Reorganization Under Chapter 11
Emergence from Chapter 11 Proceedings
On October 26, 2009 (the "Petition Date"), the Company and substantially all of its direct and indirect subsidiaries filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code" or "Chapter 11") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The cases were being jointly administered under the caption In re FairPoint Communications, Inc., Case No. 09-16335 (the "Chapter 11 Cases"). On January 13, 2011, the bankruptcy judge entered into an order dated as of December 29, 2010 (the "Confirmation Order") confirming the Company's Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the "Plan") and on January 24, 2011 (the "Effective Date") the Company emerged from Chapter 11 protection.
On the Effective Date, the Company substantially consummated its reorganization through a series of transactions contemplated by the Plan and the Plan became effective pursuant to its terms.
The Plan provided for, among other things:
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(i) | the cancellation and extinguishment on the Effective Date of all of the Company's equity interests outstanding on or prior to the Effective Date, including but not limited to all outstanding shares of the Company's common stock, par value $0.01 per share, options and contractual or other rights to acquire any equity interests, |
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(ii) | the issuance of shares of the Company's new common stock, par value $0.01 per share, and the issuance of warrants to purchase shares of the Company's common stock to holders of certain claims in connection with a warrant agreement that the Company entered into with The Bank of New York Mellon, as the warrant agent, on the Effective Date (the "Warrant Agreement"), in accordance with the Plan, |
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(iii) | the satisfaction of claims associated with |
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(a) | the credit agreement, dated as of March 31, 2008, by and among FairPoint Communications, Spinco, Bank of America, N.A., as syndication agent, Morgan Stanley Senior Funding, Inc. and Deutsche Bank Securities Inc., as co-documentation agents, and Lehman Commercial Paper Inc., as administrative agent, and the lenders party thereto (as amended, supplemented or otherwise modified from time to time, the "Pre-Petition Credit Facility"), |
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(b) | the 13-1/8% Senior Notes due April 1, 2018 (the "Old 13-1/8% Notes"), which were issued pursuant to the indenture, dated as of March 31, 2008, by and between Spinco and U.S. Bank National Association, as amended, and |
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(c) | the 13-1/8% Senior Notes due April 2, 2018 (the "New 13-1/8% Notes" and, together with the Old 13-1/8% Notes, the "Pre-Petition Notes"), which were issued pursuant to the indenture, dated as of July 29, 2009, by and between FairPoint Communications and U.S. Bank National Association and |
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(iv) | the termination by its conversion into the Old Revolving Facility (as defined herein) of the Debtor-in-Possession Credit Agreement, dated as of October 27, 2009 (as amended, the "DIP Credit Agreement"), by and among FairPoint Communications and FairPoint Logistics, Inc. ("FairPoint Logistics"), certain financial institutions and Bank of America, N.A., as the administrative agent. |
The Company's common stock began trading on the Nasdaq Stock Market LLC on January 25, 2011. In addition, on the Effective Date, FairPoint Communications and FairPoint Logistics (collectively, the "Old Credit Agreement Borrowers") entered into a $1,075.0 million senior secured credit facility with a syndicate of lenders and Bank of America, N.A., as the administrative agent for the lenders, arranged by Banc of America Securities LLC (the "Old Credit Agreement") comprised of a $75 million revolving facility (the "Old Revolving Facility") and a $1.0 billion term loan facility (the "Old Term Loan", and together with the Old Revolving Facility, the "Old Credit Agreement Loans").
In connection with the Chapter 11 Cases, the Company also negotiated with representatives of the state regulatory authorities in Maine, New Hampshire and Vermont with respect to (i) certain regulatory approvals relating to the Chapter 11 Cases and the Plan and (ii) certain modifications to the requirements imposed by state regulatory authorities as a condition to approval of the Merger (each a "Merger Order", and collectively, the "Merger Orders").
On June 30, 2011 and on November 7, 2012, the Bankruptcy Court entered final decrees closing certain of the Company's bankruptcy cases due to such cases being fully administered. Of the 80 original bankruptcy cases, only the Chapter 11 Case of Northern New England Telephone Operations LLC (Case No. 09-16365) remains open.
Financial Reporting in Reorganization
The Company applied the Reorganizations Topic of the ASC effective as of the Petition Date. The Reorganizations Topic of the ASC, which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Amounts that can be directly associated with the reorganization and restructuring of the business after the Petition Date must be reported separately as reorganization items in the statements of operations. In addition, cash provided by and used for reorganization items must be disclosed separately.
The Company's consolidated statement of operations for the twenty-four days ended January 24, 2011 includes the results of operations during the Chapter 11 Cases. As such, any revenues, expenses, and gains and losses realized or incurred that are directly related to the bankruptcy case are reported separately as reorganization items due to the bankruptcy.
