapter 11 Cases
 Organization and Basis of Financial ReportingFairPoint 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.Financial Reporting in ReorganizationOn 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.Emergence from Chapter 11 ProceedingsOn 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.
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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.Plan of ReorganizationGeneralThe 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;
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
    
    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.
 Termination of Material AgreementsOn 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.
 Exit Credit AgreementOn 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
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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.Certificate of Incorporation and By-lawsPursuant 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).Departure and Appointment of DirectorsPursuant 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.
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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 AgreementOn 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.Warrant AgreementOn 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.Litigation Trust AgreementOn 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.
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New Long Term Incentive Plan and Success Bonus PlanAs 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.Regulatory SettlementsIn 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.Reporting RequirementsIn 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
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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.Plan InjunctionExcept 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.Impact on Net Operating Loss Carryforwards (NOLs)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.RestatementIn 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.
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The restated March 31, 2010 interim consolidated financial statements were corrected for the
following errors:Costs Capitalized to Property, Plant and Equipment AdjustmentDue 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 AdjustmentAn 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 AdjustmentsIn 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.
 (2)
    
    Reorganization
 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.
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Reorganization Items
  Predecessor CompanyTwenty-Four
    
    
    Three MonthsDays Ended
    
    
    EndedJanuary 24, 2011

    
    March 31, 2010(Restated)Professional fees (a)
    
    $
    (13,965)
    
    
    $
    (14,739)Success bonus (b)
    
    
    
    
    
    
    (875)Non-cash allowed claim adjustments (c)
    
    
    
    
    
    
    (977)Cancellation of debt income (d)
    
    
    1,351,057
    
    
    
    Goodwill adjustment (e)
    
    
    (339,153)
    
    
    
    Intangible assets adjustment (e)
    
    
    (30,381)
    
    
    
    Property, plant and equipment adjustment (e)
    
    
    (69,036)
    
    
    
    Pension and post-retirement healthcare
adjustment (e)
    
    
    22,076
    
    
    
    Other assets and liabilities adjustment (e)
    
    
    (16,037)
    
    
    
    Tax account adjustments (e)
    
    
    4,313
    
    
    
    Other (f)
    
    
    (11,561)
    
    
    
    Total reorganization items
    
    $
    897,313
    
    
    $
    (16,591)
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Liabilities Subject to Compromise
   Predecessor CompanyDecember 31, 2010Senior secured credit facility
    
    $
    1,970,963Senior Notes
    
    
    549,996Interest rate swap
    
    
    98,833Accrued interest
    
    
    211,550Accounts payable
    
    
    57,640Other accrued liabilities
    
    
    16,129Other long-term liabilities
    
    
    200Liabilities subject to compromise
    
    $
    2,905,311
  Magnitude of Potential Claims
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(3)
    
    Fresh Start Accounting
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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Reorganized Condensed Consolidated Balance Sheet
As of January 24, 2011
(Unaudited)
(in thousands, except share data)
 Predecessor
    

    Reorganization

    
    
    
    Fresh StartCompany

    
    Adjustments (a)

    
    
    
    Adjustments (b)
    
    
    
    
    Successor CompanyAssetsCurrent assets:Cash
    
    $
    101,703
    
    
    
    (91,441)
    
    
    (c)
    
    
    
    
    
    
    
    $
    10,262Restricted cash
    
    
    2,386
    
    
    
    82,764
    
    
    (c)
    
    
    
    
    
    
    
    
    85,150Accounts receivable, net
    
    
    129,308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,308Materials and supplies
    
    
    24,776
    
    
    
    
    
    
    
    
    
    (24,098)
    
    
    (l)
    
    
    678Prepaid expenses
    
    
    17,152
    
    
    
    
    
    
    
    
    
    (2,347)
    
    
    
    
    
    14,805Other current assets
    
    
    8,620
    
    
    
    
    
    
    
    
    
    (4,247)
    
    
    
    
    
    4,373Deferred income tax, net
    
    
    31,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,400Total current assets
    
    
    315,345
    
    
    
    (8,677)
    
    
    
    
    
    (30,692)
    
