-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HxENnRKo1fNFEZEIqS0u7W/q+wVP70kq5x8wlpra3cSHqH5LveUp/3ETAjevD/iX trhCIv57za4o1qiIQl+OHA== 0000912057-01-506364.txt : 20010409 0000912057-01-506364.hdr.sgml : 20010409 ACCESSION NUMBER: 0000912057-01-506364 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRPOINT COMMUNICATIONS INC CENTRAL INDEX KEY: 0001062613 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 133725229 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-56365 FILM NUMBER: 1590806 BUSINESS ADDRESS: STREET 1: 521 EAST MOREHEAD ST STREET 2: STE 250 CITY: CHARLOTTE STATE: NC ZIP: 28202 BUSINESS PHONE: 7043448150 FORMER COMPANY: FORMER CONFORMED NAME: MJD COMMUNICATIONS INC DATE OF NAME CHANGE: 19980527 10-K405 1 a2042675z10-k405.txt 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000. / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to COMMISSION FILE NUMBER 333-56365 FAIRPOINT COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-3725229 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 521 EAST MOREHEAD STREET, SUITE 250 28202 CHARLOTTE, NORTH CAROLINA (Zip Code) (Address of Principal Executive Offices)
------------------------ Registrant's Telephone Number, Including Area Code: (704) 344-8150. SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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/ As of March 15, 2001, the registrant had outstanding 45,834,720 shares of Class A common stock and 4,269,440 shares of Class C common stock. 2,108,594 shares of Class A common stock were held by non-affiliates and the Company estimates the market value of such shares, as of March 15, 2001, was $27.7 million, based upon a purchase price of $13.12 per share. All of the shares of Class C common stock were held by non-affiliates and the Company estimates the market value of such shares, as of March 15, 2001, was approximately $56.0 million, based upon a purchase price of $13.12 per share. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FAIRPOINT COMMUNICATIONS, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
ITEM PAGE NUMBER NUMBER - --------------------- -------- Index....................................................... 2 PART I 1. Business.................................................... 3 2. Properties.................................................. 11 3. Legal Proceedings........................................... 11 4. Submission of Matters to a Vote of Security Holders......... 11 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 12 6. Selected Financial Data..................................... 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 14 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................ 22 8. Independent Auditors' Report and Consolidated Financial Statements.................................................. 23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 60 PART III 10. Directors and Executive Officers of the Registrant.......... 60 11. Executive Compensation...................................... 62 12. Security Ownership and Beneficial Management................ 66 13. Certain Relationships and Related Transactions.............. 67 PART IV 14.d Exhibits, Financial Statement Schedules, and Reports on Form 8K.......................................................... 69 Independent Auditors' Report and Schedule................... 70 Signatures.................................................. 72 Exhibit Index............................................... 73
2 PART I Except as otherwise required by the context, references in this Annual Report to the "Company," "FairPoint," "our company," "we," "us," or "our" refer to the combined business of FairPoint Communications, Inc. and all of its subsidiaries. ITEM 1. BUSINESS OUR BUSINESS We are a facilities-based provider of voice, data and Internet services. We were incorporated in 1991 for the purpose of acquiring and operating traditional telephone companies in rural markets. Since our first traditional telephone company acquisition in 1993, we have acquired 28 such companies, which currently operate in 17 states. In early 1998, we launched our competitive communications business by competing for business customers in Tier IV and select Tier III markets, which typically have populations of less than 100,000. These markets are generally within a 200-mile radius of the areas served by our traditional telephone companies. We refer to this approach as our "edge-out" strategy, which allows us to leverage our existing network infrastructure, operating systems and management expertise to expand our competitive communications business in a capital-efficient manner. Furthermore, the stable cash flows of our traditional telephone business provide the financial capacity to help fund our continued acquisition activity or competitive communications business growth. We believe that we have enjoyed strong success to date in terms of access lines added and market expansion. As of December 31, 2000, we provided service to over 357,000 access lines. This total includes approximately 237,000 access lines served by our traditional telephone companies. Approximately 80% of our traditional telephone company access lines serve residential customers. We believe that our traditional telephone business is attractive because there is limited competition and a favorable regulatory environment. In particular, pursuant to existing state and federal regulations, we are able to charge rates which enable us to recover our operating and capital costs, plus a reasonable (as determined by the relevant regulatory authority) rate of return on our investment capital. Traditional telephone companies are characterized by stable operating results and strong cash flow margins. We believe that there is an opportunity to provide our integrated suite of communications services to small- and medium-sized businesses in select markets near our traditional telephone companies. We expect these markets will display strong growth driven by the increasing demand for data and Internet services by businesses. We intend to capitalize on this opportunity and have deployed, or are in the process of deploying, a number of data applications, high-speed Internet access services and web-enabled business applications that are designed for our target customers. BUSINESS STRATEGY Our objective is to be the leading provider of voice, data and Internet services in our target markets. The key elements of our strategy are as follows: - Accelerate growth through strategic acquisitions. We have accumulated substantial experience in acquiring and integrating 28 traditional telephone companies over the past 8 years. We intend to utilize this experience to accelerate our growth, expand our national presence, complement our service capabilities and increase our customer base by continuing to acquire strategically located traditional telephone companies. - Improve operating efficiency and profitability. We have successfully achieved significant operating efficiencies at our acquired traditional telephone companies by applying our operating, regulatory, marketing, technical and management expertise and our financial resources, and 3 consolidating various functions to improve their operations and profitability. Additionally, we have increased revenues by introducing innovative marketing strategies for enhanced and ancillary services. - Increase customer loyalty and brand identity through superior customer service. We seek to attract and build long-term relationships with our customers by providing a highly experienced, locally-based account management team that provides consultative sales and ongoing personalized customer care. We believe that our service-driven customer relationship strategy builds strong, positive brand name recognition and leads to high levels of customer satisfaction and loyalty. - Generate stable cash flow to enhance growth. Our traditional telephone business, which served approximately 237,000 access lines as of December 31, 2000, generated approximately $111.4 million of Adjusted EBITDA for 2000. We intend to use this continuing cash flow and our other financing sources to fund future acquisitions of traditional telephone companies and grow our competitive communications business. - Enter regional competitive communications markets. The geographic diversity of our traditional telephone companies allows us to pursue a competitive communications business edge-out strategy, which permits us to enter markets on a regional and potentially national basis. Our ability to place newly acquired competitive communications customers on our facilities-based network, coupled with our existing traditional telephone companies' switching network, back-office capability and sales and technical personnel, affords us a competitive advantage by enabling us to limit capital spending and enhance profitability. - Deploy a capital-efficient network. By both leveraging our existing traditional telephone companies' switching network and transport infrastructure and leasing the last mile to the customer from the incumbent carrier, we are able to cost-effectively offer competitive communications services without making significant capital investments in host switching and network equipment. The use of existing switches from our traditional telephone companies in our competitive markets allows us to avoid up-front costs for legacy circuit-based switching and maintain flexibility to deploy next generation packet-based technologies when they become commercially available. - Target small- to medium-sized business customers in Tier IV and select Tier III markets. We believe there is significant opportunity in our target markets to provide an integrated suite of voice, data and Internet services to small- and medium-sized businesses. We believe customers in these markets are underserved by incumbent telephone companies and that many of them would prefer to purchase communications services as an integrated package from a single provider. Additionally, the type of high-speed connectivity and data applications we offer are becoming increasingly important for our target customers due to the dramatic growth in Internet and web-enabled business applications and the need to overcome any geographic disadvantage such customers may face. - Offer web-enabled business applications. We are developing a suite of web-enabled products for business customers in both our competitive and traditional markets, which will allow our customers to subscribe to web design, web hosting, e-mail and e-commerce applications via a web browser. These value-added services will complement our existing product suite, lead to increased market share and customer loyalty and drive greater bandwidth utilization on our network, thereby enhancing our profitability. - Leverage our management's experience. Our senior management team has a substantial amount of experience in the communications industry. Our senior executives have, on average, 23 years of experience working in a variety of traditional and competitive phone companies. This 4 experience has been a major factor in our success to date and will continue to play a critical role in the evolution and execution of our growth strategy. RECENT DEVELOPMENTS CONSOLIDATION OF OPERATIONS AT THE COMPETITIVE COMMUNICATIONS BUSINESS Our competitive communications subsidiary, FairPoint Communications Solutions Corp. ("FairPoint Solutions") announced its decision to consolidate its operations and scale back its expansion plans in December 2000 and in a second phase in January 2001. This consolidation was a proactive response to the deterioration in the capital markets and the general slowing in the economy that became evident during the fourth quarter 2000. We believe this consolidation will accomplish the near and long-term objectives of directing FairPoint Solutions' efforts from rapid new market growth to a more measured, high quality revenue growth in its existing markets. Through this consolidation, FairPoint Solutions will preserve capital, maintain a fully-funded business plan and reach individual market profitability more quickly than under the previous rapid growth business model. This strategy will conserve capital and increase market share by acquiring new customers and cross-selling to its existing customers enhanced voice services, data and web-enabled products providing higher quality revenues and improved market profitability. In connection with our consolidation, we closed 26 sales offices and consolidated our three operations centers into our Albany, New York operations center. This consolidation resulted in a restructuring charge of approximately $16.5 million in the fourth quarter 2000 and we anticipate recording an additional charge of approximately $27.0 to $35.0 million in the first quarter 2001. FairPoint Solutions' revised business plan focuses on a subset of its existing markets, namely those established facilities-based markets that edge out from our traditional telephone companies. We believe these markets exhibit the potential for greater revenue and profitability growth, and more efficient deployment of capital. This strategy will enable FairPoint Solutions to: (1) generate higher quality revenue by increasing market and product penetration in facilities-based markets; (2) spend less capital; (3) lower business execution risk; and (4) consolidate operations into one operations center to produce a more efficient operating structure. We believe a more measured growth plan is a prudent decision in light of the current status of the capital markets and general market conditions. The key elements for executing this strategy include: (1) Focusing on markets which edge-out from the Company's traditional telephone companies in the Northeast and Northwest and taking advantage of their switching and network infrastructure, thereby increasing the efficiency of invested capital by FairPoint Solutions; (2) Concentrating FairPoint Solutions' marketing and sales efforts in the 53 most attractive facilities-based markets of our existing 217 markets where there is greater potential for the cross-selling of higher margin voice, data and web products, thereby allowing for higher quality revenues and higher margins; (3) Converting to on-switch status all customers in those 24 markets in which co-locations exist in order to achieve the highest possible margins and best returns on invested capital in those markets. Future marketing and sales activity will be provided by telemarketing resources in these smaller markets; (4) Maintaining high levels of customer service (but no local sales presence) in those 112 markets which do not have a FairPoint Solutions' network currently in place, but that offer attractive long-term economic characteristics. These will be the first markets re-entered after the capital markets reopen; 5 (5) Continuing to serve and bill existing customers in the remaining 28 markets, where regulatory or competitive considerations limit economic opportunities, with minimal customer service support; (6) Provisioning new customers directly to on-switch status, which will have the effect of significantly reducing customer acquisition costs, minimizing risks of disrupting customer service, and improving provisioning efficiency; and (7) Maintaining a strong focus on higher quality service and generating sales of higher margin services to customers in existing markets. FairPoint Solutions does not plan to enter new markets in the foreseeable future. We believe that by effectively executing our revised competitive communications business strategy in our established markets, FairPoint Solutions will be well positioned to return to a growth strategy if and when the capital markets become accessable to FairPoint Solutions. DEBT FINANCING ACTIVITY We completed an amendment to our Credit Facility on March 30, 2001. Under this amendment, the revolving and acquisition facilities' amortization was amended such that these facilities will be due in their entirety on September 30, 2004. In addition, such amendment provides us with the ability, until December 31, 2001, to increase the term facilities by up to an aggregate of $150.0 million. We also amended certain of the financial covenants. On November 9, 2000, FairPoint Solutions amended and restated its senior secured credit facility to increase the commitments of the lenders thereunder to $250.0 million. On March 21, 2001, FairPoint Solutions completed an amendment to such Amended and Restated Credit Agreement which reduced the commitment of the lenders to $200.0 million. The First Amendment to the Amended and Restated Credit Agreement, which expires in November 2007, provides for a revolving tranche and a term tranche. FairPoint Solutions has the ability to borrow up to $75.0 million under the revolving tranche and has the opportunity, subject to certain conditions, to increase such availability by an additional $50.0 million. FairPoint Solutions has the ability to borrow up to $125.0 million under the term tranche of such facility. In May 2000, we issued $200.0 million aggregate principal amount of 12 1/2% senior subordinated notes. Interest on these notes is payable semi-annually in cash on May 1 and November 1 of each year, beginning on November 1, 2000. These notes will mature on May 1, 2010. MANAGEMENT Effective April 1, 2001, John P. Duda will be our President and Chief Operating Officer and Peter G. Nixon will be President of our Telecom Group. Mr. Duda will be responsible for all operations of both our Telecom Group and FairPoint Solutions. OUR SERVICES We have designed our service offerings to meet the specific needs of our customers. Our integrated services allow customers to combine voice, data and Internet communications onto one network, thereby reducing our overall costs. We offer a comprehensive selection of voice, data and Internet communications services, including: VOICE SERVICES Local Telephone Services. We provide customers with basic dialtone for local service and originate and terminate interexchange carrier calls placed to and from our customers. 6 Enhanced Local Services. Our enhanced local services include: - -caller name and number -store-and-forward fax identification - -call waiting -follow-me numbers - -call transferring and call -conference calling forwarding - -voice mail -automatic callback - -call hunting -call hold - -teleconferencing -DID (direct inward dial) - -video conferencing -Centrex services
Long Distance Services. We offer intra-state and inter-state long distance services. International long distance service is available to over 200 countries. These services are available via dedicated and switched access. Long Distance, Wholesale and Consulting Services. We provide independent, traditional telephone companies end-to-end service and support that allows these customers to operate their own long distance communications services. We also offer our expertise by providing sales, marketing and training materials to these companies. DATA AND INTERNET SERVICES - High Speed Internet Access. We offer Internet access via DSL technology, dedicated T-1 connections and Internet dial-up. Customers can utilize this access in combination with customer-owned equipment and software to establish a presence on the web. - Enhanced Internet Services. Our enhanced Internet services include obtaining Internet Protocol addresses, basic web site design and hosting, domain name services, content feeds and web-based e-mail services. Our services include access to 24-hour, 7-day a week customer support. - Private Line Service. Our private line service provides digital connectivity between customer locations for data or voice traffic. Dedicated private lines enable customers to transmit all voice, video and data information at a set speed and with maximum security. We offer local and long distance private line services, as well as frame relay services. - Web-Enabled Business Applications. We are developing a suite of web-enabled products for our business customers, which will allow our customers to obtain web design, web hosting, e-mail and e-commerce services. OUR MARKETS Our 28 traditional telephone companies operate as the incumbent carrier in 17 states. Our traditional telephone companies serve an average of 12 access lines per square mile versus the regional Bell operating company average of 128 access lines per square mile. Approximately 80% of these access lines serve residential customers. As of December 31, 2000, our competitive communications business served customers in 217 markets, generally consisting of one central office service area, in 17 states. With the implementation of our revised competitive communications business plan, we will continue to serve these 217 markets, but our sales and marketing will be directed to the 53 facilities-based markets located in the Northeastern and Northwestern regions of the country. We currently are provisioning services from Verizon in our Northeastern markets and Qwest in our Northwestern markets. We believe that our target competitive communications markets represent approximately 2.1 million business access lines, served by approximately 281 central offices. We have developed an extensive market and customer database to identify markets in which we offer our services. Our 7 proprietary database incorporates information that includes mapping statistics, business descriptions, central office service areas, and network availability. Our markets generally meet the following criteria: - at least 4,000 business access lines located in Tier IV and select Tier III markets; - served by regional Bell operating company or large independent telephone company; - likelihood of limited competition; - economical transport availability; and - positive trends for economic and population growth. Our extensive database and development process are designed to enable us to determine the appropriate staffing levels needed to ensure that we adequately serve our customers. Our database provides our sales force and marketing team with extensive information on potential customers. Our market analysis and development process allows us to effectively target those customers whose business profiles meet our sales and marketing objectives. SALES AND MARKETING Our marketing approach emphasizes locally managed, customer-oriented sales, marketing and service. We believe most communications companies devote their resources and attention primarily toward customers in more densely populated markets. We seek to differentiate ourselves from our competitors by focusing our sales efforts on providing each customer with a superior level of service. Each of our traditional telephone companies has a long history in the communities it serves. Our strategy is to maintain and enhance the strong brand identity and reputation that we enjoy in our markets, as we believe this is a significant competitive advantage. As we market new services, or reach out from our franchised territories to serve other markets as a competitive communications business, we will seek to continue to utilize our brand identity in order to attain higher recognition with potential customers. We market our competitive communications services through our direct sales force. As of March 15, 2001, our direct sales force in our competitive markets consisted of 66 people in 15 sales offices serving our 53 facilities-based markets. Many of our sales representatives work out of virtual offices in their local communities, positioning them close to their customers and eliminating the need for physical sales offices in each market. Additionally, our local sales presence facilitates a direct connection to the community, which enhances customer satisfaction and loyalty. INFORMATION TECHNOLOGY AND SUPPORT SYSTEMS Our approach to systems focuses on implementing mature, best-of-class applications that we integrate through an advanced messaging protocol that allows consistent communication and coordination throughout our entire organization. Web-based user interfaces are designed to be used by our personnel and our customers for such activities as account activation, billing presentment, repair reports and sales channel management. We leverage our internal expertise with that of outside vendors to assist with project/program management and implementation/integration services. We have selected 8 leading application and hardware vendors for key functional requirements to improve upon our existing systems, including:
VENDOR FUNCTIONALITY - ------ ------------- Metasolv Order entry and management, network inventory and design, service provisioning, trouble management and customer care Daleen Billing, rating, treatment and collections DSET Interface with traditional telephone company Lawson Human resources and financial accounting Hyperion Forecasting and enterprise reporting
We are integrating these applications to provide strategic and operating advantages such as direct customer access to account information and integrated provisioning for all products and services. In addition, certain of our application providers are working with us to jointly develop specialized applications to support such processes as flow-through provisioning, supply chain management and web-based processes. We expect these activities to give us significant strategic advantages. NETWORK ARCHITECTURE AND TECHNOLOGY Our traditional telephone company network consists of central office hosts and remote sites with advanced digital switches, primarily manufactured by Nortel and Siemens, operating with the most current software. The outside plant consists of transport and distribution delivery networks connecting our host central office with remote central offices and ultimately with our customers. As of March 15, 2001, we maintained over 26,456 miles of copper plant and 2,013 miles of fiber optic plant. We own fiber optic cable, which has been deployed throughout our current network and is the primary transport technology between our host and remote central offices and interconnection points with other incumbent carriers. Our fiber optic transport systems are primarily synchronous optical networks and utilize asynchronous optical systems for limited local or specialized applications. Our fiber optic transport systems of choice is capable of supporting increasing customer demand for high bandwidth transport services and applications due to its 240 gigabyte design and switching capacity. In the future, this platform will enable direct Asynchronous Transfer Mode, Frame Relay and/or Internet Protocol insertion into the synchronous optical network or physical optical layer. In both our traditional telephone company markets and competitive markets, DSL-enabled integrated access technology is being deployed to minimize the last mile provisioning cost and to provide significant broadband capacity to our customers. We install DSL equipment, or a DSLAM, in every co-location in our competitive markets. Currently, DSL service is utilized as a network element to reduce our service costs. In the future, we may offer this service as a competitive retail offering in the markets where it is most appropriate. We offer DSL retail service to customers in our traditional telephone company markets. As of December 31, 2000, we had 105 DSLAMs installed throughout our network. Our competitive communications business network architecture is capital-efficient and highly scalable due to our smart-build strategy and our existing nationwide traditional telephone company infrastructure. Our smart-build strategy migrates both our new and existing customers to facilities-based services by co-locating our equipment in the incumbent telephone companies' central offices and transporting our traffic back to our traditional telephone company host switch. This approach allows for an efficient deployment of capital by utilizing our existing traditional telephone infrastructure to reduce capital expenditures associated with switches, network and transport investment. 9 Our competitive communications edge-out business plan provides us the unique ability to deploy packet capable infrastructures while avoiding up-front costs for legacy circuit-based switching in competitive markets. At the same time, we are assembling select long-haul network facilities at low cost through unbundled network element leases, dark fiber purchases and strategic partnerships. This lowers the cost of long distance transport, enables us to continue the growth of our long distance wholesale operations. Rapid and significant changes in technology are expected in the communications industry. Our future success will depend, in part, on our ability to anticipate and adapt to technological changes. We believe that our network architecture, which takes advantage of our existing traditional telephone infrastructure and smart-build strategy, enables us to efficiently respond to these technological changes. COMPETITION Our traditional telephone companies typically experience little competition as the incumbent carrier because generally the demographic characteristics of these markets will not support more than one communications provider. Our competitive communications business operates in a more highly competitive communications services marketplace than our traditional telephone companies. Competition for our services is based on service, price, quality, reputation, geographic scope, name recognition, network reliability, service features, billing services and perceived quality and responsiveness to customers' needs. In each of our selected regional competitive communications markets, we compete principally with Verizon in the Northeast region and Qwest in the Northwest region. In addition, in some of our selected competitive communications markets we compete with other competitive communications companies. Changes resulting from the Telecommunications Act of 1996 radically altered the market opportunity for new telecommunications service providers. Since the Telecommunications Act requires local exchange carriers to unbundle their networks, new telecommunications service providers are able to enter the market by installing switches and leasing line capacity. Newer competitive service providers, like us and some of our competitors in some of our competitive communications markets, can be more opportunistic in designing and implementing networks because they will not have to replicate existing facilities until traffic volume justifies building them. In addition to the existing and potentially new communications service providers and interexchange carriers, we may face competition from other market entrants such as electric utilities, cable television companies and wireless companies. Electric utilities have existing assets and low cost access to capital which could allow them to enter a market rapidly and accelerate network development. Cable television companies are entering the telecommunications market by upgrading their networks with fiber optics and installing facilities to provide fully interactive transmission of broadband voice, video and data communications. Furthermore, wireless companies intend to develop wireless technology for deployment in the United States as a broadband substitute for traditional wireline local telephones. Some Internet companies are also developing applications to deliver switched voice communications over the Internet. Moreover, long distance companies are aggressively entering the Internet access markets. Long distance carriers have substantial transmission capabilities, traditionally carry data to large numbers of customers and have an established billing system infrastructure that permits them to add new services. Satellite companies also are offering broadband access to the Internet from desktop PCs. 10 EMPLOYEES As of March 15, 2001, we employed a total of 1,415 full-time employees, including 144 employees of our traditional telephone companies represented by five unions. We believe the state of our relationship with our union and non-union employees is satisfactory. ITEM 2. PROPERTIES We either lease or own our administrative offices and generally own our maintenance facilities, rolling stock, co-location equipment, central office and remote switching platforms and transport and distribution network facilities. Administrative and maintenance facilities are generally located in or near community centers. Our regional operations center, located in Albany, New York, provides customer provisioning, customer service, repair and information technology and support systems for customers of FairPoint Solutions. Co-location equipment is located in leased space in the incumbent carrier's central office. Central offices are often within the administrative building and outlying customer service centers. Auxiliary battery or other non-utility power sources are at each central office to provide uninterrupted service in the event 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 incumbent long distance carrier. These facilities are located on land pursuant to permits, easements or other agreements. Rolling stock includes service vehicles, construction equipment and other required maintenance equipment. ITEM 3. LEGAL PROCEEDINGS We currently and from time to time are involved in litigation and regulatory proceedings incidental to the conduct of our business, but we are not a party to any lawsuit or proceeding which, in our opinion, is likely to have a material adverse effect on us. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public market for the common equity of the Company. Substantially all of the Company's outstanding common equity securities are owned by Kelso & Company ("Kelso"), Thomas H. Lee Equity Fund IV, L.P. ("THL"), certain institutional investors and the Company's executive officers and directors. As of March 15, 2001, there were approximately 65 holders of Class A common stock and 28 holders of Class C common stock. There were 9,645,598 options to purchase shares of Class A common stock outstanding as of March 15, 2001, of which 2,047,484 were fully vested. There are no shares of common stock that could be sold pursuant to Rule 144 under the Securities Act or, other than pursuant to the Registration Rights Agreement (as defined herein), that we have agreed to register under the Securities Act for sale by the security holders. Our ability to pay dividends is governed by restrictive covenants contained in the indentures governing our publicly held debt as well as restrictive covenants in our bank lending arrangement. We have never paid cash dividends on our equity securities and currently have no intention of paying cash dividends on our equity securities for the foreseeable future. 12 ITEM 6. SELECTED FINANCIAL DATA The selected data presented below under the captions "Statement of Operations Data," "Balance Sheet Data" and "Summary Cash Flow Data" for, and as of the end of, each of the years in the five-year period ended December 31, 2000, are derived from the consolidated financial statements of FairPoint and its subsidiaries. The consolidated financial statements as of December 31, 1999 and 2000, and of each of the years in the three-year period ended December 31, 2000 are included elsewhere in this report. The "Balance Sheet Data" as of December 31, 1996 is derived from unaudited consolidated financial statements not included herein.
