FairPoint Communications 2009 Annual Report Download - page 20

Table of Contents
While many of these issues were anticipated, the magnitude of difficulties experienced was beyond our expectations.
We have since worked diligently to remedy these issues. The order backlog has been reduced significantly and order handle times continue to be
reduced. Provisioning of new orders has steadily improved and call volumes into the customer service centers have returned to pre-Cutover levels. In
addition, systems functionality supporting our collection efforts continues to improve, but certain functionality is not fully operational. As a result of
these functionality issues and past billing issues, our efforts to collect past due amounts continue to be hampered. During the third quarter of 2009, we
revised the methodology of calculating the allowance for doubtful accounts based on recent collections experience. The issues discussed above and the
change in methodology resulted in a significant increase in our allowance for doubtful accounts during the third quarter of 2009. Overall, delays in
implementing the collections software functionality, together with other Cutover issues, have caused an increase in accounts receivable, which has
adversely impacted our liquidity.
Because of these Cutover issues, during the year ended December 31, 2009, we incurred $28.8 million of incremental expenses in order to operate
our business, including third-party contractor costs and internal labor costs in the form of overtime pay. The Cutover issues also required significant
staff and senior management attention, diverting their focus from other efforts.
In addition to the significant incremental expenses we incurred as a result of these Cutover issues, we were unable to fully implement our operating
plan for 2009 and effectively compete in the marketplace, which we believe had an adverse effect on our business, financial condition, results of
operations and liquidity.
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On April 30, 2010, the Company filed amendments to its Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 2009, June 30,
2009 and September 30, 2009 (collectively, the "Amendments") to reflect the effect of an accounting error, a one-time non-operating loss related to a
disputed claim and certain billing and other adjustments. For the nine months ended September 30, 2009, the accounting error and the billing and other
adjustments resulted in a $25.0 million overstatement of revenues, a $0.2 million understatement of operating expenses and a $9.6 million overstatement
of other income in the financial data originally reported in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009,
which was originally filed with the SEC on November 20, 2009. The restatement of the interim condensed consolidated financial statements contained
in the Amendments (the "Restatement"), which Restatement accounts for the foregoing overstatements and understatement, resulted in a reduction in net
income of $21.8 million, net of income taxes, for the nine months ended September 30, 2009. For more information, see the Amendments as filed with
the SEC.
As a result of the Restatement, the Company determined that the Company was not in compliance with the interest coverage ratio maintenance
covenant and the leverage ratio maintenance covenant under the Pre-petition Credit Facility for the measurement period ended June 30, 2009, which
constituted an event of default under each of the Pre-petition Credit Facility and the Swaps, and may have constituted an event of default under the
Notes, in each case at June 30, 2009.
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