    
    
    
    
    275,976Property, plant, and equipment net
    
    
    1,852,508
    
    
    
    
    
    
    
    
    
    (41,616)
    
    
    (f)(l)
    
    
    1,810,892Goodwill
    
    
    595,120
    
    
    
    
    
    
    
    
    
    (339,153)
    
    
    (i)
    
    
    255,967Intangible assets, net
    
    
    187,791
    
    
    
    
    
    
    
    
    
    (30,381)
    
    
    (g)
    
    
    157,410Prepaid pension asset
    
    
    3,053
    
    
    
    
    
    
    
    
    
    363
    
    
    (h)
    
    
    3,416Debt issue costs, net
    
    
    
    
    
    
    2,366
    
    
    (d)
    
    
    
    
    
    
    
    
    2,366Restricted cash
    
    
    1,678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,678Other assets
    
    
    13,040
    
    
    
    
    
    
    
    
    
    (3,874)
    
    
    (l)
    
    
    9,166Total assets
    
    $
    2,968,535
    
    
    
    (6,311)
    
    
    
    
    
    (445,353)
    
    
    
    
    $
    2,516,871Liabilities and Stockholders Equity
(Deficit)Liabilities not subject to compromise:Current portion of long-term debt
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    Current portion of capital lease obligations
    
    
    1,233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,233Accounts payable
    
    
    98,674
    
    
    
    (23,735)
    
    
    
    
    
    
    
    
    
    
    
    74,939Claims payable and estimated claims accrual
    
    
    
    
    
    
    94,292
    
    
    (c)
    
    
    
    
    
    
    
    
    94,292Other accrued liabilities
    
    
    61,065
    
    
    
    (1,800)
    
    
    (c)
    
    
    (4,457)
    
    
    (h)
    
    
    54,808Total current liabilities
    
    
    160,972
    
    
    
    68,757
    
    
    
    
    
    (4,457)
    
    
    
    
    
    225,272Capital lease obligations
    
    
    3,831
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,831Accrued pension obligation
    
    
    93,033
    
    
    
    
    
    
    
    
    
    (7,905)
    
    
    (h)
    
    
    85,128Employee benefit obligations
    
    
    346,853
    
    
    
    
    
    
    
    
    
    (13,599)
    
    
    (h)
    
    
    333,254Deferred income taxes
    
    
    56,408
    
    
    
    331,493
    
    
    (j)
    
    
    (40,124)
    
    
    (j)
    
    
    347,777Unamortized investment tax credits
    
    
    4,313
    
    
    
    
    
    
    
    
    
    (4,313)
    
    
    (j)
    
    
    Other long-term liabilities
    
    
    12,079
    
    
    
    (2,094)
    
    
    (c)
    
    
    13,138
    
    
    
    
    
    23,123Long-term debt, net of current portion
    
    
    
    
    
    
    1,000,000
    
    
    (d)
    
    
    
    
    
    
    
    
    1,000,000Total long-term liabilities
    
    
    516,517
    
    
    
    1,329,399
    
    
    
    
    
    (52,803)
    
    
    
    
    
    1,793,113Total liabilities not subject to compromise
    
    
    677,489
    
    
    
    1,398,156
    
    
    
    
    
    (57,260)
    
    
    
    
    
    2,018,385Liabilities subject to compromise
    
    
    2,910,952
    
    
    
    (2,910,952)
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    3,588,441
    
    
    
    (1,512,796)
    
    
    
    
    
    (57,260)
    
    
    
    
    
    2,018,385Stockholders equity (deficit):Predecessor Company common stock
    
    
    894
    
    
    
    (894)
    
    
    
    
    
    
    
    
    
    
    
    Additional paid-in capital, Predecessor
Company
    
    
    725,804
    
    
    
    (725,804)
    
    
    
    
    
    
    
    
    
    
    
    Successor Company common stock
    
    
    
    
    
    
    257
    
    
    (i)
    
    
    
    
    
    
    
    
    257Additional paid-in capital, Successor
Company
    
    
    
    
    
    
    498,229
    
    
    (i)
    
    
    
    
    
