FairPoint Communications 2006 Annual Report Download

Download and view the complete annual report

Please find the complete 2006 FairPoint Communications annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 150

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150






xx


oo




(Exact Name of Registrant as Specified in Its Charter)

(State or Other Jurisdiction of 
Incorporation or Organization) (I.R.S. Employer Identification No.)

 
(Address of Principal Executive Offices) (Zip code)
Registrant’s Telephone Number, Including Area Code: .
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
 
Securities registered pursuant to Section 12(g) of the Act: 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer oAccelerated filer xNon-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2006 (based on the closing price of $14.40 per share as quoted on the New
York Stock Exchange as of such date) was approximately $386,771,000.
As of March 1, 2007, there were 35,271,910 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

Table of contents

  • Page 1
    ...) 521 East Morehead Street, Suite 250 Charlotte, North Carolina (Address of Principal Executive Offices) 13-3725229 (I.R.S. Employer Identification No.) 28202 (Zip code) Registrant's Telephone Number, Including Area Code: (704) 344-8150 . Securities registered pursuant to Section 12(b) of the...

  • Page 2
    ...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 . PART...

  • Page 3
    ... and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Forward-looking statements may relate to, among other things: · future performance generally, · our dividend policy and expectations regarding dividend payments, · business development activities, · future capital and...

  • Page 4
    ...largest local telephone company in the United States, in each case based on number of access lines. We operate in 18 states with 311,150 access line equivalents (including voice access lines and high speed data lines, which include digital subscriber lines, or DSL, wireless broadband and cable modem...

  • Page 5
    ... position in the communities we serve, with limited competition. Demand for telephone services from our residential and local business customers has historically been very stable despite changing economic conditions. As a result, we have experienced less of a decline in access lines during the last...

  • Page 6
    ... local and long distance voice, data and Internet services. In addition, we offer enhanced features such as caller identification, call waiting, call forwarding, teleconferencing, video conferencing and voicemail. We also offer broadband communications solutions to most of our customers primarily...

  • Page 7
    ... provision of our basic local telephone service to customers within our service areas; (ii) the provision of network access to interexchange carriers for origination and termination of interstate and intrastate long distance phone calls; (iii) Universal Service Fund high cost loop payments; and (iv...

  • Page 8
    ... Services, we offer wholesale long distance services to communications providers that are not affiliated with us. Data and Internet Services We offer Internet access via DSL technology, dedicated T-1 connections, Internet dial-up, high speed cable modem and wireless broadband. Customers can utilize...

  • Page 9
    ... following chart identifies the number of access line equivalents in each of our 18 states as of December 31, 2006: State Tggess Line Equivalents Maine Florida New York Washington Ohio Missouri Illinois Virginia Vermont Idaho Kansas Pennsylvania Oklahoma Colorado Other States(1) Total: 68,163 56...

  • Page 10
    ... our host and remote central offices and interconnection points with other incumbent carriers. Our fiber optic transport system is primarily a synchronous optical network capable of supporting increasing customer demand for high bandwidth transport services. This system supports advanced services...

  • Page 11
    ... 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 individuals. In addition, many of these companies, such as America Online, Inc., Microsoft Network and Yahoo, offer...

  • Page 12
    ... in the long distance business is based primarily on price, although service bundling, branding, customer service, billing service and quality play a role in customers' choices. Other Competition Although we currently believe we offer the only comprehensive suite of communications services in our...

  • Page 13
    ...offerings that may increase their ability to compete for residential customer lines, and we have experienced increasing competition from wireless service providers. Access Cparges. The Federal Communications Commission regulates the prices that incumbent local telephone companies charge for the use...

  • Page 14
    ...our operating companies. Among other things, the Multi Association Group plan reduces access charges and shifts a portion of cost recovery, which historically has been based on minutes-of-use, to flat-rate, monthly per line charges on enduser customers rather than long distance carriers. As a result...

  • Page 15
    ... local telephone services. State regulatory commissions generally regulate the rates incumbent local exchange carriers charge for intrastate services, including rates for intrastate access services paid by providers of intrastate long distance services. Although the Federal Communications Commission...

  • Page 16
    ... of digits when dialing and receive nondiscriminatory access to telephone numbers, operator service, directory assistance and directory listing; (iv) ensure access to telephone poles, ducts, conduits and rights of way; and (v) compensate competitors for the competitors' costs of completing calls to...

  • Page 17
    ... 31, 2006. Under current Federal Communications Commission regulations, the total Universal Service Fund available to all rural local telephone companies is subject to a cap. In any given year, the cap may or may not be reached. In any year where the cap is reached, the per access line rate at which...