Reorganization Items. Reorganization items represent expense or income amounts that have been recognized as a direct result of the Chapter 11 Cases and are presented separately in the consolidated statements of operations pursuant to the Reorganizations Topic of the ASC. Such items consist of the following (amounts in thousands):
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| Predecessor Company |
| Twenty-Four Days Ended January 24, 2011 |
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Professional fees (a) | $ | (13,965 | ) |
Cancellation of debt income (b) | 1,351,057 |
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Goodwill adjustment (c) | (351,931 | ) |
Intangible assets adjustment (c) | (30,381 | ) |
Property, plant and equipment adjustment (c) | (56,258 | ) |
Pension and post-retirement healthcare adjustment (c) | 22,076 |
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Other assets and liabilities adjustment (c) | (16,037 | ) |
Tax account adjustments (c) | 4,313 |
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Other (d) | (11,561 | ) |
Total reorganization items | $ | 897,313 |
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(a) | Professional fees relate to legal, financial advisory and other professional costs directly associated with the reorganization process. |
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(b) | Net gains and losses associated with the settlement of liabilities subject to compromise, of which $1,351,055 was recognized on the Effective Date. |
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(c) | Revaluation of long-lived assets and certain assets and liabilities upon adoption of fresh start accounting. |
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(d) | Includes expenses associated with the Long Term Incentive Plan (as defined hereinafter in note (16) "Stock-Based Compensation") adopted as part of the Plan, the FairPoint Litigation Trust entered into as part of the Plan and the write-off of the Predecessor Company's long term incentive plans and director and officer policy. |
After the Effective Date, income or expense amounts recognized as a result of settling outstanding bankruptcy claims and professional fees directly associated with the reorganization process are included in operating expenses as Reorganization related expense in the consolidated statements of operations.
Magnitude of Bankruptcy Claims
Claims totaling $4.9 billion were filed with the Bankruptcy Court against the Company. As of February 28, 2014, through the claim resolution process, $3.8 billion of these claims have been settled and $1.1 billion of these claims have been disallowed by the Bankruptcy Court. Additionally, $15.2 million of these claims have been withdrawn by the respective creditors. The disallowance of one claim in the amount of $0.2 million has been appealed by the claimant.
Fresh Start Accounting
Upon confirmation of the Plan by the Bankruptcy Court and satisfaction of the remaining material contingencies to complete the implementation of the Plan, under the Reorganizations Topic of the ASC, the Company was required to apply the provisions of fresh start accounting to its financial statements on the Effective Date because (i) the reorganization value of the assets of the emerging entity immediately before the date of confirmation was less than the total of all post-petition liabilities and allowed claims and (ii) the holders of the existing voting shares of the Predecessor Company's common stock immediately before confirmation received less than 50 percent of the voting shares of the emerging entity.
The adoption of fresh start accounting resulted in a new reporting entity. The financial statements as of January 24, 2011 and for subsequent periods report the results of a new entity with no beginning retained earnings. With the exception of deferred taxes and assets and liabilities associated with pension and post-retirement healthcare plans, which were recorded in accordance with the Income Taxes Topic of the ASC and the Compensation Topic of the ASC, respectively, all of the new entity's assets and liabilities were recorded at their estimated fair values upon the Effective Date and the Predecessor Company's retained deficit and accumulated other comprehensive loss were eliminated. Any presentation of the new entity's financial position and results of operations is not comparable to prior periods.
In accordance with fresh start accounting, the Company also recorded the debt and equity at fair value utilizing the total enterprise value of approximately $1.5 billion. The enterprise value was determined in conjunction with the confirmation of the Plan. To facilitate the calculation of the enterprise value, the Company developed financial projections for the five years ending December 31, 2015 for the post-emergence company using a number of estimates and assumptions and prepared a calculation of the present value of the future cash flows. The projections were based on information available to the Company at the time of preparation of such projections in connection with the Plan and its confirmation and also in connection with negotiations regarding the Plan with certain of its lenders. The projections and calculation of the present value of the future cash flows included key assumptions, such as: (i) revenue growth beginning in 2013 through the terminal year based on the Company achieving specified business objectives, (ii) improving earnings before interest and taxes margins, (iii) reductions in capital expenditures and (iv) a risk adjusted discount rate of 7.2%. Projections are inherently subject to uncertainties and risks and the Company's actual results and financial condition have varied from those contemplated by the projections and other financial information provided to the Bankruptcy Court. The Company believes that because such projections and other financial information are now out of date and because of developments with respect to the Company's business since such projections were prepared, these projections should not be relied upon.