    
    
    
    498,229Retained deficit
    
    
    (1,134,293)
    
    
    
    1,734,697
    
    
    (e)
    
    
    (600,404)
    
    
    (k)
    
    
    Accumulated other comprehensive loss
    
    
    (212,311)
    
    
    
    
    
    
    
    
    
    212,311
    
    
    
    
    
    Total stockholders equity (deficit)
    
    
    (619,906)
    
    
    
    1,506,485
    
    
    
    
    
    (388,093)
    
    
    
    
    
    498,486Total liabilities and stockholders equity
(deficit)
    
    $
    2,968,535
    
    
    
    (6,311)
    
    
    
    
    
    (445,353)
    
    
    
    
    $
    2,516,871
 22




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##### Table of Contents



(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 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
    
    $
    2,910,952Less: Transfer to claims reserve
    
    
    (66,893)Remaining liabilities subject to compromise
    
    
    2,844,059Less: Issuance of debt and equityNew long-term debt
    
    
    (1,000,000)Successor common stock (at par value)
    
    
    (251)Successor additional paid-in capital
    
    
    (476,403)Successor warrants
    
    
    (16,350)Pre-tax gain from cancellation and satisfaction of 
predecessor debt
    
    $
    1,351,055
 (b)
    
    Represents the adjustments of assets and liabilities to fair value or other
measurement in conjunction with adoption of fresh start accounting.(c)
    
    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
    
    $
    66,893Professional and restructuring fees
    
    
    24,601Other
    
    
    9,894Claims Reserve before emergence date payments
    
    
    101,388Less: Professional and restructuring fee payments
    
    
    (7,096)Claims Reserve at emergence
    
    $
    94,292
 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.(d)
    
    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.
 23




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##### Table of Contents



Pre-tax gain from cancellation and satisfaction of
predecessor debt
    
    $
    1,351,055Income tax impact
    
    
    (331,495)Other
    
    
    (11,561)Total impact on condensed consolidated statement of 
operations
    
    
    1,007,999Cancellation of predecessor common stock and additional 
paid-in capital
    
    
    726,698Total reorganization adjustments
    
    $
    1,734,697
 (f)
    
    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.(g)
    
    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.
 (h)
    
    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
 24




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##### Table of Contents



applied to projected benefit obligations from the prior measurement date to the
Effective Date. The discount rates applied to projected obligations changed as follows:
 January 24,

    
    December 31,2011

    
    2010Pension Discount Rate  Management
    
    
    5.22
    %
    
    
    5.07
    %Pension Discount Rate  Associate
    
    
    5.84
    %
    
    
    5.64
    %Post-retirement Healthcare Discount
Rate  Management
    
    
    5.64
    %
    
    
    5.45
    %Post-retirement Healthcare Discount 
Rate  Associate
    
    
    5.85
    %
    
    
    5.65
    %
 (i)
    
    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):
 Business Enterprise Value
    
    $
    1,498,486Plus: Non-debt liabilities
    
    
    1,018,385Reorganization Value of FairPoint Assets
    
    $
    2,516,871Fair value of FairPoint assets (excluding goodwill)
    
    
    (2,260,904)Reorganization Value in Excess of Fair Value (Goodwill)
    
    $
    255,967Reorganization Value of FairPoint Assets
    
    $
    2,516,871Less: Non-debt liabilities
    
    
    (1,018,385)Debt
    
    
    (1,000,000)New Common Stock ($257) and Additional Paid-in-

Capital ($498,229)
    
    $
    498,486
 (j)
    
    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.(k)
    
    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
    
    $
    595,120Elimination of predecessor intangible assets
    
    
    187,791Property, plant and equipment adjustment
    
    
    69,036Successor unfavorable agreement liabilities
    
    
    13,690Successor intangible assets
    
    
    (157,410)Successor goodwill
    
    
    (255,967)Pension and post-retirement health actuarial gain
    
    
    (22,076)Income tax impact
    
    
    (40,124)Other adjustments
    
    
    (1,967)Total impact on condensed consolidated statement of 
operations
    
    $
    388,093Elimination of accumulated other comprehensive loss
    
    
    212,311Total fair value adjustments and elimination of
predecessor accumulated other comprehensive loss
    
