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Dear Mr. Berko:

Dear H.S.:

Yahoo! Finance is the last place I’d ever look for financial information. Several readers have told me that they’ve made bad mistakes by relying on Yahoo data, which are often six months old and incorrect. Yes, Yahoo reports a $1.03 Fairpoint dividend, but Fairpoint reported to the Street in early March that the dividend was discontinued. This is an example of Yahoo’s unreliability, an “I don’t care” attitude and the cesspool level of talent they hire.

Fairpoint Communications Inc. (FRP-$0.88) is a $1.3 billion revenue communications company home ported in Charlotte, N.C., and employing 4,100 people. FRP provides telephone and data service to rural and small urban communities, including long-distance, Internet, broadband, television, directory assistance plus most of the other stuff offered by Verizon and AT&T. FRP has more than 1.7 million access line equivalents, high-speed data lines and cable modems. FRP’s 90 million shares have a market cap of nearly $80 million, though it has an enterprise value (as of June 30, 2009) of $2.4 billion.

But management, which acquired Verizon’s New England operations in February 2008, acquired some unexpected problems in the process. It seems that connecting Verizon’s phone service to the FRP network was enormously more costly than management anticipated and numerous service disruptions plus system incompatibility created a maelstrom of angry activity overloading Fairpoint’s capacity to respond.

Revenues increased nearly fivefold with the Verizon purchase, but FRP management lacked the capability to fix problems quickly enough to satisfy customers and shareholders. Costs increased so much that the company is in danger of violating the loan covenants put in place when it borrowed $1.8 billion for the Verizon purchase. If FRP violates its bond terms and is unable to renegotiate new terms with the lenders, it will be forced to restructure its balance sheet and significantly dilute shareholders’ interest.

However, it seems that management may have its hand properly around the problem. Access line erosion is easing, billing cycles are now back on normal schedules, repair and order times are now back to normal and calls to customer service are back to pre-Verizon levels. FRP expects to lose 35 cents a share in 2009 and 20 cents next year. Management expects the company to become profitable again by 2011. In the past 52 weeks, FRP has traded between 55 cents and $9.45.

Though it can be said that a $1 stock price is a plausible extension of reality, it can also be said that there’s an 85 percent degree of probability that FRP may soon be in big trouble. If you want to put your money on that 15 percent window, I don’t have an objection if you buy 25,000 shares, if you have no objection to losing $15,000.

Meanwhile, you should know that FRP is launching an exchange offer for its 13.125 percent senior notes due in 2018. Management needs to do this to keep interest costs down and to keep the company in compliance with its major lenders. Liquidity is a big problem, and collections remain below the levels the company had prior to switching the Verizon system to the Fairpoint system. If FRP doesn’t make its interest payments on Oct. 1, the company will be officially in default, and your 25,000 shares could turn to smoke.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775 or e-mail him at mjberko@yahoo.com.