1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT RATIO OF EARNINGS TO FIXED CHARGES AND OPERATING DATA) Statement of Operations Data: Revenues............................................. $30,364 $47,639 $ 92,561 $148,162 $246,264 ------- ------- -------- -------- -------- Operating expenses: Network operating costs............................ 5,936 14,465 27,264 49,306 134,209 Selling, general and administrative................ 7,585 11,958 28,646 52,138 94,908 Depreciation and amortization...................... 6,644 8,777 20,089 31,632 52,544 Restructure charge................................. -- -- -- -- 16,485 Stock-based compensation........................... -- -- -- 3,386 16,451 ------- ------- -------- -------- -------- Total operating expenses............................. 20,165 35,200 75,999 136,462 314,597 ------- ------- -------- -------- -------- Income (loss) from operations........................ 10,199 12,439 16,562 11,700 (68,333) ------- ------- -------- -------- -------- Interest expense(1).................................. (9,605) (9,293) (27,170) (51,185) (66,038) Other income, net.................................... 829 1,515 3,097 4,930 13,222 ------- ------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary item............................................... 1,423 4,661 (7,511) (34,555) (121,149) Income tax (expense) benefit......................... (1,462) (1,876) 2,112 5,615 32,035 Minority interest in income of subsidiaries.......... (33) (62) (80) (100) (3) ------- ------- -------- -------- -------- Earnings (loss) before extraordinary item............ (72) 2,723 (5,479) (29,040) (89,117) Extraordinary item................................... -- (3,611) (2,521) -- -- ------- ------- -------- -------- -------- Net loss............................................. $ (72) $ (888) $ (8,000) $(29,040) $(89,117) ======= ======= ======== ======== ======== Balance Sheet Data (at period end): Cash and cash equivalents.......................... $ 4,253 $ 6,822 $ 13,241 $ 9,923 $ 1,023 Working capital (deficit).......................... 596 108 10,778 15,660 (47,592) Property, plant and equipment, net................. 41,615 61,207 142,321 178,296 348,916 Total assets....................................... 97,020 144,613 442,112 518,035 941,423 Long-term debt, net of current portion............. 70,609 126,503 364,610 458,529 751,630 Redeemable preferred stock......................... 10,689 130 -- -- -- Total stockholders' equity (deficit)............... (2,142) (10,939) 9,886 (11,581) 64,378 Other Financial Data: Adjusted EBITDA(2)................................. $17,639 $22,669 $ 39,668 $ 51,548 $ 13,881 Capital expenditures............................... 8,439 8,262 12,433 43,509 107,772 Ratio of earnings to fixed charges(3).............. 1.2x 1.5x -- -- -- Summary Cash Flow Data: Net cash provided by (used in) operating activities....................................... $ 9,772 $ 9,839 $ 14,867 $ 7,704 $(14,832) Net cash provided by (used in) investing activities....................................... (19,790) (38,967) (225,522) (76,610) (343,365) Net cash provided by financing activities.......... 10,599 31,697 217,074 65,588 349,297 Operating Data (at period end): Access lines in service............................ 34,017 48,731 136,374 190,722 357,157
- -------------------------- (1) In 1999, interest expense includes $13.3 million related to the retirement of warrants of one of our subsidiaries. See Note 9 to our consolidated financial statements. (2) Adjusted EBITDA represents net earnings (loss) plus interest expense, income taxes, depreciation and amortization, extraordinary items, and non- cash stock-based compensation charges. Adjusted EBITDA is 13 presented because management believes it provides useful information regarding our ability to incur and/or service debt. Management expects that investors may use this data to analyze and compare other communications companies with us in terms of operating performance, leverage and liquidity. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net earnings (loss) as a measure of performance, or for cash flow as a measure of liquidity. Adjusted EBITDA as calculated by us is not necessarily comparable to similarly captioned amounts of other companies. The definition in the indenture governing our outstanding publicly-held debt is designed to determine EBITDA for the purposes of contractually limiting the amount of debt which we may incur. Adjusted EBITDA presented in the selected financial data above differs from the definition of EBITDA in such indentures. (3) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before income taxes, minority interest, income or loss from equity investments and extraordinary items, plus distributed income of equity investments, amortization of capitalized interest, and fixed charges. Fixed charges include interest expense on all indebtedness, capitalized interest and rental expense on operating leases representing that portion of rental expense deemed to be attributable to interest. We had a deficiency of $8.3 million, $34.5 million and $122.8 million to cover fixed charges in 1998, 1999 and 2000, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are facilities-based provider of voice, data and Internet services. We were incorporated in 1991 for the purpose of acquiring and operating traditional telephone companies in rural markets. Since our first traditional telephone company acquisition in 1993, we have acquired 28 such companies, which currently operate in 17 states. In early 1998, we launched our competitive communications business by competing for small- and medium-sized business customers in Tier IV and select Tier III markets, which typically have populations of less than 100,000. These markets are generally within a 200-mile radius of the areas served by our traditional telephone companies. We refer to this as our "edge-out" strategy, which allows us to leverage our existing network infrastructure, operating systems and management expertise to accelerate the roll-out of our competitive communications business in a capital-efficient manner. Furthermore, the stable cash flows of our traditional telephone business provide financial capacity to help fund our continued growth. Historically, our operating results have been primarily related to our traditional telephone business. In the future, we anticipate that our competitive communications business will have an increasing impact on our operating results. We expect that our revenue growth will increase with the growth of our competitive communications markets and expansion in communication and web-enabled services. We expect to experience operating losses for the next few years as a result of our competitive communications business growth. REVENUES We derive our revenues from: - Local calling services. We receive revenues from providing local exchange telephone services, including monthly recurring charges for basic service, usage charges for local calls and service charges for special calling features. - Network access charges. These revenues consist primarily of charges paid by long distance companies and other customers for access to our networks in connection with the completion of long distance telephone calls both to and from our customers. - Long distance services. We receive revenues from charges to our retail and wholesale long distance customers. 14 - Data and Internet services. We receive revenues from monthly recurring charges for services, including digital subscriber line, Voice over Internet Protocol/Voice Telephony over Asynchronous Transfer Mode, special access, private lines, Internet and other services. - Other services. We receive revenues from other services, including billing and collection, directory services and sale and maintenance of customer premise equipment. The following summarizes our percentage of revenues from these sources:
YEARS ENDED DECEMBER 31, ------------------------------ REVENUE SOURCE 1998 1999 2000 - -------------- -------- -------- -------- Local calling services..................................... 24% 28% 35% Network access charges..................................... 52% 49% 41% Long distance services..................................... 8% 8% 11% Data and Internet services................................. 3% 4% 5% Other services............................................. 13% 11% 8%
OPERATING EXPENSES Our operating expenses are categorized as network operating costs, selling, general and administrative expenses, depreciation and amortization, restructure charge and stock-based compensation. - Network operating costs include costs incurred in connection with the operation of our central offices and outside plant facilities and related operations. In addition to the operational costs of owning and operating our own facilities, we also lease and purchase local and long distance services from the regional Bell operating companies, large independent telephone companies and third party long distance providers. - Selling, general and administrative expenses consist of expenses relating to sales and marketing, customer service and administration and corporate and personnel administration. - Depreciation and amortization includes depreciation of our communications network and equipment and amortization of goodwill related to our acquisitions. - Restructure charge includes non-recurring cash and non-cash charges associated with the consolidation activities at FairPoint Solutions. - Stock-based compensation consists of non-cash compensation charges incurred in connection with shareholder appreciation rights agreements granted to two executive officers and stock options to employees. ACQUISITIONS As we continue to expand into competitive markets, we expect to focus our acquisition efforts on traditional telephone companies that enable us to enhance the implementation of our strategy as a competitive communications provider. Our past acquisitions have had a major impact on our operations. Accordingly we do not believe that comparing historical results on a period by period basis is meaningful due to the significant number of acquisitions we have made each year. - During 2000, we acquired four traditional telephone companies for an aggregate purchase price of $363.1 million, which included $86.9 million of acquired debt. At the respective dates of acquisition, these companies served an aggregate of approximately 79,500 access lines. 15 - During 1999, we acquired seven traditional telephone companies for an aggregate purchase price of $82.7 million, which included $7.4 million of acquired debt. At the respective dates of acquisition, these companies served an aggregate of approximately 14,700 access lines. - During 1998, we acquired four traditional telephone companies for an aggregate purchase price of $255.2 million, which included $31.1 million of acquired debt. At the respective dates of acquisition, these companies served an aggregate of approximately 78,700 access lines. STOCK-BASED COMPENSATION In January 2000, we recognized a non-cash compensation charge of $12.3 million. The charge consisted of compensation expense of $3.8 million recognized in connection with the modification of employee stock options and the settlement of employee stock options for cash by one of our principal shareholders. The compensation expense also included the settlement of a cash payment obligation between certain of our employee-shareholders and our principal shareholders under their pre-existing shareholder's agreement for $8.5 million. In addition, we recognized non-cash compensation related to the excess of estimated market value over the aggregate exercise price of options that were granted to some of our officers and employees in April 2000 in exchange for the cancellation of options to purchase common stock of FairPoint Solutions. This excess of $15.9 million of intrinsic value of the options will be amortized over the vesting period of five years. In conjunction with these options, we intend to provide a cash bonus that will also be recognized over the five-year vesting period. The payment of the cash bonus will be deferred until the underlying options are exercised, with proceeds from exercise being equal to the bonus. Accordingly, there will not be any material cash impact to us from these transactions. For the year ended December 31, 2000, compensation expense of $3.1 million and $1.0 million was recognized for these options and bonuses, respectively. During 2000, 320,250 unvested options subject to the option and bonus compensation charge were forfeited. As of December 31, 2000, unearned compensation on the converted FairPoint Solutions options was $9.7 million and based on the number of options outstanding as of December 31, 2000, the cash bonus FairPoint Solutions intends to pay, assuming all options are exercised, is $4.3 million. 16 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999 REVENUES. Revenues increased $98.1 million to $246.3 million in 2000 compared to $148.2 million in 1999. Of this increase, $45.4 million was attributable to the internal growth of our competitive and traditional communications businesses, $41.6 million was attributable to revenues from companies we acquired in 2000 and $11.1 million was attributable to revenues from companies we acquired in 1999. Local calling services accounted for $45.8 million of this increase, including an increase of $28.1 million from new business lines in our competitive markets and an increase in the number of access lines in our traditional telephone companies, as well as an increase of $14.6 million from the companies we acquired in 2000 and $3.1 million from companies we acquired in 1999. Network access charges increased $28.0 million, including an increase of $16.3 million from companies we acquired in 2000, $4.7 million from companies we acquired in 1999, $3.5 million was from new business lines in our competitive markets and $3.5 million from universal service revenue increases and interstate cost study true-ups within our traditional telephone companies. Long distance services revenues increased $14.2 million, including an increase of $10.5 million from new long distance retail and wholesale customers and an increase of $3.7 million from companies acquired in 2000 and 1999. Data and Internet services revenues increased $7.2 million, including an increase of $4.8 million from acquisitions and an increase of $2.4 million as a result of increased service offerings to our customers. Other revenues increased $2.9 million primarily due to other revenue contributed by the companies we acquired in 2000 and 1999. OPERATING EXPENSES. NETWORK OPERATING COSTS. Network operating costs increased $84.9 million to $134.2 million in 2000 from $49.3 million in 1999. Of this increase, $70.6 million was attributable to operating expenses associated with the expansion into competitive markets and increased growth in our local calling, network access and long distance service offerings. The companies we acquired in 2000 accounted for $11.3 million and the companies we acquired in 1999 account for $3.0 million of the remaining portion of the increase. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $42.8 million to $94.9 million in 2000 compared to $52.1 million in 1999. Contributing to this increase were costs of $34.2 million primarily related to our expansion of selling, customer support and administration activities to support our growth in competitive markets. The companies we acquired in 2000 contributed $7.1 million to the increase and the companies we acquired in 1999 contributed $1.5 million to the increase. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $20.9 million to $52.5 million in 2000 from $31.6 million in 1999. This increase consisted of $4.7 million attributable to the increased investment in our communications network to support the growth of our competitive communications business and $14.7 million related to the companies we acquired in 2000 and 1999. RESTRUCTURE CHARGE. In association with the consolidation of FairPoint Solutions, we recognized a restructure charge of $16.5 million in the fourth quarter 2000 and we anticipate recording an additional restructure charge of approximately $27.0 to $35.0 million in the first quarter 2001. STOCK-BASED COMPENSATION. As discussed above, in January 2000 we recognized non-cash compensation charges of $12.3 million for the year ended December 31, 2000. An additional $4.1 million was recognized in association with the exchange of FairPoint Solutions employee stock options. For the year ended December 31, 1999, stock-based compensation of $3.4 million was related to the increase in the estimated value of fully vested stock appreciation right agreements between certain members of our management and our principal stockholders. 17 INCOME (LOSS) FROM OPERATIONS. Income from operations decreased $80.0 million to a loss of $68.3 million in 2000 from income of $11.7 million in 1999. This decline was primarily attributable to the $16.4 million stock-based compensation charge, the $16.5 million restructure charge and the expenses associated with our expansion into competitive markets. Except for the effect of the $12.3 million stock-based compensation charge discussed above and an additional restructure charge of $27.0 to $35.0 million planned to be recognized during the first quarter of 2001, we expect this trend to continue for the next few years as we build out our competitive communications business. OTHER INCOME (EXPENSE). Total other expense increased $6.5 million to $52.8 million in 2000 from $46.3 million in 1999. The expense consists primarily of interest expense on long-term debt, offset by a $6.6 million net gain on sale of stock and cellular investments for the year ended December 31, 2000. INCOME TAX BENEFIT. Income tax benefit increased $26.4 million to $32.0 million for the year ended December 31, 2000. The income tax benefit as a percentage of loss before taxes was 26% for the year ended December 31, 2000, compared to 16% for the year ended December 31, 1999. NET LOSS. Our net loss was $89.1 million for 2000, compared to a loss of $29.0 million for 1999, as a result of the factors discussed above. YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998 REVENUES. Revenues increased $55.6 million to $148.2 million in 1999 from $92.6 million in 1998. This was principally a result of the acquisitions completed in 1999 and 1998, which contributed $40.5 million to the increase. Growth in the number of local and long distance business customers also contributed to the revenue increase. These factors contributed to the growth in all of our revenue sources. Local calling services accounted for $19.1 million of the increase, including $10.5 million from the companies we acquired in 1999 and 1998 and $7.8 million from new business lines in our competitive markets. Network access revenue increased $24.2 million, of which $21.0 million was contributed by the companies we acquired in 1999 and 1998. Long distance services revenues increased $4.5 million due mainly to revenues from new long distance retail and wholesale customers. Data and Internet services increased $2.8 million and other revenues increased $5.0 million, in each case due mainly to revenues from companies we acquired in 1999 and 1998. OPERATING EXPENSES. NETWORK OPERATING COSTS. Network operating costs increased $22.0 million to $49.3 million in 1999 from $27.3 million in 1998. The increase was partly attributable to operating expenses associated with the companies we acquired in 1999 and 1998, which accounted for $10.8 million of the increase. The remaining increase was primarily associated with our expansion into competitive markets and increased growth in local and access and long distance service offerings. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $23.5 million to $52.1 million in 1999 compared to $28.6 million in 1998. The companies we acquired in 1999 and 1998 contributed $5.6 million to the increase. Also contributing to this increase were costs of $16.0 million primarily related to expansion of selling, customer support and administration activities to support our growth in competitive markets. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $11.5 million to $31.6 million in 1999 from $20.1 million in 1998. This increase consisted of $9.9 million related to the companies we acquired in 1999 and 1998 and $0.7 million due to increased investment in our communications network to support the growth of our competitive communications business. 18 STOCK-BASED COMPENSATION. Stock-based compensation was related to the increase in the estimated value of fully vested stock appreciation right agreements between certain members of our management and principal stockholders of the Company. INCOME FROM OPERATIONS. As a result of the factors described above, income from operations decreased $4.9 million to $11.7 million in 1999 from $16.6 million in 1998. As a percentage of revenues, income from operations was 7.9% in 1999, as compared to 17.9% in 1998. This margin decline in 1999 was primarily attributable to expenses associated with the expansion into competitive markets. OTHER INCOME (EXPENSE). Total other expense increased $22.2 million to $46.3 million in 1999 from $24.1 million in 1998. The increase was primarily attributable to an increase in interest expense associated with the additional debt incurred to complete acquisitions and a $13.3 million charge to interest expense associated with the retirement of certain warrants to purchase the common stock of one of our subsidiaries. EXTRAORDINARY ITEM. For 1998, we recognized an extraordinary loss of $2.5 million (net of taxes) related to the early retirement of debt. NET LOSS. Our net loss was $29.0 million for 1999, compared to a loss of $8.0 million for 1998, as a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES Our cash flow requirements include general corporate expenditures, capital expenditures, debt service and acquisitions. We expect that our traditional telephone companies' cash flow from operations and our Credit Facility will fund the capital expenditures, working capital and debt service requirements of its traditional telephone companies for the foreseeable future. We will require significant capital resources to fund the competitive communications business which will be funded primarily by FairPoint Solutions' senior secured credit facility. Our capital requirements will include the funding of operations and capital asset expenditures. Historically, we have used the proceeds from institutional and bank debt, private equity offerings, and available cash flow to fund our operations. We may secure additional funding through the sale of public or private debt and/or equity securities or enter into another bank credit facility to fund future acquisitions and operations. If the growth of our competitive communications business occurs more rapidly than we currently anticipate or if our operating results are below expectations, there can be no assurance that we will be successful in raising sufficient additional capital on terms that we consider acceptable, or that our operations will produce positive cash flow in sufficient amounts to meet its liquidity requirements. The failure to raise and generate sufficient funds may require the Company to delay or abandon some of its planned future growth or expenditures, which could have a material adverse effect on the Company's growth and its ability to compete in the communications industry. CAPITAL EXPENDITURES Our annual capital expenditures for our traditional telephone operations have historically been significant. Because existing regulations allow us to recover our operating and capital costs, plus a reasonable return on our invested capital in regulated telephone assets, capital expenditures constitute an attractive use of our cash flow. We have historically generated sufficient cash flow from operations to meet all of our capital expenditure requirements for our traditional telephone operations. For the period from January 1, 2001 to December 31, 2002, we expect capital expenditures for our traditional telephone operations to be approximately $88.0 to $90.0 million. We expect to finance capital expenditures for our traditional telephone companies principally from cash flow from operations of these companies. 19 Our competitive communications business plan will require significant capital expenditures for our competitive communications business over the next few years. For the period from January 1, 2001 to December 31, 2002, we plan to spend approximately $33.0 to $35.0 million for capital expenditures for our competitive communications business. We expect to finance capital expenditures for our competitive communications operations from draws under the FairPoint Solutions' credit facility and cash investments from our traditional telephone operations (to the extent the Company is permitted to downstream funds to our competitive communications companies under our debt instruments). DEBT FINANCING We have utilized a variety of debt instruments to fund our business, including: OUR CREDIT FACILITY. Our Credit Facility provides for two term facilities, one with approximately $67.1 million principal amount outstanding as of December 31, 2000 that matures on June 30, 2006 and the other with the principal amount of approximately $70.6 million outstanding as of December 31, 2000 that matures on June 20, 2007. Our Credit Facility also provides for a revolving facility with a principal amount of $85.0 million that matures on September 30, 2004 and a revolving acquisition facility with a principal amount of $165.0 million that also matures on September 30, 2004. As of December 31, 2000, $51.8 million was outstanding on the revolving facility, $60.1 million was outstanding on the revolving acquisition facility and $138.1 million was available for borrowing under the remaining revolving acquisition facility and revolving facility. On March 30, 2001, we completed an amendment to our Credit Facility. Under this amendment, the revolving and acquisition facilities' amortization was amended such that these facilities will be due in their entirety on September 30, 2004. In addition, such amendment provides us with the ability, until December 31, 2001, to increase our term facilities by up to an aggregate of $150.0 million. We also amended certain of the financial covenants. SENIOR SUBORDINATED NOTES AND FLOATING RATE NOTES ISSUED IN 1998. We have outstanding publicly-held debt comprised of $125.0 million aggregate principal amount of 9 1/2% senior subordinated notes and $75.0 million aggregate principal amount of floating rate notes. Interest on the senior subordinated notes and floating rate notes is payable semi-annually in cash on each May 1 and November 1. Both series of notes mature on May 1, 2008. These notes are general unsecured obligations, subordinated in right of payment to all existing and future senior debt and effectively subordinated to all existing and future debt and other liabilities of our subsidiaries. SENIOR SUBORDINATED NOTES ISSUED IN 2000. In May 2000, we issued $200.0 million aggregate principal amount of 12 1/2% senior subordinated notes. Interest on these notes is payable semi-annually in cash on May 1 and November 1 of each year. These notes will mature on May 1, 2010. These notes are general unsecured obligations and rank equally with all of FairPoint's other unsecured senior subordinated indebtedness and are subordinated in right of payment to all of FairPoint's senior indebtedness, whether or not secured, and effectively subordinated to all existing and future debt and other liabilities of our subsidiaries. FAIRPOINT SOLUTIONS CREDIT FACILITY. On March 21, 2001, we completed an amendment to FairPoint Solutions' Amended and Restated Credit Agreement. The First Amendment to the Amended and Restated FairPoint Solutions Credit Facility provides for a revolving tranche and a term tranche. FairPoint Solutions can borrow up to $75.0 million under the revolving tranche and has the opportunity, subject to certain conditions, to increase such availability by an additional $50.0 million. FairPoint Solutions can borrow up to $125.0 million under the term tranche of such facility. The total commitment of $200.0 million matures on November 9, 2001; provided, however, that upon receipt of all necessary regulatory approvals, which FairPoint Solutions anticipates receiving prior to November 2001, the maturity date shall be extended to November 9, 2007. 20 EQUITY FINANCING In January 2000, THL, Kelso and certain other institutional investors and members of management acquired an aggregate of $408.8 million of our equity securities. We received $158.9 million of net proceeds in such transaction, which we used to repay debt. CASH FLOWS Net cash used by operating activities was $14.8 million for the year ended 2000 and net cash provided by operating activities was $7.7 million and $14.9 million for the years ended 1999 and 1998, respectively. Net cash used in investing activities was $343.4 million, $76.6 million and $225.5 million for the years ended 2000, 1999 and 1998, respectively. These cash flows primarily reflect expenditures relating to traditional telephone company acquisitions of $256.1 million, $53.9 million and $217.1 million in 2000, 1999 and 1998, respectively, and capital expenditures of $107.8 million, $43.5 million and $12.4 million in 2000, 1999 and 1998, respectively. Net cash provided by financing activities was $349.3 million, $65.6 million and $217.1 million for the years ended 2000, 1999 and 1998, respectively. These cash flows primarily represent borrowings, the proceeds of which were $668.8 million, $138.9 million and $510.6 million in 2000, 1999 and 1998, respectively and the proceeds from the issuance of common stock of $158.9 in 2000 and $31.8 million in 1998. There was no common stock issued in 1999. A majority of the proceeds received were used to repay long-term debt of $459.9 million, $52.1 million and $307.8 million and to complete acquisitions made in 2000, 1999 and 1998 respectively. NEW ACCOUNTING STANDARDS Effective January 1, 2001, we adopted the provisions of Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS No. 133). SFAS No. 133 requires the recognition of all derivative financial instruments as either assets or liabilities in the statement of financial condition and measurement of those instruments at fair value. Changes in the fair values of those derivatives will be reported in earnings or other comprehensive income depending on the use of the derivative in whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in the fair value of a derivative and the effect on the consolidated financial statements will depend on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value or cash flows of the asset or liability hedged. Under the provisions of SFAS No. 133, the method that will be used for assessing the effectiveness of a hedging derivative, as well as the measurement approach for determining the ineffective aspects of the hedge, must be established at the inception of the hedge. The only derivative instruments we have identified which were recorded on our consolidated balance sheet on January 1, 2001 are interest rate swap agreements. The fair value of these agreements was approximatley $4.7 million at January 1, 2001. The fair value indicates an estimated amount we would have to pay to cancel the contracts or transfer them to other parties. On December 3, 1999, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB No. 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 101 covers a broad range of topics, some of which include revenue recognition for "bill and hold" arrangements, accounting for refundable and nonrefundable up-front fees, accounting for multiple element arrangements, contingent rentals and gross and net reporting of revenues from internet sales. As amended by SAB 101A and SAB 101B, the effective date for calendar year-end companies is no later than the quarter beginning October 1, 2000. The adoption of SAB No. 101 was not significant to the Company's financial reporting. 21 INFLATION We do not believe inflation has a significant effect on our operations. YEAR 2000 We did not experience significant disruptions in our operations as a result of the Year 2000 issue. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2000, we recorded our marketable available-for-sale equity securities at a fair value of $0.9 million. These securities have exposure to price risk. A hypothetical ten percent adverse change in quoted market prices would decrease the recorded value by approximately $0.1 million. We have limited our exposure to material future earnings or cash flow exposures from changes in interest rates on long-term debt, since approximately 88% of our debt bears interest at fixed rates or effectively at fixed rates through the use of interest rate swaps. However, our earnings are affected by changes in interest rates as our long-term debt under our credit facilities have variable interest based on either the prime rate or LIBOR. If interest rates on our variable debt averaged 10% more, our interest expense would have increased, and loss before taxes would have increased by approximately $3.6 million for the year ended December 31, 2000. We have entered into interest rate swaps to manage our exposure to fluctuations in interest rates on our variable rate debt. The fair value of these swaps was approximately $4.7 million at December 31, 2000. The fair value indicates an estimated amount we would have to pay to cancel the contracts or transfer them to other parties. In connection with our Credit Facility, we used six interest rate swap agreements, with notional amounts of $25.0 million each, and one interest rate swap agreement with a notional amount of $50.0 million to effectively convert a portion of our variable interest rate exposure to fixed rates ranging from 8.32% to 9.34%. The swap agreements expire from November 2001 to May 2004. In connection with our floating rate notes, we used an interest rate swap agreement, with a notional amount of $75.0 million to effectively convert our variable interest rate exposure to a fixed rate of 10.78%. Such swap agreement expires May 3, 2003. FairPoint Solutions used an interest rate swap agreement with a notional amount of $50.0 million to effectively convert a portion of its variable interest rate exposure under the FairPoint Solutions' Amended and Restated Credit Facility to a fixed rate of 10.59%. This swap agreement expires in November 2003. 22 INDEPENDENT AUDITORS' REPORT The Board of Directors FairPoint Communications, Inc.: We have audited the accompanying consolidated balance sheets of FairPoint Communications, Inc. and subsidiaries as of December 31, 1999 and 2000 and the related consolidated statements of operations, stockholders' equity (deficit), comprehensive losses and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of FairPoint Communications, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FairPoint Communications, Inc. and subsidiaries as of December 31, 1999 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP March 8, 2001, except as to the fourth and fourteenth paragraphs of note 6 which are as of March 30, 2001 Charlotte, North Carolina 23 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 2000
1999 2000 -------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Current assets: Cash...................................................... $ 9,923 1,023 Accounts receivable, net of allowance for doubtful accounts of $921 in 1999 and $3,208 in 2000............. 25,658 48,257 Prepaid and other assets.................................. 4,039 6,440 Investments available-for-sale............................ 7,327 936 Income taxes recoverable.................................. 3,233 387 -------- -------- Total current assets.................................... 50,180 57,043 -------- -------- Property, plant, and equipment, net......................... 178,296 348,916 -------- -------- Other assets: Goodwill, net of accumulated amortization................. 229,389 451,486 Investments............................................... 36,246 50,353 Debt issue costs, net of accumulated amortization......... 17,948 29,195 Covenants not to compete, net of accumulated amortization............................................ 3,706 2,982 Other..................................................... 2,270 1,448 -------- -------- Total other assets...................................... 289,559 535,464 -------- -------- Total assets............................................ $518,035 941,423 ======== ========
See accompanying notes to consolidated financial statements. 24 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 2000
1999 2000 -------- --------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 12,725 38,118 Other accrued liabilities................................. 7,647 28,336 Restructuring accrual..................................... -- 13,343 Accrued interest payable.................................. 4,396 11,547 Current portion of long-term debt......................... 3,866 5,182 Current portion of obligation under capital lease......... 53 3,671 Accrued property taxes.................................... 2,078 2,605 Current portion of obligation for covenants not to compete................................................. 1,236 1,298 Demand notes payable...................................... 752 535 Deferred income taxes..................................... 1,767 -- -------- --------- Total current liabilities............................... 34,520 104,635 -------- --------- Long-term liabilities: Long-term debt, net of current portion.................... 458,529 751,630 Unamortized investment tax credits........................ 577 384 Obligation for covenants not to compete, net of current portion................................................. 2,622 1,833 Deferred income taxes..................................... 26,819 -- Obligation under capital lease, net of current portion.... 12 -- Other liabilities......................................... 3,094 13,537 -------- --------- Total long-term liabilities............................. 491,653 767,384 -------- --------- Minority interest........................................... 443 15 -------- --------- Common stock subject to put options, 1,752 shares at December 31, 1999 and 382 shares at December 31, 2000..... 3,000 5,011 -------- --------- Stockholders' equity (deficit): Preferred stock: Series D nonvoting, convertible, cumulative participating, par value $.01 per share, 30,000 shares authorized............................................ -- -- Common stock: Class A voting, par value $.01 per share, 60,000 shares authorized, issued and outstanding 34,451 shares at December 31, 1999 and 45,527 shares at December 31, 2000.................................................. 345 455 Class B nonvoting, convertible, par value $.01 per share, 50,000 shares authorized....................... -- -- Class C nonvoting, convertible, par value $.01 per share, 4,600 shares authorized, issued and outstanding 4,269 shares at December 31, 2000..................... -- 43 Additional paid-in capital................................ 48,868 227,245 Unearned compensation..................................... -- (9,707) Accumulated other comprehensive income.................... 4,187 440 Accumulated deficit....................................... (64,981) (154,098) -------- --------- Total stockholders' equity (deficit).................... (11,581) 64,378 -------- --------- Total liabilities and stockholders' equity (deficit).... $518,035 941,423 ======== =========
See accompanying notes to consolidated financial statements. 25 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
1998 1999 2000 -------- -------- --------- (DOLLARS IN THOUSANDS) Revenues.................................................... $92,561 148,162 246,264 ------- -------- --------- Operating expenses: Network operating costs................................... 27,264 49,306 134,209 Selling, general and administrative....................... 28,646 52,138 94,908 Depreciation and amortization............................. 20,089 31,632 52,544 Restructure charge........................................ -- -- 16,485 Stock-based compensation.................................. -- 3,386 16,451 ------- -------- --------- Total operating expenses................................ 75,999 136,462 314,597 ------- -------- --------- Income (loss) from operations........................... 16,562 11,700 (68,333) ------- -------- --------- Other income (expense): Net gain on sale of investments and other assets.......... 651 512 6,648 Interest income........................................... 442 446 1,076 Dividend income........................................... 1,119 1,452 1,403 Interest expense.......................................... (27,170) (51,185) (66,038) Other nonoperating, net................................... 885 2,520 4,095 ------- -------- --------- Total other expense..................................... (24,073) (46,255) (52,816) ------- -------- --------- Loss before income taxes and extraordinary item......... (7,511) (34,555) (121,149) Income tax benefit.......................................... 2,112 5,615 32,035 Minority interest in income of subsidiaries................. (80) (100) (3) ------- -------- --------- Loss before extraordinary item.......................... (5,479) (29,040) (89,117) Extraordinary item -- loss on early retirement of debt, net of income tax benefit of $1,755........................... (2,521) -- -- ------- -------- --------- Net loss................................................ $(8,000) (29,040) (89,117) ======= ======== =========
See accompanying notes to consolidated financial statements. 26 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
SERIES D CLASS A CLASS B CLASS C PREFERRED COMMON COMMON COMMON ------------------- ------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT -------- -------- -------- -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Balance, December 31, 1997...... -- $ -- 17,612 $177 -- $ -- -- $-- Net loss........................ -- -- -- -- -- -- -- -- Preferred stock dividends....... -- -- -- -- -- -- -- -- Issuance of capital stock....... -- -- 18,591 185 -- -- -- -- Reclassification of shares of common stock subject to put options....................... -- -- (1,752) (17) -- -- -- -- ------- ---- ------- ---- ------- ---- ----- --- Balance December 31, 1998....... -- -- 34,451 345 -- -- -- -- Net loss........................ -- -- -- -- -- -- -- -- Other comprehensive income from available-for-sale securities.................... -- -- -- -- -- -- -- -- Compensation expense for stock- based awards.................. -- -- -- -- -- -- -- -- ------- ---- ------- ---- ------- ---- ----- --- Balance December 31, 1999....... -- -- 34,451 345 -- -- -- -- Net loss........................ -- -- -- -- -- -- -- -- Issuance of common stock under stock options and warrants.... -- -- 307 3 -- -- -- -- Issuance of capital stock for cash, net of direct offering expenses of $23.9 million..... 4,674 47 100 1 4,244 42 4,269 43 Exchange of Class A common shares for Class B common and Series D preferred shares..... 16,788 168 (25,088) (251) 8,300 83 -- -- Cancellation of put options on common shares................. -- -- 1,752 17 -- -- -- -- Unearned stock option compensation.................. -- -- -- -- -- -- -- -- Compensation expense for stock- based awards.................. -- -- -- -- -- -- -- -- Forfeit of unvested stock options....................... -- -- -- -- -- -- -- -- Other comprehensive loss from available-for-sale securities.................... -- -- -- -- -- -- -- -- Conversion of Series D preferred and Class B common shares to Class A common shares......... (21,462) (215) 34,006 340 (12,544) (125) -- -- Repurchase and cancellation of shares of common stock........ -- -- (1) -- -- -- -- -- ------- ---- ------- ---- ------- ---- ----- --- Balance at December 31, 2000.... -- $ -- 45,527 $455 -- $ -- 4,269 $43 ======= ==== ======= ==== ======= ==== ===== === ACCUMU- LATED TOTAL OTHER STOCK- ADDITIONAL UNEARNED COMPRE- ACCUMU- HOLDERS' PAID-IN COMPEN- HENSIVE LATED EQUITY CAPITAL SATION INCOME DEFICIT (DEFICIT) ---------- --------- -------- -------- --------- (AMOUNTS IN THOUSANDS) Balance, December 31, 1997...... 16,813 -- -- (27,929) (10,939) Net loss........................ -- -- -- (8,000) (8,000) Preferred stock dividends....... -- -- -- (12) (12) Issuance of capital stock....... 31,652 -- -- -- 31,837 Reclassification of shares of common stock subject to put options....................... (2,983) -- -- -- (3,000) ------- ------- ------- -------- ------- Balance December 31, 1998....... 45,482 -- -- (35,941) 9,886 Net loss........................ -- -- -- (29,040) (29,040) Other comprehensive income from available-for-sale securities.................... -- -- 4,187 -- 4,187 Compensation expense for stock- based awards.................. 3,386 -- -- -- 3,386 ------- ------- ------- -------- ------- Balance December 31, 1999....... 48,868 -- 4,187 (64,981) (11,581) Net loss........................ -- -- -- (89,117) (89,117) Issuance of common stock under stock options and warrants.... 3,810 -- -- -- 3,813 Issuance of capital stock for cash, net of direct offering expenses of $23.9 million..... 150,281 -- -- -- 150,414 Exchange of Class A common shares for Class B common and Series D preferred shares..... -- -- -- -- -- Cancellation of put options on common shares................. 2,983 -- -- -- 3,000 Unearned stock option compensation.................. 15,926 (15,926) -- -- -- Compensation expense for stock- based awards.................. 8,510 3,097 -- -- 11,607 Forfeit of unvested stock options....................... (3,122) 3,122 -- -- -- Other comprehensive loss from available-for-sale securities.................... -- -- (3,747) -- (3,747) Conversion of Series D preferred and Class B common shares to Class A common shares......... -- -- -- -- -- Repurchase and cancellation of shares of common stock........ (11) -- -- -- (11) ------- ------- ------- -------- ------- Balance at December 31, 2000.... 227,245 (9,707) 440 (154,098) 64,378 ======= ======= ======= ======== =======
See accompanying notes to consolidated financial statements. 27 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSES YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