    $
    600,404
 (l)
    
    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.
 25




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##### Table of Contents



(4)
    
    Accounting Policies
  (a) Use of Estimates
   (b) Revenue Recognition
    26




---



##### Table of Contents



(c) Maintenance and Repairs
  (d) Cash and Cash Equivalents
  (e) Restricted Cash
   (f) Accounts Receivable
  27




---



##### Table of Contents



(g) Credit Risk
   (h) Materials and Supplies
   (i) Property, Plant and Equipment
     28




---



##### Table of Contents



Average LifeCategory
    
    (In Years)Buildings
    
    
    45Central office equipment
    
    
    5  11Outside communications plantCopper cable
    
    
    15  18Fiber cable
    
    
    25Poles and conduit
    
    
    30  50Furniture, vehicles and other
    
    
    3  15
  (j) Long-Lived Assets
  (k) Computer Software and Interest Costs
     (l) Debt Issue Costs
  29




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##### Table of Contents



(m) Advertising Costs
  (n) Goodwill and Other Intangible Assets
 ,
     30




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##### Table of Contents



Successor

    
    
    PredecessorCompany

    
    
    CompanyAt

    
    
    AtMarch 31,

    
    
    December 31,2011

    
    
    2010Customer lists (weighted average 9.0 years and 9.7
years for Successor Company and Predecessor Company, 
respectively):Gross carrying amount
    
    $
    99,000
    
    
    
    $
    208,504Less accumulated amortization
    
    
    (2,291)
    
    
    
    
    (62,073)Net customer lists
    
    
    96,709
    
    
    
    
    146,431Trade name (indefinite life):Gross carrying amount
    
    
    58,000
    
    
    
    
    42,816Favorable leasehold agreements (weighted average 2.7
years):Gross carrying amount
    
    
    410
    
    
    
    
    Less accumulated amortization
    
    
    (28)
    
    
    
    
    Net favorable leasehold agreements
    
    
    382
    
    
    
    
    Total intangible assets, net
    
    $
    155,091
    
    
    
    $
    189,247
    (o) Accounting for Income Taxes
  31




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##### Table of Contents



(p) Stock-based Compensation Plans
   (q) Employee Benefit Plans
  (r) Business Segments
 .
 32




---



##### Table of Contents



(s) Other Long-Term Liabilities
  (5)
    
    Recent Accounting Pronouncements
   (6)
    
    Dividends
  (7)
    
    Income Taxes
     33




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##### Table of Contents



Accounting for Contingencies,
   34




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##### Table of Contents



(8)
    
    Interest Rate Swap Agreements
     (9)
    
    Long Term Debt
  Successor
    
    
    
    PredecessorCompany



    CompanyMarch 31,

    
    
    December 31,2011

    
    
    2010Senior secured 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
    
    $
    
    
    
    
    $
    1,970,963Senior secured credit facility, variable rate of 6.50%
(weighted average rate of 6.50%) at March 31, 2011, due 2016
    
    
    1,000,000
    
    
    
    
    Senior notes, 13.125%, due 2018
    
    
    
    
    
    
    
    549,996Total outstanding long-term debt
    
    
    1,000,000
    
    
    
    
    2,520,959Less amounts subject to compromise
    
    
    
    
    
    
    
    (2,520,959
    )Total long-term debt, net of amounts subject to compromise
    
    $
    1,000,000
    
    
    
    $
    Less current portion
    
    
    (2,500
    )
    
    
    
    Total
long-term debt, net of current portion
    
    $
    997,500
    
    
    
    $
    
 35




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##### Table of Contents



Quarter ending March 31 (SuccessorCompany),2012
    
    
    $   2,5002013
    
    
    10,0002014
    
    
    13,7502015
    
    
    31,2502016
    
    
    942,500$
    1,000,000
 Exit Credit Agreement
  36




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##### Table of Contents



Debtor-in-Possession Financing
 DIP Credit Agreement
   Interest Rate and Fees.
   37




