FairPoint Communications 2008 Annual Report Download

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Table of contents

  • Page 1
    ... or Organization) 13-3725229 (I.R.S. Employer Identification No.) 521 East Morehead Street, Suite 500 Charlotte, North Carolina (Address of Principal Executive Offices) 28202 (Zip code) (704) 344-8150 Registrant's Telephone Number, Including Area Code: Securities registered pursuant to Section...

  • Page 2
    ...a shell company (as defined in Rule 12b-2 of the Act). Yes o No  The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2008 (based on the closing price of $7.21 per share as quoted on the New York Stock Exchange as of such date) was approximately...

  • Page 3
    .... 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services 119 119...

  • Page 4
    ... use by customers of alternative technologies; availability and levels of regulatory support payments; the effects of regulation, including restrictions and obligations imposed by federal and state regulators as a condition to approvals obtained to consummate the merger with a subsidiary of Verizon...

  • Page 5
    1

  • Page 6
    ...Verizon New England") in Maineo New Hampspire and Vermont and tpe customers of Verizon and its subsidiaries' (otper tpan Cellco Partnerspip ("Cellco")) (collectivelyo tpe "Verizon Group") related long distance and Internet service provider business in tpose states prior to tpe merger. Our Business...

  • Page 7
    ...the acquirer in the merger. For more information see note 1 to the "Consolidated Financial Statements." Prior to the merger, the Verizon Group engaged in a series of restructuring transactions to effect the transfer of specified assets and liabilities of the Verizon Northern New England business to...

  • Page 8
    ...employment, compensation and benefits of Spinco employees. Through the master services agreement, we have replicated and/or replaced certain existing Verizon systems during a phased period through the end of January 2009. Regulatory Merger Conditions We are subject to the orders issued by the state...

  • Page 9
    ... availability of broadband service (such as DSL) to specified levels in each of Maine, New Hampshire and Vermont, which is expected to result in capital expenditures in each state in excess of the minimum capital expenditures set forth in the orders described above. These orders also limited rates...

  • Page 10
    ...time fee owed by us at cutover to Verizon Information Technologies LLC ("Verizon Technologies") under the transition services agreement. The line loss payments were contemplated by an order of the New Hampshire Public Utilities Commission (the "NHPUC") issued on February 25, 2008. The order required...

  • Page 11
    ...our basic local telephone service to customers within our service areas; (ii) the provision of network access to interexchange carriers for origination and termination of interstate and intrastate long distance phone calls and dedicated private line facilities; (iii) Universal Service Fund high cost...

  • Page 12
    ...FairPoint Carrier Services, Inc., we offer wholesale long distance services to communications providers that are not affiliated with us. Data and Internet Services We offer broadband Internet access via DSL technology, dedicated T-1 connections, Internet dial-up, high speed cable modem and wireless...

  • Page 13
    ... each call record generated by the interexchange carrier's customer. Directory Services. Through our local telephone companies, we publish telephone directories in the majority of our locations. These directories provide white page listings, yellow page listings and community information listings...

  • Page 14
    ... such local exchange carriers, we typically change this practice to provide additional support for existing products and services as well as to support the introduction of new services. As of December 31, 2008, we had 827 employees engaged in sales, marketing and customer service. Information...

  • Page 15
    ... Cable high speed data services are generally priced competitively and promote speeds generally higher than many wireline companies offer. We estimate that as of December 31, 2008, a majority of the customers that we serve had access to a cable modem offering. The second area of competition is local...

  • Page 16
    ... and wireless) and on-line content services, are provided primarily by Internet service providers, satellite-based companies, long distance carriers and cable television companies. Many of these companies provide direct access to the Internet and a variety of supporting services to businesses and...

  • Page 17
    ... by long-distance carriers. The amount of access charge revenue that we will receive is subject to change. Our non-rural operations are subject to price cap regulation of access charges. Under price cap regulation, limits are imposed on a company's interstate rates without regard to its costs or...

  • Page 18
    ...these changes may have on our business. Universal Service Support Current FCC rules provide different methodologies for the determination of universal service payments to rural and non-rural carriers. In general, the rules provide high-cost support to rural carriers where the company's actual costs...

  • Page 19
    ... the FCC's rules in the forms of Interstate Access Support ("IAS") and Interstate Common Line Support ("ICLS"). We receive IAS support in all three of our price cap study areas (Maine, New Hampshire and Vermont). We also continue to receive ICLS support in our rate-of-return study areas. These forms...

  • Page 20
    ... to telephone numbers, operator service, directory assistance and directory listing; (iv) ensure competitive access to telephone poles, ducts, conduits and rights of way; and (v) compensate competitors for the cost of completing calls to competitors' customers from the other carrier's customers. In...

  • Page 21
    ...for their long distance services, provided that they comply with certain existing and additional safeguards, such as providing special access performance metrics, offering lowvolume calling plans, and making available certain monthly usage information on customers' bills. The FCC also has ruled that...

  • Page 22
    ... on negotiated commercial terms. The FCC order also allows rural rate-of-return carriers, including our Legacy FairPoint operations, the option to continue providing DSL service as a common carrier (status quo) offering. The FCC also has concluded that broadband Internet access service providers...

  • Page 23
    ... we expand substantially the availability of broadband service (such as DSL) to specified levels in each of Maine, New Hampshire and Vermont, which is expected to result in capital expenditures in each state in excess of the minimum capital expenditures set forth in the orders described above. 19

  • Page 24
    ...for basic local exchange services and allows pricing flexibility for other services, including intrastate long distance, optional services and bundled packages. Under the terms of the merger order, among other things, we reduced the caps on monthly basic exchange rates effective as of August 1, 2008...

