FairPoint Communications 2011 Annual Report Download - page 35

Table of Contents





As discussed in “Part II – Item 9A. Controls and Procedures,” we concluded that the following material weakness in our internal controls over financial
reporting which was previously identified in our 2010 Annual Report on Form 10-K and our quarterly reports on Form 10-Q for the quarters ending March 31,
2011, June 30, 2011 and September 30, 2011 continues to exist as of December 31, 2011:
• Procedures for the review of our income tax provision and supporting schedules were not adequate to identify and correct errors in a timely
manner.
As a result of this material weakness, our management concluded that our disclosure controls were not effective as of December 31, 2011. Our
management has initiated steps to remediate this issue. If the remediation is not successful or we otherwise fail to maintain an effective system of internal
controls, such a failure could result in material misstatements in our financial statements, prevent us from providing timely financial statements or prevent us
from meeting our reporting requirements both with the SEC and under our debt obligations, cause investors to lose confidence in our reported financial
information and have a negative impact on the market price of our Common Stock.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act and the related rules and regulations of the SEC, including
accelerated reporting requirements and expanded disclosures regarding evaluations of internal control systems. With respect to internal control over financial
reporting, standards established by the Public Company Accounting Oversight Board define a material weakness as a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected on a timely basis. If our management identifies one or more material weaknesses in internal
control over financial reporting in the future in accordance with the annual assessments and quarterly evaluations required by the Sarbanes-Oxley Act, we will
be unable to assert that our internal controls are effective which could result in sanctions or investigation by regulatory authorities. In addition, any such
material weakness could result in material misstatements in our financial statements, prevent us from providing timely financial statements or meeting our
reporting requirements both with the SEC and under our debt obligations and cause investors to lose confidence in our reported financial information.
We note that we have identified a material weakness in our internal controls over financial reporting which existed as of December 31, 2011 and had
previously identified certain other material weaknesses in our internal controls over financial reporting which existed as of December 31, 2010 and for the
quarters ending March 31, 2011, June 30, 2011 and September 30, 2011, which material weaknesses are discussed in greater detail in “Item 9A. Controls and
Procedures”.



We sponsor qualified pension and post-retirement medical and dental plans for certain employees which require significant amounts of cash to maintain.
The accrual of future benefits by employees and retirees in these qualified pension plans that are not covered by a collective bargaining agreement have been
frozen. However, under the terms of our qualified pension plans for participants and retirees covered by a collective bargaining agreement, contractual
increases in benefits will continue each year through 2014, at which time the collective bargaining agreements will terminate and be renegotiated. Future
increases in benefits earned by participants and retirees in these plans will require increasing amounts of cash to maintain and may limit our operational
flexibility. These future cash requirements could have a material adverse impact on our business, financial condition, results of operations, liquidity and/or
the market price of our Common Stock.
Our qualified pension plans have funding requirements as defined under ERISA. These required pension contributions may be impacted by several
factors, including fluctuations in the discount rate used to calculate the funding target, the performance of our pension asset portfolio, the number of retirees
who elect to receive lump sum distributions and the demographics of plan participants. Fluctuations or adverse changes in any of these factors are beyond our
control and may diminish the funded status of our pension plans thereby significantly increasing the contributions we are required to make under ERISA. For
example, economic factors have led to a significant decrease in our discount rate for our pension plans and certain workforce reductions have resulted in a
large amount of lump-sum payments being made to participants in 2011. These factors will increase our future contributions to the pension plans. The extent
of such increases in our required contributions could have a material adverse impact on our business, financial condition, results of operations, liquidity
and/or the market price of our Common Stock.
During the year ended December 31, 2011, we experienced actual gains on pension plan assets totaling approximately 1.6%. The actuarially-determined
funded status of our pension plans is dependent on the market value of the assets held by each plan. As such, a significant decline in the market value of the
pension plans’ assets could result in us having to make additional contributions to these plans. Furthermore, if the third party trustee who holds these plan
assets were to become insolvent, access to the plan assets could be limited and we could be required to pay lump-sum payments and benefits from our assets.
Such required contributions and other payments could have a material adverse impact on our business, financial condition, results of operations, liquidity
and/or the market price of our Common Stock.

Upon our adoption of fresh start accounting, we recorded our property, plant and equipment at fair value and we recorded amortizable intangible assets
of $99.4 million and a non-amortizable intangible asset of $58.0 million. Amortizable long-lived assets must be reviewed for impairment whenever indicators
of impairment exist. Non-amortizable long-lived assets are required to be reviewed for impairment on an annual basis or more frequently whenever indicators