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##### Table of Contents



(10) Employee Benefit Plans
   Successor Company

    
    Predecessor CompanySixty-Six Days Ended

    
    
    Twenty-Four Days EndedMarch 31, 2011
    
    January 24, 2011Qualified

    
    Post-retirement

    
    Qualified

    
    Post-retirementPension

    
    Health

    

    Pension

    
    HealthService cost
    $
    
    2,118
    
    $
    
    2,873
    
    
    $
    
    849
    
    $
    
    1,167Interest cost
    
    
    2,437
    
    
    
    3,209
    
    
    
    
    934
    
    
    
    1,252Expected return on plan assets
    
    
    (2,422)
    
    
    
    (2)
    
    
    
    
    (1,089)
    
    
    
    (1)Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    276Amortization of actuarial (gain) loss
    
    
    
    
    
    
    
    
    
    
    
    283
    
    
    
    368Net periodic benefit cost
    $
    
    2,133
    
    $
    
    6,080
    
    
    $
    
    1,075
    
    $
    
    3,062
 Predecessor CompanyThree Months EndedMarch 31, 2010(Restated)Post-Qualified
    
    
    retirementPension
    
    
    HealthService cost
    $
    
    2,881
    
    $
    
    3,453Interest cost
    
    
    3,012
    
    
    
    3,981Expected return on plan assets
    
    
    (4,148)
    
    
    
    Amortization of prior service cost
    
    
    381
    
    
    
    1,073Amortization of actuarial (gain) loss
    
    
    279
    
    
    
    777Net periodic benefit cost
    $
    
    2,405
    
    $
    
    9,284
    38




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##### Table of Contents



(11) Accumulated Other Comprehensive Loss
  Successor

    
    PredecessorCompany
    
    CompanyMarch 31,
    
    December 31,2011
    
    2010Accumulated other comprehensive loss, net of taxes:Defined benefit pension and post-retirement plans
    $
    
    
    
    
    $
    
    (212,804)Total accumulated other comprehensive loss
    $
    
    
    
    
    $
    
    (212,804)
  (12) Earnings Per Share
  39




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##### Table of Contents



Successor Company
    
    
    Predecessor CompanySixty-Six Days
    
    
    Twenty-Four Days
    
    Three MonthsEnded
    
    
    Ended
    
    EndedMarch 31, 2011
    
    
    January 24, 2011
    
    March 31, 2010(Restated)Weighted average number of common
shares used for basic earnings per
share
    
    
    25,633
    
    
    
    
    89,424
    
    
    
    89,424Effect of potential dilutive shares
    
    
    
    
    
    
    
    271
    
    
    
    Weighted average number of common
shares and potential dilutive shares
used for diluted earnings per share
    
    
    25,633
    
    
    
    
    89,695
    
    
    
    89,424Anti-dilutive shares excluded from the
above reconciliation
    
    
    5,121
    
    
    
    
    712
    
    
    
    2,535
  (13) Stockholders Equity (Deficit)
  (14) Fair Value Measurements
 Fair
Value Measurements
   40




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##### Table of Contents



(15)  Commitments and Contingencies
 (a) Leases
  (b) Legal Proceedings
     (c) Service Quality Penalties
    41




---



##### Table of Contents



(d) Performance Assurance Plan Credits
   (e) Capital Expenditure Obligations
  42




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    Overview
      43




---



##### Table of Contents



Fresh Start Accounting
  Restatement
    Costs Capitalized to Property, Plant and Equipment Adjustment
  44




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##### Table of Contents



Application of Overhead Costs Adjustment
   Other Adjustments
   Basis of Presentation
   Revenues
  
    
    Voice services.We receive revenues from our telephone operations from the provision
of local exchange, long-distance, local private line, 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 unbundled network elements, interconnection revenues from
competitive LECs and wireless carriers, and some data transport revenues. Voice services
revenues also include Universal 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, including wireless carriers to backhaul voice and data traffic from cell towers to
mobile telephone switching offices.
 45




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##### Table of Contents



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.
    