  • Page 18
    ... Group plan created a new universal service support mechanism, Interstate Common Line Support, to replace carrier common line access charges and the recovery of certain costs formerly recovered through traffic sensitive access charges. A recent Federal Communications Commission order merged long...

  • Page 19
    ... component as a telecommunications service. The Federal Communications Commission order provides an option which allows rate of return carriers, such as our operating companies, the option to continue providing DSL service as a common carrier (status quo) offering but carriers are no longer required...

  • Page 20
    ... law and other factors that our board of directors may deem relevant. Our board of directors may decrease the level of dividends provided for in the dividend policy or entirely discontinue the payment of dividends. Our credit facility contains significant restrictions on our ability to make dividend...

  • Page 21
    ... financing for working capital, capital expenditures or acquisitions; · causing us to not be able to refinance our indebtedness on terms acceptable to us or at all; · limiting our flexibility in planning for, or reacting to, changes in our business and the communications industry generally; 19

  • Page 22
    ... a direct or indirect equity interest in the Company's operating subsidiaries. As a result, the Company will rely on dividends and other payments or distributions from its operating subsidiaries to pay dividends with respect to its common stock and to meet its debt service obligations generally. The...

  • Page 23
    ... restrict or prohibit the Company's subsidiaries from taking such actions. Our gredit fagility gontains govenants that limit our business flexibility by imposing operating and finangial restrigtions on our operations and the payment of dividends. Covenants in our credit facility impose significant...

  • Page 24
    ... affegt our ability to pay dividends. Our initial public offering in February 2005 resulted in an "ownership change" within the meaning of the U.S. federal income tax laws addressing net operating loss carry forwards, alternative minimum tax credits and other similar tax attributes. As a result of...

  • Page 25
    ... through December 31, 2006, due mainly to challenging economic conditions and the introduction of digital subscriber line services. We may continue to experience net access line losses in our markets. Our inability to retain access lines could adversely affect our business and results of operations...

  • Page 26
    ...: · loss of customers (in general, when we lose a customer for local service we also lose that customer for all related services); · reduced usage of our network by our existing customers who may use alternative providers for long distance and data services; · reductions in the prices for our...

  • Page 27
    ... diffigulties may adversely affegt our business and results of operations. We originate and terminate calls for long distance carriers and other interexchange carriers over our network and for that service we receive payments for access charges. These payments represent a significant portion of our...

  • Page 28
    ... networss. We are dependent on rights-of-way and other permits from railroads, utilities, state highway authorities, local governments and transit authorities to install and maintain conduit and related communications equipment for any expansion of our networks. We may need to renew current rights...

  • Page 29
    ..., the New York Stock Exchange and the Public Company Accounting Oversight Board, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. We evaluate our internal controls systems to allow management to report on...

  • Page 30
    ... from network access charges, which are paid to us by intrastate and interstate long distance carriers for originating and terminating calls in the regions served. This also includes Universal Service Fund payments for local switching support, long term support and interstate common line support. In...

  • Page 31
    ... the same per line support as the rural local exchange carriers receive if a state commission determines that granting such support to competitors would be in the public interest. In fact, wireless communications providers in certain of our markets have obtained matching support payments from the...

  • Page 32
    ... new or greater obligations related to assisting law enforcement, bolstering homeland security, minimizing environmental impacts, or addressing other issues that impact our business. For example, existing provisions of the Communications Assistance for Law Enforcement Act and Federal Communications...

  • Page 33
    ...of an electrical power failure. Transport and distribution network facilities include fiber optic backbone and copper wire distribution facilities, which connect customers to remote switch locations or to the central office and to points of presence or interconnection with the long distance carriers...

  • Page 34
    ... below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on shares of our common stock against (i) the cumulative total return of all companies listed on the New York Stock Exchange and (ii) the cumulative total return of the peer group set forth below...

  • Page 35
    ... Services, Inc. and Windstream Corporation. Dividend Poligy and Restrigtions General Our board of directors has adopted a dividend policy which reflects an intention that a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments...

  • Page 36
    ... County Poughkeepsie Limited Partnership to an affiliate of Verizon, which sale is expected to occur during the second quarter of 2007. See "-Restrictions on Payment of Dividends" below. Restrictions on Payment of Dividends Under Delaware law, our board of directors may declare dividends only to...

  • Page 37
    ... our credit facility and these restrictions. Equity Compensation Plan Information The table below provides information, as of the end of the most recently completed fiscal year, concerning securities authorized for issuance under our equity compensation plans. Number of segurities to be issued upon...

  • Page 38
    ...Residential access lines Business access lines High Speed Data subscribers $ 32,317 311,150 194,119 57,587 59,444 $ 28,099 288,899 188,206 55,410 45,283 $ 33,595 264,308 196,145 50,226 17,937 $ 38,803 248,581 189,803 51,810 6,968 Summary Cash Flow Data: Net cash provided by operating activities...

