FairPoint Communications 2010 Annual Report Download - page 59

Table of Contents
Selling, general and administrative. Selling, general and administrative expenses increased $33.1 million to $417.5 million in 2009 compared to 2008.
The Telecom Group contributed $79.2 million and $38.1 million to selling, general and administrative expenses in the years ended December 31, 2009 and
2008, respectively. Included in selling, general and administrative expenses in the years ended December 31, 2009 and 2008 are $9.8 million and
$91.9 million, respectively, of expenses related to the Transition Services Agreement, and $28.0 million and $52.2 million, respectively, of non-recurring
Cutover related costs. Excluding the acquisition of the Telecom Group and the Transition Services Agreement, selling, general and administrative expenses
would have increased $98.3 million. The increase is primarily due to a $23.2 million increase in bad debt expense, increases in other operating expenses, some
of which are attributable to the methodology utilized by Verizon to allocate certain expenses to selling, general and administrative expenses prior to the Cutover
to our own operating systems, as well as $11.1 million in costs incurred to effect a restructuring of our capital structure prior to filing bankruptcy.
Depreciation and amortization. Depreciation and amortization increased $20.3 million to $275.3 million in 2009 compared to 2008. The Telecom Group
contributed $36.7 million and $27.8 million to depreciation and amortization expense in the years ended December 31, 2009 and 2008, respectively.
Excluding the acquisition of the Telecom Group, depreciation and amortization expense would have increased $11.4 million, due primarily to increased gross
plant asset balances, including capitalized software placed into service upon termination of the Transition Services Agreement. Also contributing to the increase
in depreciation and amortization expense in 2009 is an increase of $5.6 million in amortization expense on intangible assets acquired in the Merger, as no such
amortization was recognized during the first quarter of 2008, prior to the Merger.
Included in operating expenses are non-cash stock based compensation expenses associated with the award of restricted stock and restricted units. Stock
based compensation expenses totaled $2.1 million and $4.4 million for the years ended December 31, 2009 and 2008, respectively.
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Interest expense. Interest expense increased $42.9 million to $204.9 million in 2009 compared to 2008. This increase is due to the debt that we incurred
upon and subsequent to the closing of the Merger. Accrued and unpaid interest on the Old Notes exchanged in connection with our offer to exchange the Old
Notes for the New Notes (the “Exchange Offer”) through July 28, 2009 was paid on July 29, 2009 in the form of additional New Notes totaling
$18.9 million. Accrued and unpaid interest on the New Notes from July 29, 2009 through September 30, 2009 was payable in the form of additional New
Notes totaling $12.2 million. This $31.1 million interest expense paid or payable in the form of New Notes has been treated as non-cash for purposes of our
financial debt covenants under the Pre-Petition Credit Facility. Additionally, upon the filing of the Chapter 11 Cases, in accordance with the Reorganizations
Topic of the ASC, we ceased the accrual of interest expense on the Pre-Petition Notes and the Swaps as it was unlikely that such interest expense would be paid
or would become an allowed priority, secured or unsecured claim. We continued to accrue interest expense on the Pre-Petition Credit Facility, as such interest is
considered an allowed claim pursuant to the Plan.
Gain (loss) on derivative instruments. Gain (loss) on derivative instruments represents net gains and losses recognized on the change in fair market value
of interest rate swap derivatives. During the years ended December 31, 2009 and 2008, respectively, we recognized a net non-cash gain of $12.3 million and a
net non-cash loss of $11.8 million related to our derivative financial instruments. In connection with the filing of the Chapter 11 Cases, the Swaps were
terminated by the counterparties and have been recorded on the consolidated balance sheet at the termination values provided by the counterparties.
Gain on early retirement of debt. Gain on early retirement of debt represents $13.2 million net gains recognized on the repurchase of $19.9 million
aggregate principal amount of the Old Notes during the year ended December 31, 2009, partially offset by a loss of $0.8 million attributable to writing off a
portion of the unamortized debt issue costs associated with the Pre-Petition Credit Facility.
Other income (expense). Other income (expense) includes non-operating gains and losses such as those incurred on sale of equipment. Other income
decreased $1.5 million to $2.0 million in 2009 compared to 2008.
Reorganization items. Reorganization items represent expense or income amounts that have been recognized as a direct result of the Chapter 11 Cases. For
more information, see note 2 to the consolidated financial statements.
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