FairPoint Communications 2009 Annual Report Download - page 7

Table of Contents
In connection with the Merger, the Company and Spinco entered into a $2.03 billion credit facility, as subsequently amended (the "Pre-petition
Credit Facility"), and Spinco issued and the Company subsequently assumed $551 million of 131/8% Senior Notes due 2018 (the "Old Notes"). In
consideration of the Merger, Verizon received a $1.16 billion cash payment from Spinco and an additional $551 million in cash from the proceeds of the
issuance of the Old Notes. Verizon's stockholders received approximately 54 million shares of the Company's common stock, representing
approximately 60.2% of the equity ownership interests in the Company at that time. As a result of the Merger the Company's size, as measured by
access lines and revenues, increased approximately fivefold.
Following the acquisition of the Northern New England operations, the Company faced significant short- and long term challenges, including,
among other things (i) integrating the Northern New England operations into the Company's existing operations, (ii) keeping pace with competition
from bundled offerings by cable companies, as well as the use of alternative technologies, which are eroding the Company's traditional base of wireline
voice customers, (iii) monitoring, repairing and upgrading the existing telecommunications network of the Northern New England operations, while
simultaneously building a new state-of-the-art next generation Internet protocol ("IP")-based network, and (iv) overcoming the difficulty of transitioning
certain back-office functions from Verizon's integrated systems to newly created systems of the Company, which occurred in January 2009 (the
"Cutover").
These challenges were made even more difficult by deteriorating market conditions. Although local exchange carriers ("LECs") were the only
source of voice communications for many years, more recently LECs, including the Company, have experienced a decline in the number of access lines
in service, primarily due to increased competition from wireless carriers, cable television operators who offer voice services, and Internet service
providers who offer voice over IP ("VoIP") services. Moreover, these competitive challenges were exacerbated by the turmoil in the financial markets,
which significantly limited available capital and resulted in a significant decline in the domestic economy. The Company believes that the economic
decline has reduced consumer spending and contributed to an increase in the rate of decline in access lines and an increase in overdue accounts
receivable balances from customers. Additionally, in connection with the Cutover, the Company incurred higher than anticipated incremental costs and
was required to devote significant resources, including management time and attention, to resolving Cutover-related problems. Finally, the regulatory
regimes under which the Company operates limit its flexibility in addressing these problems. As a result of the combined impact of each of these
factors, the Company was unable to attain the performance levels it expected at the time of the acquisition of the Northern New England operations.
The inability to achieve the expected financial performance levels with respect to the Northern New England operations made it impossible for the
Company to service its approximately $2.7 billion in debt obligations. Interest costs on the Company's significant debt absorbed a large portion of its
operating cash flow, thereby imposing limitations on the Company's ability to construct its next generation, IP-based network which the Company
believes will enable it to offer a new suite of IP-based services and implement its strategic business plan. The Company believes these are necessary
steps to reverse the current downward trend of the Company's revenue and operating cash flows.
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As a result of the various factors affecting the Company's financial performance and operations, the Company determined that it may not be in
compliance with certain financial covenants in the Pre-petition Credit Facility for the period ended June 30, 2009. Accordingly, as a first step in a
restructuring of its capital structure, the Company initiated an offer to exchange (the "Exchange Offer") the Old Notes for new 131/8% Senior Notes due
2018 (the "New Notes" and, together with the Old Notes, the "Notes"). The Exchange Offer was consummated on July 29, 2009. Pursuant to the
Exchange Offer, $439.6 million in aggregate principal amount of the Old Notes (which amount was
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