  • Page 25
    ... Verizon Northern New England business committed to make broadband capability available to 75% of its access lines in Vermont by 2008 and 80% of its access lines in Vermont by 2010 with milestones of 65% and 77% for 2007 and 2009, respectively. The Amended Incentive Regulation Plan provides pricing...

  • Page 26
    ...not certain whether funding will be available to us for this potential obligation. Environmental Regulations Like all other local telephone companies, our 32 local exchange carrier subsidiaries are subject to federal, state and local laws and regulations governing the use, storage, disposal of, and...

  • Page 27
    ... divestitures; limit our flexibility in planning for, or reacting to, changes in our business and the communications industry generally; place us at a competitive disadvantage compared with competitors that have a less significant debt burden; and make us more vulnerable to economic downturns...

  • Page 28
    ..., dividends, management fees or otherwise. Distributions to us from our subsidiaries will depend on their respective operating results and will be subject to restrictions under, among other things, the laws of their jurisdiction of organization; the rules and regulations of state and federal...

  • Page 29
    ... our board of directors may deem relevant. In addition, the orders of the state regulatory authorities approving the merger, the indenture governing the notes and our credit facility contain significant restrictions on our ability to make dividend payments and the terms of our future indebtedness...

  • Page 30
    ... and issue preferred stock; pay dividends in the future or make other distributions on our stock or repurchase or redeem stock; create liens; redeem or prepay certain debt; make certain investments; engage in specified sales of assets; enter into transactions with affiliates; enter new lines of...

  • Page 31
    ... have been used or have expired. Limitations on our usage of net operating loss carryforwards, and other factors requiring us to pay cash taxes in the future, would reduce the funds available to service our debt and pay dividends in the future. The price of our common stock may fluctuate...

  • Page 32
    ... in any substantial negotiations with respect to any transaction involving the acquisition or issuance of our capital stock, or options to acquire or other rights in respect of our capital stock unless, generally, the shares are issued to qualifying employees or retirement plans, each in accordance...

  • Page 33
    ... business of Verizon New England in Maine, New Hampshire and Vermont, and the customers of the Verizon Group's related long distance and Internet service provider businesses in those states, to Spinco, (ii) the receipt by the Verizon Group of the Spinco securities and the special cash payment...

  • Page 34
    ... standards, commitments to expand substantially the availability of broadband service and restrictions on our payment of dividends. Risks Related to Our Business We provide services to customers over access lines, and if we lose access lines, our business, financial condition, results of operations...

  • Page 35
    ... utilities. The Internet services market is also highly competitive, and we expect that this competition will intensify. We estimate that as of December 31, 2008, at least a majority of the customers we serve had access to a cable modem offering. Many of our competitors have brand recognition, offer...

  • Page 36
    ..., recession or unfavorable regulatory action in any of those states may adversely affect our business, financial condition, results of operations and liquidity. As of December 31, 2008, approximately 87% of our access line equivalents were located in Maine, New Hampshire and Vermont. As a result of...

  • Page 37
    ...adverse effect on our ability to pay dividends. We may not be able to raise sufficient additional capital on terms that we consider acceptable, or at all. As a condition to their approval of the merger, state regulatory authorities in Maine, New Hampshire and Vermont have imposed restrictions on our...

  • Page 38
    ... loss of any member of our senior management team, due to retirement or otherwise, and the inability to attract and retain highly qualified technical and management personnel in the future, could have a material adverse effect on our business, financial condition, results of operations and liquidity...

  • Page 39
    ..., "earnings" reviews, or make adjustments to price cap formulas that may result in rate changes. In addition, reforms of the federal and state access charge systems, combined with the development of competition, have caused the aggregate amount of access charges paid by long-distance carriers to...

  • Page 40
    ... average cost per loop and are likely to decline based on historical trends. We also receive other Universal Service Fund support payments including Interstate Access Support in all three of our price cap study areas (Maine, New Hampshire, and Vermont) and Interstate Common Line Support in our rate...

  • Page 41
    ... customer privacy, or addressing other issues that affect our business. For example, existing provisions of the Communications Assistance for Law Enforcement Act and FCC regulations implementing that legislation require communications carriers to ensure that their equipment, facilities, and services...

  • Page 42
    ... customers to remote switch locations or to the central office and to points of presence or interconnection with the long distance carriers. These facilities are located on land pursuant to permits, easements or other agreements. Our rolling stock includes service vehicles, construction equipment...

  • Page 43
    ... was no trading market for our common stock. The following table shows the high and low closing sales prices per share of our common stock as reported on the New York Stock Exchange for the periods indicated: Year Ended December 31, 2008 High Low First quarter Second quarter Third quarter Fourth...

  • Page 44
    ... ends on December 31, 2008. This graph assumes that $100 was invested on February 4, 2005 (the date of the initial public offering of our common stock) in our common stock and in each of the market index and the sector index at the closing price for the Company and the other companies, and that all...

  • Page 45
    ... our board of directors may deem relevant. In addition, the orders of the state regulatory authorities approving the merger, the indenture governing the notes and our credit facility contain significant restrictions on our ability to make dividend payments and the terms of our future indebtedness...

  • Page 46
    ...; losses on asset sales and other extraordinary losses; non-cash portion of any retirement or pension plan expense incurred; all one-time cash costs and expenses paid with respect to advisory services, financing sources and other advisors retained prior to the closing date with respect to the...

  • Page 47
    ... of Contents Regulatory Orders The orders issued by the state regulatory authorities in Maine, New Hampshire and Vermont provide for the following dividend restrictions: • • restrictions on our ability to pay dividends if we are unable to satisfy specified financial ratio tests set forth in...