1998 1999 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) Net loss.................................................... $(8,000) (29,040) (89,117) Other comprehensive income (loss): Unrealized holding gains on available-for-sale securities.............................................. -- 4,187 242 Less reclassification adjustment for gain realized in net loss.................................................... -- -- (3,989) ------- ------- ------- Comprehensive loss...................................... $(8,000) (24,853) (92,864) ======= ======= =======
See accompanying notes to consolidated financial statements. 28 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
1998 1999 2000 --------- -------- --------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss.................................................. $ (8,000) (29,040) (89,117) --------- -------- --------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization......................... 20,089 31,632 52,544 Amortization of debt issue costs...................... 1,445 1,710 3,533 Provision for uncollectible revenue................... 390 634 2,778 Deferred income taxes................................. (1,653) (5,676) (32,819) Income from equity method investments................. (931) (2,497) (4,853) Deferred patronage dividends.......................... (265) (380) (113) Minority interest in income of subsidiaries........... 80 100 3 Increase in put warrant obligation.................... 714 13,331 -- Stock-based compensation.............................. -- 3,386 16,451 Impairment of long-lived assets....................... -- -- 2,854 Net gain on sale of investments and other assets...... (630) (512) (6,648) Loss on early retirement of debt...................... 2,897 -- -- Amortization of investment tax credits................ (130) (193) (219) Changes in assets and liabilities arising from operations, net of acquisitions: Accounts receivable............................... 5,988 (853) (17,150) Prepaid and other assets.......................... 253 (23) (1,145) Accounts payable.................................. (1,398) (2,117) 16,319 Accrued interest payable.......................... 1,128 384 5,560 Restructuring accrual............................. -- -- 13,343 Other accrued liabilities......................... 689 2,773 17,360 Income taxes recoverable.......................... (5,799) (4,955) 6,487 --------- -------- --------- Total adjustments............................... 22,867 36,744 74,285 --------- -------- --------- Net cash provided by (used in) operating activities.................................... 14,867 7,704 (14,832) --------- -------- --------- Cash flows from investing activities: Acquisition of telephone properties, net of cash acquired................................................ (217,080) (53,949) (256,068) Acquisition of property, plant, and equipment............. (12,433) (43,509) (107,772) Proceeds from sale of property, plant, and equipment...... 107 116 67 Distributions from investments............................ 118 2,590 3,161 Payment on covenants not to compete, net.................. (219) (988) (1,205) Acquisition of investments................................ (8) (349) (674) Proceeds from sale of investments......................... 4,088 20,065 19,200 Acquisition of minority interest.......................... -- -- (560) Increase (decrease) in other assets/liabilities, net...... (95) (586) 486 --------- -------- --------- Net cash used in investing activities................. $(225,522) (76,610) (343,365) --------- -------- ---------
29 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
1998 1999 2000 --------- -------- --------- (DOLLARS IN THOUSANDS) Cash flows from financing activities: Proceeds from issuance of long-term debt.................. $ 510,583 138,943 668,786 Repayment of long-term debt............................... (307,763) (52,056) (459,911) Purchase of stock warrants................................ -- (17,500) -- Repurchase of preferred stock and warrants................ (175) -- -- Dividends paid to preferred stockholders.................. (12) -- -- Net proceeds from issuance of common stock................ 31,837 -- 158,859 Repurchase of shares of common stock...................... -- -- (1,000) Loan origination costs.................................... (17,345) (3,703) (14,780) Dividends paid to minority stockholders................... (6) (4) (4) Repayment of capital lease obligation..................... (45) (92) (2,653) --------- -------- --------- Net cash provided by financing activities............. 217,074 65,588 349,297 --------- -------- --------- Net increase (decrease) in cash....................... 6,419 (3,318) (8,900) Cash, beginning of year..................................... 6,822 13,241 9,923 --------- -------- --------- Cash, end of year........................................... $ 13,241 9,923 1,023 ========= ======== =========
See accompanying notes to consolidated financial statements. 30 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1999, AND 2000 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION FairPoint Communications, Inc. (FairPoint) provides management services to its wholly-owned subsidiaries: S T Enterprises, Ltd. (STE); MJD Ventures, Inc. (Ventures); MJD Services Corp. (Services); FairPoint Communications Solutions Corp. (FairPoint Solutions); and MJD Capital Corp. STE, Ventures, and Services also provide management services to their wholly-owned subsidiaries. Collectively, the wholly-owned subsidiaries of STE, Ventures, and Services primarily provide traditional 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. FairPoint Solutions is a competitive communications business offering local and long distance, internet, and data services in various states. STE's wholly-owned subsidiaries include Sunflower Telephone Company (Sunflower); Northland Telephone Company of Maine, Inc. and Northland Telephone Company of Vermont, Inc. (the Northland Companies); and S T Long Distance, Inc. (S T Long Distance). Ventures' wholly-owned subsidiaries include Sidney Telephone Company (Sidney); C-R Communications, Inc. (C-R); Taconic Telephone Corp. (Taconic); Ellensburg Telephone Company (Ellensburg); Chouteau Telephone Company (Chouteau); Utilities, Inc. (Utilities); Chautauqua & Erie Telephone Corporation (C&E); Columbus Grove Telephone Company (Columbus Grove); The Orwell Telephone Company (Orwell); Telephone Services Company (TSC); GT Communications, Inc. (GT Com); Peoples Mutual Telephone Company (Peoples); Fremont Telcom Co. (Fremont); Fretel Communications LLC (Fretel); and Comerco, Inc. (Comerco). Services' wholly-owned subsidiaries include Bluestem Telephone Company (Bluestem); Big Sandy Telecom, Inc. (Big Sandy); Columbine Telecom Company (Columbine); Odin Telephone Exchange, Inc. (Odin); Kadoka Telephone Co. (Kadoka); Ravenswood Communications, Inc. (Ravenswood); Union Telephone Company of Hartford (Union); Armour Independent Telephone Co. (Armour); Yates City Telephone Company (Yates); and WMW Cable TV Co. (WMW). PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of FairPoint Communications, Inc. and its subsidiaries (the Company). All intercompany transactions and accounts have been eliminated in consolidation. The Company's traditional telephone subsidiaries follow the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards (SFAS) No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION (SFAS No. 71). This accounting recognizes the economic effects of rate regulation by recording costs and a return on investment, as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, SFAS No. 71 requires the Company's telephone subsidiaries to depreciate telephone plant over useful lives that would otherwise be determined by management. SFAS No. 71 also requires deferral of certain costs and obligations based upon approvals received from regulators to permit recovery of such amounts in future years. The Company's traditional telephone subsidiaries periodically review the applicability of SFAS No. 71 based on the developments in their current regulatory and competitive environments. 31 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenues are recognized as services are rendered and are primarily derived from the usage of the Company's networks and facilities or under revenue sharing arrangements with other communications carriers. Revenues are derived from primarily three sources: access, pooling, and miscellaneous. Local access charges are billed to local end users under tariffs approved by each state's Public Utilities Commission. Access revenues are derived on the intrastate jurisdiction by billing access charges to interexchange carriers and to regional Bell operating companies. These charges are billed based on toll or access tariffs approved by the local state's Public Utilities Commission. Access charges for the interstate jurisdiction are billed in accordance with tariffs filed by the National Exchange Carrier Association (NECA) or by the individual company and approved by the Federal Communications Commission. Revenues are determined on a bill and keep basis or a pooling basis. If on a bill and keep basis, the Company bills the charges to either the access provider or the end user and keeps the revenue. If the Company participates in a pooling environment (interstate or intrastate), the toll or access billed are contributed to a revenue pool. The revenue is then distributed to individual companies based on their company-specific revenue requirement. This distribution is based on individual state Public Utilities Commission (intrastate) or Federal Communications Commission's (interstate) approved separation rules and rates of return. Distribution from these pools can change relative to changes made to expenses, plant investment, or rate of return. Some companies participate in federal and certain state universal service programs that are pooling in nature but are regulated by rules separate from those described above. These rules vary by state. Miscellaneous revenues are derived by billing to either end users, access providers, or other parties, services such as directory advertising, billing and collecting services, sale and maintenance of customer premise equipment, etc. These services are typically billed under contract or under tariff supervision. Installation fees are deferred and related costs are capitalized and amortized over the estimated lives of the customers. CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade receivables. The Company places its cash with high quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large number of customers in several states. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. The Company is also exposed to credit losses in the event of nonperformance by the counterparties to its interest rate swap agreements. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the contracts. INVESTMENTS Investments consist of stock in CoBank, Rural Telephone Bank (RTB), the Rural Telephone Finance Cooperative (RTFC), Illuminet Holdings, Inc. (Illuminet), and various cellular companies and 32 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) partnerships and other minority equity investments, and Non-Qualified Deferred Compensation Plan assets. For the investments in partnerships, the equity method of accounting is used. All other investments, with the exception of Illuminet and the Non-Qualified Deferred Compensation Plan assets, are stated at cost. To determine if an impairment of an investment exists, the Company monitors and evaluates the financial performance of the business in which it invests and compares the carrying value of the investee to the fair values of similar investments, which in certain instances, is based on traditional valuation models utilizing multiples of cash flows. When circumstances indicate that a decline in the fair value of the investment has occurred and the decline is other than temporary, the Company records the decline in value as a realized loss and a reduction in the cost of the investment. The Company did not incur any losses from other than temporary declines in fair value in 1998, 1999, and 2000. The investment in Illuminet stock is classified as available-for-sale and the Non-Qualified Deferred Compensation Plan assets are classified as trading in accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (SFAS No. 115). SFAS No. 115 requires fair value reporting for certain investments in debt and equity securities with readily determinable fair values. Available-for-sale and trading securities are recorded at fair value. For available-for-sale securities, the unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of comprehensive income until realized. Unrealized holding gains and losses on trading securities are included in other income. The Company currently receives patronage dividends from its investments in businesses organized as cooperatives for federal income tax purposes (CoBank and RTFC stock). Patronage dividends represent cash distributions of the cooperative's earnings and notices of allocations of earnings to the Company. Deferred and uncollected patronage dividends are included as part of the basis of the investment until collected. The RTB investment pays dividends annually based on the discretion of its Board of Directors. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are carried at cost. Repairs and maintenance are charged to expense as incurred; major renewals and improvements are capitalized. For traditional telephone companies, the original cost of depreciable property retired, together with removal cost, less any salvage realized, is charged to accumulated depreciation. For all other companies, the original cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations. The traditional telephone companies capitalize estimated costs of debt and equity funds used for construction purposes for projects greater than $100,000. Depreciation is determined using the straight-line method for financial reporting purposes. Equipment held under capital leases are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. 33 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEBT ISSUE COSTS Debt issue costs are being amortized over the life of the related debt, ranging from 5 to 10 years. Accumulated amortization of loan origination costs was $3,104,714 and $6,637,791 at December 31, 1999 and 2000, respectively. INTANGIBLE ASSETS The covenants not to compete are being amortized over their useful life of three to five years. Accumulated amortization of covenants not to compete was $1,470,000 and $2,672,239 at December 31, 1999 and 2000, respectively. Goodwill consists of the difference between the purchase price incurred in acquisitions using the purchase method of accounting and the fair value of net assets acquired. Goodwill is being amortized using the straight-line method over an estimated useful life of 40 years. Accumulated amortization of goodwill was approximately $12.4 million and $22.5 million at December 31, 1999 and 2000, respectively. The Company reviews its long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. PENSION AND OTHER POSTRETIREMENT PLANS One of the Company's subsidiaries acquired in 2000 sponsors a defined benefit plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation levels prior to retirement. Benefits under this plan were frozen in connection with the Company's acquisition of the subsidiary. One of the Company's subsidiaries also sponsors a healthcare plan that provides postretirement medical benefits for substantially all retirees. The net periodic costs of pension and other postretirement benefit plans are recognized as employees render the services necessary to earn the benefits. 34 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swaps to manage its exposure to fluctuations in interest rates of its variable rate debt. Amounts receivable or payable under interest rate swap agreements are accrued at each balance sheet date and included as adjustments to interest expense. STOCK OPTION PLANS The Company accounts 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 (APB No. 25), and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123), permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. SFAS No. 123 allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income disclosures as if the fair-value method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the intrinsic value-based method of accounting described above and has adopted the disclosure requirements of SFAS No. 123. STOCK APPRECIATION RIGHTS Stock appreciation rights have been granted to certain members of management by principal shareholders of the Company. The Company accounts for stock appreciation rights in accordance with Financial Accounting Standards Board Interpretation No. 28, ACCOUNTING FOR STOCK APPRECIATION RIGHTS AND OTHER VARIABLE STOCK OPTION OR AWARD PLANS. The Company measures compensation as the amount by which the market value of the shares of the Company's stock covered by the grant exceeds the option price or value specified, by reference to a market price or otherwise, subject to any appreciation limitations under the plan and a corresponding credit to additional paid-in capital. Changes, either increases or decreases, in the market value of those shares between the date of the grant and the measurement date result in a change in the measure of compensation for the right. Valuation of stock appreciation rights is typically based on traditional valuation models utilizing multiples of cash flows, unless there is a current market value for the Company's stock. RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1999 consolidated financial statements to conform to the 2000 presentation. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the reported amounts of revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 35 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (2) RESTRUCTURE CHARGE In December 2000, the Company initiated a realignment and restructuring of its competitive communications business, which resulted in the Company recording a nonrecurring charge of approximately $16.5 million. Of the total restructuring charge, approximately $3.3 million relates to employee termination benefits and other employee termination related costs. The Company terminated approximately 360 positions in December 2000. These reductions took place due to organizational changes within the operations and sales offices of FairPoint Solutions, including closing facilities in several states. The operation centers in Birmingham, Alabama and Dallas, Texas were closed and consolidated to the FairPoint Solutions' central operating facility in Albany, New York. FairPoint Solutions also closed 15 of 41 district sales offices, including all those in the southeast and southwest regions of the United States. The restructuring charge includes approximately $10.3 million in contractual obligations for such items as equipment, occupancy, and other lease terminations and other facility exit costs incurred as a direct result of this plan. The restructuring charge also includes approximately $2.9 million, net of salvage value, for the write down of property, plant, and equipment. These assets primarily include leasehold improvements, furniture, and office equipment. Estimated salvage values are based on estimates of proceeds upon sale of certain of the affected assets. There were also approximately $0.1 million of other incremental costs incurred as a direct result of the restructuring plan. Selected information relating to the restructuring charge follows:
EQUIPMENT, WRITE DOWN EMPLOYEE OCCUPANCY, AND OF PROPERTY, TERMINATION OTHER LEASE PLANT, AND BENEFITS TERMINATIONS EQUIPMENT OTHER TOTAL ----------- -------------- ------------ -------- -------- (DOLLARS IN THOUSANDS) Restructure charge........ $3,271 10,252 2,854 108 16,485 Write-down of assets to net realizable value.... -- -- (2,854) -- (2,854) Cash payments............. (243) (45) -- -- (288) ------ ------ ------ --- ------ Restructuring accrual as of December 31, 2000.................. $3,028 10,207 -- 108 13,343 ====== ====== ====== === ======
In the first quarter of 2001, the Company completed its plans for the restructuring of operations at FairPoint Solutions. The Company anticipates recording an additional charge of approximately $27--$35 million in the first quarter of 2001. Of the total first quarter 2001 restructuring charge, approximately $3.0 million will relate to employee termination benefits and other employee termination related costs. The Company terminated approximately 365 positions in January 2001. These reductions completed the organizational changes at the operation centers and sales offices of FairPoint Solutions which began in December 2000. Certain positions were eliminated at the central operating facility in Albany, New York and at the corporate office in Charlotte, North Carolina. In addition, another 11 sales offices were closed and staff at the remaining sales offices was reduced. 36 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (2) RESTRUCTURE CHARGE (CONTINUED) The restructure charge in the first quarter of 2001 will include approximately $5.8 million in contractual obligations for such items as equipment, occupancy, and other lease terminations and other facility exit costs incurred as a direct result of the plan. The restructuring charge will also include approximately $18--$26 million, net of salvage value, for the write down of property, plant, and equipment. There will also be approximately $0.2 million of other incremental costs incurred as a direct result of the restructuring plan. (3) ACQUISITIONS On March 30, 1998, the Company acquired 100% of the common stock of Taconic. On April 30, 1998, the Company acquired 100% of the common stock of Ellensburg. On June 1, 1998, the Company acquired 100% of the common stock of Chouteau. On November 6, 1998, the Company acquired 100% of the common stock of Utilities. The aggregate purchase price for these acquisitions was $224.1 million. On February 1, 1999, the Company acquired 100% of the common stock of Ravenswood. On February 16, 1999, the Company acquired 100% of the common stock of Columbus Grove. On April 30, 1999, the Company acquired 100% of the common stock of Union, Armour, and WMW. On September 1, 1999, the Company acquired 100% of the common stock of Yates. On December 17, 1999, the Company acquired 100% of the common stock of Orwell. The aggregate purchase price for these acquisitions was $75.3 million. On April 3, 2000, the Company acquired 100% of the common stock of GT Com and Peoples. On June 1, 2000, the Company acquired 100% of the common stock of Fremont and Fretel. On July 3, 2000, the Company acquired 100% of the common stock of Comerco. The aggregate purchase price for these acquisitions was $276.2 million, including $6.0 million issued in common stock. The Fremont acquisition was completed using cash and the issuance of 457,318 shares of Class A common stock of the Company valued at $13.12 per share. Acquisition costs were approximately $1.2 million, $0.9 million, and $1.0 million in 1998, 1999, and 2000, respectively. The acquisitions have been accounted for using the purchase method and, accordingly, the results of their operations have been included in the Company's consolidated financial statements from the date of acquisition. The excess of the purchase price and acquisition costs over the fair value of the net identifiable assets acquired was approximately $156.5 million, $36.7 million, and $231.2 million and has been recognized as goodwill in 1998, 1999, and 2000, respectively. 37 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (3) ACQUISITIONS (CONTINUED) The allocation of the total net purchase price for the 1998, 1999, and 2000 acquisitions are shown in the table below:
1998 1999 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) Current assets.................................. $ 27,539 25,484 29,141 Property, plant, and equipment.................. 85,161 18,675 100,121 Excess cost over fair value of net assets acquired...................................... 156,540 36,710 231,167 Other assets.................................... 30,577 11,598 23,880 Current liabilities............................. (15,967) (2,113) (16,038) Other liabilities............................... (58,606) (14,131) (91,077) -------- ------- ------- Total net purchase price.................... $225,244 76,223 277,194 ======== ======= =======
The following unaudited pro forma information presents the combined results of operations of the Company as though the acquisitions occurred at the beginning of the preceding year. These results include certain adjustments, including amortization of goodwill, increased interest expense on debt related to the acquisitions, certain preacquisition transaction costs, and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations if the acquisitions had been in effect at the beginning of each period or which may be attained in the future.
PRO FORMA YEARS ENDED DECEMBER 31, ------------------------------ 1998 1999 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) (UNAUDITED) Revenues........................................ $174,609 212,148 264,639 Net loss........................................ (8,531) (40,914) (91,976)
38 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (4) PROPERTY, PLANT, AND EQUIPMENT A summary of property, plant, and equipment, including equipment owned under capital leases of $232,337 and $6,525,737 at December 31, 1999 and 2000, respectively, is shown in the table below:
ESTIMATED LIFE (IN YEARS) 1999 2000 --------------- ---------- ---------- (DOLLARS IN THOUSANDS) Land........................................................ -- $ 1,640 3,535 Buildings and leasehold improvements........................ 2--40 22,993 36,349 Telephone equipment......................................... 3--50 327,824 543,295 Cable equipment............................................. 3--20 1,615 1,570 Furniture and equipment..................................... 3--32 13,433 26,669 Vehicles and equipment...................................... 3--27 12,804 18,302 Computer software........................................... 3--10 3,567 11,170 -------- ------- Total property, plant, and equipment.................... 383,876 640,890 Accumulated depreciation, including amounts applicable to assets acquired under capital leases of $180,154 in 1999 and $1,025,291 in 2000.................................... (205,580) (291,974) -------- ------- Net property, plant, and equipment...................... $178,296 348,916 ======== =======
The traditional telephone company composite depreciation rate for property and equipment was 7.39%, 7.28%, and 7.80% in 1998, 1999, and 2000, respectively. Depreciation expense for the years ended December 31, 1998, 1999, and 2000 was $16,416,346, $24,471,896, and $41,265,194, respectively. (5) INVESTMENTS The cost, unrealized holding gain, and fair value of Illuminet stock, the Company's only investment classified as available-for-sale, at December 31, 1999 and 2000 is summarized below:
UNREALIZED HOLDING FAIR COST GAIN VALUE -------- ---------- --------- December 31, 1999............................ $573,605 6,753,275 7,326,880 ======== ========= ========= December 31, 2000............................ $226,742 709,002 935,744 ======== ========= =========
The unrealized holding gain is reported as a separate component of accumulated other comprehensive income, net of related taxes of $2,566,245 and $269,421 at December 31, 1999 and 2000, respectively. 39 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (5) INVESTMENTS (CONTINUED) At December 31, 1998, Illuminet stock was carried at cost, as there was no readily determinable fair value. Proceeds from sales of available-for-sale securities were $14,431,728 in 2000. Gross gains of $3,989,053 were realized on those sales. There were no sales of available-for-sale securities during 1998 and 1999. The Company's non-current investments at December 31, 1999 and 2000 consist of the following:
1999 2000 -------- -------- (DOLLARS IN THOUSANDS) Investment in cellular companies and partnerships........ $22,374 23,756 RTB stock................................................ 10,259 20,217 CoBank stock and unpaid deferred CoBank patronage ....... 2,326 4,269 RTFC secured certificates and unpaid deferred RTFC patronage.............................................. 688 639 Other nonmarketable minority equity investments and Non- Qualified Deferred Compensation Plan assets............ 599 1,472 ------- ------- Total investments.................................... $36,246 50,353 ======= =======
The investments accounted for under the equity method and the Company's ownership percentage as of December 31, 1999 and 2000 are summarized below:
1999 2000 -------- -------- Chouteau Cellular Telephone Company......................... 33.0% 33.3% Northeast Competitive Access Providers, LLC................. 25.0% 25.0% GTE Ohio RSA #3 LP.......................................... 25.0% -- Illinois Valley Cellular RSA 2 - I Ptnrs.................... 13.3% 13.3% Illinois Valley Cellular RSA 2 -11 Ptnrs.................... 13.3% 13.3% Illinois Valley Cellular RSA 2 - III Ptnrs.................. 13.3% 13.3% Tangible Data Options, LLC.................................. 12.5% 12.5% ILLINET Communications, LLC................................. 9.1% 9.1% Orange County-Poughkeepsie Limited Partnership.............. 7.5% 7.5% Illinetworks, LLC .......................................... 7.4% -- ILLINET Communications of Central IL LLC.................... 5.2% 5.2% Virgina PCS Alliance L.C. .................................. -- 2.4%
40 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (6) LONG-TERM DEBT Long-term debt at December 31, 1999 and 2000 is shown below:
1999 2000 ---------- ---------- (DOLLARS IN THOUSANDS) Senior secured notes, variable rates ranging from 8.56% to 10.57% at December 31, 2000, due 2004 to 2007...... $215,513 249,605 Senior subordinated notes due 2008: Fixed rate, 9.50%..................................... 125,000 125,000 Variable rate, 10.91% at December 31, 2000............ 75,000 75,000 Senior subordinated notes, 12.50%, due 2010............. -- 200,000 Senior secured notes, variable rates ranging from 10.94% to 12.75% at December 31, 2000, due 2004 to 2007...... 21,747 80,000 Senior notes to RTFC: Fixed rate, 9.20%, due 2009........................... 4,532 4,126 Variable rates ranging from 8.40% to 8.80% at December 31, 2000, due 2009......................... 6,795 6,186 Subordinated promissory notes, 7.00%, due 2005.......... 7,000 7,000 First mortgage notes to Rural Utilities Service, fixed rates ranging from 2.00% to 10.78%, due 2002 to 2016.................................................. 6,459 8,185 Senior notes to RTB, fixed rates ranging from 7.50% to 8.00%, due 2008 to 2014............................... -- 1,571 Other debt, 5.75% to 9.50%, due 2001 and 2004........... 349 139 -------- -------- Total outstanding long-term debt.................... 462,395 756,812 Less current portion.................................... (3,866) (5,182) -------- -------- Total long-term debt, net of current portion........ $458,529 751,630 ======== ========
The approximate aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2000 are as follows:
(DOLLARS IN FISCAL YEAR THOUSANDS) - ----------- ----------- 2001.............................................. $ 5,182 2002.............................................. 4,869 2003.............................................. 5,051 2004.............................................. 134,690 2005.............................................. 95,182 Thereafter........................................ 511,838 -------- $756,812 ========
41 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (6) LONG-TERM DEBT (CONTINUED) SENIOR SECURED NOTES On March 30, 1998, the Company closed a $315 million senior secured credit facility (the Credit Facility) which committed $75 million of term debt (tranche C) amortized over nine years, $155 million of term debt (tranche B) amortized over eight years, and an $85 million reducing revolving credit facility (revolving facility) with a term of 6.5 years. On March 14, 2000, an additional $165 million reducing revolving credit facility (acquisition facility) with a term of 4.5 years was committed and available to the Company under the Credit Facility. At December 31, 2000, the Company had approximately $138.1 million available to borrow under the Credit Facility. Borrowings under the Credit Facility bear interest at a rate based, at the option of the Company, on the participating banks' prime rate or Eurodollar rate, plus an incremental rate of 2.0%, 1.75%, 1.5%, and 1.5% for the prime rate and 3.0%, 2.75%, 2.5%, and 2.5% for the Eurodollar margins for the tranche C, tranche B, revolving facility, and acquisition facility, respectively. The Credit Facility is secured by a perfected first priority pledge of the stock of certain subsidiaries of the Company. The Credit Facility is also guaranteed by four of the Company's intermediary holding companies, subject to contractual or regulatory restrictions. In addition to annual administrative agent's fees, the Company pays fees of 1/2% per annum on the aggregate unused portion of the tranche B, revolving facility, and acquisition facility commitments. On March 30, 2001, the Company amended the Credit Facility. Under this amendment, the payment terms of the revolving and acquisition facilities were changed such that the total debt under these facilities will be due on September 30, 2004. The new payment terms are reflected in the accompanying consolidated balance sheet at December 31, 2000 and in the preceding summary of the aggregate maturities of long-term debt. The Company used six interest rate swap agreements, with notional amounts of $25 million each, and one interest rate swap agreement with a notional amount of $50 million, to effectively convert a portion of its variable interest rate exposure under the Credit Facility to fixed rates ranging from 8.32% to 9.34%. The expiration dates of the swap agreements range from November 2001 to May 2004. The Credit Facility contains various restrictions, including those relating to payment of dividends by the Company. In management's opinion, the Company has complied with all such requirements. The Credit Facility is secured by the common stock of the Company. SENIOR SUBORDINATED NOTES DUE 2008 On May 5, 1998, the Company consummated a debt offering consisting of $125 million in aggregate principal amount of Senior Subordinated Notes due 2008 (the Fixed Rate Notes), and $75 million in aggregate principal amount of Floating Rate Callable Securities due 2008 (the Floating Rate Notes). The notes are unsecured obligations of the Company and are subordinated to all existing and future senior indebtedness. Interest on the notes is payable semiannually. Interest on the Fixed Rate Notes is 9.5% and interest on the Floating Rate Notes is equal to a rate per annum at LIBOR plus 418.75 basis points. As to the Floating Rate Notes, the Company used an interest rate swap agreement, with a notional amount of $75 million, to effectively convert its variable interest rate exposure to a fixed rate of 10.78%. The swap agreement expires on May 3, 2003. The Fixed Rate Notes are redeemable, in whole or in part, at the option of the Company, at any time on or after May 1, 2003 at redemption prices (expressed as a percentage of the principal amount) declining annually from 104.7% beginning May 1, 2003 to 100% beginning May 1, 2006 and thereafter, 42 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (6) LONG-TERM DEBT (CONTINUED) together with accrued interest to the redemption date and subject to certain conditions. Not withstanding the foregoing, on or prior to May 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Fixed Rate Notes at a redemption price of 109.5% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date, with the proceeds of an equity offering. The Floating Rate Notes are redeemable, in whole or in part, at any time at the option of the Company, at redemption prices (expressed as a percentage of the principal amount) declining annually from 105% beginning May 1, 1998 to 100% beginning May 1, 2003 and thereafter, together with accrued interest to the redemption date and subject to certain conditions. The Fixed and Floating Rate Notes' indenture places certain restrictions on the ability of the Company to (i) incur additional indebtedness, (ii) make restricted payments (dividends, redemptions, and certain other payments), (iii) incur liens, (iv) issue and sell stock of a subsidiary, (v) sell or otherwise dispose of property, business, or assets, (vi) enter into sale and leaseback transactions, (vii) engage in business other than the communications business, and (viii) engage in transactions with affiliates. In management's opinion, the Company has complied with all such requirements. SENIOR SUBORDINATED NOTES DUE 2010 On May 24, 2000, the Company consummated a debt offering consisting of $200 million in aggregate principal amount of Senior Subordinated Notes due 2010 (the 2010 Notes). The 2010 Notes are unsecured obligations of the Company and are subordinated to all existing and future senior indebtedness. Interest on the 2010 Notes is 12.5%, payable semiannually. The 2010 Notes are redeemable, in whole or in part, at the option of the Company, at any time on or after May 1, 2005 at redemption prices (expressed as a percentage of the principal amount) declining annually from 106.25% beginning May 1, 2005 to 100% beginning May 1, 2008 and thereafter, together with accrued interest to the redemption date and subject to certain conditions. Not withstanding the foregoing, on or prior to May 1, 2003, the Company may redeem up to 35% of the aggregate principal amount of the 2010 Notes at a redemption price of 112.5% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date, with the proceeds of an equity offering. The 2010 Notes indenture places certain restrictions on the ability of the Company to (i) incur additional indebtedness, (ii) make restricted payments (dividends, redemptions, and certain other payments), (iii) incur liens, (iv) issue and sell stock of a subsidiary, (v) sell or otherwise dispose of property, business, or assets, (vi) enter into sale and leaseback transactions, (vii) engage in business other than the telecommunications business, and (viii) engage in transactions with affiliates. In management's opinion, the Company has complied with all such requirements. SENIOR SECURED NOTES On October 20, 1999, FairPoint Solutions closed a $100 million convertible senior secured credit facility (the FairPoint Solutions Credit Facility). On March 27, 2000, funds available to FairPoint Solutions under the FairPoint Solutions Credit Facility increased to $165 million. On November 9, 2000, FairPoint Solutions amended and restated the FairPoint Solutions Credit Facility to increase the commitments of the lenders thereunder to $250 million. On March 21, 2001, FairPoint Solutions 43 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (6) LONG-TERM DEBT (CONTINUED) amended the FairPoint Solutions Credit Facility and lowered the commitment of the lenders to $200 million. The FairPoint Solutions Credit Facility, which expires in November 2007, provides for a revolving tranche and a term tranche. FairPoint Solutions can borrow up to $75 million under the revolving tranche and has the opportunity, subject to certain conditions, to increase such availability by an additional $50 million. FairPoint Solutions can borrow up to $125 million under the term tranche of such facility. Borrowings under the FairPoint Solutions Credit Facility are secured by all existing and future assets of FairPoint Solutions and by 100% of the stock of FairPoint Solutions. Pursuant to the terms of the FairPoint Solutions Credit Facility, FairPoint Solutions is required to comply with certain financial covenants. Upon an uncured default of certain covenants or if the debt is not paid at final maturity, the lenders have the option to exchange all outstanding indebtedness plus outstanding and accrued interest for an equal dollar amount of payment in-kind preferred stock issued by the Company. Effective with the amendment of the FairPoint Solutions Credit Facility on March 21, 2001, FairPoint Solutions was in compliance with all financial covenants. The Company used an interest rate swap agreement with a notional amount of $50 million to effectively convert a portion of its variable interest rate exposure under the FairPoint Solutions Credit Facility to a fixed rate of 10.59%. The swap agreement expires in November 2003. In conjunction with the senior notes payable to RTFC, the Company is subject to restrictive covenants limiting the amount of dividends that may be paid. At December 31, 2000, the Company was in compliance with these restrictions. The Company also has approximately $535,000 unsecured demand notes payable to various individuals and entities with interest payable at 5.25% at December 31, 2000. On March 30, 1998, the Company retired senior notes of $120.9 million and subordinated promissory notes of $3.5 million. As a result of retiring the notes, the Company recognized an extraordinary loss of approximately $2.5 million (net of taxes of approximately $1.8 million), consisting of prepayment penalties of approximately $1.4 million and the write-off of existing deferred financing costs of approximately $2.9 million. (7) EMPLOYEE BENEFIT PLANS The Company sponsors a voluntary 401(k) savings plan (the 401(k) Plan) that covers substantially all eligible employees. Each 401(k) Plan year, the Company contributes to the 401(k) Plan an amount of matching contributions determined by the Company at its discretion. For the 401(k) Plan years ended December 31, 1998, 1999, and 2000, the Company matched 100% of each employee's contribution up to 3% of compensation and 50% of additional contributions up to 6%. The 401(k) Plan also allows for a profit sharing contribution that is made based upon management discretion. Total Company contributions to the 401(k) Plan were $1,163,906, $2,291,520, and $1,720,617, for the years ended December 31, 1998, 1999, and 2000, respectively. In 1999, the Company began a Non-Qualified Deferred Compensation Plan (the NQDC Plan) that covers certain employees. The NQDC Plan allows highly compensated individuals to defer additional compensation beyond the limitations of the 401(k) Plan. Company matching contributions are subject to the same percentage as the 401(k) Plan. Total Company contributions to the NQDC Plan were $61,583 and $38,159 for the years ended December 31, 1999 and 2000, respectively. At December 31, 44 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (7) EMPLOYEE BENEFIT PLANS (CONTINUED) 1999 and 2000, the NQDC Plan assets were $127,857 and $447,310, 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 plans for union employees. C&E, Taconic, and GT Com match contributions to these plans based upon a percentage of pay of all qualified personnel and make certain profit sharing contributions. Contributions to the plans were approximately $154,600, $205,000, and $238,000 for the years ended December 31, 1998, 1999, and 2000, respectively. One of the Company's subsidiaries acquired during 2000 has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation before retirement. The plan benefits were frozen in connection with the Company's acquisition of the subsidiary. There is no additional minimum pension liability required to be recognized and plan assets are sufficient to cover all plan obligations. One of the Company's subsidiaries sponsors a healthcare plan that provides postretirement medical benefits and other benefits to employees who meet minimum age and service requirements upon retirement. The liability for the postretirement medical benefit plan was not material to the consolidated financial statements at December 31, 1999 and 2000. Certain shareholders of the Company granted stock appreciation rights to certain members of management. The stock appreciation rights are fully vested. The stock appreciation rights may be settled in cash or stock, at the option of the granting shareholders. In connection with the stock appreciation rights, the Company recorded compensation expense of approximately $3,386,000 in 1999. No compensation expense was recorded in 2000. The Company is self-insured for the purpose of providing primary medical coverage to covered employees up to $60,000 per calendar year for each covered person. The Company has purchased insurance for coverage of claims in excess of $60,000 per calendar year per covered person with an insurance company. The Company has also purchased an aggregate stop-loss policy that limits the total amount the Company pays on claims. The stop-loss fluctuates based on the number of employees. As of December 31, 2000, the aggregate stop-loss was approximately $7.6 million. The estimated liability for claims, including incurred but not reported claims, is included in other accrued liabilities in the accompanying consolidated balance sheets and amounted to approximately $1.2 million at December 31, 2000. 45 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (8) INCOME TAXES Income tax benefit (expense) before extraordinary item for the years ended December 31, 1998, 1999, and 2000 consists of the following components:
1998 1999 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) Current: Federal.......................................... $ 346 (278) 197 State............................................ (17) 24 (1,200) ------ ------ ------- Total current income tax (expense) benefit... 329 (254) (1,003) ------ ------ ------- Investment tax credits............................. 130 193 219 ------ ------ ------- Deferred: Federal.......................................... 1,047 4,988 29,921 State............................................ 606 688 2,898 ------ ------ ------- Total deferred income tax benefit............ 1,653 5,676 32,819 ------ ------ ------- Total income tax benefit..................... $2,112 5,615 32,035 ====== ====== =======
Total income tax benefit was different than that computed by applying U. S. federal income tax rates to losses before income taxes for the years ended December 31, 1998, 1999, and 2000. The reasons for the differences are shown below.