    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.
  PredecessorSuccessor Company
    
    
    Predecessor Company
    
    Combined
    
    CompanyTwenty-Four DaysSixty-Six Days Ended
    
    
    Ended
    
    Three Months Ended
    
    Three Months EndedMarch 31, 2011
    
    
    January 24, 2011
    
    March 31, 2011
    
    March 31, 2010% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of$
    
    Revenue
    
    
    $
    
    Revenue
    
    $
    
    Revenue
    
    $
    
    RevenueRevenue Source:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Restated)Voice services
    $
    
    91,248
    
    
    
    49%
    
    
    $
    
    32,977
    
    
    
    50%
    
    $
    
    124,225
    
    
    
    49%
    
    $
    
    134,418
    
    
    
    50%Access
    
    
    68,335
    
    
    
    36%
    
    
    
    
    23,023
    
    
    
    35%
    
    
    
    91,358
    
    
    
    36%
    
    
    
    96,856
    
    
    
    36%Data and Internet
services
    
    
    20,958
    
    
    
    11%
    
    
    
    
    7,537
    
    
    
    11%
    
    
    
    28,495
    
    
    
    11%
    
    
    
    27,067
    
    
    
    10%Other services
    
    
    7,861
    
    
    
    4%
    
    
    
    
    2,841
    
    
    
    4%
    
    
    
    10,702
    
    
    
    4%
    
    
    
    12,460
    
    
    
    4%Total
    $
    
    188,402
    
    
    
    100%
    
    
    $
    
    66,378
    
    
    
    100%
    
    $
    
    254,780
    
    
    
    100%
    
    $
    
    270,801
    
    
    
    100%
 46




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##### Table of Contents



Successor
    
    
    PredecessorCompany
    
    
    CompanyMarch 31,
    
    
    March 31,2011
    
    
    2010Access Line
Equivalents:Residential access lines
    
    
    695,916
    
    
    
    
    776,254Business access lines
    
    
    322,106
    
    
    
    
    349,179Wholesale access
lines
    
    
    84,667
    
    
    
    
    93,827Total switched
access lines
    
    
    1,102,689
    
    
    
    
    1,219,260High speed data
subscribers
    
    
    297,491
    
    
    
    
    283,806Total access line
equivalents
    
    
    1,400,180
    
    
    
    
    1,503,066
 Operating Expenses
  
    
    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 expense.
    
    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.
    
    Depreciation and amortization. Depreciation and amortization includes depreciation
of our communications network and equipment and amortization of intangible assets.
 Results of Operations
 Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010
  47




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Successor
    
    
    PredecessorCompany
    
    
    Company
    
    Combined
    
    Predecessor CompanySixty-Six
    
    
    Twenty-Four
    
    Three Months Ended
    
    Three Months EndedDays Ended
    
    
    Days Ended
    
    March 31, 2011
    
    March 31, 2010March 31, 2011
    
    
    January 24,
    
    
    
    
    
    % of
    
    
    
    
    
    % of2011
    
    $
    
    Revenue
    
    $
    
    Revenue(Restated)Revenues
    $
    
    188,402
    
    
    $
    
    66,378
    
    $
    
    254,780
    
    
    
    100%
    
    $
    
    270,801
    
    
    
    100%Operating expensesCosts of services
and
sales
    
    
    87,173
    
    
    
    
    38,766
    
    
    
    125,939
    
    
    
    49
    
    
    
    137,469
    
    
    
    51Selling, general and
administrative
    
    
    63,482
    
    
    
    
    27,161
    
    
    
    90,643
    
    
    
    36
    
    
    
    93,584
    
    
    
    35Depreciation and
amortization
    
    
    62,779
    
    
    
    
    21,515
    
    
    
    84,294
    
    
    
    33
    
    
    
    71,382
    
    
    
    26Reorganization
related expense
    
    
    2,736
    
    
    
    
    
    
    
    
    2,736
    
    
    
    1
    
    
    
    
    
    
    
    Total operating
expenses
    
    
    216,170
    
    
    
    
    87,442
    
    
    
    303,612
    
    
    
    119
    
    
    
    302,435
    
    
    
    112Loss from operations
    
    
    (27,768)
    