  • Page 48
    ... and Vermont and the customers of the related long distance and Internet service provider businesses in those states to subsidiaries of Spinco. The merger was accounted for as a "reverse acquisition" of Legacy FairPoint by Spinco under the purchase method of accounting because Verizon stockholders...

  • Page 49
    ... Total long term debt - 1,211,913 - 1,277,227 Total stockholders' equity (1) (2) Interest expense includes amortization of debt issue costs aggregating $3.2 million for the fiscal year ended December 31, 2008. Total access line equivalents includes voice access lines and high speed data lines...

  • Page 50
    45

  • Page 51
    ... telephone company in the United States, in each case based on number of access lines as of December 31, 2008. We operate in 18 states with 1.7 million access line equivalents (including voice access lines and high speed data lines, which include DSL, wireless broadband and cable modem) in service...

  • Page 52
    ...the merger agreement, Legacy FairPoint issued 53,760,623 shares of common stock to Verizon stockholders. Prior to the merger, the Verizon Group engaged in a series of restructuring transactions to effect the transfer of specified assets and liabilities of the Verizon Northern New England business to...

  • Page 53
    ... 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. Universal Service Fund pigp-cost loop support. We receive payments from the Universal Service Fund to support...

  • Page 54
    ...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...

  • Page 55
    ...owned subsidiary of Verizon that owned Verizon's local exchange and related business activities in Maine, New Hampshire and Vermont. Spinco was spun off from Verizon immediately prior to the merger. Spinco served approximately 1,562,000 access line equivalents as of the date of acquisition. Results...

  • Page 56
    ... Internet services would have increased $4.1 million. A decrease of 2,032 in our high speed data subscriber base was offset by increases in pricing of high speed data services. Otper services. Other services revenues decreased $0.5 million to $41.3 million in 2008 compared to 2007. Legacy FairPoint...

  • Page 57
    ... local service revenue growth, as declining demand for residential access lines resulted in 9% fewer lines in December 31, 2007 compared to December 31, 2006, as more customers substituted wireless, broadband and cable services for traditional landline services. At the same time, business access...

  • Page 58
    ... of sales and service support and local telephone services to other Verizon subsidiaries, late payment charges and customer premises equipment sales and services. These increases were partially offset by a decrease in revenue from billing and collection services. Operating Expenses Cost of services...

  • Page 59
    ...(ii) capital expenditures, including those mandated by the state regulatory orders approving the merger; (iii) working capital requirements as may be needed to support the growth of our business; (iv) dividend payments, if any, on our common stock, to the extent permitted by the agreements governing...

  • Page 60
    ... at fixed rates rather than variable rates as of December 31, 2008. After these interest rate swap agreements expire, our annual debt service obligations on such portion of the term loans will vary from year to year unless we enter into a new interest rate swap or purchase an interest rate cap or...

  • Page 61
    ... December 31, 2008, net proceeds from FairPoint's issuance of long-term debt were $1,930.0 million, repayment of long-term debt was $687.5 million and dividends to stockholders was $1,220.0 million, of which $1,160.0 million was paid to Verizon by Spinco in connection with the merger. We expect...

  • Page 62
    ... Verizon Group to make capital expenditures in New Hampshire in addition to those described above for unexpected infrastructure improvements proposed by us and approved by the New Hampshire Public Utilities Commission. Additionally, the orders issued by the state regulatory authorities in Maine, New...

  • Page 63
    ...agreements had required us to make payments totaling approximately $45.4 million to Verizon in the first quarter of 2009, including a one-time fee of $34.0 million due at cutover, with the balance related to the purchase of certain internet access hardware. The settlement set forth in the transition...

  • Page 64
    ...Accounting for pension and other post-retirement benefits; Accounting for income taxes; Depreciation of property, plant and equipment; Valuation of long-lived assets, including goodwill; Accounting for software development costs; and Purchase accounting. Revenue Recognition. We recognize service...

  • Page 65
    ..., plant and equipment principally on the composite group remaining life method and straight-line composite rates over estimated useful lives ranging from three to 50 years. This method provides for the recognition of the cost of the remaining net investment in telephone plant, less anticipated...

  • Page 66
    .... New Tccounting Standards In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 addresses howcompanies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting...

  • Page 67
    ... March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative...

  • Page 68
    ... As of December 31, 2008, the fair value of our debt was approximately $1,293 million. Our term loan A facility and revolver mature in 2014, our term loan B facility and delayed draw term loan mature in 2015 and the notes mature in 2018. We use variable and fixed rate debt to finance our operations...

  • Page 69
    ... INDEX TO FINTNCITL STTTEMENTS Page FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES: Report of Independent Registered Public Accounting Firm CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006: 65 66 67 68 69 70 71 Consolidated Balance Sheets as of December 31...

  • Page 70
    Table of Contents Report of Independent Registered Public Tccounting Firm The Board of Directors and Stockholders of FairPoint Communications, Inc.: We have audited the accompanying consolidated balance sheets of FairPoint Communications, Inc. as of December 31, 2008 and 2007, and the related ...

  • Page 71
    ... 9,730 37,090 250,938 Accounts receivable, net Other receivables Materials and supplies Other Deferred income tax, net Short term investments Total current assets Property, plant, and equipment, net Intangibles assets, net Prepaid pension asset Debt issue costs, net Restricted cash Other assets...