  • Page 39
    ...occurred as part of our initial public offering in February 2005. Total access line equivalents includes voice access lines and high speed data lines, which include DSL lines, wireless broadband and cable modem. (3) (4) (5) In connection with our initial public offering, we repurchased all of our...

  • Page 40
    ...14th largest local telephone company in the United States, in each case based on number of access lines. We operate in 18 states with 311,150 access line equivalents (including voice access lines and high speed data lines, or HSD, which include DSL, wireless broadband and cable modems) in service as...

  • Page 41
    ...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 Federal Communications Commission. These revenues also include USF payments for local switching support, long term support and interstate common line...

  • Page 42
    ... with the Company continuing as the surviving corporation for legal purposes. Spinco is a newly formed wholly-owned subsidiary of Verizon that will own Verizon's local exchange and related business activities in Maine, New Hampshire and Vermont. For accounting purposes, we expect that FairPoint will...

  • Page 43
    ... exchange carrier that provides voice communication, cable and internet services to over 7,200 access line equivalents, as of the date of acquisition, serving five communities in New York State. Berkshire's communities of service are adjacent to those of Taconic Telephone Corp., one of the Company...

  • Page 44
    ... to 2005. The decrease in local revenues from existing operations is primarily due to a 3.4% decline in net voice access lines. Universal Service Fund pigp cost loop support. USF high cost loop payments increased $0.3 million to $20.0 million in 2006. Acquired operations added $0.6 million in USF...

  • Page 45
    ... acquired companies and $2.4 million was attributable to our existing operations. This increase was primarily a result of promotional efforts and bundled product offerings with unlimited long distance designed to generate more revenue. Data and Internet services. Data and Internet services revenues...

  • Page 46
    ... due to the sale of two non-core equity investments. In 2005, in connection with our initial public offering, we refinanced our old credit facility and repurchased and/or redeemed the 9 ½% senior subordinated notes due 2008, or the 9 ½% notes, the floating rate callable securities due 2008, or the...

  • Page 47
    ... of promotional efforts and bundles with unlimited long distance designed to generate more revenue. Data and Internet services. Data and Internet services revenues increased $5.1 million to $24.2 million in 2005 from $19.1 million in 2004. The increase is due primarily to increases in DSL customers...

  • Page 48
    .... In connection with our initial public offering, we also refinanced our old credit facility and repurchased and/or redeemed the 9 ½% notes, the floating rate notes, the 12 ½% notes and the 11 7/8% notes, which resulted in significant charges of $87.7 million due to fees and penalties paid on the...

  • Page 49
    ... our business will suffer. However, our board of directors may, in its discretion, amend or repeal the dividend policy to decrease the level of dividends provided for or discontinue entirely the payment of dividends. On February 8, 2005, we used net proceeds received from our initial public offering...

  • Page 50
    ... of series A preferred stock and common stock of $129.3 million. The remaining proceeds were used to pay fees and penalties associated with the early retirement of long term debt of $61.0 million, to pay a deferred transaction fee of $8.4 million and to pay debt issuance costs of $9.0 million. For...

  • Page 51
    ... and investments, additional indebtedness, liens, capital expenditures, changes in the nature of our business, mergers, acquisitions, asset sales and transactions with affiliates. Subject to certain limitations set forth in the credit facility, we may use all of our Cumulative Distributable Cash (as...

  • Page 52
    ... (1) $8,615 5,424 2,685 496 10 (1) Fair value of interest rate swaps at December 31, 2006 was provided by the counterparties to the underlying contracts using consistent methodologies. Critigal Tggounting Poligies Our critical accounting policies are as follows: · Revenue recognition; 50

  • Page 53
    .... Certain of our interstate network access and data revenues are based on tariffed access charges filed directly with the Federal Communications Commission; the remainder of such revenues are derived from revenue sharing arrangements with other local exchange carriers administered by the National...

  • Page 54
    ...and state net operating loss carry forwards as of December 31, 2006. In February 2005, we completed our initial public offering which resulted in an "ownership change" within the meaning of the U.S. federal income tax laws addressing net operating loss carry forwards, alternative minimum tax credits...

  • Page 55
    ... the Emerging Issues Task Force on Issue No. 06-3, "How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement" ("EITF 06-3"). EITF 06-3 requires a company to disclose its accounting policy (i.e. gross vs. net basis) relating to the...

  • Page 56
    ... 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, 2006, 2005 AND 2004: Consolidated Balance Sheets as of December 31, 2006 and 2005 Consolidated...

  • Page 57
    ... with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring...