1998 1999 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) Computed "expected" tax benefit.................... $2,553 11,748 41,191 State income tax benefit, net of federal income tax benefit.......................................... 389 471 1,121 Amortization of investment tax credits............. 130 193 219 Goodwill amortization.............................. (887) (1,559) (2,843) Stock-based compensation........................... -- -- (4,288) Change in fair value of put warrant obligation..... (242) (4,681) -- Valuation allowance................................ -- -- (3,721) Disallowed expenses and other...................... 169 (557) 356 ------ ------ ------- Total income tax benefit....................... $2,112 5,615 32,035 ====== ====== =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1999 and 2000 are presented on the following page. 46 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (8) INCOME TAXES (CONTINUED)
1999 2000 -------- -------- (DOLLARS IN THOUSANDS) Deferred tax assets: Federal and state tax loss carryforwards.............. $ 1,130 38,347 Employee benefits..................................... 586 747 Restructure charge.................................... -- 3,887 Allowance for doubtful accounts....................... 213 1,130 Alternative minimum tax credits....................... 1,658 2,087 ------- ------ Total gross deferred tax assets................... 3,587 46,198 Valuation allowance............................... -- (3,721) ------- ------ Net deferred tax assets........................... 3,587 42,477 ------- ------ Deferred tax liabilities: Property, plant, and equipment, principally due to depreciation differences............................ 16,605 26,370 Goodwill, due to amortization differences............. 2,471 6,007 Basis in investments.................................. 10,531 9,831 Unrealized gain on investment......................... 2,566 269 ------- ------ Total gross deferred tax liabilities.............. 32,173 42,477 ------- ------ Net deferred tax liabilities...................... $28,586 -- ======= ======
The valuation allowance for deferred tax assets as of December 31, 2000 was $3,721,000. There was no valuation allowance at December 31, 1999. The change in the valuation allowance for the year ended December 31, 2000 was an increase of $3,721,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $116 million prior to the expiration of the net operating loss carryforwards in 2020. Taxable loss for the years ended December 31, 1999 and 2000 was approximately $0.5 million and $88.0 million, respectively. Based upon the level of projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2000. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. At December 31, 2000, federal and state net operating loss carryforwards of approximately $106 million expire December 2019 to 2020. At December 31, 2000, the Company has minimum tax credits of approximately $2.1 million which may be carried forward indefinitely. 47 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (9) WARRANTS In connection with the issuance of subordinated notes in 1994, the Company issued detachable warrants to purchase 10,000 shares of STE's common stock at the stated par value of $.01 per share. In conjunction with the retirement of the subordinated notes in 1997, the Company required STE to issue additional warrants to purchase 2,857 shares of STE's common stock. The agreement stipulated that the put/call price of the warrants should equal STE's net equity, as defined in the agreement, multiplied by the ratio of exercisable warrants to the number of shares of common stock outstanding on a fully-diluted basis on the date of the put or call. The Company recorded the obligation for the warrants based on the fair value of STE's common stock as determined by management, at the issuance date of the warrants. At each balance sheet date, the warrants were valued utilizing cash flow models that management also uses in valuing potential acquisitions. Those models estimate fair value using earnings before interest, taxes, depreciation, and amortization (EBITDA), and multiples of EBITDA for recent acquisitions of similar companies. The increase or decrease in fair value of the obligation for the warrants was recognized in earnings as interest expense. In December 1999, the Company purchased the STE warrants for $17.5 million. The increase in the value of the STE obligation during 1999 was $13.3 million. In addition, the Company previously issued warrants to purchase 7.69 shares, representing 7.14% of Sidney's common stock. The Company estimated the fair value of the warrants at the date of issuance and included the fair value in the initial allocation of purchase price for Sidney's common stock, with the related value of the warrants issued to minority shareholders included in the obligation for minority interests. In December 1999, the Company purchased the Sidney warrants for $0.5 million. The excess $0.4 million associated with the Sidney warrants was accounted for as an acquisition of minority interest and an increase to goodwill. (10) STOCKHOLDERS' EQUITY On March 30, 1998 and April 30, 1998, the Company issued a total of 18,590,800 shares of its Class A common stock to unrelated third parties and members of management for proceeds of approximately $31.8 million. These proceeds were used to finance the acquisitions of Taconic and Ellensburg. A number of events occurred during 2000 which affected the capitalization of the Company. Those events included a stock-split in the form of a stock dividend, authorizing additional classes of capital stock, issuing and reacquiring capital stock for net proceeds of approximately $158.9 million, the cancellation of put options on the Company's common stock, issuing common stock subject to put obligations related to a business combination, and recognizing costs for stock-based compensation to employees. STOCK-SPLIT In January 2000, the Company declared a twenty-for-one stock split in the form of a stock dividend. This stock split has been given retroactive effect in the accompanying consolidated financial statements. 48 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (10) STOCKHOLDERS' EQUITY (CONTINUED) ADDITIONAL CLASSES OF CAPITAL STOCK In January 2000, the Company amended its articles of incorporation to authorize an aggregate of 144,600,000 shares of capital stock. Following the amendment, the authorized share capital of the Company includes the following: CLASS A COMMON STOCK--authorized 60,000,000 voting common shares at a par value of $.01 per share. Class A common shares carry one vote per share. CLASS B COMMON STOCK--authorized 50,000,000 nonvoting, convertible common shares at a par value of $.01 per share. CLASS C COMMON STOCK--authorized 4,600,000 nonvoting, convertible common shares at a par value of $.01 per share. The Class C common shares are automatically convertible into Class A common shares upon either the completion of an initial public offering of at least $150 million of the Company's Class A common stock or the occurrence of certain conversion events, as defined in the articles of incorporation. The conversion rate for the Class C common shares to Class A common shares is one-for-one. SERIES D PREFERRED STOCK--authorized 30,000,000 nonvoting, convertible, cumulative participating preferred shares at a par value of $.01 per share. Effective August 8, 2000, all regulatory approvals necessary to effectuate a change in control were received and all outstanding Class B common and Series D preferred shares issued during 2000 were automatically converted into an equal number of Class A common shares. The Series D preferred shares did not provide for the payment of dividends for up to one year following their issuance; as such, no dividends were paid on the preferred shares during 2000. ISSUANCE AND REACQUISITION OF CAPITAL STOCK In January 2000, shares of Class A common stock issued under stock options and warrants included 35,300 shares issued under the MJD Communications, Inc. Stock Incentive Plan (1998 Plan), 255,320 shares issued under the 1995 Stock Option Plan (1995 Plan), and 16,580 shares issued pursuant to warrants to purchase shares of the Company's common stock in a cashless exercise. Options surrendered in lieu of cash were 5,300 under the 1998 Plan and 5,020 under the 1995 Plan. Following the conversion of these Class A common shares into Series D preferred shares, the newly issued Series D preferred shares were sold to a new principal shareholder of the Company. The Company's Board of Directors amended the grant of options to purchase 40,600 shares of the Company's Class A common stock under the 1998 Plan to make those options immediately exercisable and fully vested. The options were previously exercisable only upon the occurrence of a qualifying liquidating event, as defined under the 1998 Plan. A compensation charge of $463,002 was recognized in connection with the amendment of the options. As a result of the exercise of options to purchase 260,340 shares of Class A common stock under the 1995 Plan, the Company recorded a compensation charge of $3,349,665. In January 2000, at a price of $13.12 per share, the Company issued 4,673,920 shares of Series D preferred stock, 100,160 shares of Class A common stock, 4,243,728 shares of Class B common stock, and 4,269,440 shares of Class C common stock. Net proceeds from the issuance of capital stock was approximately $158.9 million. Direct costs of approximately $23.9 million associated with the issuance 49 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (10) STOCKHOLDERS' EQUITY (CONTINUED) of this capital stock were recorded as a reduction to paid-in capital. These costs included approximately $9.6 million of transaction fees and expenses paid to a new principal shareholder, transaction fees of $8.4 million which were accrued to be paid to an existing shareholder upon liquidation of their holdings, and $0.4 million for services rendered in consummating the transaction paid to a law firm in which a partner of the firm is a shareholder of the Company. In January 2000, the Company reacquired 25,087,800 Class A common shares in exchange for 16,787,800 shares of Series D preferred stock and 8,300,000 shares of Class B common stock. The Class A common shares were retired upon reacquisition. CANCELLATION OF PUT OBLIGATIONS During 1998, certain major shareholders of the Company pledged 1,752,000 shares of the Company's common stock as collateral under various loan agreements. Under the terms of the loan agreements, the Company was required, in the event of default by the shareholders, to repurchase the pledged shares for the lesser of (i) 100% of outstanding indebtedness plus accrued and unpaid interest, or (ii) $3.0 million. The Company classified $3.0 million of equity as temporary equity for the value of common stock issued and subject to put options under these arrangements. In January 2000, these put options were cancelled. As a result, the Company reclassified $3.0 million from temporary equity to the permanent capital accounts of the Company. ISSUANCE OF COMMON STOCK SUBJECT TO PUT OBLIGATIONS In connection with the acquisition of Fremont, the Company issued 457,318 shares of Class A common stock to the former owners of Fremont. Under the terms of the agreements, these shares can be put back to the Company at any time while the former owners are employed by the Company and for up to 90 days from and after the effective date of any termination. The purchase price for such stock is the higher of the fair market value or the carrying value for such stock. On December 29, 2000, the former owners of Fremont exercised their put options on 75,418 shares. The Company has recorded the common stock subject to put options as temporary equity in the accompanying consolidated balance sheet. COMPENSATION EXPENSE In 1997, two of the Company's shareholders entered into shareholder agreements with the Company and its founding shareholders, including two employee shareholders. Under the shareholder agreements, the Company's founding shareholders are entitled to a cash payment as a result of the sale of the Company's common stock to a third party by either of the two shareholders. In January 2000, one of these shareholders sold newly issued Series D preferred shares for cash to a third party. The transaction was subject to the requirements of the shareholder agreements. As the cash payment to the two employee shareholders was contingent upon their continued employment, the Company recognized the cash payment as compensation expense. Also in January 2000, the other shareholder transferred 1,093,060 shares of Series D preferred shares to the employee-shareholders in settlement of its cash payment obligation under the shareholder agreements. As a result of these transactions, the Company recognized a compensation charge of $8,510,626. 50 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (10) STOCKHOLDERS' EQUITY (CONTINUED) In April 2000, the Company issued stock options under the 1998 Plan to employee participants in the FairPoint Communications Corp. Stock Incentive Plan (FairPoint Solutions Plan) in consideration of the cancellation of all options previously granted under the FairPoint Solutions Plan. The Company issued 1,620,465 and 73,200 options to purchase Class A common shares of the Company at an exercise price of $3.28 per share and $13.12 per share, respectively. The Company is recognizing a compensation charge on these options for the amount the market value of the Company's common stock exceeded the exercise price on the date of grant. In order to maintain the same economic benefits as previously existed under the FairPoint Solutions Plan, FairPoint Solutions also intends to provide a cash bonus to its employees for each option exercised. The Company is amortizing the compensation charge related to the option grant and the cash bonus over the vesting period of five years. The vesting period may accelerate in the event of a change in control, as defined in the plan agreement. For the year ended December 31, 2000, compensation expense of $3,096,291 and $1,032,097 was recognized for these options and bonuses, respectively. During 2000, 320,250 unvested options subject to the option and bonus compensation charge were forfeited. As of December 31, 2000, unearned compensation on the converted FairPoint Solution options was $9,707,541 and based on the number of options outstanding as of December 31, 2000, the cash bonus FairPoint Solutions intends to pay, assuming all options are exercised, is $4,264,705. (11) STOCK OPTION PLANS 1995 STOCK OPTION PLAN The Company sponsors the 1995 Plan that covers officers, directors, and employees of the Company. The Company may issue qualified or nonqualified stock options to purchase up to 1,136,800 shares of the Company's Class A common stock to employees that will vest equally over five years from the date of employment of the recipient and are exercisable during years five through ten. In 1995, the Company granted options to purchase 852,800 shares at $0.25 per share. There were no options granted since 1995. The per share weighted-average fair value of stock options granted during 1995 was $0.13 on the date of grant using the Black Scholes option-pricing model. Input variables used in the model included no expected dividend yields, a risk-free interest rate of 6.41%, and an estimated option life of five years. Because the Company was nonpublic on the date of the grant, no assumption as to the volatility of the stock price was made. Stock option activity for 1998, 1999 and 2000 under the 1995 Plan is summarized as follows:
1998 1999 2000 -------- -------- -------- Outstanding at January 1........................ 852,800 852,800 852,800 Granted....................................... -- -- -- Exercised..................................... -- -- (260,340) Canceled or forfeited......................... -- -- -- ------- ------- -------- Outstanding at December 31...................... 852,800 852,800 592,460 ======= ======= ======== Exercisable at December 31...................... 781,720 852,800 592,460 ======= ======= ========
See note 10 for a description of options exercised under the 1995 Plan during 2000. 51 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (11) STOCK OPTION PLANS (CONTINUED) MJD COMMUNICATIONS, INC. STOCK INCENTIVE PLAN In August 1998, the Company adopted the 1998 Plan. The 1998 Plan provides for grants of up to 6,952,540 nonqualified stock options to executives and members of management, at the discretion of the compensation committee of the Board of Directors. Options vest in 25% increments on the second, third, fourth, and fifth anniversaries of an individual grant. In the event of a change in control, outstanding options will vest immediately. Pursuant to the terms of the grant, options granted in 1998 and 1999 become exercisable only in the event that the Company is sold, an initial public offering of the Company's common stock results in the principal shareholders holding less than 10% of their original ownership, or other changes in control, as defined, occur. The number of options that may become ultimately exercisable also depends upon the extent to which the price per share obtained in the sale of the Company would exceed a minimum selling price of $4.28 per share. All options have a term of ten years from date of grant. For those options granted in 1998 and 1999, the Company will accrue compensation expense for the excess of the estimated market value of its common stock over the exercise price of the options when and if a sale of the Company, at the prices necessary to result in exercisable options under the grant, becomes imminent or likely. Pursuant to the terms of the grant, options granted in 2000 become exercisable immediately upon vesting. The per share weighted-average fair value of stock options granted under the 1998 Plan during 2000 was $11.17 on the date of grant using the Black Scholes option-pricing model. Input variables used in the model included no expected dividend yields, a risk-free interest rate of 6.52%, and an estimated option life of ten years. Because the Company was nonpublic on the date of the grant, no assumption as to the volatility of the stock price was made. Stock option activity for 1998, 1999, and 2000 under the 1998 Plan is summarized as follows:
1998 1999 2000 ---------- ---------- ---------- Outstanding at January 1................. -- 4,664,000 4,808,000 Granted................................ 4,664,000 214,000 1,693,665 Exercised.............................. -- -- (40,600) Canceled or forfeited.................. -- (70,000) (372,750) ---------- ---------- ---------- Outstanding at December 31............... 4,664,000 4,808,000 6,088,315 ========== ========== ==========
The exercise price on options granted in 1998 and 1999 was $1.71 per share and $2.74 per share, respectively. The options forfeited in 1999 had an exercise price of $1.71 per share. In 2000, 1,620,465 options were granted with an exercise price of $3.28 per share and 73,200 options were issued with an exercise price of $13.12 per share. The options exercised in 2000 had an exercise price of $1.71 per share. Of the options forfeited in 2000, 320,250 had an exercise price of $3.28 per share and 52,500 had an exercise price of $1.71 per share. See note 10 for a description of options exercised under the 1998 Plan during 2000. There were 343,749 options exercisable at December 31, 2000 under the 1998 Plan with an exercise price of $3.28 per share. 52 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (11) STOCK OPTION PLANS (CONTINUED) FAIRPOINT COMMUNICATIONS CORP. STOCK INCENTIVE PLAN In December 1998, the Company adopted the FairPoint Solutions Plan for employees of its subsidiary, FairPoint Solutions. Under the FairPoint Solutions Plan, participating employees were granted options to purchase common stock of FairPoint Solutions at exercise prices not less than the market value of FairPoint Solutions common stock at the date of the grant. The FairPoint Solutions Plan authorized grants of options to purchase up to 1,000,000 shares of authorized, but unissued common stock. All stock options had ten-year terms and vested in 25% increments on the second, third, fourth, and fifth anniversaries of an individual grant. In the event of a change in control, outstanding options would vest immediately. The per share weighted-average fair value of stock options granted under the FairPoint Solutions Plan during 1999 and 2000 was $0.30 and $11.80, respectively, on the date of grant using the Black Scholes option-pricing model. Input variables used in the model included no expected dividend yields, a risk-free interest rate of 5.25% and 6.68% for 1999 and 2000, respectively, and an estimated option life of ten years. Because FairPoint Solutions was nonpublic on the date of the grant, no assumption as to the volatility of the stock price was made. Stock option activity for 1999 and 2000 under the FairPoint Solutions Plan is summarized as follows:
1999 2000 -------- -------- Outstanding at January 1................................ -- 885,500 Granted............................................... 970,500 40,000 Exercised............................................. -- -- Canceled or forfeited................................. (85,000) (925,500) -------- -------- Outstanding at December 31.............................. 885,500 -- ======== ======== Exercisable at December 31.............................. -- -- ======== ========
See note 10 for a description of the cancellation of all options granted under the FairPoint Solutions Plan during 2000. FAIRPOINT COMMUNICATIONS, INC. 2000 EMPLOYEE STOCK OPTION PLAN In May 2000, the Company adopted the FairPoint Communications, Inc. 2000 Employee Stock Option Plan (2000 Plan). The 2000 Plan provides for grants to members of management of up to 10,019,200 options to purchase Class A common stock, at the discretion of the compensation committee. Options granted under the 2000 Plan may be of two types: (i) incentive stock options and (ii) nonstatutory stock options. Unless the compensation committee shall otherwise specify at the time of grant, any option granted under the 2000 Plan shall be a nonstatutory stock option. The maximum number of shares of Class A common stock subject to options granted to any single participant in any calendar year is 1,500,000. Under the 2000 Plan, unless otherwise determined by the compensation committee at the time of grant, participating employees are granted options to purchase Class A common stock at exercise prices not less than the market value of the Company's Class A common stock at the date of grant. Options 53 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (11) STOCK OPTION PLANS (CONTINUED) have a term of ten years from date of grant. Options vest in increments of 10% on the first anniversary, 15% on the second anniversary, and 25% on the third, fourth, and fifth anniversaries of an individual grant. Subject to certain provisions, in the event of a change of control, the Company will cancel each option in exchange for a payment in cash of an amount equal to the excess, if any, of the highest price per share of Class A common stock offered in conjunction with any transaction resulting in a change of control over the exercise price for such option. Stock option activity for 2000 under the 2000 Plan is summarized as follows: Outstanding at January 1.................................... -- Granted................................................... 5,665,674 Exercised................................................. -- Canceled or forfeited..................................... (1,668,533) ----------- Outstanding at December 31.................................. 3,997,141 =========== Exercisable at December 31.................................. -- ===========
The range of exercise prices, number, and weighted-average remaining contractual life of options outstanding as of December 31, 2000 follow:
WEIGHTED- NUMBER AVERAGE RANGE OF OUTSTANDING AT REMAINING EXERCISE DECEMBER 31, CONTRACTUAL PRICES 2000 LIFE (YEARS) - --------------------- -------------- ------------ $13.12 1,192,347 9.31 26.24 253,818 9.31 32.80 259,015 9.31 39.36 264,611 9.31 45.95 270,607 9.31 52.48 276,602 9.31 59.04 282,598 9.31 65.60 289,393 9.31 72.16 295,788 9.31 78.72 302,584 9.31 85.28 309,778 9.31 - --------------------- --------- ---- $13.12-85.28 3,997,141 9.31 ===================== ========= ====
The per share weighted-average fair value of stock options granted under the 2000 Plan during 2000 was $1.85 on the date of grant using the Black Scholes option-pricing model. Input variables used in the model included no expected dividend yields, a weighted-average risk free interest rate of 6.49%, and an estimated option life of ten years. Because the Company was nonpublic on the date of the grant, no assumption as to the volatility of the stock price was made. The Company applies the intrinsic value method prescribed by APB No. 25 in accounting for its 1995, FairPoint Solutions, 1998, and 2000 Plans. See note 10 for a description of compensation charges 54 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (11) STOCK OPTION PLANS (CONTINUED) recognized by the Company during 2000. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been:
DECEMBER 31, 2000 ----------------------- AS PRO REPORTED FORMA ---------- ---------- (DOLLARS IN THOUSANDS) Net loss............................................... $89,117 85,904 ======= =======
The pro forma impact on income assumes no options will be forfeited. The pro forma effects are not representative of the effects on reported net income for future years. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss for 1998 and 1999 would not have been significantly reduced. (12) RELATED PARTY TRANSACTIONS During 1997, the Company entered into an agreement with MJD Partners, L.P. (Partners), at the time, a major shareholder of the Company. Under the terms of the agreement, Partners provided senior management and acquisition services to the Company. This agreement was terminated on March 31, 1998, at which time $225,000 had been paid to Partners during 1998. This expense was classified with selling, general and administrative expenses. The Company has entered into financial advisory agreements with certain equity investors, pursuant to which the equity investors provide certain consulting and advisory services related but not limited to equity financings and strategic planning. The Company paid $250,000, $400,000, and $969,201, for the years ended December 31, 1998, 1999, and 2000, respectively, in such fees to the equity investors and this expense was classified with selling, general and administrative expenses. The agreements also provide that the Company will reimburse the equity investors for travel relating to the Company's Board of Directors meetings. The Company reimbursed the equity investors $117,204, $49,627, and $102,142, for the years ended December 31, 1998, 1999, and 2000, respectively, for travel and related expenses. During 2000, the advisory and consulting fees were increased to $500,000 per annum to be paid to each of the principal shareholders through December 31, 2006. The Company also has entered into a consulting agreement dated as of July 31, 1997 with an entity controlled by a certain shareholder pursuant to which the shareholder has agreed to provide general consulting and advice to the Company as reasonably requested from time to time. Pursuant to the terms of the agreement, the consulting company is paid an annual fee of $120,000 in monthly installments plus all of the shareholder's out-of-pocket business expenses up to $30,000. The term of the agreement is one year, subject to automatic renewal for successive periods of one year each thereafter. The Company incurred expenses of $103,306 and $132,831 for the years ended December 31, 1998 and 1999, respectively, related to this consulting agreement. This agreement was terminated in January 2000. In 1998, a law firm in which a partner of such law firm is a shareholder of the Company, was paid $2,307,900, of which $289,156 was for general counsel services, $1,228,902 was for services related to 55 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (12) RELATED PARTY TRANSACTIONS (CONTINUED) financings, and $789,842 was for services related to acquisitions. In 1999, this same law firm was paid $336,835, of which $295,084 was for general counsel services and $41,751 was for services related to acquisitions. In 2000, this same law firm was paid $1,490,247, of which $237,714 was for general counsel services, $1,122,747 was for services related to financings, and $129,786 was for services related to acquisitions. All payments made by the Company for general counsel services are classified with selling, general and administrative expenses on the statement of operations. All payments made for services related to financings have been recorded as debt or equity issue costs. All payments made for services related to acquisitions have been capitalized as direct costs of the acquisitions. (13) SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31, 1998, 1999, and 2000, the Company paid interest of $24,111,997, $49,071,977, and $57,124,818, respectively. For the years ended December 31, 1998, 1999, and 2000, the Company paid income taxes of $3,585,977, $7,519,755, and $651,966, respectively. The Company issued common stock valued at $6,000,000 in connection with a business combination in 2000. Also in 2000, the Company acquired $6,293,400 in equipment under a capital lease. (14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- (DOLLARS IN THOUSANDS) 1999: Revenue......................... $ 32,937 35,621 39,545 40,059 Net loss........................ (1,841) (2,958) (3,472) (20,769) ========= ========= ========= ========= 2000: Revenue......................... $ 45,048 60,142 69,585 71,489 Net loss........................ (18,183) (12,094) (15,985) (42,855) ========= ========= ========= =========
In 1999, the Company recognized interest expense of approximately $13.3 million attributable to the purchase of STE warrants discussed in note 9, of which approximately $11.6 million was recognized during the fourth quarter. In 1999, the Company recognized compensation expense of approximately $3.4 million attributable to stock appreciation rights discussed in note 7, of which approximately $2.9 million was recognized during the fourth quarter. In 2000, the Company recognized stock-based compensation of approximately $16.5 million discussed in note 10, of which approximately $12.3 million was recognized in the first quarter. In the fourth quarter of 2000, the Company recognized a restructuring charge of approximately $16.5 million discussed in note 2. 56 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (15) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, AND DEMAND NOTES PAYABLE The carrying amount approximates fair value because of the short maturity of these instruments. INVESTMENTS Investments classified as available-for-sale and trading are carried at their fair value which approximates $0.9 million and $0.4 million, respectively, at December 31, 2000 (see note 5 and note 7). The fair value of investments classified as available-for-sale at December 31, 1999 approximated $7.3 million. Other non-current investments do not have a readily determinable fair value (not publicly traded). On an annual basis, management determines a fair value of its investments based on the financial performance of the investee, the fair value of similar investments, and in certain instances, based on traditional valuation models used by industry analysts. At December 31, 1999 and 2000, the Company had other non-current investments with a carrying value of approximately $36.2 million and $49.9 million, respectively, and estimated fair values of approximately $57.8 million and $84.9 million, respectively. LONG-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, 1999 and 2000, the Company had long-term debt with a carrying value of approximately $462.4 million and $756.8 million, respectively, and estimated fair values of approximately $447.6 million and $702.7 million, respectively. DERIVATIVE FINANCIAL INSTRUMENTS The Company entered into interest rate swaps to manage its exposure to fluctuations in interest rates of its variable rate debt. The fair value of the Company's interest rate swaps is determined from valuations received from financial institutions. The fair value of these swaps was approximately $1.0 million and $(4.7) million at December 31, 1999 and 2000, respectively. The fair value indicates an estimated amount the Company would receive (pay) if the contracts were cancelled or transferred to other parties. LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (16) REVENUE CONCENTRATIONS Revenues for interstate access services is based on reimbursement of costs and an allowed rate of return. Revenues of this nature are received from NECA in the form of monthly settlements. Such revenues amounted to 27.3%, 25.4%, and 19.8% of the Company's total revenues for the years ended December 31, 1998, 1999, and 2000, respectively. The Company also derives significant revenues from 57 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (16) REVENUE CONCENTRATIONS (CONTINUED) Verizon, principally from network access and billing and collecting service. Such revenues amounted to 10.4%, 10.9%, and 7.6% of the Company's total revenues for the years ended December 31, 1998, 1999, and 2000, respectively. (17) REPORTABLE SEGMENTS The Company has two reportable segments: traditional telephone operations and competitive communications operations. The traditional telephone operations provide local, long distance and other communication services to customers in rural communities in which competition is currently limited for local telecommunications services. The competitive communications operations provide local, long distance and other communication services to customers in markets outside of the Company's traditional telephone markets. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on EBITDA. EBITDA represents net earnings (loss) plus interest expense, income taxes, depreciation and amortization, extraordinary items, and non-cash stock-based compensation charges. The Company generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. The Company's reportable segments are strategic business units that offer similar telecommunications related products and services in different markets. They are managed separately because each segment requires different marketing and operational strategies related to the providing of local and long distance communications services. The Company utilizes the following information for purposes of making decisions about allocating resources to a segment and assessing a segment's performance:
DECEMBER 31, 1998 DECEMBER 31, 1999 ------------------------------------ ------------------------------------ TRADITIONAL TRADITIONAL TELEPHONE COMPETITIVE TELEPHONE COMPETITIVE OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL ----------- ----------- -------- ----------- ----------- -------- (DOLLARS IN THOUSANDS) Revenues from external customers.......... $ 89,500 3,061 92,561 136,477 11,685 148,162 Intersegment revenues........... -- 270 270 -- 2,640 2,640 Interest expense..... 27,170 -- 27,170 50,463 722 51,185 Depreciation and amortization....... 20,034 55 20,089 30,876 756 31,632 Stock-based compensation....... -- -- -- 3,386 -- 3,386 Income tax (expense) benefit............ 267 1,845 2,112 (2,337) 7,952 5,615 Extraordinary item--loss on early retirement of debt............... 2,521 -- 2,521 -- -- -- EBITDA............... 44,350 (4,682) 39,668 70,969 (19,421) 51,548 Segment assets....... 436,838 5,576 442,414 487,354 31,297 518,651 Expenditures for segment assets..... 10,912 1,521 12,433 28,293 15,216 43,509 DECEMBER 31, 2000 ------------------------------------ TRADITIONAL TELEPHONE COMPETITIVE OPERATIONS OPERATIONS TOTAL ----------- ----------- -------- (DOLLARS IN THOUSANDS) Revenues from external customers.......... 191,779 54,485 246,264 Intersegment revenues........... -- 3,111 3,111 Interest expense..... 59,556 6,482 66,038 Depreciation and amortization....... 47,057 5,487 52,544 Stock-based compensation....... 12,323 4,128 16,451 Income tax (expense) benefit............ (5,615) 37,650 32,035 Extraordinary item--loss on early retirement of debt............... -- -- -- EBITDA............... 111,404 (97,523) 13,881 Segment assets....... 839,228 103,490 942,718 Expenditures for segment assets..... 50,253 57,519 107,772
58 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1999, AND 2000 (17) REPORTABLE SEGMENTS (CONTINUED) A reconciliation of reportable segment amounts to the Company's consolidated balances for the years ended December 31, 1998, 1999 and 2000 is as follows:
1998 1999 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) Revenues: Total revenue for reportable segments..................... $ 92,831 150,802 249,375 Elimination of intersegment revenue....................... (270) (2,640) (3,111) -------- -------- -------- Total consolidated revenue............................ $ 92,561 148,162 246,264 ======== ======== ======== EBITDA to net loss: EBITDA.................................................... $ 39,668 51,548 13,881 Other components of EBITDA: Depreciation and amortization........................... (20,089) (31,632) (52,544) Interest expense........................................ (27,170) (51,185) (66,038) Stock-based compensation................................ -- (3,386) (16,451) Extraordinary item--loss on early retirement of debt.... (2,521) -- -- Income tax benefit...................................... 2,112 5,615 32,035 -------- -------- -------- Net loss.............................................. $ (8,000) (29,040) (89,117) ======== ======== ======== Assets: Total assets for reportable segments...................... $442,414 518,651 942,718 Consolidating and eliminating adjustments................. (302) (616) (1,295) -------- -------- -------- Consolidated total.................................... $442,112 518,035 941,423 ======== ======== ========
59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information with respect to our directors, executive officers and other key personnel. Executive officers are generally appointed annually by the board of directors to serve, subject to the discretion of the board of directors, until their successors are appointed.