  • Page 72
    Total long-term liabilities Minority interest 2,942,679 6 593,965 - Stockholders' equity: Common stock, $0.01 par value, 200,000,000 shares authorized, issued and outstanding 88,995,572 shares at December 31, 2008 and 53,760,623 shares at December 31, 2007 Additional paid-in capital 890 735,719 ...

  • Page 73
    ... INC. TND SUBSIDITRIES Consolidated Statements of Operations Years ended December 31, 2008, 2007 and 2006 (in thousands, except per share data) 2008 2007 2006 Revenues Operating expenses: Cost of services and sales, excluding depreciation and amortization Selling, general and administrative expense...

  • Page 74
    ... 31, 2008, 2007 and 2006 (in thousands) Tccumulated other comprehensive income (loss) Common Stock Shares Tmount Tdditional paid-in capital Retained earnings (deficit) Total stockholders' equity Balance at December 31, 2005 Net income Net change in parent funding Employee benefit adjustment 53...

  • Page 75
    ... of Comprehensive (Loss) Income Years ended December 31, 2008, 2007 and 2006 (in thousands, except per share data) 2008 2007 2006 Net (loss) income Other comprehensive loss, net of taxes: Defined benefit pension and post-retirement plans (net of $56.4 million taxes) $ (68,525) $32,828 (85,037) (85...

  • Page 76
    ... operations: Loan origination costs Proceeds from issuance of long-term debt Repayments of long-term debt Contributions from (to) Verizon Restricted cash Repayment of capital lease obligations Dividends paid to stockholders Net cash provided by (used in) financing activities of continuing...

  • Page 77
    Non-cash equity consideration 316,290 551,000 See accompanying notes to consolidated financial statements. - - - - Non-cash issuance of senior notes 70

  • Page 78
    ... in northern New England, offering an array of services, including local and long distance voice, data, Internet and broadband product offerings, to both residential and business customers. FairPoint is the seventh largest telephone company in the United States based on the number of access lines as...

  • Page 79
    ...periods prior to the merger include the wireline-related businesses, Internet access, long distance and customer premises equipment services provided by the Verizon Northern New England business to customers in the states of Maine, New Hampshire and Vermont. All significant intercompany transactions...

  • Page 80
    ...by state regulatory authorities as conditions to their approval of the merger; (v) obligations under the Company's employee benefit plans; and (vi) potential acquisitions. On March 4, 2009, the Board of Directors suspended the payment of dividends on the Company's common stock. The Company's $2,030...

  • Page 81
    ... rates as of December 31, 2008. Spinco issued, and the Company assumed in the merger, $551.0 million aggregate principal amount of the notes. The notes mature on April 1, 2018 and are not redeemable at the Company's option prior to April 1, 2013. Interest is payable on the notes semi-annually...

  • Page 82
    ...by the Verizon Group and, in the case of service quality improvements under the performance enhancement plan, $25 million provided by the Verizon Group. In Vermont the Company has also agreed to certain broadband buildout milestones that require the Company to reach 100% broadband availability in 50...

  • Page 83
    ... access, pooling, local calling services, Universal Service Fund receipts, long distance services, Internet and broadband services, and other miscellaneous services. Local access charges are billed to local end users under tariffs approved by each state's public utilities commission. Access revenues...

  • Page 84
    ... to cost of services and sales as these costs are incurred. (d) Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. (e) Restricted Cash As of March 31, 2008, the closing date of the merger...

  • Page 85
    ... condition of those entities issuing the debt and equity securities. A significant decline in the fair value of plan assets could result in additional contributions to the plans by the Company in order to meet funding requirements under the Employee Retirement Income Security Act of 1974, as...

  • Page 86
    ... Lives Years Buildings Central office equipment Outside communications plant Copper cable Fiber cable 45 5 - 11 15 - 18 25 30 - 50 3 - 15 Poles and conduit Furniture, vehicles and other When depreciable telephone plant used in the Company's wireline network is replaced or retired, the carrying...

  • Page 87
    ... the annual review noted above, effective January 1, 2006, the remaining useful lives of circuit equipment had been shortened from 9 years to 8 years predominantly to reflect a modification to Verizon's broadband deployment business strategy. The Company believes that current estimated useful asset...

  • Page 88
    ... of customer lists, non-compete agreement and trade names of Legacy FairPoint acquired in the merger. The intangible assets of the Verizon Northern New England business were not transferred to Spinco, and thus are not included in the Company's balance sheet for periods subsequent to the merger date...

  • Page 89
    ... swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps effectively change the variable rate on the debt obligations to a fixed rate. Under the terms of the interest rate swaps currently in effect, the Company makes a payment if the variable rate is below...

  • Page 90
    ...No. 123(R), Spare-Based Payment (SFAS No. 123(R)). SFAS No. 123(R) establishes accounting for stock-based awards granted in exchange for employee services. Accordingly, for employeeawards which are expected to vest, stock-based compensation cost is measured at the grant date, based on the fair value...

  • Page 91
    ... prior to March 31, 2008. As part of the merger, liabilities and assets attributable to the employees of the Verizon Northern New England business were spun off from the relevant Verizon benefit plans to new benefit plans maintained by the Company and accounted for in accordance with Statement...

  • Page 92
    ...and wholesale telecommunications services, including local telephone, high speed internet, long distance and other services in 18 states. The Company's chief operating decision maker assesses operating performance and allocates resources based on the consolidated results. (u) Purchase Accounting We...

  • Page 93
    ... in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The Statement also...

  • Page 94
    ... and Vermont and the customers of the related long distance and Internet service provider businesses in those states to subsidiaries of Spinco. The merger was accounted for as a "reverse acquisition" of Legacy FairPoint by Spinco under the purchase method of accounting because Verizon stockholders...

