FairPoint Communications 2007 Annual Report Download - page 52

Table of Contents
Restrictions.” In addition to these conditions and requirements imposed by the regulatory orders, the new credit facility and the indenture
governing the notes will contain conditions and requirement with respect to the payment of dividends by us, and certain of these
conditions and requirements may be more restrictive than the conditions and requirements imposed by the regulatory orders. The
indenture governing the notes will also contain covenants restricting the payment of dividends by us. See “Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Dividend Policy and Restrictions.”
We are subject to regulation primarily by federal and state governmental agencies. At the federal level, the FCC has jurisdiction over
interstate and international communications services. State telecommunications regulators exercise jurisdiction over intrastate
communications services. In connection with the approval of the transactions by the regulatory authorities in Maine, New Hampshire and
Vermont, we will be subject to restrictions on our operations and capital expenditures. See “Item. 1. Business—Regulatory Environment
—State Regulation—Regulatory Conditions to the Merger.”
On January 15, 2007, we entered into the merger agreement pursuant to which Spinco will merge with and into the Company with
the Company continuing as the surviving corporation. For accounting purposes, we expect that FairPoint will be the acquiree.
Consequently, merger related costs are being expensed as incurred in connection with the merger and related transactions and FairPoint’s
assets and liabilities will be recorded at fair value at acquisition.
Following the merger, our operations will be more focused on small urban markets and will be geographically concentrated in the
northeastern United States. We expect to face more competition in our business located in the northeastern United States and we expect to
be less dependent on access and Universal Service Fund revenue.
Pursuant to the fifth amendment to our existing credit facility, we agreed to significant restrictions on the operation of our business,
including with respect to the payment of dividends, capital expenditures and future acquisitions. See “Item 1. Business — Recent
Developments — Amendment to Our Existing Credit Facility.”
On January 15, 2007, we entered into the MSA with Capgemini. Through the MSA, we intend to replicate and/or replace certain
existing Verizon systems during a phased period through the fourth quarter of 2008. We are currently in the application development stage
of the project and are recognizing costs in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use.” We have recognized both external and internal service costs associated with the MSA based on
total labor incurred as of December 31, 2007 compared to the total estimated labor to substantially complete the implementation project.
In connection with our evaluation of the effectiveness of our internal control over financial reporting for the year ended December 31,
2007, our management determined that our internal control over financial reporting was not effective as of December 31, 2007 because a
material weakness in internal control over financial reporting existed as of December 31, 2007. Specifically, our management’s oversight
and review procedures designed to monitor the effective of control activities in our northern New England division were ineffective. As a
result, errors existed in capitalized software costs, operating expenses, accounts receivable, prepaid expenses, accounts payable and
accrued expenses in our preliminary 2007 consolidated financial statements. These identified errors were corrected prior to the finalization
of those financial statements. We believe that progress has been made in the remediation of this material weakness.
Management views our business of providing voice, data and communication services to residential and business customers as one
business segment and currently aggregates these revenue streams under the quantitative and qualitative thresholds defined in
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”
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