NAME AGE POSITION - ---- -------- -------- Jack H. Thomas............................ 60 Co-Founder, Chairman of the Board of Directors and Chief Executive Officer Eugene B. Johnson......................... 53 Co-Founder, Vice Chairman of the Board of Directors and Chief Development Officer John P. Duda.............................. 53 President and Chief Operating Officer Walter E. Leach, Jr....................... 49 Senior Vice President and Chief Financial Officer Shirley J. Linn........................... 50 Vice President, General Counsel and Secretary Peter G. Nixon............................ 48 President--Telecom Group Timothy W. Henry.......................... 45 Vice President of Finance and Treasurer, Assistant Secretary Lisa R. Hood.............................. 35 Vice President and Controller Daniel G. Bergstein....................... 57 Co-Founder and Director Frank K. Bynum, Jr........................ 38 Director Anthony J. DiNovi......................... 38 Director George E. Matelich........................ 44 Director Kent R. Weldon............................ 33 Director
JACK H. THOMAS. Mr. Thomas has served as Chairman of our board of directors since August 1998 and served as our President from 1993 to April 2000. Mr. Thomas has served as our Chief Executive Officer since 1993. Mr. Thomas is a co-founder and has been a director of our company since 1991. From 1985 to 1993, Mr. Thomas was Chief Operating Officer of C-TEC Corporation, a diversified communications company which at the time owned Commonwealth Telephone Company, a 240,000 access line telephone company. Prior to 1985, Mr. Thomas worked at United Telephone Company of Ohio and C&P Telephone in various management capacities. EUGENE B. JOHNSON. Mr. Johnson has served as our Vice Chairman since August 1998 and our Chief Development Officer since April 2000. Mr. Johnson has served as our Senior Vice President from 1993 to 1998 and served as our Executive Vice President from February 1998 to April 2000. Mr. Johnson is a co-founder and has been a director of our company since 1991. From 1987 to 1993, Mr. Johnson served as President and principal shareholder of JC&A, Inc., an investment banking and brokerage firm providing services to the cable television, telephone and related industries. From 1985 to 1987, Mr. Johnson served as the director of the mergers and acquisitions department of Cable 60 Investments, Inc., an investment banking firm. Mr. Johnson currently is a director of OPASTCO, the primary industry organization for small independent telephone companies and serves on its education and finance committees. JOHN P. DUDA. Mr. Duda has served as the President and Chief Executive Officer of our Telecom Group, which has been responsible for all aspects of our traditional telephone operations, since August 1998. From January 1994 to August 1998, Mr. Duda served as our Chief Operating Officer. Prior to 1994, Mr. Duda served as Vice President, Operations and Engineering of Rochester Tel Mobile Communications, State Vice President Minnesota, Nebraska and Wyoming and Director of Network Planning and Operations for Pennsylvania and New Jersey for Sprint and served in various management positions with C&P Telephone and Bell Atlantic. Mr. Duda is currently on the United States Telecom Association's Board of Directors and serves on its Executive and Midsize Company committees. Effective April 1, 2001, Mr. Duda will assume the duties of President and COO of the Company. WALTER E. LEACH, JR. Mr. Leach has served as our Chief Financial Officer and Secretary since October 1994 and our Senior Vice President since February of 1998. From 1984 through September 1994, Mr. Leach served as Executive Vice President of Independent Hydro Developers, where he had responsibility for all project acquisition, financing and development activities. SHIRLEY J. LINN. Ms. Linn has served as our Vice President and General Counsel since October 2000 and our Secretary since December 2000. Prior to joining the Company, Ms. Linn was a partner, from 1984 to 2000, in the Charlotte, North Carolina law firm of Underwood Kinsey Warren & Tucker, P.A., where she specialized in general business matters, particularly mergers and acquisitions. PETER G. NIXON. Mr. Nixon has served as President of our Telecom Group's Eastern Region since June 1999 and President of Chautauqua & Erie Telephone Corporation ("C&E") since July 1997 when we acquired C&E. From April 1, 1989 to June 1997, Mr. Nixon served as Executive Vice President of C&E. From April 1, 1978 to March 31, 1989, Mr. Nixon served as Vice President of Operations for C&E. Mr. Nixon has served as the past Chairman of the New York State Telephone Association, in addition to his involvement in several community and regional organizations. Effective April 1, 2001, Mr. Nixon will become President--Telecom Group assuming the responsibilities previously held by Mr. Duda. TIMOTHY W. HENRY. Mr. Henry has served as our Vice President of Finance and Treasurer since December 1997. From 1992 to December 1997, Mr. Henry served as Vice President/Portfolio Manager at CoBank, ACB, and managed a $225 million telecommunications loan portfolio, which included responsibility for CoBank's relationship with us. LISA R. HOOD. Ms. Hood has served as our Vice President and Controller since December 1993. Prior to joining our company, Ms. Hood served as manager of a local public accounting firm in Kansas. Ms. Hood is a certified public accountant. DANIEL G. BERGSTEIN. Mr. Bergstein is a co-founder and has been a director of our company since 1991. Mr. Bergstein served as Chairman of our board of directors from 1991 until August 1998. Since 1988, Mr. Bergstein has been a senior partner in the New York office of the international law firm Paul, Hastings, Janofsky & Walker LLP, where he is the Chairman of the Firm's National Telecommunications Practice. Mr. Bergstein is a corporate and securities lawyer, specializing in mergers and acquisitions and corporate finance transactions. FRANK K. BYNUM, JR. Mr. Bynum has served as a director of our company since May 1998. He is also a Managing Director of Kelso. Mr. Bynum joined Kelso in 1987 and has held positions of increasing responsibility at Kelso prior to becoming a Managing Director. Mr. Bynum is a director of 61 CDT Holdings, plc, Citation Corporation, Cygnus Publishing, Inc., HCI Direct, Inc., iXL Enterprises, Inc. and 21st Century Newspapers, Inc. ANTHONY J. DINOVI. Mr. DiNovi has served as a director of our company since January 2000. He is currently a Managing Director of Thomas H. Lee Partners, L.P. Prior to joining Thomas H. Lee Partners, L.P. in 1988, Mr. DiNovi worked in the Corporate Finance Department at Wertheim Schroder & Co., Inc. Mr. DiNovi is a director of Eye Care Centers of America Inc., Fisher Scientific International, Inc., US LEC Corp. and various private corporations. GEORGE E. MATELICH. Mr. Matelich has served as a director of our company since July 1997. Mr. Matelich is currently a Managing Director of Kelso, with which he has been associated since 1985. Mr. Matelich currently serves on the Boards of Directors of GlobeNet Communications Group Limited and Humphreys, Inc. Mr. Matelich is also a Trustee of the University of Puget Sound. KENT R. WELDON. Mr. Weldon has served as a director of our company since January 2000. He is a Vice President of Thomas H. Lee Partners, L.P. Mr. Weldon worked at the firm from 1991 to 1993 and rejoined it in 1995. Prior to 1991, Mr. Weldon worked at Morgan Stanley & Co. Incorporated in the Corporate Finance Department. Mr. Weldon is a director of Fisher Scientific International, Inc. and Syratech Corporation. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information for the fiscal year ended December 31, 2000 concerning compensation paid to our chief executive officer and our other four most highly compensated executive officers during 2000.
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ---------------------------------- ------------ NUMBER OF OTHER SECURITIES ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION (2) - --------------------------- -------- -------- -------- ------------ ------------ ---------------- Jack H. Thomas ................. 2000 $375,000 $ -- $ 79,745 782,854 $28,247 Chairman and Chief Executive 1999 330,000 180,000 89,270 -- 8,262 Officer 1998 300,000 150,000 71,101 1,300,000 15,750 Eugene B. Johnson .............. 2000 $285,000 $ -- $ 47,508 211,401 $ 8,099 Vice Chairman and Chief 1999 264,000 132,000 69,154 -- 7,839 Development Officer 1998 240,000 120,000 37,261 1,195,000 15,264 G. Brady Buckley(3) ............ 2000 $274,856 $ -- $ -- 1,285,173 $25,115 President and Chief Operating 1999 253,740 240,000 163,976 549,000 7,380 Officer 1998(1) 125,000 90,000 33 -- -- Walter E. Leach, Jr. ........... 2000 $165,000 $ -- $ 24,038 798,198 $ 7,943 Senior Vice President and Chief 1999 150,077 80,000 33,606 -- 7,596 Financial Officer 1998 132,246 62,942 19,332 650,000 14,922 John P. Duda ................... 2000 $160,500 $ 80,000 $ 40,418 167,430 $ 8,099 President and Chief Operating 1999 150,037 75,000 54,065 -- 7,839 Officer(4) 1998 142,589 49,000 26,511 410,000 15,264
- -------------------------- (1) Represents six months of compensation. (2) Reflects matching contributions made under our 401(k) plan and value of group term life insurance coverage. 62 (3) Resigned, effective as of December 31, 2000. Mr. Buckley's options to purchase shares of Class A common stock expired as of March 15, 2001. (4) Effective April 1, 2001. 1995 STOCK OPTION PLAN Our 1995 Stock Option Plan was adopted on February 22, 1995. The 1995 plan provides for the grant of options to purchase up to an aggregate of 1,136,800 shares of our Class A common stock. The 1995 plan is administered by our compensation committee, which makes discretionary grants of options to our officers, directors and employees. Options granted under the 1995 plan may be incentive stock options, which qualify for favorable Federal income tax treatment under Section 422A of the Internal Revenue Code, or nonstatutory stock options. The selection of participants, allotment of shares, determination of price and other conditions of purchase of such options is determined by our compensation committee, in its sole discretion. Each option grant is evidenced by a written incentive stock option agreement or nonstatutory stock option agreement dated as of the date of grant and executed by us and the optionee. Such agreement also sets forth the number of options granted, the option price, the option term and such other terms and conditions as may be determined by the board of directors. As of March 15, 2001, a total of 592,460 options to purchase shares of our Class A common stock were outstanding under the 1995 plan. Such options were exercisable at a price of $.25 per share. Options granted under the 1995 plan are nontransferable, other than by will or by the laws of descent and distribution. 1998 STOCK INCENTIVE PLAN In August 1998, we adopted our 1998 Stock Incentive Plan, the 1998 Plan. The 1998 Plan provides for grants to members of management of up to 6,952,540 nonqualified options to purchase our Class A common stock, at the discretion of the compensation committee. Options vest in 25% increments on the second, third, fourth, and fifth anniversaries of an individual grant. In the event of a change in control, outstanding options will vest immediately. As of March 15, 2001, a total of 5,520,102 options were outstanding under the 1998 Plan. Pursuant to the terms of the grant, 4,656,800 options become exercisable only in the event that we are sold, an initial public offering of our common stock occurs, or other changes in control, as defined, occur. The number of options that may ultimately become exercisable also depends upon the extent to which the price per share obtained in a sale of FairPoint would exceed a minimum selling price of $4.28 per share. Options have a term of ten years from date of grant. We will accrue as compensation expense the excess of the estimated fair value of our common stock over the exercise price of the options when and if a sale of FairPoint, at the prices necessary to result in exercisable options under the grant, becomes imminent or likely. In April 2000, all of the options outstanding under FairPoint Solutions' stock option plan were converted to options to purchase our Class A common stock under the 1998 Plan. As a result, 925,500 options to purchase common stock of FairPoint Solutions were converted into an aggregate of 1,693,665 options, which become immediately exercisable upon vesting. As of March 15, 2001, 863,302 options to purchase our Class A common stock at an exercise price of $3.28 per share were outstanding under this grant. Upon completion of the conversion, the FairPoint Solutions stock option plan was terminated. 63 2000 EMPLOYEE STOCK OPTION PLAN In May 2000, the Company adopted the 2000 Employee Stock Option Plan. The 2000 Plan provides for grants to members of management of up to 10,019,200 options to purchase our Class A common stock, at the discretion of the compensation committee. Options granted under the 2000 Plan may be of two types: (i) incentive stock options and (ii) nonstatutory stock options. Unless the compensation committee shall otherwise specify at the time of grant, any option granted under the 2000 Plan shall be a nonstatutory stock option. The maximum number of shares of our Class A common stock subject to options granted to any single participant in any calendar year is 1,500,000. As of March 15, 2001, the Company has granted 5,665,700 options under the 2000 plan, of which 3,533,036 were outstanding and 2,132,664 were forfeited. Unless otherwise determined by the compensation committee at the time of grant, options granted pursuant to the 2000 Plan will have an exercise price which is not less than the market value of a share of our Class A common stock on the date the option is granted. Options have a term of ten years from date of grant. Options vest in increments of 10% on the first anniversary, 15% on the second anniversary, and 25% on the third, fourth and fifth anniversaries of an individual grant. Subject to certain provisions, in the event of a change of control, we will cancel each option in exchange for a payment in cash of an amount equal to the excess, if any, of the highest price per share of our Class A common stock offered in conjunction with any transaction resulting in a change of control over the exercise price for such option. OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table shows individual grants of options made to the executive officers set forth in the Summary Compensation Table during fiscal year 2000. All such grants were made under the 2000 Employee Stock Option Plan.
POTENTIAL REALIZABLE VALUE % OF TOTAL AT ASSUMED ANNUAL RATES OF OPTIONS STOCK PRICE APPRECIATION NUMBER OF SHARES GRANTED TO FOR OPTION TERM (1) UNDERLYING EMPLOYEES IN --------------------------- NAME OPTIONS FISCAL YEAR EXERCISE PRICE EXPIRATION DATE 5% 10% - ---- ---------------- ------------ ---------------- --------------- ------------ ------------ Jack H. Thomas....... 782,854 13.8% $13.12 to $85.28 April 1, 2010 $1,927,797 $5,334,807 Eugene B. Johnson.... 211,401 3.7% $13.12 to $85.28 April 1, 2010 $ 520,571 $1,440,583 G. Brady Buckley..... 1,285,173 22.7% $13.12 to $85.28 April 1, 2010 $3,164,760 $8,757,864 Walter E. Leach, Jr................. 798,198 14.1% $13.12 to $85.28 April 1, 2010 $1,965,572 $5,439,350 John P. Duda......... 167,430 3.0% $13.12 to $85.28 April 1, 2010 $ 412,304 $1,140,974
- -------------------------- (1) This column shows the hypothetical gains on the options granted based on assumed annual compound price appreciation of 5% and 10% over the full ten-year term of the options. The assumed rates of appreciation are mandated by the SEC and do not represent our estimate or projection of future prices. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES The following table sets forth the information with respect to the executive officers set forth in the Summary Compensation Table concerning the exercise of options during fiscal year 2000, the number 64 of securities underlying options as of December 31, 2000 and the year end value of all unexercised in-the-money options held by such individuals.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES VALUE OPTIONS/SARS AT OPTIONS/SARS AT FISCAL ACQUIRED ON REALIZED FISCAL YEAR-END (#) YEAR-END ($) NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1) - ---- ------------ --------- ------------------------- ---------------------------- Jack H. Thomas............. -- -- 609,200/1,757,854 7,366,615/11,124,705 Eugene B. Johnson.......... -- -- 511,950/1,107,651 6,153,155/10,226,213 G. Brady Buckley........... -- -- 137,250/411,750 1,350,540/4,051,620 Walter E. Leach, Jr........ 182,800 2,293,116 152,350/1,255,248 1,738,314/5,214,941 John P. Duda............... 118,140 1,520,462 197,560/474,930 2,393,185/3,508,575
- ------------------------ (1) Represents the difference between the exercise price and the fair market value of our common stock at December 31, 2000. In January 2000, 16,580 warrants and 300,940 options to purchase our Class A common stock were exercised and the underlying shares were sold for aggregate proceeds of $3,975,836. In connection with this transaction, the board of directors approved the acceleration of the vesting and exercise of 40,600 options owned by Mr. Leach. In addition, Mr. Leach and Mr. Duda also received an aggregate of $1,165,000 from certain of our stockholders in satisfaction of a portion of such stockholders' stock appreciation rights obligations to Messrs. Duda and Leach. EMPLOYMENT AGREEMENTS In January 2000, we entered into employment agreements with each of Jack H. Thomas, Eugene B. Johnson, Walter E. Leach, Jr. and John P. Duda. Each of the employment agreements provides for an employment period from January 20, 2000 until December 31, 2003 and provides that upon the termination of the executive's employment due to a change of control, the executive is entitled to receive from us in a lump sum payment an amount equal to such executive's base salary as of the date of termination for a period ranging from twelve months to twenty-four months. For purposes of the previous sentence, a change of control shall be deemed to have occurred if: (a) certain of our stockholders no longer own, either directly or indirectly, shares of our capital stock entitling them to 51% in the aggregate of the voting power for the election of our directors as a result of a merger or consolidation of FairPoint, a transfer of our capital stock or otherwise; or (b) we sell, assign, convey, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of our property or assets to any other person or entity. In addition, we have agreed to maintain the executives' long term disability and medical benefits for a similar period following a change of control. In the event that any executive's employment with us terminated without cause and not as a result of a change of control, such executive is entitled to receive a lump sum payment from us in an amount equal to such executive's base salary for a period ranging from six months to twelve months and is also entitled to long term disability and medical benefits for a similar period. In the event that any executive's employment is terminated by us for cause or by such executive without good reason, such executive is not entitled to any benefits under his employment agreement. 65 ITEM 12. SECURITY OWNERSHIP AND BENEFICIAL MANAGEMENT The following table sets forth information regarding beneficial ownership of our Class A common stock as of March 15, 2001 for (i) each executive officer named in the "Summary Compensation Table"; (ii) each director, (iii) all of our executive officers and directors as a group, and (iv) each person who beneficially owns 5% or more of the outstanding shares of our Class A common stock.
NUMBER OF SHARES PERCENT OF BENEFICIALLY OWNED(1) OUTSTANDING(1) --------------------- -------------- Executive Officers and Directors: Jack H. Thomas(2)......................................... 2,082,590 4.1% Eugene B. Johnson(3)...................................... 939,130 1.9% G. Brady Buckley(4)....................................... 0 * Walter E. Leach, Jr.(5)................................... 152,350 * John P. Duda(6)........................................... 197,560 * Daniel G. Bergstein(7).................................... 2,155,140 4.3% Frank K. Bynum, Jr.(8).................................... 18,199,496 36.3% Anthony J. DiNovi(9)...................................... 21,461,720 42.8% George E. Matelich(8)..................................... 18,199,496 36.3% Kent R. Weldon(9)......................................... 21,461,720 42.8% All Executive Officers and Directors as a group 43,726,126 87.3% (10 persons)............................................ 5% Stockholders: Kelso Investment Associates V, L.P. and Kelso Equity % Partners V, L.P.(8) ...................................... 18,199,496 36.3 320 Park Avenue, 24th Floor New York, New York 10022 Thomas H. Lee Equity Fund IV, LP and Affiliates(9) ......... 21,461,720 42.8% 75 State Street Boston, Massachusetts 02109
- ------------------------ * Less Than 1%. (1) Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned by them, subject to community property laws where applicable. The percentage of beneficial ownership is based on 50,104,160 shares of common stock outstanding as of March 15, 2001. (2) Includes 609,200 shares of Class A common stock issuable upon exercise of options that are either currently exercisable or become exercisable during the next 60 days. Does not include 1,757,854 shares of Class A common stock issuable upon exercise of options that are not currently exercisable or become exercisable during the next 60 days. (3) Includes 511,950 shares of Class A common stock issuable upon exercise of options that are either currently exercisable or become exercisable during the next 60 days. Does not include 1,107,651 shares of Class A common stock issuable upon exercise of options that are not currently exercisable or become exercisable during the next 60 days. (4) In connection with the termination of Mr. Buckley's employment by mutual agreement, we repurchased the 7,640 shares of Class A common stock owned by Mr. Buckley on January 3, 2001, representing all of the Class A common stock owned by Mr. Buckley. In addition, all of Mr. Buckley's options to purchase shares of Class A common stock expired as of March 15, 2001. Mr. Buckley did not exercise his options prior to such termination date. 66 (5) Includes 152,350 shares of Class A common stock issuable upon exercise of options that are either currently exercisable or become exercisable during the next 60 days. Does not include 1,255,248 shares of Class A common stock issuable upon exercise of options that are not currently exercisable or become exercisable during the next 60 days. (6) Includes 197,560 shares of Class A common stock issuable upon exercise of options that are either currently exercisable or become exercisable during the next 60 days. Does not include 474,930 shares of Class A common stock issuable upon exercise of options that are not currently exercisable or become exercisable during the next 60 days. (7) Includes 2,155,140 shares of Class A common stock owned by JED Communications Associates, Inc., a corporation owned 100% by Mr. Bergstein and members of his immediate family. (8) Includes 16,427,726 shares of Class A common stock owned by Kelso Investment Associates V, L.P. ("KIAV") and 1,771,770 shares of Class A common stock owned by Kelso Equity Partners V, L.P. ("KEPV"). KIAV and KEPV, due to their common control, could be deemed to beneficially own each other's shares, but each disclaims such beneficial ownership. Joseph S. Schuchert, Frank T. Nickell, Thomas R. Wall, IV, George E. Matelich, Michael B. Goldberg, David I. Wahrhaftig, Frank K. Bynum, Jr. and Philip E. Berney may be deemed to share beneficial ownership of shares of Class A common stock owned of record by KIAV and KEPV, by virtue of their status as general partners of the general partner of KIAV and as general partners of KEPV. Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig, Bynum and Berney share investment and voting power with respect to securities owned by KIAV and KEPV, but disclaim beneficial ownership of such securities. (9) Shares of Class A common stock held by Thomas H. Lee Equity Fund IV, L.P. may be deemed to be beneficially owned by THL Equity Advisors IV, LLC, the general partner of Thomas H. Lee Equity Fund IV, L.P., Thomas H. Lee Company, Mr. DiNovi, Mr. Weldon and the other partners of Thomas H. Lee Partners, L.P. Each of such persons disclaims beneficial ownership of such shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS FINANCIAL ADVISORY AGREEMENTS We entered into a Management Services Agreement with THL Equity Advisors IV, LLC, or THL Advisors, dated as of January 20, 2000 and an Amended and Restated Financial Advisory Agreement dated as of January 20, 2000 with Kelso, pursuant to which THL Advisors and Kelso provide certain consulting and advisory services related, but not limited to, equity financings and strategic planning. Pursuant to these agreements, we pay to each of THL Advisors and Kelso annual advisory fees of $500,000 payable on a quarterly basis until December 31, 2006 and we reimburse them for out of pocket expenses for the duration of the agreements. Further, we agreed to pay Kelso a transaction fee of approximately $8.5 million, which fee is payable upon an initial public offering of our Class A common stock. In connection with our equity financing and recapitalization, we terminated our financial advisory agreement with Carousel Capital Partners, L.P., a former significant stockholder, and the original financial advisory agreement with Kelso. We paid advisory fees and out of pocket expenses of $1,071,343 and $449,627 to THL Advisors and Kelso in 2000 and 1999, respectively. CONSULTING AGREEMENT On January 20, 2000, we terminated a consulting agreement dated as of July 31, 1997 between us and an entity controlled by Daniel G. Bergstein, a director and principal stockholder of the company, under which Mr. Bergstein provided general consulting and advice to us as reasonably requested from 67 time to time. During 1999, we paid consulting fees under the consulting agreement of $132,831. During 2000, no consulting fees were paid. LEGAL SERVICES Daniel G. Bergstein is a senior partner of Paul, Hastings, Janofsky & Walker LLP, a law firm which provides legal services to us. For the years ended December 31, 2000 and 1999, we paid Paul Hastings approximately $1,490,247 and $336,835, respectively, for legal services. STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS AGREEMENT We entered into a stockholders agreement with our stockholders, dated as of January 4, 2000, which contains provisions relating to: (i) the designation of members to our board of directors (including, two members to be designated by THL, two members by Kelso and the remaining members to be designated jointly by THL and Kelso), (ii) restrictions on transfers of shares, (iii) the requirement that our stockholders take certain actions upon the approval of a majority of the stockholders in connection with an initial public offering or a sale of FairPoint, (iv) the requirement of FairPoint to sell shares to the stockholders under certain circumstances upon authorization of an issuance or sale of additional shares, (v) the participation rights of stockholders in connection with a sale of shares by other stockholders, and (vi) our right to purchase all (but not less than all) of the shares of a management stockholder in the event of resignation, termination of employment, death or disability. The stockholders agreement also provides that we must obtain consent from THL and Kelso in order for us to incur debt in excess of $5 million. We entered into a registration rights agreement with our stockholders, dated as of January 20, 2000, pursuant to which our stockholders have the right in certain circumstances and subject to certain conditions, to require us to register shares of our common stock held by them under the Securities Act of 1933, as amended. Under the registration rights agreement, except in limited circumstances, we are obligated to pay all expenses in connection with such registration. In connection with the execution of the stockholders agreement and the registration rights agreement, we terminated our previous stockholders agreement and registration rights agreement, each dated July 31, 1997. PURCHASE OF COMMON STOCK BY MANAGEMENT In January 2000, 65,540 shares of our Class A common stock were purchased by 21 employees for an aggregate purchase price of $859,655, including 7,640 shares purchased by Mr. Buckley for a purchase price of $100,210. TERMINATION OF PRESIDENT AND CHIEF OPERATING OFFICER In connection with the termination of Mr. Buckley's employment by mutual agreement, the Company entered into an agreement with him, effective in January 2001, providing that in consideration of the execution of such agreement, he would receive the following: (a) a $275,000 severance payment, which is payable in accordance with the Company's ordinary payroll practices; (b) continued health benefits, on the same basis as prior to his termination, for an additional six months; and (c) an amount in cash equal to 5% of his 2000 W-2 compensation. In addition, pursuant to the terms of the agreement, Mr. Buckley exercised his right to tender his 7,640 shares of Class A common stock in exchange for a return of his original purchase price of $100,210. The termination agreement also provided for the acceleration of all of the options held by Mr. Buckley, with the result that as of December 31, 2000, Mr. Buckley was eligible, for a period of sixty days thereafter, to exercise a total of 274,500 stock options, each at a $3.28 exercise price. Mr. Buckley did not elect to exercise such options, however, prior to such expiration date. 68 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 69 INDEPENDENT AUDITORS' REPORT The Board of Directors FairPoint Communications, Inc.: Under date of March 8, 2001, except as to the fourth and fourteenth paragraphs of note 6 which are as of March 30, 2001, we reported on the consolidated balance sheets of FairPoint Communications, Inc. and subsidiaries as of December 31, 1999 and 2000 and the related consolidated statements of operations, stockholders' equity (deficit), comprehensive losses and cash flows for each of the years in the three-year period ended December 31, 2000, which are included in this Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement Schedule II. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP March 8, 2001 Charlotte, North Carolina 70 SCHEDULE II FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1998, 1999, and 2000
ADDITIONS BALANCE AT ADDITIONS CHARGED TO DEDUCTIONS BALANCE AT BEGINNING OF DUE TO COSTS AND FROM ALLOWANCE END OF DESCRIPTION YEAR ACQUISITIONS EXPENSES (NOTE) YEAR - ----------- ------------ ------------ ---------- -------------- ---------- (DOLLARS IN THOUSANDS) Year ended December 31, 1998: Allowance for doubtful receivables...................... $ 49 621 390 356 704 ==== ==== ====== ==== ====== Year ended December 31, 1999: Allowance for doubtful receivables...................... $704 70 634 487 921 ==== ==== ====== ==== ====== Year ended December 31, 2000: Allowance for doubtful receivables...................... $921 311 2,778 802 3,208 ==== ==== ====== ==== ======
- ------------------------ Note: Customers' accounts written-off, net of recoveries. 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FAIRPOINT COMMUNICATIONS, INC. BY: /S/ WALTER E. LEACH, JR. ----------------------------------------- Name: Walter E. Leach, Jr. Title: SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ JACK H. THOMAS Director, Chairman of the Board ------------------------------------------- of Directors, and Chief April 2, 2001 Jack H. Thomas Executive Officer Director, Vice Chairman of the /s/ EUGENE B. JOHNSON Board of Directors, Executive ------------------------------------------- Vice President and Assistant April 2, 2001 Eugene B. Johnson Secretary /s/ WALTER E. LEACH, JR. Senior Vice President and Chief ------------------------------------------- Financial Officer (Principal April 2, 2001 Walter E. Leach, Jr. Finance Officer) /s/ LISA R. HOOD Controller (Principal Accounting ------------------------------------------- Officer) April 2, 2001 Lisa R. Hood /s/ DANIEL G. BERGSTEIN Director ------------------------------------------- April 2, 2001 Daniel G. Bergstein /s/ FRANK K. BYNUM, JR. Director ------------------------------------------- April 2, 2001 Frank K. Bynum, Jr. /s/ ANTHONY J. DINOVI Director Anthony J. DiNovi ------------------------------------------- April 2, 2001 Anthony J. Dinovi /s/ GEORGE E. MATELICH Director ------------------------------------------- April 2, 2001 George E. Matelich /s/ KENT R. WELDON Director ------------------------------------------- April 2, 2001 Kent R. Weldon