  • Page 58
    ... issue costs, net Deferred income tax Interest rate swaps Other Total assets $ 246,264 499,184 12,057 13,197 7,574 23,830 3,190 764 885,230 $ 242,617 481,343 39,808 3,662 9,145 47,160 5,649 207 908,139 Liabilities and Stogsholders' Equity Current liabilities: Accounts payable Dividend payable...

  • Page 59
    ... Other income (expense): Net gain (loss) on sale of investments and other assets Interest and dividend income Interest expense Impairment on investments Equity in net earnings of investees Realized and unrealized losses on interest rate swaps Other nonoperating, net Total other expense Income...

  • Page 60
    ...-sale securities Other comprehensive income from cash flow hedges Balance at December 31, 2004 Net income Net proceeds from issuance of common stock Transfer of Class A and Class C to common stock Exercise of stock options Issuance of restricted shares, net of forfeitures Recognition of compensation...

  • Page 61
    ...2006, 2005, and 2004 (in thousands) 2006 2005 2004 Net income (loss) Other comprehensive income (loss): Available-for-sale securities...- - - (1,243) (226) - (1,469) Cash flow hedges: Change in net unrealized gain, net of tax expense (benefit) of $0.1 million and $3.3 million as of the twelve ...

  • Page 62
    ...-off of offering costs - - 5,951 Net (gain) loss on sale of investments and other assets (14,740) 11 (104) Impairment on investments - 1,200 349 Amortization of investment tax credits (12) (16) (27) Stock-based compensation 2,859 2,350 49 Other non-cash item (637) (212) - Change in fair value of...

  • Page 63
    ...with early retirement of long term debt Payment of deferred transaction fee Repurchase of shares of common stock subject to put options Repurchase of redeemable preferred stock Loan origination and offering costs Dividends paid to minority stockholders Proceeds from the exercise of stock options Net...

  • Page 64
    ... provide telephone local exchange services in various states. Operations also include resale of long distance services, internet services, cable services, equipment sales, and installation and repair services. MJD Capital Corp. leases equipment to other subsidiaries of FairPoint. Carrier Services...

  • Page 65
    ...from: access, pooling, local calling services, Universal Service Fund receipts, long distance services, Internet and data 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 66
    ... Compensation Plan assets are classified as trading. The Company uses fair value reporting for marketable investments in debt and equity securities classified as either available-for-sale or trading. For available-for-sale securities, the unrealized holding gains and losses, net of the related tax...

  • Page 67
    .... The Company's investment in the Rural Telephone Bank (RTB) paid dividends annually at the discretion of its board of directors. The investment in the RTB was liquidated in April of 2006. (h) Property, Plant, and Equipment Property, plant, and equipment is carried at cost. Repairs and maintenance...

  • Page 68
    ... for impairment at least annually. During this assessment, management relies on a number of factors, including operating results, business plans, and anticipated future cash flows. Other intangible assets recorded by the Company consist of acquired customer relationships. These intangible assets...

  • Page 69
    ... tax planning strategies in making this assessment, as well as all positive and negative evidence that would affect the recoverability of deferred tax assets. As a result of the offering, the Company has reduced its aggregate long term debt and expects a significant reduction in its annual interest...

  • Page 70
    .... The fair value indicates an estimated amount the Company would pay if the contracts were canceled or transferred to other parties. Amounts receivable or payable under interest rate swap agreements are accrued at each balance sheet date and gains and losses related to effective hedges are reported...

  • Page 71
    ... No. 123(R), the Company accounted for its stock option plans using the intrinsic-value-based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense was recorded on the date of grant only...

  • Page 72
    ... and inputs used in valuations. The new measurement and disclosure requirements of SFAS No. 157 are effective for the Company in the first quarter 2008. The Company does not expect a significant impact from adopting SFAS No. 157. In September 2006, the SEC issued Staff Accounting Bulletin (SAB...

  • Page 73
    ... to pay fees and expenses, including underwriting discounts of $27.8 million, $8.2 million of debt issuance costs associated with the credit facility and a transaction fee of approximately $8.4 million paid to Kelso & Company, one of the Company's investors. On March 10, 2005, the Company used $18...

  • Page 74
    ...for income tax purposes. The Company incurred acquisition costs of $0.3 million. GITC is a single exchange rural incumbent local exchange carrier located in the Village of Germantown, Ohio. The GITC acquisition has been accounted for using the purchase method of accounting for business combinations...

  • Page 75
    ... deductible for income tax purposes. The Company incurred acquisition costs of $0.6 million. Berkshire is an independent local exchange carrier that provides voice communication, cable and internet services. Berkshire's communities of service are adjacent to those of Taconic Telephone Corp., one of...

  • Page 76
    ... Based upon the Company's purchase price allocation, the excess of the purchase price and acquisition costs over the fair value of the net identifiable assets acquired was approximately $4.6 million. The Company recorded an intangible asset related to the acquired company's customer relationships of...