  • Page 95
    ... of specified assets and liabilities of the local exchange business of Verizon New England in Maine, New Hampshire and Vermont and the customers of the Verizon Group's related long distance and Internet service provider businesses in those states to Spinco and the entities (including an entity...

  • Page 96
    ... useful life. The allocation of the total net purchase price of the merger is shown in the table below (in thousands): Cash Current assets Property, plant, and equipment Investments Excess cost over fair value of net assets acquired Intangible assets Other assets Current liabilities Long-term debt...

  • Page 97
    ... and Other Intangible Tssets Changes in the carrying amount of goodwill were as follows (in thousands): Balance, December 31, 2007 Acquisition of FairPoint Communications, Inc. Balance, December 31, 2008 - 619,372 $619,372 The Company's intangible assets consist of customer lists, non-compete...

  • Page 98
    ...time, the Company enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps effectively change the variable rate on the debt obligations to a fixed rate. Under the terms of the interest rate swaps, the Company makes a payment if the...

  • Page 99
    ... as a result of changes in the fair value of the swap agreements during the year ended December 31, 2008. (8) Long-term Debt Long-term debt for the Company at December 31, 2008 and 2007 is shown below (in thousands): 2008 2007 Senior secured credit facility, variable rates ranging from 4.69...

  • Page 100
    ...,000 Prior to March 31, 2008, debt held by the Verizon Northern New England business was recorded at the Verizon consolidated level and interest expense was allocated to the Verizon Northern New England business. On March 31, 2008, immediately prior to the merger, FairPoint and Spinco entered into...

  • Page 101
    ... applied in forward order of maturity of the remaining amortization payments. Voluntary prepayments of borrowings under the term loan facilities and optional reductions of the unutilized portion of the revolving facility commitments will be permitted upon payment of an applicable payment fee, which...

  • Page 102
    ...FairPoint Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) (8) Long-term Debt (Continued) indebtedness, loans and investments, additional indebtedness, liens, capital expenditures, changes in the nature of our business, mergers, acquisitions, asset sales...

  • Page 103
    ...Verizon Northern New England business funding relative to the total debt and equity for the Verizon Companies. (9) Employee Benefit Plans As a result of the merger and the associated transfer of the pension and other post-employment benefits ("OPEB") assets and liabilities to FairPoint, the Company...

  • Page 104
    ... benefit (income) cost related to the Company's pension and post-retirement healthcare plans for the nine months ended December 31, 2008 are presented below. In Thousands Qualified Pension Post-retirement Health Service cost Interest cost Expected return on plan assets Amortization of prior service...

  • Page 105
    ...31, 2008 Qualified Pension Discount rate Expected return on plan assets Rate of compensation increase 6.50% 8.50% 4.00% Post-retirement Health Discount rate Rate of compensation increase 6.00% 4.00% In developing the expected long-term rate of return assumption, the Company evaluated historical...

  • Page 106

  • Page 107
    ... to our pension plans after 2009. A summary of plan assets, projected benefit obligation and funded status of the plans are as follows for the year ended December 31, 2008: Nine months ended December 31, 2008 (In thousands) Qualified Pension Post-retirement Health Fair value of plan assets: Fair...

  • Page 108
    ... comprehensive loss Estimated amounts that will be amortized from accumulated other comprehensive income (loss) in the next fiscal year: Prior service cost Net actuarial gain (loss) $ 107,162 $ 34,318 $ $ (1,452) $ (623) (2,075) $ (4,292) (2,656) (6,948) Total amount estimated to be amortized...

  • Page 109
    ... the rate of return in the Verizon pension trusts. A 1% change in the medical trend rate assumed for post-retirement health benefits would have the following effects at December 31, 2008: (In thousands) Post-retirement Health 1% increase in the medical trend rate: Effect on total service cost and...

  • Page 110
    ... FairPoint Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) (9) Employee Benefit Plans (Continued) Estimated future employer contributions, benefit payments and Medicare prescription drug subsidies expected to offset the future post-retirement benefit...

  • Page 111
    ... tax expense Investment tax credits Deferred: Federal State and local Total deferred income tax (expense) benefit 6,359 39,203 Total income tax (expense) benefit $(19,459) $(17,322) Total income tax (expense) benefit was different than that computed by applying U.S. Federal income tax rates...

  • Page 112
    ...31, 2008, the Company has alternative minimum tax credits of $3.8 million that may be carried forward indefinitely. Legacy FairPoint completed an initial public offering on February 8, 2005, which resulted in an "ownership change" within the meaning of the U.S. Federal income tax laws addressing net...

  • Page 113
    ... to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2004. During the quarter ending June 30, 2008, Verizon effectively settled the IRS examination for fiscal years 2000 through 2003. Due to the executed tax sharing agreement dated January 15...

  • Page 114
    ... the operations of the Verizon Companies, filed a consolidated federal income tax return and combined state income tax returns in the states of Maine, New Hampshire and Vermont. The operations of the Verizon Companies, including the Verizon Northern New England business, for periods prior to...

  • Page 115
    ... per share. (13) Stockholders' Equity On March 31, 2008, FairPoint completed the acquisition of Spinco, pursuant to which Spinco merged with and into FairPoint, with FairPoint continuing as the surviving corporation for legal purposes. In order to effect the merger, the Company issued 53,760,623...

  • Page 116
    ... price. This cancellation was triggered by certain events noted in the 1998 Plan. These stock options were granted by the Company prior to becoming a public company and therefore the Company is accounting for these options under the prospective method under SFAS 123(R). As of December 31, 2008...