72 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Exhibits 2.1 Stock Purchase Agreement dated as of December 23, 1999 by and among MJD Ventures, Inc., TPG Communications, Inc., TPG Partners, L.P., TPG Parallel I, L.P., J. Milton Lewis and Robert DiPauli.(1) 2.2 Stock Purchase Agreement dated as of January 4, 2000 by and among FairPoint, Thomas H. Lee Equity IV, L.P., Kelso Investment Associates V, L.P., Kelso Equity Partners V, L.P., Carousel Capital Partners, L.P. and certain other signatories thereto.(1) 2.3 Stock Purchase Agreement dated as April 25, 2000 by and among MJD Ventures, Inc., Fremont Telcom Co. and the other parties thereto.(4) 2.4 Stock Purchase Agreement dated as of May 23, 2000 by and among MJD Ventures, Inc., W.B.W. Trust Number One and Comerco, Inc.(4) 3.1 Sixth Amended and Restated Certificate of Incorporation of the Company.(2) 3.2 By-Laws of the Company.(4) 3.3 Certificate of Designation of Series D Preferred Stock of the Company.(1) 4.1 Indenture, dated as of May 5, 1998, between FairPoint and United States Trust Company of New York, relating to FairPoint's $125,000,000 9 1/2% Senior Subordinated Notes due 2008 and $75,000,000 Floating Rate Callable Securities due 2008.(3) 4.2 Indenture, dated as of May 24, 2000, between FairPoint and United States Trust Company of New York, relating to FairPoint's $200,000,000 12 1/2% Senior Subordinated Notes due 2010.(4) 4.3 Form of Initial Fixed Rate Security.(3) 4.4 Form of Initial Floating Rate Security.(3) 4.5 Form of Exchange Fixed Rate Security.(3) 4.6 Form of Exchange Floating Rate Security.(3) 4.7 Form of 144A Senior Subordinated Note due 2010.(4) 4.8 Form of Regulation S Senior Subordinated Note due 2010.(4) 4.9 Registration Rights Agreement dated as of May 19, 2000 between FairPoint and the Initial Purchasers named therein.(4) 10.1 Credit Agreement dated as of March 30, 1998 among FairPoint, various lending institutions, NationsBank of Texas, N.A. and Bankers Trust Company.(3) 10.2 First Amendment to Credit Agreement dated as of April 30, 1998 among FairPoint, NationsBank of Texas, N.A. and Bankers Trust Company.(1) 10.3 Second Amendment to Credit Agreement dated as of May 14, 1999 among FairPoint, NationsBank of Texas, N.A. and Bankers Trust Company.(4) 10.4 Amendment and Waiver dated as of January 12, 2000 among FairPoint, NationsBank of Texas, N.A. and Bankers Trust Company.(4) 10.5 Fourth Amendment and Consent dated as of March 14, 2000 among FairPoint, First Union National Bank, Bank of America, N.A. and Bankers Trust Company.(2)
73 10.6 Fifth Amendment and Consent dated as of October 6, 2000 among FairPoint, First Union, National Bank, Bank of America, N.A. and Bankers Trust Company.(5) 10.7 Sixth Amendment to Credit Agreement and First Amendment to Pledge Agreement dated as of March 30, 2001 among FairPoint, First Union, National Bank, Bank of America, N.A. and Bankers Trust Company.* 10.8 Amended and Restated Credit Agreement dated as of November 9, 2000 among FairPoint Solutions, various lending institutions, Bank of America, N.A., Bankers Trust Company and First Union National Bank.(5) 10.9 First Amendment to Amended and Restated Credit Agreement dated as of March 9, 2001 and effective as of March 21, 2001 among FairPoint Solutions, various lending institutions, Bank of America, N.A., Bankers Trust Company and First Union National Bank.* 10.10 Amended and Restated Security Agreement dated as of November 9, 2000 by and among FairPoint Solutions and First Union National Bank.(5) 10.11 Amended and Restated Subsidiary Guaranty dated as of November 9, 2000 made by FairPoint Communications Solutions Corp.- New York, FairPoint Communications Solutions Corp.- Virginia and FairPoint Solutions Capital, LLC.(5) 10.12 Amended and Restated Preferred Stock Issuance and Capital Contribution Agreement dated as of November 9, 2000 among FairPoint and First Union National Bank.(5) 10.13 Amended and Restated Pledge Agreement dated as of November 9, 2000 by and among FairPoint Solutions, the Guarantors, the Pledgors and First Union National Bank.(5) 10.14 Amended and Restated Tax Sharing Agreement dated November 9, 2000 by and among FairPoint and its Subsidiaries.(5) 10.15 Form of B Term Note.(3) 10.16 Form of C Term Note Floating Rate.(3) 10.17 Form of C Term Note Fixed Rate.(3) 10.18 Form of RF Note.(3) 10.19 Form of AF Note.(3) 10.20 Subsidiary Guaranty dated as of March 30, 1998 by MJD Holdings Corp., MJD Ventures, Inc., MJD Services Corp., ST Enterprises, Ltd. for the benefit of Bankers Trust Company.(3) 10.21 Pledge Agreement dated as of March 30, 1998 among MJD Communications, Inc., ST Enterprises, Ltd., MJD Holdings Corp., MJD Services Corp., MJD Ventures, Inc., C-R Communications, Inc., as pledgors, and Bankers Trust Company, as collateral agent and pledgee.(3) 10.22 Stockholders' Agreement dated as of January 20, 2000 of FairPoint.(1) 10.23 Registration Rights Agreement dated as of January 20, 2000 of FairPoint.(1) 10.24 Management Services Agreement dated as of January 20, 2000 by and between FairPoint and THL Equity Advisors IV, LLC.(1) 10.25 Amended and Restated Financial Advisory Agreement dated as of January 20, 2000 by and between FairPoint and Kelso & Company, L.P.(1)
74 10.26 Non-Competition, Non-Solicitation and Non-Disclosure Agreement dated as of January 20, 2000 by and between FairPoint and JED Communications Associates, Inc.(1) 10.27 Non-Competition, Non-Solicitation and Non-Disclosure Agreement dated as of January 20, 2000 by and between FairPoint and Daniel G. Bergstein.(1) 10.28 Non-Competition, Non-Solicitation and Non-Disclosure Agreement dated as of January 20, 2000 by and between FairPoint and Meyer Haberman.(1) 10.29 Subscription Agreement dated as of January 31, 2000 by and between FairPoint and each of the Subscribers party thereto.(1) 10.30 Employment Agreement dated as of January 20, 2000 by and between FairPoint and Jack Thomas.(1) 10.31 Employment Agreement dated as of January 20, 2000 by and between FairPoint and Eugene Johnson.(1) 10.32 Employment Agreement dated as of January 20, 2000 by and between FairPoint and John P. Duda.(1) 10.33 Employment Agreement dated as of January 20, 2000 by and between FairPoint and Walter E. Leach, Jr.(1) 10.34 Institutional Stock Purchase Agreement dated as of January 20, 2000 by and among FairPoint and the other parties thereto.(1) 10.35 Institutional Stockholders Agreement dated as of January 20, 2000 by and among FairPoint and the other parties thereto.(1) 10.36 FairPoint 1995 Stock Option Plan.(4) 10.37 FairPoint Amended and Restated 1998 Stock Incentive Plan.(4) 10.38 FairPoint 2000 Employee Stock Option Plan.(4) 12 Ratio of earnings to fixed charges calculation.* 21 Subsidiaries of the Company.*
- ------------------------ * Filed herewith. (1) Incorporated by reference to the annual report of the Company for the year ended 1999, filed on Form 10-K. (2) Incorporated by reference to the amended annual report of the Company for the year ended 1999, filed on Form 10-K/A. (3) Incorporated by reference to the registration statement on Form S-4 of FairPoint, declared effective as of October 1, 1998. (4) Incorporated by reference to the registration statement on Form S-4 of FairPoint, declared effective as of August 9, 2000. (5) Incorporated by reference to the quarterly report filed on Form 10-Q for the period ended September 30, 2000. 75 (b) Reports on Form 8-K On February 4, 2000, the Company filed a Current Report on Form 8-K disclosing the consummation of its January 2000 equity financing and recapitalization. On April 17, 2000, the Company filed a Current Report on Form 8-K disclosing its acquisition of all of the outstanding capital stock of TPG Communications, Inc., pursuant to the terms of a Stock Purchase Agreement, dated as of December 23, 1999, for an aggregate purchase price of approximately $146.3 million. On May 10, 2000, the Company filed a Current Report on Form 8-K, dated May 9, 2000, announcing its intention to file a registration statement for an underwritten public offering of its common stock. On May 10, 2000 the Company filed a Current Report on Form 8-K, dated May 9, 2000, announcing its intention to raise $200 million through a private offering of senior subordinated notes. The senior subordinated notes will have a ten-year term and interest will be paid semi-annually in cash. On May 10, 2000 the Company filed a Current Report on Form 8-K, dated April 28, 2000 announcing the amendment and restatement of its Certificate of Incorporation to change its legal name from MJD Communications, Inc. to FairPoint Communications, Inc. On May 31, 2000, the Company filed a Current Report on Form 8-K disclosing the consummation of its May 2000 private placement of $200 million of its 12 1/2% Senior Subordinated Notes due 2010. On December 18, 2000, the Company filed a Current Report on Form 8-K, dated December 18, 2000, announcing the consolidation of the operations of FairPoint Solutions. On January 5, 2001, the Company filed a Current Report on Form 8-K announcing the completion of its plan to consolidate the operations of FairPoint Solutions. On March 19, 2001, the Company filed a Current Report on Form 8-K, dated March 12, 2001, announcing year end and fourth quarter results for the year ended December 31, 2001. On March 23, 2001, the Company filed a Current Report on Form 8-K disclosing certain changes in management effective April 1, 2000. 76 EX-10.7 2 a2042675zex-10_7.txt EXHIBIT 10.7 Exhibit 10.7 SIXTH AMENDMENT TO CREDIT AGREEMENT AND FIRST AMENDMENT TO PLEDGE AGREEMENT SIXTH AMENDMENT TO CREDIT AGREEMENT AND FIRST AMENDMENT TO PLEDGE AGREEMENT (collectively, this "Amendment") dated as of March 30, 2001, among FAIRPOINT COMMUNICATIONS, INC. (f/k/a MJD Communications, Inc.), a Delaware corporation (the "Borrower"), the lenders from time to time party to the Credit Agreement referred to below (the "Lenders"), FIRST UNION NATIONAL BANK, as Documentation Agent (the "Documentation Agent"), BANK OF AMERICA, N.A. (f/k/a Bank of America National Trust and Savings Association, successor by merger to Bank of America, N.A. f/k/a Nationsbank, N.A. successor by merger to NATIONSBANK OF TEXAS, N.A.), as Syndication Agent (the "Syndication Agent"), BANKERS TRUST COMPANY, as Administrative Agent (the "Administrative Agent" and, together with the Documentation Agent and the Syndication Agent, collectively, the "Agents") and BANKERS TRUST COMPANY, as Pledgee under the Pledge Agreement referred to below (the "Pledgee"). Unless otherwise indicated, all capitalized terms used herein and not otherwise defined shall have the respective meanings provided such terms in the Credit Agreement referred to below. W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, the Lenders and the Agents are parties to a Credit Agreement, dated as of March 30, 1998 (as amended, modified or supplemented to but not including the date hereof, the "Credit Agreement"); WHEREAS, the Borrower, various Subsidiaries of the Borrower and the Pledgee are parties to a Pledge Agreement, dated as of March 30, 1998 (as amended, modified or supplemented to, but not including, the date hereof, the "Pledge Agreement"); and WHEREAS, subject to the terms and conditions of this Amendment, the parties hereto wish to amend the Credit Agreement and the Pledge Agreement, in each case as herein provided; NOW, THEREFORE, it is agreed: I. AMENDMENTS TO CREDIT AGREEMENT. 1. Section 1.01(a) of the Credit Agreement is hereby amended by deleting said Section in its entirety and inserting the following new Section 1.01(a) in lieu thereof: "(a) Loans under the Initial B Term Facility (each, an "Initial B Term Loan" and, collectively, the "Initial B Term Loans") (i) shall be made to the Borrower pursuant to one or more drawings on and after the Closing Date and prior to the Initial B Termination Date, provided that Initial B Term Loans incurred pursuant to Initial B Term Commitments created pursuant to an Initial B Term Commitment Renewal shall not be subject to the foregoing but shall be made within the time frame specified in the definition of Initial B Term Commitment Renewal, (ii) except as hereinafter provided, may, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that all Initial B Term Loans made as part of the same Borrowing shall, unless specifically provided herein, consist of Loans of the same Type and (iii) shall not exceed in aggregate principal amount for any Lender in respect of any incurrence of Initial B Term Loans the Initial B Term Commitment, if any, of such Lender as in effect immediately prior to such incurrence. Once repaid, Initial B Term Loans may not be reborrowed, provided that Initial B Term Loans may be subsequently incurred to the extent of the Initial B Term Commitments created pursuant to the Initial B Term Commitment Renewal.". 2. Section 1.01(b) of the Credit Agreement is hereby amended by deleting said Section in its entirety and inserting the following new Section 1.01(b) in lieu thereof: "(b) Loans under the Initial C Term Facility shall be made pursuant to the Total Initial C Term Commitment (each, an "Initial C Term Loan-Floating Rate" and, collectively, the "Initial C Term Loans-Floating Rate") and pursuant to the CoBank Commitment (each, a "C Term Loan-Fixed Rate" and, collectively, the " C Term Loans-Fixed Rate"), with (A) the Initial C Term Loans-Floating Rate (i) to be made to the Borrower pursuant to a single drawing on the Closing Date (and not thereafter), (ii) except as hereinafter provided, and, in any event, at the option of the Borrower, to be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that all Initial C Term Loans-Floating Rate made as part of the same Borrowing shall, unless specifically provided herein, consist of Loans of the same Type and (iii) not to exceed in aggregate principal amount for any Lender at the time of incurrence of Initial C Term Loans-Floating Rate on the Closing Date the Initial C Term Commitment, if any, of such Lender as in effect on such date immediately prior to such incurrence and (B) the C Term Loans-Fixed Rate to be made to the Borrower by CoBank on the Closing Date (and not thereafter) by converting the CoBank Continuing Loans into C Term Loans-Fixed Rate in the aggregate amount of the CoBank Commitment. Once repaid, Initial C Term Loans-Floating Rate and C-Term Loans-Fixed Rate may not be reborrowed.". 3. Section 1.01 of the Credit Agreement is hereby amended by inserting the following new clauses (e) and (f) at the end of said Section: "(e) Subject to Section 1.14 and the other terms and conditions set forth herein, Loans under the Incremental B Term Facility (each, an "Incremental B Term Loan" and, collectively, the "Incremental B Term Loans") (i) shall be made to the Borrower pursuant to a single drawing on the respective Incremental B Term Borrowing Date (which date, in any event, shall be the date of effectiveness of the applicable Incremental Term Loan Commitment Agreement pursuant to which such Incremental B Term Loans are to be made and shall not be later than the Incremental Term Commitment Termination Date); (ii) except as hereinafter provided, may, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that -2- all Incremental B Term Loans made as part of the same Borrowing shall, unless specifically provided herein, consist of Loans of the same Type and (iii) shall not exceed in aggregate principal amount for any Lender in respect of any incurrence of Incremental B Term Loans the Incremental B Term Commitment, if any, of such Lender as in effect immediately prior to such incurrence. Once repaid, Incremental B Term Loans may not be reborrowed. (f) Subject to Section 1.14 and the other terms and conditions set forth herein, Loans under the Incremental C Term Facility (each, an "Incremental C Term Loan" and, collectively, the "Incremental C Term Loans") (i) shall be made to the Borrower pursuant to a single drawing on the respective Incremental C Term Borrowing Date (which date, in any event, shall be the date of effectiveness of the applicable Incremental Term Loan Commitment Agreement pursuant to which such Incremental C Term Loans are to be made and shall not be later than the Incremental Term Commitment Termination Date); (ii) except as hereinafter provided, may, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that all Incremental C Term Loans made as part of the same Borrowing shall, unless specifically provided herein, consist of Loans of the same Type and (iii) shall not exceed in aggregate principal amount for any Lender in respect of any incurrence of Incremental C Term Loans the Incremental C Term Commitment, if any, of such Lender as in effect immediately prior to such incurrence. Once repaid, Incremental C Term Loans may not be reborrowed.". 4. Section 1.05(b) of the Credit Agreement is hereby amended by (i) inserting the text "(or, if issued after the Closing Date, be dated the date of the issuance thereof)" immediately following the text "Closing Date" in subclause (ii) of said Section and (ii) deleting the parenthetical appearing in subclause (iii) of said Section and inserting the text "(or, if issued after the Closing Date, be in a stated principal amount equal to the outstanding principal amount of B Term Loans of such Lender at such time)" in lieu thereof. 5. Section 1.05(c) of the Credit Agreement is hereby amended by (i) inserting the text "(or, if issued after the Closing Date, be dated the date of the issuance thereof)" immediately following the text "Closing Date" in subclause (ii) of said Section and (ii) deleting the parenthetical appearing in subclause (iii) of said Section and inserting the text "(or, if issued after the Closing Date, be in a stated principal amount equal to the outstanding principal amount of C Term Loans-Floating Rate of such Lender at such time)" in lieu thereof. 6. Section 1.07 of the Credit Agreement is hereby amended by deleting the first sentence of said Section in its entirety and inserting the following new sentence in lieu thereof: "All Loans under this Agreement (other than C Term Loans-Fixed Rate) shall be made by the Lenders PRO RATA on the basis of their Initial B Term Commitments, Incremental B Term Commitments, Initial C Term Commitments, Incremental C Term -3- Commitments, Revolving Commitments or Acquisition Commitments, as the case may be, if any.". 7. Section 1 of the Credit Agreement is hereby amended by inserting the following new Section 1.14 immediately after Section 1.13 appearing therein: "1.14. INCREMENTAL TERM COMMITMENTS. (a) So long as no Default or Event of Default then exists or would result therefrom, the Borrower shall, in consultation with the Administrative Agent, have the right to request on one or more occasions on and after the Sixth Amendment Effective Date and prior to the Incremental Term Commitment Termination Date that one or more Lenders (and/or one or more other Persons which will become Lenders as provided below) provide Incremental B Term Commitments and/or Incremental C Term Commitments and, subject to the terms and conditions contained in this Agreement, make Incremental B Term Loans and/or Incremental C Term Loans pursuant thereto, as the case may be, it being understood and agreed, however, that (i) no Lender shall be obligated to provide an Incremental Term Commitment as a result of any such request by the Borrower, and until such time, if any, as such Lender has agreed in its sole discretion to provide an Incremental Term Commitment and executed and delivered to the Administrative Agent an Incremental Term Loan Commitment Agreement as provided in clause (b) of this Section 1.14, such Lender shall not be obligated to fund any Incremental B Term Loans and/or Incremental C Term Loans, as the case may be, (ii) any Lender (or, in the circumstances contemplated by clause (vii) below, any other Person which will qualify as an Eligible Transferee) may so provide an Incremental Term Commitment without the consent of any other Lender, (iii) each provision of Incremental Term Commitments pursuant to this Section 1.14 on a given date shall be in a minimum aggregate amount (for all Lenders (including in the circumstances contemplated by clause (vii) below, Eligible Transferees who will become Lenders)) of at least $30,000,000, (iv) the aggregate amount of all Incremental Term Commitments permitted to be provided pursuant to this Section 1.14 and the aggregate principal amount of all Incremental Term Loans permitted to be made pursuant to Sections 1.01(e) and (f) shall not, in either case, exceed $150,000,000, (v) the relevant Incremental Term Loan Commitment Agreements shall specifically set forth whether the Incremental Term Commitments in respect thereof shall constitute either Incremental B Term Commitments or Incremental C Term Commitments, (vi) the upfront fees payable in respect of the relevant Incremental Term Commitments, the applicable voluntary prepayment premiums (if any) payable in respect of the Incremental B Term Loans and/or Incremental C Term Loans and the interest rate margin applicable to the Incremental B Term Loans and/or Incremental C Term Loans shall be as set forth in the relevant Incremental Term Loan Commitment Agreement; PROVIDED that in no event shall the applicable interest rate margin set forth in any such Incremental Term Loan Commitment Agreement for any Incremental Term Loans exceed the Applicable Base Rate Margin or Applicable Eurodollar Margin (in each case, as in effect on the Sixth Amendment Effective Date) by more than 1.00%, (vii) if, within 10 Business Days after the Borrower has requested the then existing Lenders (other than Defaulting Lenders) to provide Incremental Term Commitments pursuant to this Section 1.14 the Borrower has not received Incremental Term Commitments in an aggregate -4- amount equal to that amount of Incremental Term Commitments which the Borrower desires to obtain pursuant to such request (as set forth in the notice provided by the Borrower as provided below), then the Borrower may, with the consent of the Administrative Agent (which consent shall not be unreasonably withheld or delayed), request Incremental Term Commitments from Persons which would qualify as Eligible Transferees hereunder in an aggregate amount equal to such deficiency (and with the fees to be paid to such Eligible Transferee to be no greater than that to be paid to the then existing Lenders providing Incremental Term Commitments), (viii) on each Incremental Term Borrowing Date, each of the Administrative Agent and each trustee for the Permitted Subordinated Debt shall have received an officer's certificate from the chief financial officer of the Borrower in form and substance reasonably satisfactory to the Administrative Agent, which certificate shall (I) contain a representation and warranty that (x) the Borrowing of Incremental B Term Loans and/or Incremental C Term Loans (and the incurrence of Liens by the Borrower and the Subsidiary Guarantors to secure such Obligations) do not conflict and are not inconsistent with and do not result in any breach or violation of, any of the terms, covenants, conditions or provisions of, or constitute a default under, any terms of any Permitted Subordinated Debt or the documentation governing the same, (y) after giving effect to the incurrence of such Loans, all of the Obligations constitute "Senior Debt" under the documentation governing the Permitted Subordinated Debt and (z) the respective Incremental Term Loans are being incurred under the documentation governing each incurrence of Permitted Subordinated Debt in reliance on the "Leverage Ratio" incurrence test referred to therein and subclause (II) below (and that the Borrower will not take a contrary position for any purpose), (II) certify that the Borrower is in compliance with a Leverage Ratio (as defined in the documentation governing the respective Permitted Subordinated Debt) of not greater than 7.0:1.0 (after giving PRO FORMA effect to the incurrence of the Incremental Term Loans to be incurred and as determined in accordance with the requirements of the documentation governing the respective Permitted Subordinated Debt), (III) be accompanied by financial calculations in form and substance reasonably satisfactory to the Administrative Agent establishing compliance with the Leverage Ratio referred to in preceding clause (II) and (IV) certify compliance with the requirements of the documentation governing all Permitted Subordinated Debt and all applicable covenants contained therein; and (ix) all actions taken by the Borrower pursuant to this Section 1.14 shall be done in coordination with the Administrative Agent. (b) At the time of any provision of Incremental Term Commitments pursuant to this Section 1.14, (i) the Borrower, the Administrative Agent and each such Lender or other Eligible Transferee (each, an "Incremental Term Lender") which agrees to provide an Incremental Term Commitment shall execute and deliver to the Administrative Agent an Incremental Term Loan Commitment Agreement substantially in the form of Exhibit L (appropriately completed), with the effectiveness of such Incremental Term Lender's Incremental Term Commitment to occur upon delivery of such Incremental Term Loan Commitment Agreement to the Administrative Agent and the payment of any fees (including, without limitation, any fees payable pursuant to clause (ii) below) required in connection therewith, (ii) the Administrative Agent shall receive from the Borrower (or, -5- to the extent agreed to by the Borrower and the respective Incremental Term Lender, from such respective Incremental Term Lender) the payment of a non-refundable fee of $3,500 for each Eligible Transferee which becomes a Lender pursuant to this Section 1.14 and (iii) the Borrower shall deliver to the Administrative Agent an opinion or opinions, in form and substance reasonably satisfactory to the Administrative Agent, from counsel to the Borrower reasonably satisfactory to the Administrative Agent and dated such date, covering such of the matters set forth in the opinions of counsel delivered to the Administrative Agent on the Closing Date pursuant to Section 4.01(b) as may be reasonably requested by the Administrative Agent, and such other matters as the Administrative Agent may reasonably request (including an opinion as to no conflict with all Permitted Subordinated Debt and the documentation governing the same). The Administrative Agent shall promptly notify each Lender as to the effectiveness of each Incremental Term Loan Commitment Agreement, and (i) at such time Annex I shall be deemed modified to reflect the Incremental B Term Commitments and/or Incremental C Term Commitments, as the case may be, of such Incremental Term Lenders and (ii) to the extent requested by such Incremental Term Lenders, B Term Notes and/or C Term Notes-Floating Rate will be issued, at the Borrower's expense, to such Incremental Term Lenders, to be in conformity with the requirements of Section 1.05 (with appropriate modifications) to the extent needed to reflect the new Incremental Term Loans made by such Incremental Term Lenders. (c) In connection with each incurrence of Incremental B Term Loans pursuant to Section 1.01(e) or Incremental C Term Loans pursuant to Section 1.01(f), the Lenders and the Borrower hereby agree that, notwithstanding anything to the contrary contained in this Agreement, the Borrower and the Administrative Agent may take all such actions as may be necessary to ensure that all Lenders with outstanding B Term Loans and C Term Loans-Floating Rate, as the case may be, continue to participate in each Borrowing of outstanding B Term Loans and C Term Loans-Floating Rate (after giving effect to the incurrence of Incremental B Term Loans or Incremental C Term Loans pursuant to Section 1.01(e) or (f), as the case may be) on a PRO RATA basis, including by adding the Incremental B Term Loans or the Incremental C Term Loans to be so incurred to the then outstanding Borrowings of B Term Loans or C Term Loans-Floating Rate, as the case may be, on a PRO RATA basis even though as a result thereof such new Incremental B Term Loan or Incremental C Term Loan, as the case may be (to the extent required to be maintained as Eurodollar Loans), may effectively have a shorter Interest Period than the then outstanding Borrowings of B Term Loans or C Term Loans-Floating Rate, as the case may be, and it is hereby agreed that (x) to the extent any then outstanding Borrowings of B Term Loans or C Term Loans-Floating Rate that are maintained as Eurodollar Loans are affected as a result thereof, any costs of the type described in Section 1.11 incurred by such Lenders in connection therewith shall be for the account of the Borrower or (y) to the extent the Incremental B Term Loans and Incremental C Term Loans to be so incurred are added to the then outstanding Borrowings of B Term Loans or C Term Loans-Floating Rate, as the case may be, which are maintained as Eurodollar Loans, the Lenders that have made such additional Incremental B Term Loans or Incremental C Term Loans, as the case may be, shall be entitled to receive an effective -6- interest rate on such additional Incremental B Term Loans or Incremental C Term Loans, as the case may be, as is equal to the Eurodollar Rate as in effect two Business Days prior to the incurrence of such additional Incremental B Term Loans or Incremental C Term Loans, as the case may be, plus the then Applicable Eurodollar Margin for such Term Loans until the end of the respective Interest Period or Interest Periods with respect thereto." 8. Section 2.01 of the Credit Agreement is hereby amended by inserting the following new clause (f) at the end of said Section: "(f) All voluntary prepayments of principal of B Term Loans and C Term Loans-Floating Rate, in each case made on or after the occurrence of the first Incremental Term Borrowing Date to occur after the Sixth Amendment Effective Date and prior to the second anniversary of such Incremental Term Borrowing Date, will be subject to payment to the Administrative Agent, for the ratable account of each Lender with outstanding B Term Loans and each Lender with outstanding C Term Loans-Floating Rate, of a fee as follows: (x) if prior to the first anniversary of the first Incremental Term Borrowing Date to occur after the Sixth Amendment Effective Date, an amount equal to the Specified Prepayment Premium Percentage of the aggregate principal amount of such prepayment and (y) if payable on or after the first anniversary of the first Incremental Term Borrowing Date to occur after the Sixth Amendment Effective Date and prior to the second anniversary of such Incremental Term Borrowing Date, an amount equal to the Specified Prepayment Premium Percentage of the aggregate principal amount of such prepayment. Such prepayment fees shall be due and payable upon the date of any voluntary prepayment of such Term Loans.". 9. Section 2.02(a) of the Credit Agreement is hereby amended by (i) deleting the comma appearing at the end of clause (x) of said Section and inserting the word "and" in lieu thereof and (ii) deleting the text "any reduction of the Total Revolving Commitment or Total Acquisition Commitment, as the case may be, pursuant to this Section 2.02(a) shall reduce the then remaining Scheduled Reductions applicable thereto PRO RATA and (z)" appearing in said Section. 10. Section 2.03(a) of the Credit Agreement is hereby amended by deleting the text "The Total Commitment (and the Commitment of each Lender)" appearing in said Section and inserting the text "The Total Initial B Term Commitment, the Total Initial C Term Commitment, the Co-Bank Commitment, the Total Revolving Commitment and the Total Acquisition Commitment (and the Initial B Term Commitment, Initial C Term Commitment, Co-Bank Commitment, Revolving Commitment and Acquisition Commitment of each Lender with such a Commitment)" in lieu thereof. 11. Section 2.03(b) of the Credit Agreement is hereby amended by deleting said Section in its entirety and inserting the following new Section 2.03(b) in lieu thereof: "(b) The Total Initial B Term Commitment shall (i) be reduced on the date any Initial B Term Loans are incurred in an amount equal to the aggregate principal amount -7- of Initial B Term Loans so incurred, (ii) terminate in its entirety (to the extent not theretofore terminated) at 5:00 P.M. (New York time) on the Initial B Termination Date, whether or not any Initial B Term Loans are incurred on such date, (iii) until terminated in full, be reduced on each day on which Initial B Term Loans, if still outstanding, would be required to be repaid pursuant to Sections 3.02(A)(c), (e) and (f) by the amount, if any, by which the amount required to be applied pursuant to said Sections to repay Initial B Term Loans (determined as if an unlimited amount of Initial B Term Loans were actually outstanding) exceeds the aggregate principal amount of Initial B Term Loans being repaid, (iv) terminate in its entirety (to the extent not theretofore terminated) on the date of the initial issuance of any Permitted Subordinated Debt, (v) terminate in its entirety on the day on which a Change of Control occurs and (vi) be increased after any Initial B Term Loans have been mandatorily repaid pursuant to Section 3.02 or the Total Initial B Term Loan Commitment has been reduced pursuant to clause (iii) or (iv) above in the aggregate amount of such repayment and/or reduction to the extent new Initial B Term Commitments are provided pursuant to an Initial B Term Commitment Renewal.". 12. Section 2.03(c) of the Credit Agreement is hereby amended by inserting the word "Initial" (i) immediately following the word "Total" and (ii) immediately preceding the text "C Term Loans-Floating Rate", in each case appearing in said Section. 13. Section 2.03(d) of the Credit Agreement is hereby amended by deleting said Section in its entirety and inserting the following new Section 2.03(d) in lieu thereof: "(d) The Incremental B Term Commitment of each Lender provided pursuant to a particular Incremental Term Loan Commitment Agreement shall terminate in its entirety on the respective Incremental B Term Borrowing Date for such Incremental Term Loan Commitment Agreement (after giving effect to the incurrence of the Incremental B Term Loans on each such date).". 14. Section 2.03(e) of the Credit Agreement is hereby amended by deleting said Section in its entirety and inserting the following new Section 2.03(e) in lieu thereof: "(e) The Incremental C Term Commitment of each Lender provided pursuant to a particular Incremental Term Loan Commitment Agreement shall terminate in its entirety on the respective Incremental C Term Borrowing Date for such Incremental Term Loan Commitment Agreement (after giving effect to the incurrence of the Incremental C Term Loans on each such date).". 15. Section 3.01 of the Credit Agreement is hereby amended by (i) deleting the word "and" immediately prior to the text "(iv)" appearing in said Section and (ii) inserting the following text at the end of said Section: "; and (v) each prepayment of B Term Loans and C Term Loans-Floating Rate pursuant to this Section 3.01 made on or after the occurrence of the first Incremental Term Borrowing Date to occur after the Sixth Amendment Effective Date and prior to the -8- second anniversary of such Incremental Term Borrowing Date shall be subject to the payment of the fee described in Section 2.01(f)". 