  • Page 77
    ... that it signed definitive agreements to merge with a subsidiary of Verizon Communications Inc. owning the wireline operations of Verizon in Maine, New Hampshire and Vermont. The Company expects that FairPoint will be the acquiree for accounting purposes. Consequently, merger related costs have been...

  • Page 78
    ... and partnerships: Orange County-Poughkeepsie Limited Partnership Chouteau Cellular Telephone Company Illinois Valley Cellular RSA 2, Inc. Syringa Networks, LLC Other equity method investments Investments in securities carried at cost: RTB stock CoBank stock and unpaid deferred CoBank patronage RTFC...

  • Page 79
    ... the equity method and the Company's ownership percentage as of December 31, 2006 and 2005 are summarized below: 2006 2005 Chouteau Cellular Telephone Company ILLINET Communications, LLC Orange County-Poughkeepsie Limited Partnership ILLINET Communications of Central IL LLC Syringa Networks, LLC...

  • Page 80
    ... in Equity Securities Carried at Cost The aggregate cost of the Company's cost method investments totaled $4.1 million at December 31, 2006. These investments consist primarily of investments in stock of governmental agencies and minority interests in limited partnerships or corporations. Therefore...

  • Page 81
    ... of long-term debt for each of the five years subsequent to December 31, 2006 are as follows (in thousands): Fiscal year: 2007 2008 2009 2010 2011 Thereafter $ 714 753 161 2,210 15,171 588,977 $607,986 (a) 2005 Senior Secured Notes On February 8, 2005, the Company entered into a credit facility...

  • Page 82
    ..., capital expenditures, changes in the nature of the Company's business, mergers, acquisitions, asset sales and transactions with the Company's affiliates. The credit facility restricts the Company's ability to declare and pay dividends on its common stock as follows: · The Company may use all of...

  • Page 83
    ... the Company to use available cash to repurchase shares of its capital stock, subject to the same conditions. The Company may obtain letters of credit under the revolving facility to support obligations of the Company and/or obligations of its subsidiaries incurred in the ordinary course of business...

  • Page 84
    ... amounts of dividends that may be paid. A portion of the RTFC notes, the full amount of the RTB notes and notes payable to the Rural Utilities Service were repaid in 2005 using proceeds from the Company's initial public offering and borrowings under the 2005 Senior Secured Notes. The Company also...

  • Page 85
    ..., 2006 and 2005, the NQDC Plan assets were $0.7 million and $0.6 million, respectively. The related deferred compensation obligation is included in other liabilities in the accompanying consolidated balance sheets. C&E, Taconic, and GT Com also sponsor defined contribution 401(k) retirement savings...

  • Page 86
    ..." Federal tax benefit (expense) from continuing operations State income tax benefit (expense), net of Federal income tax expense Dividends and loss on redemption on preferred stock Dividends received deduction Rate change Change in valuation allowance (Federal and state) Other Total income tax...

  • Page 87
    ... 31, 2006, the Company has alternative minimum tax credits of $2.7 million that may be carried forward indefinitely. The Company 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 88
    ... cost related to non-vested share-based payment arrangements granted under the Company's four stock-based compensation plans. That cost is expected to be recognized over a weighted average period of 2.1 years. Any future share awards under any of these plans will be made using newly issued...

  • Page 89
    ... fair value of stock options granted during 1995 was $0.69 on the date of grant using the Black-Scholes option-pricing model. Input variables used in the model included no expected dividend yield, a risk-free interest rate of 6.41%, and an estimated option life of five years. Because the Company...

  • Page 90
    ...under the 1998 Plan was $58.95 on the date of grant using the Black-Scholes option-pricing model. Input variables used in the model included no expected dividend yield, a risk-free interest rate of 6.52%, and an estimated option life of 10 years. Because the Company was not public on the date of the...

  • Page 91
    ...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 discretion of the compensation committee. During 2002, the Company amended the 2000 Plan to limit the number...

  • Page 92
    ... to 280,880 additional shares of common stock may be issued in the future pursuant to awards authorized under the 2005 Plan. In March 2006, the Company's board of directors approved the grant of an additional 100,000 shares to the Company's chief executive officer. These shares will be granted under...

  • Page 93
    ...Company's board of directors approved an annual award to each of the Company's non-employee directors of approximately $30,000 in the form of non-vested stock or stock units, at the recipient's option, issued under the 2005 Plan. The non-vested stock and stock units will vest in four equal quarterly...

  • Page 94
    ... of Carrier Services as of December 31, 2006 and 2005 follows (in thousands): 2006 2005 Accounts receivable Current assets of discontinued operations Accrued liabilities Restructuring accrual Accrued property taxes Current liabilities of discontinued operations Selected information relating to...