  • Page 117
    ...on December 31, 2008. (b) 2000 Employee Stock Incentive Plan In May 2000, the Company adopted the FairPoint Communications, Inc. 2000 Employee Stock Incentive Plan (the 2000 Plan). The 2000 Plan provided for grants to members of management of up to 1,898,521 options to purchase common stock, at the...

  • Page 118
    ... the FairPoint Communications, Inc. 2005 Stock Incentive Plan (the 2005 Plan). The 2005 Plan provides for the grant of up to 947,441 shares of non-vested stock, stock units and stock options to members of the Company's board of directors and certain key members of the Company's management. Shares...

  • Page 119
    ... the FairPoint Communications, Inc. 2008 Long Term Incentive Plan (the 2008 Plan). The 2008 Plan provides for the grant of up to 9,500,000 shares of non-vested stock, stock units and stock options to members of the Company's board of directors and certain key members of the Company's management...

  • Page 120

  • Page 121
    ... New England Business Stock-based Compensations Plans Prior to the merger, the Verizon Northern New England business participated in the Verizon Communications Long Term Incentive Plan (the Verizon Plan). The Verizon Plan permitted the granting of nonqualified stock options, incentive stock options...

  • Page 122
    ...tariffed rates, market prices or negotiated terms that approximated market rates. These goods and services included items such as communications and data processing services, office space, professional fees and insurance coverage. The Verizon Northern New England business also reimbursed Verizon for...

  • Page 123
    ... 157 effective January 1, 2008 was not material to the Company's financial statements. The following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis (at least annually) as of December 31, 2008 (in thousands): Quoted Prices in Tctive Markets...

  • Page 124

  • Page 125
    Table of Contents FairPoint Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) (18) Revenue Concentrations As of December 31, 2008, approximately 87% of the Company's access line equivalents were located in Maine, New Hampshire and Vermont. As a result of ...

  • Page 126
    ... with the Company's tax sharing agreement with Verizon Communications Inc., and provides that the amount of cash used to make any such repurchase will reduce the amount of cumulative distributable cash (as defined in the credit agreement) available for the payment of cash dividends or share...

  • Page 127
    ... one-time fee owed at cutover by the Company to Verizon Information Technologies LLC under the transition services agreement. The line loss payments were contemplated by an order of the New Hampshire Public Utilities Commission issued on February 25, 2008. The order required that Verizon pay $15...

  • Page 128
    ...of our Northern New England operations with Legacy FairPoint's operations. The processes we are developing include, but are not limited to, information technology, order provisioning, customer billing, payment processing, credit and collections, inventory management, accounts payable, payroll, human...

  • Page 129
    ... In addition, this Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Although these changes have been significant, management does not believe that these changes have negatively affected our...

  • Page 130
    ... of Contents PTRT III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS TND CORPORTTE GOVERNTNCE The information required by Items 401, 405, 406, 407(c)(3), 407(d)(4) and 407(d)(5) of Regulation S-K under the Securities Act is incorporated herein by reference to the Company's definitive proxy statement to be...

  • Page 131
    ... (a) Financial Statements The financial statements filed as part of this Annual Report are listed in the index to the financial statements under "Item 8. Financial Statements and Supplementary Data" in this Annual Report, which index to the financial statements is incorporated herein by reference...

  • Page 132
    ...duly authorized. FAIRPOINT COMMUNICATIONS, INC. Date: March 5, 2009 By: /s/ EUGENE B. JOHNSON Name: Eugene B. Johnson Title: Cpief Executive Officer and Cpairman of tpe Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below...

  • Page 133
    /s/ JANE E. NEWMAN Jane E. Newman /s/ MICHAEL R. TUTTLE Michael R. Tuttle Director Director March 5, 2009 March 5, 2009 121

  • Page 134
    .... 1 to the Transition Services Agreement, dated as of March 31, 2008, by and among FairPoint, Northern New England Telephone Operations LLC, Enhanced Communications of Northern New England Inc. and Verizon Information Technologies LLC(6) 2.15 2.16 Master Services Agreement, dated as of January 15...

  • Page 135

  • Page 136
    ... 30, 2009, by and among Verizon Communications Inc., Verizon New England Inc., Verizon Information Technologies LLC, FairPoint, Northern New England Telephone Operations LLC, Telephone Operating Company of Vermont LLC and Enhanced Communications of Northern New England Inc.* Eighth Amended and...

  • Page 137
    ... 2008, by and among Northern New England Telephone Operations LLC, Telephone Operating Company of Vermont LLC and Lehman Commercial Paper Inc.(6) Amended and Restated Tax Sharing Agreement, dated as of November 9, 2000, by and among FairPoint and its Subsidiaries.(14) Amended and Restated Employment...

  • Page 138
    ... the Staff of the New Hampshire Public Utilities Commission and Verizon Communications Inc.(6) Statement Regarding Computation of Per Share Earnings (included in the financial statements contained in this Annual Report). 11 14.1 14.2 21 23.1 31.1 FairPoint Code of Business Conduct and Ethics.(27...

  • Page 139
    31.2 32.1 Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*†125

  • Page 140
    ... States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*†Order of the Maine Public Utilities Commission, dated February 1, 2008.(28) 99.1 99.2 99.3 * †Order of the Vermont Public Service Board, dated February 15, 2008.(29) Order of the New Hampshire...

  • Page 141
    ...Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on December 13, 2007. Incorporated by reference to the Current Report on Form 8-K of FairPoint filed on January 8, 2008. Incorporated by reference to the Annual Report on Form 10-K of FairPoint for the year ended December...

