FairPoint Communications 2010 Annual Report Download - page 12

Table of Contents
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Upon our emergence from Chapter 11 on January 24, 2011, we adopted fresh start accounting in accordance with guidance under the applicable
reorganization accounting rules, pursuant to which our reorganization value, which represents the fair value of the entity before considering liabilities, and
approximates the amount a willing buyer would pay for the assets of the entity immediately after the reorganization, has been allocated to the fair value of
assets in conformity with guidance under the applicable accounting rules for business combinations, using the purchase method of accounting for business
combinations. The amount remaining after allocation of the reorganization value to the fair value of identified tangible and intangible assets will be reflected as
goodwill, which is subject to periodic evaluation for impairment. In addition to fresh start accounting, our future consolidated financial statements will reflect
all effects of the transactions contemplated by the Plan. Accordingly, our future consolidated statements of financial position and consolidated statements of
operations will not be comparable in many respects to our consolidated statements of financial position and consolidated statements of operations for periods
prior to our adoption of fresh start accounting and prior to accounting for the effects of the reorganization, including the consolidated financial statements
contained herein. As a result, our financial and operating results for the year ended December 31, 2010 may not be indicative of future financial performance.
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Our NOLs will be substantially reduced by the recognition of gains on the discharge of certain debt pursuant to the Plan. Further, our ability to utilize our
NOL carryforwards will be limited by Section 382 of the Internal Revenue Code of 1986, as amended, as the debt restructuring resulted in an ownership
change. In general, following an ownership change, a limitation is imposed on the amount of pre-ownership change NOL carryforwards that may be used to
offset taxable income in each year following the ownership change. We plan to elect, pursuant to a special rule that is applicable to ownership changes resulting
from a Chapter 11 reorganization, to calculate this annual limitation by increasing the value attributed to our stock prior to the ownership change by the
amount of creditor claims surrendered or canceled during the reorganization. Specifically, the amount of the annual limitation would equal the “long-term tax-
exempt rate” (published monthly by the Internal Revenue Service (the “IRS”)) for the month in which the ownership change occurs, which in our cases is
4.10%, multiplied by the lesser of (i) the value of the Company’s stock immediately after, rather than immediately before, the ownership change, and (ii) the
value of the Company’s pre-change assets. Any increase in the value attributed to our stock resulting from the ownership change effectively would increase the
annual limitation on our NOLs.
Any portion of the annual limitation on pre-ownership change NOLs that is not used to reduce taxable income in a particular year may be carried forward
and used in subsequent years. The annual limitation is increased by certain built-in gains recognized (or treated as recognized) during the five years following
the ownership change (up to the total amount of built-in gain that existed at the time of the ownership change). The Company expects the limitations on our
NOL carryforwards for the five years following an ownership change to be increased by built-in gains. The Company currently projects that all available
NOL carryforwards, after giving effect to the reduction for debt discharged, will be utilized to offset future income within the NOL carryforward periods.
Therefore, the Company does not expect to have NOL carryforwards after such time.
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From 2007 through January 2009, we were in the process of developing and deploying new systems, processes and personnel to replace those used by
Verizon to operate and support our network and back-office functions in the Maine, New Hampshire and Vermont operations we acquired from Verizon in the
Merger. These services were provided by Verizon under the Transition Services Agreement, dated as of January 15, 2007, which we entered into with certain
subsidiaries of Verizon in connection with the Merger, as amended (the “Transition Services Agreement”). On January 30, 2009, we began transitioning certain
back-office functions from Verizon’s integrated systems to newly created systems of the Company (the “Cutover”), and on February 9, 2009, we began
operating our new platform of systems independently from the Verizon systems, processes and personnel.
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