  • Page 95
    ... on the sale of two non-core assets resulting in pre-tax gains of $16.4 million. In addition, in the fourth quarter of 2006, the Company incurred $2.4 million in expenses related to the merger agreement with Verizon Communications Inc. In connection with the Company's initial public offering in...

  • Page 96
    ...term Debt The fair value of the Company's long-term debt is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities. At December 31, 2006 and 2005, the Company had long-term debt with a carrying...

  • Page 97
    ... the Company's initial public offering of common stock, contained certain material misstatements and omitted certain material information necessary to be included relating to the Company's broadband products and access line trends. The plaintiff, who has been a plaintiff in several prior securities...

  • Page 98
    ... to the North Carolina State Court, which was denied by the Federal Magistrate. The plaintiff has objected to and appealed the Magistrate's decision to the District Court Judge. The Company has contested the appeal and filed a Motion to Dismiss the action. The Magistrate, on February 9, 2006, issued...

  • Page 99
    ... under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Management's Report on Internal Control Over Finangial Reporting Management is...

  • Page 100
    ... inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all...

  • Page 101
    ... Communications Systems, Inc. (Unite), and Cass County Telephone Company Limited Partnership and LEC Long Distance, Inc. (Cass County) during the year ended December 31, 2006, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting...

  • Page 102
    ... services to the cable television, telephone and related industries. From 1985 to 1987, Mr. Johnson served as a director of the mergers and acquisitions department of Cable Investments, Inc., an investment banking firm. Mr. Johnson is also on the Board of Trustees of the University of North Carolina...

  • Page 103
    ... under our stockholders agreement which was terminated in connection with our initial public offering. David L. Hauser- Mr. Hauser, age 55, was appointed as a director of our company in February 2005. He is currently the Group Executive and Chief Financial Officer of Duke Energy Corporation, where...

  • Page 104
    ... listing standards of the New York Stock Exchange. Among other functions, the compensation committee oversees the compensation of our chief executive officer and other executive officers and senior management, including plans and programs relating to cash compensation, incentive compensation, equity...

  • Page 105
    ... Officer Executive Vice President, Corporate Development Executive Vice President, General Counsel and Secretary Senior Vice President and Controller Treasurer The following sets forth selected biographical information for our executive officers who are not directors. Peter G. Nixon. Mr. Nixon...

  • Page 106
    ... and persons who own, or are part of a group that owns, more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC and the New York Stock Exchange. Officers, directors and greater than ten percent shareholders are required...

  • Page 107
    ... 11. EXECUTIVE COMPENSTTION Compensation Committee Report Our executive compensation program for our executive officers named in the Summary Compensation Table below ("NEOs") is administered by the compensation committee of our board of directors. The compensation committee is generally responsible...

  • Page 108
    ... of FairPoint; and (5) offer a total compensation program that takes into account the compensation practices of comparable companies. In order to more closely align NEO compensation with the long-term interests of our stockholders, the intent of the compensation committee is to generally provide...

  • Page 109
    ... chief executive officer and the other executive officers with the general goal of providing competitive salaries. Decisions take into account independent studies and surveys prepared by consultants based on publicly available information with respect to other comparable communications companies. In...

  • Page 110
    ...Company does not in any way time its stock awards to the release of material non-public information. Deferred Compensation We maintain a nonqualified deferred compensation plan (the NQDC Plan) for NEOs and other select executives in order to enable them to defer compensation in excess of the limits...

  • Page 111
    ...; (iii) 5%-developing FairPoint's employees; (iv) 5%-supporting public policy initiatives and FairPoint complying with the internal control requirements of the Sarbanes-Oxley Act; (v) 2.5% -achieving specified customer service and community relations goals; and (v) 2.5%-promoting workers' safety and...

  • Page 112
    ...25%-developing new lines of business; and (iii) 15% -managing FairPoint's non-strategic assets. (i) 40%-meeting the needs of FairPoint's various departments; (ii) 30% -standardizing and enhancing FairPoint's compliance with public company and corporate governance requirements; (iii) 10%-assisting in...

  • Page 113
    ... of base salary as of the date of termination, plus the continuation of certain benefits, including medical benefits, for twelve months. Tax Considerations Section 162(m) of the Internal Revenue Code, or the Code, generally disallows a tax deduction to public corporations for compensation, other...

  • Page 114
    ...Twards $ Non-equity Ingentive Plan Compensation $ Change in pension volume and NQ DC Earnings $ Tll Other Compensation $ (4)(5) Total $ Eugene B. Johnson 2006 434,740 394,140 1,171,158 - - - 25,647 2,025,685 Chairman of the Board of Directors and Chief Executive Officer John Crowley...