  • Page 142

  • Page 143
    ...State of New Hampshire Public Utilities Commission (the "Line Loss Payments"). WHEREAS, FairPoint has made allegations of non-performance of certain obligations by Verizon, Spinco, Supplier or their Affiliates. WHEREAS, FairPoint requires access to the temporary use of certain Internet Single Number...

  • Page 144
    ..., Affiliates, officers, directors, principals, employees, attorneys, agents, designees, representatives, successors, predecessors and assigns, from any and all claims, demands, bills, controversies, obligations , costs (including reasonable costs and attorneys fees), and causes of action of any...

  • Page 145
    ... Smith Title: Authorized Representative VERIZON INFORMATION TECHNOLOGIES LLC By: Name: Stephen E. Smith Title: Authorized Representative FAIRPOINT COMMUNICATIONS, INC. By: /s/ Shirley J. Linn Name: Shirley J. Linn Title: Executive Vice President 5 NORTHERN NEW ENGLAND TELEPHONE OPERATIONS LLC...

  • Page 146
    ... Revenue Code (the "Code") may result. Diversified Investment Advisors does not and cannot provide legal or tax advice. Ghe Adoption Agreement and the related Plan document (the "Plan") are not prototypes and have not been reviewed by the IRS. Ghey are intended purely as sample documents for use by...

  • Page 147
    ...: FairPoint Communications, Inc. (b) Address of Employer: 521 E. Morehead Street, Suite 500 Charlotte, NC 28202 (c) Federal Gax ID Number of Employer: 13-3725229 (704) 344-8150 (d) (e) Contact Phone Number: Publicly Graded Company (check one): o x (f) (i) No. (ii) Yes. (Note: For Key...

  • Page 148
    ..." as defined under Code section 409A and Internal Revenue Service guidance issued there under. 5. Effective Date (Article 2.17 of the Plan). (check one and provide information required by section (a) or (b), as applicable ): (a) o For new plans: Ghe Effective Date of the Plan is ( provide...

  • Page 149
    ... (4) Nonelective Employer Contributions shall be credited to each respective Annual Sub-Account. Distribution Election Method (check one if 8(b) above is selected) : 5 o x (i) Annual Election - A Participant must make a new Distribution Election each Gaxable Year. (ii) Carry Forward Election...

  • Page 150
    ... Salary Reduction Contribution up to a maximum deferral of (check one, if applicable) : (ii) (iii) o o o (b) (1) (2) (3) Calendar Year Code section 402(g) limit. 402(g) limit less 401(k) deferrals made to the 401(k) Plan. $ . A Participant may enter into a separate Deferral Agreement to make...

  • Page 151
    ... the Participant modifies or terminates the automatic Deferral Agreement by notifying the Plan Administrator (carry forward deferral election). 11. Employer Contributions (Article 4.2 of the Plan). An Employer may elect to make the following types of Employer Contributions (complete, if applicable...

  • Page 152
    ...Forms of Distribution upon Separation from Service (a) A Participant may elect to have his or her Participant's Account balance distributed in the following form(s). If no election is made, a single sum payment is the default election (check options to be available if 15(b) or (c) above is selected...

  • Page 153
    ... to be available. Annual is default option if no option selected.) : x o o x 17. (i) Monthly. (ii) Quarterly. Semi-annually. (iii) (iv) Annually. Giming of Distributions (check one): o x o o (a) (b) (c) (d) At termination. six months following Separation from Service. year(s) following...

  • Page 154
    ... Account Balance (check one) : o o x 20. (i) No minimum account balance. $10,000. (ii) (iii) $ 50,000 (must be greater than $10,000 but not to exceed $100,000). Change in the Form, Giming or Processing Schedule of Distribution upon Separation from Service (Article 4.4(b) of the Plan) (check...

  • Page 155
    ... if the annual amount does not exceed the IRS Code Section 402(g) limit, tax withholding, plan termination and liquidation, cancellation of deferral elections due to disability, unforeseeable emergency or hardship, 409A violation or certain offsets to cover a debt owed to the company not to exceed...

  • Page 156
    ... to satisfy such Emergency and the balance of installments will be recalculated.) (b) (c) (d) Change in Control. Gransfer to 401(k) Plan ("Gandem Plan") (check one; if not checked, the first box is the default option) : x o (a) Not applicable. No transfer to 401(k) plan. (b) Gransfer to 401...

  • Page 157
    ... the Employee for such plan year. Ghe Participant's Account shall be 17 debited by the amount of such contributions. Notwithstanding any otherwise conflicting provision in this Plan, a Participant's election with respect to a calendar year shall not be given effect, and the Employer shall not make...

  • Page 158
    ...x o 37. (a) Not applicable. All contributions are 100% vested. (b) (c) Not applicable. No Employer contributions. Year of Service as defined in 401(k) Plan of the Employer. (d) Other . Plan Investments (Article 6 of the Plan) (check one; if not checked, the first box is the default option) :

  • Page 159
    ... Rate but Plan assets are not specifically set aside from Employer's general assets. (b) (c) (c) Addendum Items : Code Section 409A Gransition Relief Payment Elections 20 No later than December 31, 2008, a Participant may elect on a form provided by the Plan Administrator to make a new...

  • Page 160
    FairPoint Communications, Inc. By: Gitle: Gary C. Garvey Senior Vice President, Human Resources 22

  • Page 161
    ...the Employer wishes to establish a nonqualified employee retirement plan (the "Plan") solely to provide deferred compensation for a select group of management or highly compensated employees within the meaning of sections 201(2), 301(a)(3) and 101(a)(1) of the Employee Retirement Income Security Act...