16. Section 3.02(A)(b)(i) of the Credit Agreement is hereby amended by (i) deleting the table appearing in said Section in its entirety and inserting the following new table in lieu thereof: "DATE AMOUNT ---- ------ June 30, 1998 [$171,976.35 September 30, 1998 $ 171,976.35 December 31, 1998 $ 171,976.35 March 31, 1999 $ 171,976.35 June 30, 1999 $ 171,976.35 September 30, 1999 $ 171,976.35 December 31, 1999 $ 171,976.35 March 31, 2000 $ 171,976.35 June 30, 2000 $ 171,976.35 September 30, 2000 $ 171,976.35 December 31, 2000 $ 171,976.35 March 31, 2001 $ 171,976.35 June 30, 2001 $ 171,976.35 September 30, 2001 $ 171,976.35 December 31, 2001 $ 171,976.35 March 31, 2002 $ 171,976.35 June 30, 2002 $ 171,976.35 September 30, 2002 $ 171,976.35 December 31, 2002 $ 171,976.35 March 31, 2003 $ 171,976.35 June 30, 2003 $ 171,976.35 September 30, 2003 $ 171,976.35 December 31, 2003 $ 171,976.35 March 31, 2004 $ 171,976.35 June 30, 2004 $ 171,976.35 September 30, 2004 $ 171,976.35 December 31, 2004 $ 10,719,297.50 March 31, 2005 $ 10,719,297.50 June 30, 2005 $ 10,719,297.50 September 30, 2005 $ 10,719,297.50 -9- "DATE AMOUNT ---- ------ December 31, 2005 $ 10,719,297.50 B Maturity Date $ 10,719,296.10] and (ii) deleting the proviso appearing at the end of said Section and inserting the following sentence in lieu thereof: "In the event that the Borrower incurs any Incremental B Term Loans pursuant to Section 1.01(e), then (i) each of the foregoing Scheduled Repayments occurring after the date of such incurrence through and including September 30, 2004 shall be increased by 0.25% of the aggregate principal amount of the Incremental B Term Loans so incurred and (ii) each of the foregoing Scheduled Repayments occurring after September 30, 2004 shall be increased by an amount equal to (x) the aggregate principal amount of the Incremental B Term Loans so incurred less the portion thereof allocated to the foregoing Scheduled Repayments as provided in the preceding clause (i) divided by (y) 6.". 17. Section 3.02(A)(b)(ii) is hereby amended by (i) deleting the table appearing in said Section in its entirety and inserting the following new table in lieu thereof: Floating Rate Fixed Rate "Date Amount Amount - --------------------- ---------------- ------------ April 1, 1998 [$0 $ 313,567 June 30, 1998 $ 58,734 $ 301,638 September 30, 1998 $ 58,734 $ 307,321 December 31, 1998 $ 58,734 $ 330,617 March 31, 1999 $ 58,734 $ 336,530 June 30, 1999 $ 58,734 $ 342,560 September 30, 1999 $ 58,734 $ 348,712 December 31, 1999 $ 58,734 $ 363,736 March 31, 2000 $ 58,734 $ 370,135 June 30, 2000 $ 58,734 $ 376,663 September 30, 2000 $ 58,734 $ 383,321 December 31, 2000 $ 58,734 $ 402,613 March 31, 2001 $ 58,734 $ 409,540 June 30, 2001 $ 58,734 $ 416,606 September 30, 2001 $ 58,734 $ 515,704 December 31, 2001 $ 58,734 $ 529,893 March 31, 2002 $ 58,734 $ 539,266 -10- Floating Rate Fixed Rate "Date Amount Amount - --------------------- ---------------- ------------ June 30, 2002 $ 58,734 $ 548,826 September 30, 2002 $ 58,734 $ 521,965 December 31, 2002 $ 58,734 $ 531,665 March 31, 2003 $ 58,734 $ 541,567 June 30, 2003 $ 58,734 $ 551,674 September 30, 2003 $ 58,734 $ 561,990 December 31, 2003 $ 58,734 $ 572,520 March 31, 2004 $ 58,734 $ 583,267 June 30, 2004 $ 58,734 $ 594,237 September 30, 2004 $ 58,734 $ 49,807 December 31, 2004 $ 58,734 $ 49,807 March 31, 2005 $ 58,734 $ 49,807 June 30, 2005 $ 2,731,130 $ 4,970,106 September 30, 2005 $ 2,731,130 $ 4,970,106 December 31, 2005 $ 2,731,130 $ 4,970,106 March 31, 2006 $ 2,731,130 $ 4,970,106 June 30, 2006 $ 2,731,130 $ 4,970,106 September 30, 2006 $ 2,731,130 $ 4,970,106 December 31, 2006 $ 2,731,130 $ 4,970,106 C Maturity Date $ 2,731,130 $ 4,970,106"]. and (ii) inserting the following sentence at the end of said Section: - ------------------------------------------------------------------------------ "In the event that the Borrower incurs any Incremental C Term Loans pursuant to Section 1.01(f), then (i) each of the Scheduled Repayments for C Term Loans-Floating Rate occurring after the date of such incurrence through and including March 31, 2005 shall be increased by 0.25% of the aggregate principal amount of the Incremental C Term Loans so incurred and (ii) each of the Scheduled Repayments for C Term Loans-Floating Rate occurring after March 31, 2005 shall be increased by an amount equal to (x) the aggregate principal amount of the Incremental C Term Loans so incurred less the portion thereof allocated to the Scheduled Repayments for C Term Loans-Floating Rate as provided in the preceding clause (i) divided by (y) 8.". 18. Section 5.05(a) of the Credit Agreement is hereby amended by inserting the text "(other than Incremental B Term Loans and Incremental C Term Loans)" immediately after the text "all Term Loans" appearing in said Section. -11- 19. Section 5.05(c) of the Credit Agreement is hereby amended by deleting said Section in its entirety and inserting the following new Section 5.05(c) in lieu thereof: "(c) The proceeds of AF Loans may only be used (x) for working capital requirements, (y) to finance capital expenditure requirements (including Permitted CLEC Expenditures) and Permitted Acquisitions and/or (z) to repay RF Loans.". 20. Section 5.05 of the Credit Agreement is hereby further amended by inserting the following new Section 5.05(e) immediately following Section 5.05(d) thereof: "(e) The proceeds of all Incremental Term Loans shall be utilized on the date of incurrence of such Loans for the same purposes as AF Loans specified in Section 5.05(c) above." 21. Section 7.11(b) of the Credit Agreement is hereby amended by deleting the table appearing in said Section in its entirety and inserting the following new table in lieu thereof: "FISCAL QUARTER ENDING RATIO ---------------------- ----- Trigger Date through 1.50 to 1.0 March 31, 2003 June 30, 2003 1.60 to 1.0 through September 31, 2003 December 31, 2003 1.65 to 1.0 through March 31, 2004 June 30, 2004 through 1.75 to 1.0 December 31, 2004 Thereafter 2.0 to 1.0 22. Section 7.12(b) of the Credit Agreement is hereby amended by deleting the table appearing in said Section in its entirety and inserting the following new table in lieu thereof: "FISCAL QUARTER ENDING RATIO ---------------------- ----- Trigger Date through 6.50 to 1.0 September 30, 2002 December 31, 2002 6.25 to 1.0 -12- through March 31, 2003 June 30, 2003 6.00 to 1.0 through September 30, 2003 December 31, 2003 5.75 to 1.0 through March 31, 2004 Thereafter 5.50 to 1.0". 23. Section 7.13(b) of the Credit Agreement is hereby amended by deleting the table appearing in said Section in its entirety and inserting the following new table in lieu thereof: "FISCAL QUARTER ENDING RATIO ---------------------- ----- Trigger Date through September 30, 2002 4.00 to 1.0 December 31, 2002 through September 30, 2003 3.50 to 1.0 Thereafter 3.25 to 1.0". 24. The definition of "Credit Documents" appearing in Section 9 of the Credit Agreement is hereby amended by (i) deleting the word "and" appearing in said definition and inserting a comma in lieu thereof and (ii) inserting the text "and each Incremental Term Loan Commitment Agreement" immediately following the text "Subsidiary Guaranty" appearing in said definition. 25. Section 9 of the Credit Agreement is hereby further amended by (i) deleting the definitions of "Applicable Base Rate Margin", "Applicable CC Percentage", "Applicable Eurodollar Margin", "B Term Commitment", "B Term Commitment Renewal", "B Term Facility", "B Termination Date", "B Term Loan", "C Term Commitment", "C Term Facility", "C Term Loan", "C Term Loans-Floating Rate", "Margin Reduction Discount", "Scheduled Reductions" and "Total Term Commitment" appearing in said Section and (ii) inserting in the appropriate alphabetical order the following new definitions: "Applicable Base Rate Margin" shall mean (i) in the case of AF Loans and RF Loans, 1.75% LESS the Margin Reduction Discount, if any, (ii) in the case of B Term Loans, 2.25% LESS the Margin Reduction Discount, if any and (iii) in the case of C Term Loans-Floating Rate, 2.50% LESS the Margin Reduction Discount, if any; PROVIDED that in the case of B Term Loans and C Term Loans-Floating Rate, in the event that the "Applicable Base Rate Margin" as set forth in any Incremental Term Loan Commitment -13- Agreement with any Incremental Term Lender exceeds the Applicable Base Rate Margin then in effect under this Agreement (after giving effect to any prior increases thereto pursuant to this proviso), the Applicable Base Rate Margin as used herein shall be increased on the respective Incremental Term Borrowing Date to the Applicable Base Rate Margin set forth in such Incremental Term Loan Commitment Agreement. "Applicable CC Percentage" shall mean, for any day, a percentage equal to (i) in the case of RF Loans, (x) if the unutilized portion of the Total Revolving Commitment on such day is less than 50% of the Total Revolving Commitment on such day, 0.50% and (y) if the unutilized portion of the Total Revolving Commitment on such day equals or exceeds 50% of the Total Revolving Commitment on such day, 0.75% and (ii) in the case of AF Loans, (x) if the unutilized portion of the Total Acquisition Commitment on such day is less than 50% of the Total Acquisition Commitment on such day, 0.50% and (y) if the unutilized portion of the Total Acquisition Commitment on such day equals or exceeds 50% of the Total Acquisition Commitment on such day, 0.75%. "Applicable Eurodollar Margin" shall mean (i) in the case of AF Loans and RF Loans, 2.75% LESS the Margin Reduction Discount, if any, (ii) in the case of B Term Loans, 3.25% LESS the Margin Reduction Discount, if any and (iii) in the case of C Term Loans-Floating Rate, 3.50% LESS the Margin Reduction Discount, if any; PROVIDED that in the case of B Term Loans and C Term Loans-Floating Rate, in the event that the "Applicable Eurodollar Margin" as set forth in any Incremental Term Loan Commitment Agreement with any Incremental Term Lender exceeds the Applicable Eurodollar Margin then in effect under this Agreement (after giving effect to any prior increases thereto pursuant to this proviso), the Applicable Eurodollar Margin as used herein shall be increased on the respective Incremental Term Borrowing Date to the Applicable Eurodollar Margin set forth in such Incremental Term Loan Commitment Agreement. "B Term Commitment" of any Lender shall mean the Initial B Term Commitment and/or the Incremental B Term Commitment of such Lender. "B Term Facility" shall mean and include the Initial B Term Facility and the Incremental B Term Facility. "B Term Loans" shall mean and include Initial B Term Loans and Incremental B Term Loans. "C Term Commitment" of any Lender shall mean the Initial C Term Commitment and/or the Incremental C Term Commitment of such Lender. "C Term Facility" shall mean and include the Initial C Term Facility and the Incremental C Term Facility. "C Term Loan-Floating Rate" shall mean each Initial C Term Loan-Floating Rate and each Incremental C Term Loan. -14- "C Term Loans" shall mean each C Term Loan-Floating Rate and each C Term Loan-Fixed Rate. "Incremental B Term Commitment" shall mean, for each Incremental Term Lender, the commitment of such Incremental Term Lender to make Incremental B Term Loans pursuant to Section 1.01(e) on a given Incremental B Term Borrowing Date, as such commitment (x) is set forth in the respective Incremental Term Loan Commitment Agreement delivered pursuant to Section 1.14(b) and (y) may be terminated pursuant to Section 2.03. "Incremental B Term Facility" shall mean the Facility evidenced by the Total Incremental B Term Commitment. "Incremental B Term Loan" shall have the meaning provided in Section 1.01(e). "Incremental B Term Borrowing Date" shall mean each date on which the Borrower incurs a Borrowing of Incremental B Term Loans, each of which dates shall be the date of the effectiveness of the respective Incremental Term Loan Commitment Agreement pursuant to which such Incremental B Term Loans are to be made; PROVIDED that no such date shall occur after the Incremental Term Commitment Termination Date. "Incremental C Term Commitment" shall mean, for each Incremental Term Lender, the commitment of such Incremental Term Lender to make Incremental C Term Loans pursuant to Section 1.01(f) on a given Incremental C Term Borrowing Date, as such commitment (x) is set forth in the respective Incremental Term Loan Commitment Agreement delivered pursuant to Section 1.14(b) and (y) may be terminated pursuant to Section 2.03. "Incremental C Term Facility" shall mean the Facility evidenced by the Total Incremental C Term Commitment. "Incremental C Term Loan" shall have the meaning provided in Section 1.01(f). "Incremental C Term Borrowing Date" shall mean each date on which the Borrower incurs a Borrowing of Incremental C Term Loans, each of which dates shall be the date of effectiveness of the respective Incremental Term Loan Commitment Agreement pursuant to which such Incremental C Term Loans are to be made; PROVIDED that no such date shall occur after the Incremental Term Commitment Termination Date. "Incremental Term Borrowing Date" shall mean and include any Incremental B Term Borrowing Date and any Incremental C Term Borrowing Date. "Incremental Term Loan" shall mean each Incremental B Term Loan and each Incremental C Term Loan. -15- "Incremental Term Commitment" shall mean, for each Incremental Term Lender, such Incremental Term Lender's Incremental B Term Commitment or Incremental C Term Commitment, as the case may be. "Incremental Term Loan Commitment Agreement" shall mean an Incremental Term Loan Commitment Agreement substantially in the form of Exhibit L (appropriately completed). "Incremental Term Commitment Termination Date" shall mean December 31, 2001. "Incremental Term Lender" shall have the meaning provided in Section 1.14(b). "Initial B Term Loan" shall have the meaning provided in Section 1.01(a). "Initial B Term Commitment" shall mean, with respect to each Lender, the amount set forth opposite such Lender's name on Annex I hereto directly below the column entitled "Initial B Term Commitment", as the same may be (x) reduced or terminated pursuant to Sections 2.02, 3.03 and/or 8 or (y) adjusted from time to time as a result of assignments to or from such Lender pursuant to Sections 1.13 and/or 11.04(b) plus the amount, if any, of an Initial B Term Commitment of such Lender committed to pursuant to an Initial B Term Commitment Renewal. "Initial B Term Commitment Renewal" shall mean the providing of additional Initial B Term Commitments from time to time after any mandatory repayment of Initial B Term Loans and/or mandatory reduction of Initial B Term Commitments pursuant to Section 2.03(b)(iii) or (iv) (each, a "B Reduction Event") in an aggregate amount (the "Additional B Commitment Amount"), selected by the Borrower, not to exceed the principal amount of the Initial B Term Loans so repaid and the Initial B Term Commitments so reduced, with any Initial B Term Commitment Renewal to be effected by: (i) the Borrower requesting in writing some or all of the Lenders and/or other Eligible Transferees acceptable to the Agents and the Borrower to provide an additional Initial B Term Commitment, which request shall be given within 90 days following the B Reduction Event but in any event prior to the date occurring 255 days after the Closing Date and (ii) each such Lender or Eligible Transferee who desires to do so, providing a written notice to the Borrower and the Administrative Agent in response to such request setting forth the additional Initial B Term Commitment it will offer, with the amount so specified (or such lesser amount as is allocated to such Lender by the Agents if the aggregate offered additional Initial B Term Commitments exceed the Additional B Commitment Amount) to be such Person's additional Initial B Term Commitment, it being agreed that any such additional Initial B Term Commitments shall terminate on the date occurring 270 days after the Closing Date (after giving effect to the making of Initial B Term Loans, if any, on such date) and each such Person with an additional Initial B Term Commitment shall be a Lender. -16- "Initial B Term Facility" shall mean the Facility evidenced by the Total Initial B Term Commitment. "Initial B Termination Date" shall mean the date occurring 270 days after the Closing Date. "Initial C Term Commitment" shall mean, for each Lender, the amount set forth opposite such Lender's name on Annex I hereto directly below the column entitled "Initial C Term Commitment," as the same may be terminated pursuant to Section 2.03. "Initial C Term Facility" shall mean the Facility evidenced by the Total Initial C Term Commitment and the Co-Bank Commitment. "Initial C Term Loan-Floating Rate" shall have the meaning provided in Section 1.01(b). "Margin Reduction Discount" shall mean zero, PROVIDED that (I) at any time prior to the occurrence of the first Incremental Term Borrowing Date to occur after the Sixth Amendment Effective Date, the Margin Reduction Discount applicable to B Term Loans and C Term Loans-Floating Rate shall be increased to .25% per annum, when, and for so long as, the Leverage Ratio as at the end of the then Relevant Fiscal Quarter is less than 5.0 to 1 and (II) the Margin Reduction Discount applicable to RF Loans and AF Loans (and only such Loans) shall be increased to .25%, .50% or .75% per annum, as specified in clauses (i), (ii) and (iii) below, as the case may be, when, and for so long as, the ratio set forth in such clause has been satisfied as at the end of the then Relevant Fiscal Quarter: (i) the Margin Reduction Discount for RF Loans and AF Loans shall be .25% per annum in the event that as of the end of the Relevant Fiscal Quarter the Leverage Ratio is less than 5.50 to 1 but equal to or greater than 5.00 to 1; (ii) the Margin Reduction Discount for RF Loans and AF Loans shall be .50% per annum in the event that as of the end of the Relevant Fiscal Quarter the Leverage Ratio is equal to or greater than 4.50 to 1 but less than 5.00 to 1; and (iii) the Margin Reduction Discount for RF Loans and AF Loans shall be .75% per annum in the event that as of the end of the Relevant Fiscal Quarter the Leverage Ratio is less than 4.50 to 1. The Leverage Ratio shall be determined as of the last day of the Relevant Fiscal Quarter, by delivery of an officer's certificate of the Borrower to the Lenders pursuant to Section 6.01(e), which certificate shall set forth the calculation of the Leverage Ratio. The Margin Reduction Discount so determined shall apply, except as set forth below, from the date on which such officer's certificate is delivered to the Administrative Agent to the earlier of (x) the date on which the next certificate is delivered to the Administrative Agent pursuant to Section 6.01(e) and (y) the 45th day following the end -17- of the fiscal quarter in which such first certificate was delivered to the Administrative Agent (or the 90th day if such fiscal quarter was the last fiscal quarter of a fiscal year). Notwithstanding anything to the contrary contained above, the Margin Reduction Discount shall be zero (x) if no officer's certificate has been delivered to the Lenders pursuant to Section 6.01(e) which sets forth the Leverage Ratio as of the last day of the Relevant Fiscal Quarter or the financial statements upon which any such calculations are based have not been delivered, until such a certificate and/or financial statements are delivered, (y) at all times when there shall exist a Default under Section 8.01 or an Event of Default and (z) in the case of B Term Loans and C Term Loans-Floating Rate only, at all times on and after the first Incremental Term Borrowing Date to occur after the Sixth Amendment Effective Date. It is understood and agreed that the Margin Reduction Discount as provided above shall in no event be cumulative and, in the case of the Margin Reduction Discount applicable to RF Loans and AF Loans, only the Margin Reduction Discount available pursuant to clause (i), (ii) or (iii) of clause (II) of the proviso in the first sentence of this definition above, if any, contained in this definition shall be applicable. "Sixth Amendment" shall mean the Sixth Amendment to this Agreement, dated as of March 30, 2001. "Sixth Amendment Effective Date" shall have the meaning provided in the Sixth Amendment. "Scheduled Reduction" shall have the meaning provided in the Credit Agreement immediately prior to the Sixth Amendment Effective Date. "Specified Prepayment Premium Percentage" shall mean, at any time, the highest "Voluntary Prepayment Premium Percentage" specified in any Incremental Term Loan Commitment Agreement executed and delivered on or prior to such time. "Total Incremental B Term Commitment" shall mean the sum of the Incremental B Term Commitments of each of the Lenders. "Total Incremental C Term Commitment" shall mean the sum of the Incremental C Term Commitments of each of the Lenders. "Total Initial B Term Commitment" shall mean the sum of the Initial B Term Commitments of each of the Lenders. "Total Initial C Term Commitment" shall mean the sum of the Initial C Term Commitments of each of the Lenders. 26. Section 11.04(b) of the Credit Agreement is hereby amended by deleting the text ", with the consent of the Administrative Agent and the Borrower (which consents shall not be unreasonably withheld)" appearing the last sentence of said Section and inserting the text ", with prior written notice to the Administrative Agent," in lieu thereof. -18- 27. The Credit Agreement is hereby further amended by adding new Exhibit L thereto in the form of Exhibit L attached hereto. II. AMENDMENTS TO PLEDGE AGREEMENT. 1. The Pledge Agreement is hereby amended by deleting the third recital appearing therein in its entirety. 2. Section 1 of the Pledge Agreement is hereby amended by (i) deleting the text "such Pledgor" in each instance where it appears in clause (i) of said Section and inserting the text "the Borrower" in lieu thereof, (ii) deleting the text "such Pledgor" in the first place such text appears in clause (ii) of said Section and inserting the text "the Borrower" in lieu thereof and (iii) deleting the text ", including all obligations, if any, of such Pledgor under its Guaranty (if any) in respect of Secured Interest Rates Agreements" appearing in clause (ii) of said Section. 3. The Pledge Agreement is hereby amended by the following new Section 26 immediately following Section 25 thereof: "26. At any time a payment is made by any Pledgor in respect of the Obligations from the proceeds of any sale or other disposition of Collateral owned by such Pledgor (each, a "RELEVANT PAYMENT"), the right of contribution of each Pledgor hereunder against each other such Pledgor shall be determined as provided in the immediately following sentence, with the right of contribution of each Pledgor to be revised and restated as of each date on which a Relevant Payment is made. At any time that a Relevant Payment is made by a Pledgor that results in the aggregate payments made by such Pledgor hereunder in respect of the Obligations to and including the date of the Relevant Payment exceeding such Pledgor's Contribution Percentage (as defined below) of the aggregate payments made by all Pledgors hereunder in respect of the Obligations from the proceeds of any sale or other disposition of Collateral owned by the Pledgors to and including the date of the Relevant Payment (such excess, the "AGGREGATE EXCESS AMOUNT"), each such Pledgor shall have a right of contribution against each other Pledgor who has made payments hereunder in respect of the Obligations from the proceeds of any sale or other disposition of Collateral owned by such Pledgor to and including the date of the Relevant Payment in an aggregate amount less than such other Pledgor's Contribution Percentage of the aggregate payments made to and including the date of the Relevant Payment by all Pledgors hereunder in respect of the Obligations from the proceeds of any sale or other disposition of Collateral owned by the Pledgors (the aggregate amount of such deficit, the "AGGREGATE DEFICIT AMOUNT") in an amount equal to (x) a fraction the numerator of which is the Aggregate Excess Amount of such Pledgor and the denominator of which is the Aggregate Excess Amount of all Pledgors multiplied by (y) the Aggregate Deficit Amount of such other Pledgor. A Pledgor's right of contribution pursuant to the preceding sentences shall arise at the time of each computation, subject to adjustment to the time of any subsequent computation; PROVIDED, that no Pledgor may take any action to enforce such right until the Obligations have been paid in full and the Total Commitment has been terminated, it being expressly recognized and agreed by all parties hereto that -19- any Pledgor's right of contribution arising pursuant to this Agreement against any other Pledgor shall be expressly junior and subordinate to such other Pledgor's obligations and liabilities in respect of the Obligations and any other obligations owing under this Agreement. As used in this Section 26: (i) each Pledgor's "CONTRIBUTION PERCENTAGE" shall mean the percentage obtained by dividing (x) the Adjusted Net Worth (as defined below) of such Pledgor by (y) the aggregate Adjusted Net Worth of all Pledgors; (ii) the "ADJUSTED NET WORTH" of each Pledgor shall mean the greater of (x) the Net Worth (as defined below) of such Pledgor and (y) zero; and (iii) the "NET WORTH" of each Pledgor shall mean the amount by which the fair salable value of such Pledgor's assets on the date of any Relevant Payment exceeds its existing debts and other liabilities (including contingent liabilities, but without giving effect to any obligations arising under this Agreement) on such date. All parties hereto recognize and agree that, except for any right of contribution arising pursuant to this Section 26, each Pledgor who makes any payment in respect of the Obligations shall have no right of contribution or subrogation against any other Pledgor in respect of such payment. Each of the Pledgors recognizes and acknowledges that the rights to contribution arising hereunder shall constitute an asset in favor of the party entitled to such contribution. In this connection, each Pledgor has the right to waive its contribution right against any Pledgor to the extent that after giving effect to such waiver such Pledgor would remain solvent, in the determination of the Required Lenders.". III. MISCELLANEOUS PROVISIONS. 1. In order to induce the Lenders to enter into this Amendment, the Borrower hereby represents and warrants that: (a) no Default or Event of Default exists as of the Sixth Amendment Effective Date, both before and after giving effect to this Amendment; and (b) all of the representations and warranties contained in the Credit Agreement or the other Credit Documents are true and correct in all material respects on the Sixth Amendment Effective Date, both before and after giving effect to this Amendment, with the same effect as though such representations and warranties had been made on and as of the Sixth Amendment Effective Date (it being understood that any representation or warranty made as of a specific date shall be true and correct in all material respects as of such specific date). 2. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 3. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same -20- instrument. A complete set of counterparts shall be lodged with the Borrower and the Administrative Agent. 4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 5. This Amendment shall become effective on the date (the "Sixth Amendment Effective Date") when each of the following conditions shall have been satisfied: (i) the Administrative Agent shall have received from each Credit Party certified copies of resolutions of the Board of Directors of such Credit Party with respect to the matters set forth in this Amendment and such resolutions shall be satisfactory to the Administrative Agent; (ii) the Administrative Agent shall have received from Paul, Hastings, Janofsky & Walker LLP, special New York counsel to the Credit Parties, an opinion addressed to the Agents, the Collateral Agent and each of the Lenders and dated the Sixth Amendment Effective Date in form and substance satisfactory to the Administrative Agent, and covering such matters incident to this Amendment as the Administrative Agent may reasonably request (including an opinion as to no conflict with all Permitted Subordinated Debt and the documentation governing the same); (iii) the Borrower shall have paid to each Lender which has executed and delivered a counterpart of this Amendment on or prior to 5:00 P.M. (New York time) on Thursday, March 29, 2001, an amendment fee equal to the sum of (I) 0.50% of the sum of (x) the Revolving Commitment of such Lender as in effect on such date PLUS (y) the Acquisition Commitment of such Lender as in effect on such date PLUS (II) 0.25% of the aggregate principal amount of the Term Loans made by such Lender and outstanding on such date (immediately prior to the occurrence of the Sixth Amendment Effective Date); (iv) the Borrower shall have paid to the Administrative Agent such fees as may have been agreed to in writing among such parties; (v) the Borrower, each Subsidiary Guarantor, the Required AF/RF Lenders, the Required AF Lenders, the Required RF Lenders, the Required TF Lenders, the Required B TF Lenders and the Required C TF Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at its Notice Office. 