  • Page 115
    ...($) Maximum ($) Name Eugene B. Johnson date Threshold (K) Target (K) (1) Maximum (K) units (K)(2) awards ($/Sh) 17-Mar-06 - - - - - - 50,000 - - Chairman of the Board of Directors and Chief Executive Officer John Crowley Executive Vice President, Chief Financial Officer 8-Sep-06...

  • Page 116
    ...shares, units or other plan awards: marset or payout value of unearned shares, units or other rights that have not vested (K) Name Eugene B. Johnson Grant Date unexergisable right that have not vested ($) Chairman of the Board of Directors and Chief Executive Officer 5/21/1998 1/1/2002 3/12...

  • Page 117
    ... ($) Name (K) ($) Eugene B. Johnson Chairman of the Board of Directors and Chief Executive Officer - - 63,163 872,913 John Crowley Executive Vice President, Chief Financial Officer - - 12,500 213,125 Shirley J. Linn Executive Vice President, General Counsel and Secretary Peter G. Nixon...

  • Page 118
    ..., General Counsel and Secretary 4,023 631 2,079 - 6,733 Peter G. Nixon Chief Operating Officer 6,501 11,895 998 1,575 334 - - 7,833 Walter E. Leagh, Jr. Executive Vice President, Corporate Development 4,881 18,351 Potential Payments Upon Termination or Change of Control The Company...

  • Page 119
    ... termination Voluntary retirement Without cause or after change in control $ 237,500 $ 15,132 $ 252,632 Diregtor Compensation We use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on our board of directors. In setting director...

  • Page 120
    ... annual award of approximately $30,000 in the form of restricted stock or restricted units, at the recipient's option, which are issued under our 2005 Stock Incentive Plan. These awards vest in four quarterly installments from the grant date, and the holders thereof are entitled to receive dividends...

  • Page 121
    ITEM 12. SECURITY OWNERSHIP OF CERTTIN BENEFICITL OWNERS TND MTNTGEMENT TND RELTTED STOCKHOLDER MTTTERS The following table sets forth the beneficial ownership of our common stock as of March 1, 2007 for each director, each NEO, by all directors and executive officers of the Company as a group and ...

  • Page 122
    ... shares of restricted stock awarded under our 2005 Stock Incentive Plan and (v) includes 60 shares of common stock owned by Mr. Nixon's spouse and children. (4) With respect to shares beneficially owned: (i) includes 77,364 shares of our common stock issuable upon exercise of stock options that are...

  • Page 123
    ...Report for information regarding securities authorized for issuance under the Company's equity compensation plans. ITEM 13. CERTTIN RELTTIONSHIPS TND RELTTED TRTNSTCTIONS, TND DIRECTOR INDEPENDENCE Nominating Tgreement and Registration Rights Tgreement In connection with our initial public offering...

  • Page 124
    ... Fees (2) Tax Fees (3) $ 904,000 30,000 394,000 $ 1,175,000 12,000 237,000 (1) Audit fees include amounts billed to us related to annual financial statement audit work and quarterly financial statement reviews. In 2005, this category includes services associated with our initial public offering...

  • Page 125
    ... 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. In addition, certain financial statements of equity method investments owned by the Company...

  • Page 126
    ... authorized. FAIRPOINT COMMUNICATIONS, INC. Date: March 13, 2007 By: /s/ EUGENE B. JOHNSON Name: Eugene B. Johnson Title: Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by...

  • Page 127
    ... and Plan of Merger, dated September 13, 2006, among FairPoint, MJD Ventures, Inc., FairPoint Germantown Corporation and The Germantown Independent Telephone Company.(1) Agreement and Plan of Merger, dated as of January 15, 2007, by and among Verizon Communications Inc., Northern New England...

  • Page 128
    10.16 10.17 10.18 Tax Sharing Agreement, dated as of January 15, 2007, by and among FairPoint, Verizon Communications Inc. and Northern New England Spinco Inc.(2) Amended and Restated Tax Sharing Agreement, dated as of November 9, 2000, by and among FairPoint and its Subsidiaries.(9) Affiliate ...

  • Page 129
    ... Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference. (1) Incorporated by reference to the Quarterly Report on Form 10-Q of FairPoint for the period ended September 30, 2006. (2) Incorporated by reference to the...

  • Page 130
    ... Corp. Taconic TelCom Corp. Ellensburg Telephone Company Elltel Long Distance Corp. Sidney Telephone Company Utilities, Inc. Standish Telephone Company China Telephone Company Maine Telephone Company UI Long Distance, Inc. UI Communications, Inc. UI Telecom, Inc. Telephone Service Company Chouteau...