  • Page 162
    ...) for services rendered to the Employer (or if applicable, Company), including but not limited to wages, salary, bonuses, overtime, 2.11 3 commissions, and other remuneration that is reportable to the Federal government, or which would be reportable if it were not deferred under this Plan...

  • Page 163
    ... of this Plan, references to Eligible Employee shall mean Eligible Director, unless the context clearly indicates otherwise. 2.20 "Eligible Employee" means an individual who is part of a select group of management or highly compensated individuals who performs services for the Employer as an...

  • Page 164
    ... or its affiliates if the Company is a Publicly Traded Company. Key Employees shall be determined in accordance with Code section 109A using an identification date set forth in 2.26 2.2n 6 the Adoption Agreement. A listing of Key Employees as of an identification date shall be effective for the...

  • Page 165
    ....) 2.15 "Salary Reduction Contribution Account" means a bookkeeping account established by the Employer for each Participant electing to make a Salary Reduction Contribution under the Plan. 8 2.16 2.1n "Separation from Service" means a "separation from" within the meaning of Code section 109A...

  • Page 166
    ...If this Plan is a new Plan, and the Eligible Employee is not a participant in another account balance plan of the Employer within the meaning of Code section 109A and regulations thereunder, the Eligible Employee who is eligible to participate in this Plan as of the Plan's Effective Date may make an...

  • Page 167
    ... by the Plan Administrator and in accordance with Code section 109A and regulations thereunder. (d) Failure to Make Timely Election. If an Eligible Employee fails to set the time and form of distribution prior to the time the Participant obtains a Legally Binding Right to Employer Contributions...

  • Page 168
    ... the Plan Administrator and in accordance with Code section 109A and regulations thereunder. (f) Change in the time and/or form of distribution elections or conditions on or before December 31, 2008 . If the Employer so elects in the Adoption Agreement by December 31, 2008, a Participant may make...

  • Page 169
    ... not otherwise be payable in 2008. (3) (1) 1.5 Right to Terminate Participation or Cancel a Deferral Election During Calendar Year 2005. (a) So long as the Employer so adopted by December 31, 2005 as indicated in the Adoption Agreement, a Participant and/or the Plan Administrator may elect to...

  • Page 170
    ... respect to such Plan Year in: (1) (2) A lump sum payment; Installment payments over the life expectancy of the Participant (as determined under IRS tables for purposes of Section n2 of the Code). In accordance with the Employer's election(s), a Participant electing installment payments over his or...

  • Page 171
    ... after the date of the Key Employee's Separation from Service (or, if earlier, the date of death of the Key Employee). (b) (c) 5.1 Distribution upon Disability. If a Participant becomes Disabled while employed with the Employer, the unpaid portion of his or her Participant's Account balance, if...

  • Page 172
    ..., the Company may consider the rules applicable to "domestic relations orders" under Code section 111(p) and ERISA section 206(d), and such other rules and procedures as it deems relevant. (b) Conflicts of interest- To the extent necessary for any Federal officer or employee in the executive branch...

  • Page 173
    ... be paid to cover any employment tax, where applicable, on amounts deferred under the Plan, to pay federal income tax withholding amounts (or the corresponding state, local or foreign tax withholding amounts as a result of the payment of any employment taxes), and any additional income withholding...

  • Page 174
    ... the Claimant's authorized representative will have, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits and may submit issues and comments in writing. The review will take into account all...

  • Page 175
    ... extent not covered by insurance, the Employer shall indemnify the Plan Administrator, each employee, officer, director, and agent of the Employer, and all persons formerly serving in such capacities, against any and all liabilities or expenses, including all legal fees relating thereto, arising in...

  • Page 176
    ...31 (5) The Employer does not adopt a plan of the same type as the Plan for a period of three (3) years following the date of Plan termination. (b) Section 10.2(a) shall not apply if the Plan is terminated: (1) Within twelve (12) months of a corporate dissolution taxed under Code section 331 or...

  • Page 177
    ... to time, hire outside consultants, accountants, actuaries, legal counsel, or recordkeepers to perform such tasks as the Employer may from time to time determine. No benefits under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance...

  • Page 178
    ... the FairPoint Communications, Inc. 2005 Stock Incentive Plan; the FairPoint Communications, Inc. 1995 Stock Option Plan; the FairPoint communications, Inc. Stock Incentive Plan; and the FairPoint Communications, Inc. Amended and Restated 2000 Employee Stock Incentive Plan; (3) of our report dated...

  • Page 179
    QuickLinks Exhibit 23.1 Consent of Independent Registered Public Accounting Firm

  • Page 180
    ... and report financial information; and (ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: March 5, 2009 /s/ EUGENE B. JOHNSON Eugene B. Johnson Chief Executive Officer

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    QuickLinks Exhibit 31.1 CERTIFICATION

  • Page 182
    ...to rapidly navigate through this document Exhibit 31.2 CERTIFICATION I, Alfred C. Giammarino, cerdify dhad: 1. I have reviewed dhis Annual Repord on Form 10-K of FairPoind Communicadions, Inc. (dhe "Company"); 2. Based on my knowledge, dhis repord does nod condain any undrue sdademend of a maderial...

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    QuickLinks Exhihid 31.2 CERTIFICATION

  • Page 184
    ... of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ EUGENE B. JOHNSON Eugene B. Johnson Chief Executive Officer March 5, 2009 A signed original of...

  • Page 185
    QuickLinks Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 186
    ... the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ ALFRED C. GIAMMARINO Alfred C. Giammarino Chief Financial Officer March 5, 2009 A signed original...

  • Page 187
    QuickLinks Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002