    
    
    
    (21,064)
    
    
    
    (48,832)
    
    
    
    (19)
    
    
    
    (31,634)
    
    
    
    (12)Interest expense
    
    
    (12,491)
    
    
    
    
    (9,321)
    
    
    
    (21,812)
    
    
    
    (9)
    
    
    
    (34,630)
    
    
    
    (13)Other income (expense)
    
    
    481
    
    
    
    
    (132)
    
    
    
    349
    
    
    
    
    
    
    
    26
    
    
    
    Loss before
reorganization items
and income taxes
    
    
    (39,778)
    
    
    
    
    (30,517)
    
    
    
    (70,295)
    
    
    
    (28)
    
    
    
    (66,238)
    
    
    
    (25)Reorganization items
    
    
    
    
    
    
    
    897,313
    
    
    
    897,313
    
    
    
    353
    
    
    
    (16,591)
    
    
    
    (6)(Loss) gain before
income taxes
    
    
    (39,778)
    
    
    
    
    866,796
    
    
    
    827,018
    
    
    
    325
    
    
    
    (82,829)
    
    
    
    (31)Income tax benefit
(expense)
    
    
    15,355
    
    
    
    
    (279,889)
    
    
    
    (264,534)
    
    
    
    (104)
    
    
    
    (3,501)
    
    
    
    (1)Net (loss) income
    $
    
    (24,423)
    
    
    $
    
    586,907
    
    $
    
    562,484
    
    
    
    221%
    
    $
    
    (86,330)
    
    
    
    (32)%
  Voice services.
 Access.
 Data and Internet services.
 48




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Other services.
 Operating Expenses
 Cost of services and sales.
 Selling, general and administrative
 Depreciation
and amortization
 Reorganization related expense.
 Other Results
 Interest expense
 Other income (expense)
 Reorganization items.
 Income taxes
 Net
(loss) income
 49




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Off-Balance Sheet Arrangements
  Critical Accounting Policies
  
    
    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.
  Allowance for Doubtful Accounts.
  Accounting for Pension and Other Post-retirement Benefits.
 50




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Accounting for Income Taxes.
 Depreciation of Property, Plant and Equipment.
 Valuation of Long-lived Assets, Including Goodwill.
 
    
    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.
     51




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Accounting for Software Development Costs.
 New Accounting Standards
   Inflation
  52




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Liquidity and Capital Resources
       53




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Exit Credit Agreement
   54




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Our DIP Facility
   Our Pre-Petition Credit Facility
  55




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Our Pre-Petition Notes
      Other Pre-Petition Agreements
   
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  56




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57




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Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   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.
  Changes in Internal Control Over Financial Reporting
   
    
    Restricting access to the
privileged system account for our retail billing system; and
    
    Revising access to human resource and general ledger functions within the Oracle
system to eliminate certain segregation of duties issues.
 58




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59




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PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. (Removed and Reserved).
 
 Item 5. Other Information.
  
 Item 6. Exhibits.
  60




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SIGNATURES
  FairPoint Communications, Inc.Date: May 16, 2011
    By:
    /s/ Ajay SabherwalName:
    Ajay SabherwalTitle:  Executive Vice President

          and Chief Financial Officer 61




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Exhibit Index
 Exhibit No.
    
    Description2.1
    
    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 AgreementFairPoint 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)10.23
    
    Post Filing Regulatory SettlementNew Hampshire, dated as of February 5, 2010, by and
between FairPoint and New Hampshire Public Utilities Commission Staff Advocates.(1)10.24
    
    Post Filing Regulatory SettlementMaine, 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 SettlementVermont, 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).
 62




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Exhibit No.
    
    Description31.1
    
    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.(13)99.3
    
    Order of the Vermont Public Service Board, dated February 15, 2008.(14)99.4
    
    Order of the New Hampshire Public Utilities Commission, dated February 25, 2008.(15)
 
 *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
Quarterly Report on Form 10-Q 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.(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 Current Report on Form 8-K of FairPoint filed on February 6,
2008.(14)Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on February 21,
2008.(15)Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on February 25,
2008. 63