6. By executing and delivering a copy hereof, each Credit Party hereby (x) agrees that all Loans (including, without limitation, upon the incurrence thereof, the Incremental B Term Loans and Incremental C Term Loans) shall be fully guaranteed pursuant to the Subsidiary Guaranty in accordance with the terms and provisions thereof and shall be fully secured pursuant to the Pledge Agreement and (y) reaffirms all of its obligations and liabilities under the various Credit Documents to which it is a party. -21- 7. From and after the Sixth Amendment Effective Date, all references in the Credit Agreement and each of the other Credit Documents to the Credit Agreement and the Pledge Agreement shall be deemed to be references to the Credit Agreement or the Pledge Agreement, as the case may be, as modified hereby. * * * -22- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. FAIRPOINT COMMUNICATIONS, INC. (f/k/a MJD Communications, Inc.) By: /s/ Timothy W. Henry ------------------------------------- Name: Timothy W. Henry Title: Vice President of Finance BANKERS TRUST COMPANY, Individually and as Administrative Agent By: /s/ Anca Trifan ------------------------------------- Name: Anca Trifan Title: Director BANK OF AMERICA, N.A., Individually and as Syndication Agent By: /s/ Pamela S. Kurtzman ------------------------------------- Name: Pamela S. Kurtzman Title: Principal FIRST UNION NATIONAL BANK, Individually and as Documentation Agent By: /s/ Franklin M. Wessmock ------------------------------------- Name: Franklin M. Wessmock Title: Sr. Vice President COBANK, ACB By: /s/ Rick Freeman ------------------------------------- Name: Rick Freeman Title: Vice President MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By: ------------------------------------- Name: Title: HELLER FINANCIAL, INC. By: /s/ David R. Compbell ------------------------------------- Name: David R. Compbell Title: Vice President THE TRAVELERS INSURANCE COMPANY By: /s/ Allen R. Cantrell ------------------------------------- Name: Allen R. Cantrell Title: Investment Officer UNION BANK OF CALIFORNIA, N.A. By: /s/ James C. Opdyke ------------------------------------- Name: James C. Opdyke Title: Assistant Vice President CENTURA BANK By: ------------------------------------- Name: Title: THE CIT GROUP/EQUIPMENT FINANCING, INC. By: ------------------------------------- Name: Title: FLEET NATIONAL BANK By: ------------------------------------- Name: Title: DELANO COMPANY By: Pacific Investment Management Company as its Investment Advisor By: ------------------------------------- Name: Title: FORTIS CAPITAL CORP. (f/k/a MEESPIERSON CAPITAL CORP.) By: ------------------------------------- Name: Title: By: ------------------------------------- Name: Title: SENIOR DEBT PORTFOLIO By: BOSTON MANAGEMENT AND RESEARCH, as Investment Manger By: /s/ Payson F. Swaffield ------------------------------------- Name: Payson F. Swaffield Title: Vice President OXFORD STRATEGIC INCOME FUND By: Eaton Vance Management as Investment Advisor By: ------------------------------------- Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Karl Kieffer ------------------------------------- Name: Karl Kieffer Title: Duly Authorized Signatory FIRSTAR BANK, N.A. (f/k/a MERCANTILE BANK NATIONAL ASSOCIATION) By: /s/ Gail F. Scannell ------------------------------------- Name: Gail F. Scannell Title: Vice President NATIONAL CITY BANK By: /s/ Elizabeth A. Brosky ------------------------------------- Name: Elizabeth A. Brosky Title: Assistant Vice President EATON VANCE SENIOR INCOME TRUST By: Eaton Vance Management as Investment Advisor By: /s/ Payson F. Swaffield ------------------------------------- Name: Payson F. Swaffield Title: Vice President Each of the undersigned, each being a Subsidiary Guarantor under, and as defined in, the Credit Agreement referenced in the foregoing Sixth Amendment, hereby consents to the entering into of the Sixth Amendment and agrees to the provisions thereof (including, without limitation, Sections 6 and 7 of Part II thereof). MJD HOLDINGS CORP., as a Subsidiary Guarantor and a Pledgor By: /s/ Timothy W. Henry ------------------------------------- Name: Timothy W. Henry Title: Vice President of Finance MJD VENTURES, INC., as a Subsidiary Guarantor and a Pledgor By: /s/ Timothy W. Henry ------------------------------------- Name: Timothy W. Henry Title: Vice President of Finance MJD SERVICES CORP. as a Subsidiary Guarantor and a Pledgor By: /s/ Timothy W. Henry ------------------------------------- Name: Timothy W. Henry Title: Vice President of Finance ST ENTERPRISES LTD. as a Subsidiary Guarantor and a Pledgor By: /s/ Timothy W. Henry ------------------------------------- Name: Timothy W. Henry Title: Vice President of Finance IBM CREDIT CORP. By: /s/ Thomas S. Curcio ------------------------------------- Name: Thomas S. Curcio Title: Manager of Credit, Commercial & Special Financing EXHIBIT L FORM OF INCREMENTAL TERM LOAN COMMITMENT AGREEMENT [Names(s) of Lenders(s)] [Date] FairPoint Communications, Inc. [Insert Address] re INCREMENTAL TERM LOAN COMMITMENT Ladies and Gentlemen: Reference is hereby made to the Credit Agreement, dated as of March 30, 1998 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among FairPoint Communications, Inc. (f/k/a MJD Communications, Inc.) (the "Borrower" or "you"), the lenders from time to time party thereto (the "Lenders") and Bankers Trust Company, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings set forth in the Credit Agreement. Each Lender (each, an "Incremental Term Lender") party to this letter agreement (this "Agreement") hereby severally agrees that, subject to the terms and conditions set forth herein, in Annex I hereto and in the Credit Agreement, it shall provide the Incremental B Term Commitment and/or the Incremental C Term Commitment set forth opposite its name on Annex I attached hereto (for each such Incremental Term Lender, its "Incremental Term Commitment"). Each Incremental Term Commitment provided pursuant to this Agreement shall be subject to the terms and conditions set forth in the Credit Agreement, including Section 1.14 thereof. Each Incremental Term Lender and the Borrower acknowledge and agree that the Incremental Term Commitments provided pursuant to this Agreement shall constitute either Incremental B Term Commitments or Incremental C Term Commitments (as specified in Annex I attached hereto) under, and as defined in, the Credit Agreement. Each Incremental Term Lender and the Borrower further agree that (i) the maturity date, interest rate provisions (other than the interest rate margins which may be as specified on Annex I hereto) and scheduled amortizations applicable to each Incremental Term Loan to be made available pursuant to its relevant Incremental Term Commitment provided pursuant to this Agreement are set forth in the relevant provisions of the Credit Agreement, (ii) the up-front fees payable in respect of the Incremental Term Commitment(s) provided by it pursuant to this Agreement shall be as set forth in Annex I to this Agreement and (iii) the "Applicable Base Rate Margin", the "Applicable Eurodollar Margin" and the "Voluntary Prepayment Premium Percentage" applicable to the Annex L Page 2 respective Incremental Term Loans to be made available pursuant to its Incremental Term Commitments provided pursuant to this Agreement shall be as set forth in Annex I to this Agreement (subject, however, to the limitations and requirements of Section 1.14 of the Credit Agreement). Each Incremental Term Lender party to this Agreement (i) confirms that it has received a copy of the Credit Agreement and the other Credit Documents, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement and, to the extent applicable, to become a Lender under the Credit Agreement, (ii) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement, (iii) appoints and authorizes the Administrative Agent and the Collateral Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent and the Collateral Agent, as the case may be, by the terms thereof, together with such powers as are reasonably incidental thereto, (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender, and (v) in the case of each lending institution organized under the laws of a jurisdiction outside the United States, attaches the applicable forms described in Section 3.04(b) certifying as to its entitlement to a complete exemption from United States withholding taxes with respect to all payments to be made under the Credit Agreement and the other Credit Documents. Upon the execution of a counterpart of this Agreement by such Incremental Term Lenders, the Administrative Agent and the Borrower, the delivery to the Administrative Agent of a fully executed copy (including by way of counterparts and by facsimile) hereof and the payment of any fees (including, without limitation, the upfront fees payable pursuant to the immediately preceding paragraph and the administrative fee payable to the Administrative Agent pursuant to Section 1.14(b)(ii) of the Credit Agreement) required in connection herewith, each Incremental Term Lender party hereto (i) shall be obligated to make the Incremental Term Loans provided to be made by it as provided in this Agreement on the terms, and subject to the conditions, set forth in the Credit Agreement, and, to the extent applicable, shall become a Lender pursuant to the Credit Agreement and (ii) to the extent provided in this Agreement, shall have the rights and obligations of a Lender thereunder and under the other Credit Documents. The Borrower acknowledges and agrees that all Obligations with respect to the Incremental Term Loans to be made available to the Borrower shall be fully secured pursuant to the Pledge Agreement in accordance with the terms and provisions thereof. Each Subsidiary Guarantor acknowledges and agrees that all Obligations with respect to the Incremental Term Loans shall be fully guaranteed pursuant to the Subsidiary Guaranty in accordance with the terms and provisions thereof and shall be fully secured pursuant to the Pledge Agreement in accordance with the terms and provision thereof. Annex L Page 3 This Agreement shall become effective as of the date (the "Agreement Effective Date") when (i) the Borrower, each Subsidiary Guarantor, each Incremental Term Lender and the Administrative Agent shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at the Notice Office, (ii) each condition set forth in Section 1.14 of the Credit Agreement shall have been satisfied and (iii) the Borrower shall have paid to each Incremental Term Lender the upfront fee set forth on Annex I. From and after the Agreement Effective Date, all references in the Credit Agreement and the other Credit Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as supplemented hereby. You may accept this Agreement by signing the enclosed copies in the space provided below, and returning one copy of same to us before the close of business on __________ __, _____. If you do not so accept this Agreement by such time, our Incremental Term Commitments set forth in this Agreement shall be deemed canceled. After the execution and delivery to the Administrative Agent of a fully executed copy of this Agreement (including by way of counterparts and by fax) by the parties hereto, this Agreement may only be changed, modified or varied by written instrument in accordance with the requirements for the modification of Credit Documents pursuant to Section 11.12 of the Credit Agreement. Annex L Page 4 THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Very truly yours, [NAMES OF INCREMENTAL TERM LENDERS] By ---------------------------------------- Name: Title: Agreed and Accepted this ___ day of __________, ____: FAIRPOINT COMMUNICATIONS, INC. (f/k/a MJD Communications, Inc.) By: ------------------------------ Name: Title: [NAMES OF SUBSIDIARY GUARANTORS] By: ------------------------------ Name: Title: Agreed and Accepted by: BANKERS TRUST COMPANY, as Administrative Agent By: ------------------------------ Name: Title: ANNEX I to EXHIBIT L TERMS AND CONDITIONS FOR INCREMENETAL TERM LOAN COMMITMENT AGREEMENT 1. Agreement Effective Date: __________, ____ (the "Agreement Effective Date") 2. Commitment Amounts (as of the Agreement Effective Date): INCREMENTAL TERM LENDER INCREMENTAL B TERM COMMITMENT INCREMENTAL C TERM COMMITMENT - ---------------- ------------------ ------------------ Total $ $ ------------------ ------------------ 3. UP-FRONT FEE(1): 4. "APPLICABLE BASE RATE MARGIN": ------------------------------------------. 5. "APPLICABLE EURODOLLAR MARGIN": -----------------------------------------. 6. "VOLUNTARY PREPAYMENT PREMIUM PERCENTAGE": ------------------------------. 7. ADDITIONAL CONDITIONS PRECEDENT FOR PURPOSES OF SECTION 1.14 OF THE CREDIT AGREEMENT.(2) - -------- (1) Insert up-front fees as may be agreed to by the Borrower, the Administrative Agent and Incremental Term Lenders. (2) Insert any conditions precedent, for purposes of Sections 1.14 of the Credit Agreement, to the making of any Incremental Term Loans that are required by the Incremental Term Lenders or the Administrative Agent in connection with the provision of Incremental Term Commitments pursuant to this Agreement. Any officer's certificate required by Section 1.14 shall be attached hereto. ANNEX I PAGE 2 8. NOTICE AND INFORMATION: BANKERS TRUST COMPANY One Bankers Trust Plaza 130 Liberty Street New York, NY 10006 Attn: Telephone: Telecopier: [NAMES OF INCREMENTAL TERM LENDERS](3) Address: Attention: Telephone: Telecopier: - ------------------ (3) Provide notice information for each Incremental Term Lender to be party to this Agreement. EX-10.9 3 a2042675zex-10_9.txt EXHIBIT 10.9 EXHIBIT 10.9 FIRST AMENDMENT FIRST AMENDMENT (this "Amendment"), dated as of March 9, 2001, among FAIRPOINT COMMUNICATIONS SOLUTIONS CORP., a Delaware corporation (the "Borrower"), the lenders party to the Credit Agreement referred to below (each, a "Lender" and, collectively, the "Lenders") and FIRST UNION NATIONAL BANK, as Administrative Agent (in such capacity, the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred to below are used as so defined. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Borrower, the Lenders and the Administrative Agent have entered into a Credit Agreement, dated as of October 20, 1999, as amended and restated as of March 27, 2000, and as further amended and restated as of November 9, 2000 (the "Credit Agreement"); and WHEREAS, subject to the terms and conditions set forth below, the parties hereto wish to amend the Credit Agreement as provided herein; NOW, THEREFORE, it is agreed; A. AMENDMENTS 1. The definition of the term "Consolidated EBITDA" contained in Section 1 of the Credit Agreement is hereby amended to read in its entirety as follows: "Consolidated EBITDA" shall mean, for any period, the sum of the amounts for such period of, without duplication, (i) Consolidated Net Income, (ii) provisions for taxes based on income, (iii) Consolidated Interest Expense, (iv) the non-cash portion of any retirement, pension plan or deferred compensation expense incurred by the Borrower or any of its Subsidiaries, (v) depreciation expense, (vi) amortization expense including any amortization or write-off related to the write-up of any assets as a result of purchase accounting, (vii) Permitted Non-recurring Cash Restructuring Charges taken on or after October 1, 2000 to the extent that such Permitted Non-recurring Cash Restructuring Charges otherwise reduced Consolidated Net Income for such period, and (viii) Permitted Non-recurring Non-cash Restructuring Charges taken on or after October 1, 2000 to the extent that such Permitted Non-recurring Non-cash Restructuring Charges otherwise reduced Consolidated Net Income for such period, LESS the sum of (i) gains on sales of assets (excluding sales in the ordinary course of business) and other extraordinary gains and other one-time non-cash gains, all as determined on a consolidated basis in accordance with GAAP, and (ii) any cash payment in such period that was made in respect of any non-cash deferred compensation expense incurred in a previous period but only to the extent that at or about the same time as such cash payment is made the Borrower does not receive a cash reimbursement in a like amount; PROVIDED that Consolidated EBITDA for any such period during which a Permitted Acquisition was consummated or a disposition of a business was effected shall be determined on a PRO FORMA basis as if such Permitted Acquisition were consummated or disposition effected, as the case may be, on the first day of such period; and PROVIDED FURTHER that, for purposes of calculating compliance with Section 9.17 only, Consolidated EBITDA for any period also shall be increased (to the extent not already increased pursuant to this definition) by the amount of any cash income taxes recoverable by the Parent from the Borrower pursuant to the Amended and Restated Tax Sharing Agreement during such period and which are promptly thereafter contributed in cash to the Borrower during such period. 2. The definitions of the terms "Consolidated Annualized Fixed Charges," "Consolidated Gross PP&E" and "Consolidated Senior Debt to Gross PP&E Ratio" contained in Section 1 of the Credit Agreement are hereby deleted in their entirety. 3. The definition of the term "Phase I" contained in Section 1 of the Credit Agreement is hereby amended to read in its entirety as follows: "Phase I" shall mean the period from the Restatement Effective Date through the earlier of (i) the date on which the Borrower submits a Compliance Certificate indicating that the Borrower has achieved two consecutive fiscal quarters of positive Consolidated EBITDA or (ii) the last day of the Borrower's fiscal quarter ending September 30, 2003. 4. The definition of the term "Permitted Acquisition" contained in Section 1 of the Credit Agreement is hereby amended to read in its entirety as follows: "Permitted Acquisition" shall mean any acquisition by the Borrower or any Subsidiary Guarantor of a company, business, division or product line located in the United States if (i) at least 10 Business Days prior to the consummation of such acquisition, the Borrower shall deliver to the Administrative Agent (A) a certificate of the Borrower's chief financial officer certifying that (and showing calculations in reasonable detail) immediately prior to, and after giving effect to, such acquisition all the covenants contained in this Agreement (including Sections 9.11 through 9.17, inclusive), shall be complied with on a PRO FORMA basis (as if the acquisition had been consummated on the first day of the six month period then last ended) and (B) projections (in reasonable detail) prepared by the Borrower and in form consistent with previously delivered projections and in substance reasonably satisfactory to the Administrative Agent, for the period from the date of the consummation of such acquisition to the Final Maturity Date, calculated after giving effect to such acquisition and demonstrating the Borrower's projected compliance with all of the covenants contained in this Agreement (including Sections 9.11 through 9.17 inclusive) as would be required to be complied with so that no Default or Event of Default will exist under such covenants for the period from the date of the consummation of such acquisition to the Final Maturity Date and (ii) the acquired company, business, division or product line is in the Business and, after giving effect to such acquisition, constitutes a Subsidiary of, or (in the case of a business, division or product line) is owned by, the Borrower or a Subsidiary thereof. 5. Section 1 of the Credit Agreement is hereby further amended by inserting therein the following new defined terms in appropriate alphabetical order: -2- "First Amendment Effective Date" shall mean the First Amendment Effective Date as defined in the First Amendment to this Agreement dated as of March 9, 2001. "Permitted Non-recurring Cash Restructuring Charges" shall mean those non-recurring cash restructuring charges identified in, and up to the aggregate amounts specified on, Part A of Annex XII hereto (including footnote 1 thereof) relating to the Borrower's plan to consolidate and scale back its expansion as publicly announced on December 18, 2000 and January 5, 2001; PROVIDED, HOWEVER, (i) in no event shall more than $39,000,000 of such charges in the aggregate be added back to Consolidated Net Income during the term of this Agreement and (ii) to the extent that less than $30,000,000 of such charges are incurred on or before March 31, 2001, no more than $9,000,000 of such charges in the aggregate may be added back to Consolidated Net Income as a result of same being incurred after March 31, 2001. "Permitted Non-recurring Non-cash Restructuring Charges" shall mean those non-recurring non-cash restructuring charges identified in, and up to the aggregate amounts specified on, Part B of Annex XII hereto (including footnote 2 thereof) relating to the Borrower's plan to consolidate and scale back its expansion as publicly announced on December 18, 2000 and January 5, 2001; PROVIDED, HOWEVER, (i) in no event shall more than $20,803,760 of such charges in the aggregate be added back to Consolidated Net Income during the term of this Agreement and (ii) to the extent that less than $16,000,000 of such charges are incurred on or before March 31, 2001, no more than $4,803,760 of such charges in the aggregate may be added back to Consolidated Net Income as a result of same being incurred after March 31, 2001. "Permitted Restructuring Charges" shall mean the Permitted Non-recurring Cash Restructuring Charges and the Permitted Non-recurring Non-cash Restructuring Charges. 6. Section 2.01(a)(iii) of the Credit Agreement is hereby deleted in its entirety and the following new Section 2.01(a)(iii) is inserted in lieu thereof: "(iii) may not be incurred by the Borrower unless if, after giving effect thereto, the Consolidated Senior Debt to Capitalization Ratio is not greater than 50%,". 7. Section 2.01(b)(ii) of the Credit Agreement is hereby deleted in its entirety and the following new Section 2.01(b)(ii) is inserted in lieu thereof: "(ii) may not be incurred by the Borrower unless if, after giving effect thereto, the Consolidated Senior Debt to Capitalization Ratio is not greater than 50%, and". 8. Section 3.01(b)(iv) of the Credit Agreement is hereby deleted in its entirety and the following new Section 3.01(b)(iv) is inserted in lieu thereof: "(iv) the Consolidated Senior Debt to Capitalization Ratio is greater than 50% after giving effect to such issuances of any Letters of Credit." -3- 9. Section 4.03 of the Credit Agreement is hereby amended by (i) redesignating clause (e) thereof as clause (f), and (ii) inserting the following new clause (e) immediately after clause (d) thereof: "(e) In addition to any other mandatory commitment reductions pursuant to this Section 4.03, on the First Amendment Effective Date, the Total Term Commitment shall be permanently reduced by $50,000,000." 10. Section 8.01(c)(B) of the Credit Agreement is hereby amended by deleting the phrase "and Consolidated Senior Debt to Gross PP&E Ratio" appearing therein. Section 8.01(c) of the Credit Agreement is hereby further amended by inserting the following new clause (C) at the end thereof: "(C) Within 45 days after the close of each monthly accounting period (commencing with the monthly accounting period ended January 31, 2001), the financial data, computations and other matters required to establish the Permitted Restructuring Charges added back to Consolidated EBITDA for such monthly accounting period, all of which shall be certified by the chief financial officer or vice president of finance of the Borrower, subject to changes resulting from audit and normal year-end audit adjustments (it being understood and agreed that (i) the first such report also shall include all such Permitted Restructuring Charges taken as of December 31, 2000 and (ii) the provisions of this clause (C) are in addition to the reporting of such Permitted Restructuring Charges as part of the financial statements and officer's certificate delivered pursuant to Sections 8.01(a), (b) and (e))." 11. Section 9.05(a) of the Credit Agreement is hereby amended to read in its entirety as follows: "9.05 CAPITAL EXPENDITURES. (a) The Borrower will not, and will not permit any of its Subsidiaries to, make any Consolidated Capital Expenditures, except that during any period of the Borrower set forth below (taken as one accounting period), the Borrower and its Subsidiaries may make Consolidated Capital Expenditures so long as the aggregate amount of all such Consolidated Capital Expenditures does not exceed in any period set forth below the amount set forth opposite such period below:
PERIOD AMOUNT ------ ------ Fiscal year ending: December 31, 2000 $70,000,000 December 31, 2001 $21,000,000 December 31, 2002 $10,500,000 December 31, 2003 $ 6,000,000 December 31, 2004 $ 5,500,000 December 31, 2005 $ 5,000,000 -4- PERIOD AMOUNT ------ ------ December 31, 2006 $ 5,000,000 December 31, 2007 $ 5,000,000".
12. Section 9.11 of the Credit Agreement is hereby amended to read in its entirety as follows: "9.11 MINIMUM CONSOLIDATED REVENUE. During Phase I, the Borrower will not permit Consolidated Revenue for any six-month period ending on a date set forth below to be less than the amount set forth opposite such six-month period below:
SIX-MONTH PERIOD ENDING ON AMOUNT -------------------------- ------ December 31, 2000 $32,000,000 March 31, 2001 $33,500,000 June 30, 2001 $37,500,000 September 30, 2001 $40,000,000 December 31, 2001 $44,000,000 March 31, 2002 $47,500,000 June 30, 2002 $51,000,000 September 30, 2002 $54,000,000 December 31, 2002 $57,750,000 March 31, 2003 $62,000,000 June 30, 2003 $66,000,000".
13. Section 9.12 of the Credit Agreement is hereby amended to read in its entirety as follows: -5- "9.12 MINIMUM CONSOLIDATED EBITDA. During Phase I, the Borrower will not permit Consolidated EBITDA for any six-month period ending on a date set forth below to be less than the amount set forth opposite such six-month period below:
SIX-MONTH PERIOD ENDING ON AMOUNT -------------------------- ------ December 31, 2000 $(65,000,000) March 31, 2001 $(54,000,000) June 30, 2001 $(28,250,000) September 30, 2001 $(24,000,000) December 31, 2001 $(19,000,000) March 31, 2002 $(14,750,000) June 30, 2002 $(10,500,000) September 30, 2002 $ (6,500,000) December 31, 2002 $ (3,500,000) March 31, 2003 $ 0 June 30, 2003 $ 4,000,000"
14. Section 9.15 of the Credit Agreement is hereby amended to read in its entirety as follows: "9.15 INTEREST COVERAGE RATIO. During Phase II, for any fiscal quarter ending on any date set forth below, the Borrower will not permit the ratio of (i) Consolidated Annualized EBITDA to (ii) Consolidated Annualized Interest Expense to be less than the ratio set forth opposite such date below:
FISCAL QUARTER ENDING RATIO --------------------- ----- If applicable, the last day of each fiscal quarter during the period from the commencement of Phase II to and including June 30, 2003 0.45 to 1 September 30, 2003 0.65 to 1 December 31, 2003 0.85 to 1 March 31, 2004 1.25 to 1 June 30, 2004 1.50 to 1 September 30, 2004 1.75 to 1 December 31, 2004 1.75 to 1 March 31,2005 2.00 to 1 June 30, 2005 2.25 to 1 September 30, 2005 and thereafter 2.50 to 1"
-6- 15. Section 9.16 of the Credit Agreement is hereby amended to read in its entirety as follows: "9.16 LEVERAGE RATIO. During Phase II, the Borrower will not permit the Leverage Ratio determined as at the end of the last day of any fiscal quarter ending on any date set forth below to be more than the ratio set forth opposite such date below:
FISCAL QUARTER ENDING RATIO --------------------- ----- If applicable, the last day of each fiscal quarter during the period from the commencement of Phase II to and including June 30, 2003 16.00 to 1 September 30, 2003 12.00 to 1 December 31, 2003 10.00 to 1 March 31, 2004 6.50 to 1 June 30, 2004 5.25 to 1 September 30, 2004 4.75 to 1 December 31, 2004 4.25 to 1 March 31, 2005 3.75 to 1 June 30, 2005 and thereafter 3.50 to 1"
16. Section 9.17 of the Credit Agreement is hereby amended to read in its entirety as follows: "9.17 FIXED CHARGE RATIO. During Phase II, for any six-month period ending on any date set forth below, the Borrower will not permit the ratio of (i) Consolidated EBITDA for such six-month period to (ii) Consolidated Fixed Charges for such six-month period to be less than the ratio set forth opposite such date below:
SIX-MONTH PERIOD ENDING ON RATIO -------------------------- ----- The last day of each fiscal quarter during the period from the commencement of Phase II to and including June 30, 2003 0.40 to 1 September 30, 2003 0.50 to 1.00 December 31, 2003 0.75 to 1.00 March 31, 2004 0.90 to 1.00 June 30, 2004 0.95 to 1.00 September 30, 2004 and thereafter 1.00 to 1.00"
-7- 17. Section 10.12 of the Credit Agreement is hereby amended to read in its entirety as follows: "10.12 POSITIVE EBITDA. Without limiting the provisions of Section 9.12 and only so long as Phase II shall not have theretofore occurred, the Borrower shall fail to have positive Consolidated EBITDA for the fiscal quarters ending June 30, 2003 and September 30, 2003;". 18. Section 10 of the Credit Agreement is further amended by (i) inserting the word "or" at the end of Section 10.13 thereof and (ii) inserting the following new Section 10.14 immediately following such Section 10.13: "10.14 CONSOLIDATED CASH EQUITY PAYMENTS. The Borrower shall not have received during the period commencing on the date of its incorporation through and including each date set forth below aggregate Consolidated Cash Equity equal to at least that amount set forth opposite each such date below (it being understood that the amounts set forth below are in excess of any amounts contributed to the Borrower pursuant to the exercise of the various cure rights provided for in the last paragraph of this Section 10):
DATE CUMULATIVE ---- ---------- June 30, 2001 $169,617,715 September 30, 2001 $177,917,715 March 31, 2002 $190,917,715 June 30, 2002 $194,721,715;".
19. The Credit Agreement is hereby further amended by adding thereto as Annex XII the Annex XII attached to this Amendment. B. MISCELLANEOUS PROVISIONS 1. In order to induce the Lenders to enter into this Amendment, the Borrower hereby represents and warrants that (i) the representations and warranties contained in the Credit Agreement and in the other Credit Documents are true and correct in all material respects on and as of the First Amendment Effective Date (as defined below) (except with respect to any representations and warranties limited by their terms to a specific date, which shall be true and correct in all material respects as of such date) and (ii) there exists no Default or Event of Default under the Credit Agreement on the First Amendment Effective Date, in each case both before and after giving effect to this Amendment. -8- 2. This Amendment is limited as specified and shall not constitute an amendment, modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 3. The Borrower hereby agrees to pay each Lender which delivers an executed copy of this Amendment (by hard copy or facsimile) to the Administrative Agent by no later than 3:00 p.m. (New York time) on Tuesday, March 20, 2001, a fee (the "Amendment Fee") in an amount equal to 0.25% of the sum of (I) the aggregate principal amount of all outstanding Term Loans of such Lender on the First Amendment Effective Date and (II) the aggregate Commitments of such Lender on the First Amendment Effective Date (but determined after giving effect to the reduction to the Total Term Commitment as provided for in this Amendment), which Amendment Fee shall be due and payable on the First Amendment Effective Date. 4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 5. This Amendment shall become effective on the date (the "First Amendment Effective Date") when (i) the Borrower and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of telecopier) the same to the Administrative Agent at the Notice Office and (ii) the Borrower shall have received at least $60,000,000 of new Consolidated Cash Equity during the period commencing on January 1, 2001 through, and including, the First Amendment Effective Date. 6. From and after the First Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents to the Credit Agreement shall be deemed to be referenced to the Credit Agreement as amended hereby. * * * -9- IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed and delivered as of the date first above written. FAIRPOINT SOLUTIONS COMMUNICATIONS CORP. By: /s/ Timothy W. Henry --------------------------------------- Title: Vice President of Finance and Treasurer FIRST UNION NATIONAL BANK, Individually and as Administrative Agent By: /s/ Kathrine A. Harkness --------------------------------------- Title: Vice President BANK OF AMERICA, N.A. By: /s/ Pam S. Kurtzman --------------------------------------- Title: Principal BANKERS TRUST COMPANY By: /s/ Gene S. Thompson --------------------------------------- Title: Director CITICORP USA, INC. By: /s/ J. Douglas Harvey --------------------------------------- Title: Managing Director CREDIT SUISSE FIRST BOSTON By: /s/ Bill O'Daly/Lalita Advani --------------------------------------- Title: Vice President/ Assistant Vice President COBANK, ACB By: /s/ Rick Freeman --------------------------------------- Title: Vice President CIT GROUP/EQUIPMENT FINANCING INC. By: /s/ William Evenson --------------------------------------- Title: Vice President ANNEX XII TO THE AMENDED AND RESTATED CREDIT AGREEMENT RESTRUCTURING CHARGES A. CASH RESTRUCTURING CHARGES
Description Amount(1)(2) ----------- ------------ 1. Severance: Pay $5,914,597 2. Lay Off Related Costs: $309,775 3. Present Value of Occupancy Costs: $9,223,000 4. Contractual Costs: Equipment Leases $4,822,433 5. Fixed Assets: Colocation Equipment $24,060,000 Recovery of Equipment ($15,425,000) Dismantling Costs $940,000 Furniture Costs $200,000 Colocation Operating Costs $250,000 6. Legal/Employee Benefits/ Miscellaneous: $300,000 7. Consulting/Public Relations/ Accounting: $115,000 8. Equipment Leases: $675,000 - ---------- (1) The cash Restructuring Charges identified in categories A1 through A9 above may be higher than those amounts set forth opposite such categories above; PROVIDED, HOWEVER, in no event shall the aggregate amount of all such additional cash Restructuring Charges for all of these categories combined exceed $7,125,195. (2) The non-cash Restructuring Charges identified in categories B1 through B3 above may be higher than those amounts set forth opposite such categories above; PROVIDED, HOWEVER, in no event shall the aggregate amount of all such additional non-cash Restructuring Charges for all of these categories combined exceed $2,713,534. 9. Miscellaneous Other Costs: $490,000 ---------------------------- TOTAL CASH RESTRUCTURE CHARGES $31,874,805 ----------------------------
B. NON CASH RESTRUCTURE CHARGES: 1. Leasehold Improvements: $4,449,808 2. Equipment - Lost Assets: $300,000 3. Abandoned Collocation Sites: $13,340,418 TOTAL NON-CASH RESTRUCTURING CHARGES $18,090,226 ---------------------------- TOTAL RESTRUCTURING CHARGES $49,965,031 ============================
-2- EX-12 4 a2042675zex-12.txt EXHIBIT 12 EXHIBIT 12 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, -------------------------------- 1998 1999 2000 ---- ---- ---- (Dollars in thousands) Income from continuing operations before taxes $ (7,511) (34,555) (121,149) Income from equity investments (931) (2,497) (4,853) Distributions from equity investments 118 2,590 3,161 ----------- --------- ---------- Income before fixed charges (8,324) (34,462) (122,841) Plus: Fixed Charges 28,003 52,529 68,889 ----------- --------- ---------- Earnings (as defined) 19,679 18,067 (53,952) =========== ========= ========== Interest expense 27,170 51,185 66,038 Rent expense (interest portion) 706 1,208 2,706 Capitalized interest 127 136 145 ----------- --------- ---------- Fixed charges 28,003 52,529 68,889 =========== ========= ========== "Earnings" divided by fixed charges 0.7 0.3 (0.8) =========== ========= ==========
EX-21 5 a2042675zex-21.txt EXHIBIT 21 Exhibit 21 Subsidiaries of FairPoint Communications, Inc.
Name Jurisdiction of Incorporation - ---- ----------------------------- ST Enterprises, Ltd. Kansas Sunflower Telephone Company, Inc. Kansas STE/NE Acquisition Corp., d/b/a/ Northland Telephone Company of Vermont Delaware Northland Telephone Company of Maine, Inc. Maine ST Communications, Inc. Kansas ST Computer Resources, Inc. Kansas ST Long Distance, Inc. Delaware MJD Ventures, Inc Delaware The Columbus Grove Telephone Company Ohio Quality One Technologies, Inc. Ohio C-R Communications, Inc Illinois C-R Telephone Company Illinois C-R Cellular, Inc. Illinois C-R Long Distance, Inc. Illinois Taconic Telephone Corp. New York Taconic Cellular Corp. New York Taconic Technology Corp. New York Taconic Telecom Corp. New York Taconet Wireless Corp. New York Taconet Corp. New York Ellensburg Telephone Company Washington Elltel Long Distance Corp. Washington Elltel Wireless, Inc. Washington Kittitas Valley Paging Limited Partnership Delaware Sidney Telephone Company Maine Utilities, Inc. Maine Standish Telephone Company Maine China Telephone Company Maine Maine Telephone Company Maine UI Long Distance, Inc. Maine UI Communications, Inc. Maine UI Telcom, Inc. Maine Telephone Service Company Maine Chouteau Telephone Company Oklahoma Chouteau Telecommunications & Electronics Oklahoma Independent Cellular Telephone Company Finance Corporation Oklahoma Independent Cellular Telephone Company, Inc Oklahoma TGP, Inc. Delaware Chautauqua & Erie Telephone Company New York C&E Communications, Inc. d/b/a C & E Teleadvantage New York C&E Network, Inc. New York Chautauqua & Erie Communications Ltd. New York Western New York Cellular, Inc. New York Chautauqua Cable, Inc. New York The Orwell Telephone Company Ohio Orwell Communications, Inc Ohio GTC Communications, Inc. Delaware St. Joe Communications, Inc. Florida GTC, Inc. Florida GTC Finance Corporation Delaware Peoples Mutual Telephone Company Virginia Peoples Mutual Services Company Virginia Fremont Telecom Co. Idaho Fretel Communications, LLC Idaho Comerco, Inc. Washington YCOM Networks, Inc. Washington MJD Services Corp. Delaware Bluestem Telephone Company Delaware Big Sandy Telecom, Inc Delaware Odin Telephone Exchange, Inc. Illinois Kadoka Telephone Company South Dakota Columbine Telecom Company (f/k/a Columbine Acquisition Corp.) Delaware Ravenswood Communications, Inc Illinois The El Paso Telephone Company Illinois Gemcell, Inc Illinois El Paso Long Distance Company Illinois Armour Independent Telephone Co. South Dakota Bridgewater-Canistota Independent Telephone Co. South Dakota Union Telephone Company of Hartford South Dakota Union TelNET, Inc. South Dakota KM Satellite Services, Inc. South Dakota WMW Cable TV Co. South Dakota Yates City Telephone Company Illinois FairPoint Communications Solutions Corp. (f/k/a FairPoint Communications Corp.) Delaware FairPoint Communications Solutions Corp. - New York Delaware FairPoint Communications Solutions Corp. - Virginia Delaware FairPoint Communications Investments, LLC Delaware FairPoint Solutions Operations Services, LLC North Carolina FairPoint Solutions Capital LLC North Carolina MJD Holdings Corp. Delaware MJD Capital Corp. South Dakota
-----END PRIVACY-ENHANCED MESSAGE-----