  • Page 131
    ... Mutual Long Distance Company Fremont Telcom Co. Fremont Broadband, LLC Fretel Communications, LLC Comerco, Inc. YCOM Networks, Inc. Berkshire Telephone Corporation Berkshire Cable Corp. Berkshire Net, Inc. Berkshire Cellular, Inc. Berkshire New York Access, Inc. Community Service Telephone Co...

  • Page 132
    ...Cass County Telephone Company Limited Partnership and LEC Long Distance, Inc. (Cass County) during the year ended December 31, 2006, and management excluded these subsidiaries from its assessment of the effectiveness of FairPoint Communications, Inc.'s internal control over financial reporting as of...

  • Page 133
    ... on Form h-8 and Nos. 333-127759 and 333-127760 on Form h-3 of FairPoint Communications, Inc. of our report dated February 28, 2007 relating to the financial statements of mrange County-Poughkeepsie Limited Partnership as of December 31, 2006 and 2005 and for each of the three years in the period...

  • Page 134
    ... 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 controls over financial reporting. Date: March 13, 2007 /s/ Eugene B. Johnson Eugene B. Johnson Chief Executive Officer

  • Page 135
    ... certify that: 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of FairPoint Communications, Inc. (the "Company"); Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light...

  • Page 136
    ...(d) of the Securities Exchange Act of 1934; and 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 13, 2007 A signed original of...

  • Page 137
    ... connection with the Annual Report on Form 10-K of FairPoint Communications, Inc. (the "Company") for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John P. Crowley, Chief Financial Officer of the Company, certify, pursuant...

  • Page 138
    ...ORANGE COUNTY POUGHKEEPSIE LIMITED PARTNERSHIP TABLE OF CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Balance Sheets Page 1 2 December 31, 2006 and 2005 Statements of Operations 3 For the years ended December 31, 2006, 2005 and 2004 Statements of Changes in Partners' Capital...

  • Page 139
    ...'s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management...

  • Page 140
    ...LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 2006 AND 2005 (Dollars in Thousands) 2006 2005 ASSETS CURRENT ASSETS: Accounts receivable, net of allowance of $0 and $0 Unbilled revenue Due from general...: Accounts payable and accrued liabilities Advance billings Total current liabilities LONG TERM...

  • Page 141
    ...see Note 4 for Transactions with Affiliates): Cost of service (excluding depreciation and amortization related to network assets included below) General and administrative Depreciation and amortization Net loss on sale of property, plant and equipment Total operating costs and expenses 24,449 2,623...

  • Page 142
    ... LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Dollars in Thousands) General Partner Verizon Wireless Limited Partners of the East LP Taconic Telephone Corporation Warwick Valley Telephone Company Total Partners' Capital BALANCE...

  • Page 143
    ... loss on sale of property, plant and equipment Changes in certain assets and liabilities: Accounts receivable Unbilled revenue Prepaid expenses and other current assets Accounts payable and accrued liabilities Advance billings Long term liabilities Net cash provided by operating activities $ 124...

  • Page 144
    ... service areas. The partners and their respective ownership percentages as of December 31, 2006, 2005 and 2004 are as follows: Managing and general partner: Verizon Wireless of the East LP* Limited partners: 85.0% Taconic Telephone Corporation ("Taconic") Warwick Valley Telephone Company...

  • Page 145
    ...and equipment primarily represents costs incurred to construct and expand capacity and network coverage on Mobile Telephone Switching Offices ("MTSOs") and cell sites. The cost of property, plant and equipment is depreciated over its estimated useful life using the straight-line method of accounting...

  • Page 146
    ...This approach is generally referred to as the residual method. In addition, the fair value of the aggregated wireless licenses was then subjected to a reasonableness analysis using public information of comparable wireless carriers. If the fair value of the aggregated wireless licenses as determined...

  • Page 147
    ... of accounts receivable. Approximately 98% of the Partnership's 2006, 2005 and 2004 revenue is affiliate revenue. Cellco and the Partnership rely on local and long-distance telephone companies, some of whom are related parties, and other companies to provide certain communication services. Although...

  • Page 148
    ... December 31, 2006, 2005 and 2004: 2006 2005 2004 Revenue: Operating revenues (b) Cellsite allocated revenues (c) Cost of Service: Direct telecommunication charges (a) Long distance charges Allocation of cost of service (a) Allocation of switch usage cost (a) Selling, General and Administrative...

  • Page 149
    ... effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco breached contracts with consumers, violated certain state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. Certain of these...

  • Page 150
    ... Write-offs Balance at End Charged to Operations Net of Recoveries of the Year Accounts Receivable Allowances: 2006 2005 2004 $ $ $ - - 20 $ $ $ - - - $ $ $ $ $ (20) $ - - - - - 8. SUBSEQUENT EVENTS Effective January 15, 2007, the General Partner, Cellco and Taconic entered into...