FairPoint Communications 2011 Annual Report Download - page 82

Table of Contents
on an unconsolidated basis. Accordingly, the Company believes that the substance and format of these reports do not allow meaningful comparison with our
regular publicly-disclosed consolidated financial statements. Moreover, the quarterly operating reports filed with the Bankruptcy Court are not prepared for the
purpose of providing a basis for an investment decision relating to our securities, or for comparison with other financial information filed by the Company
with the SEC.
Plan Injunction
Except as otherwise provided in the Plan, the Confirmation Order enjoined, or stayed, the continuation of any judicial or administrative proceedings or
other actions against the Company or its properties to recover on, collect or secure a claim arising prior to the Effective Date. Thus, for example, creditor
actions to obtain possession of property from the Company, or to create, perfect or enforce any lien against our property, or to collect on monies owed or
otherwise exercise rights or remedies with respect to a claim arising prior to the Effective Date, are enjoined except as provided in the Plan.
Impact on Net Operating Loss Carryforwards (“NOLs”)
The Company’s NOLs were substantially reduced by the recognition of gains on the discharge of certain debt pursuant to the Plan. Further, the
Company’s ability to utilize its 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. The Company plans 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
the Company’s 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 the Company’s case 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 the
Company’s 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 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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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 must be reported separately as reorganization items in the statements of operations beginning in the
quarter ending December 31, 2009. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that
are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts
expected to be allowed, even if they may be settled for lesser amounts. In addition, cash provided by and used for reorganization items must be disclosed
separately.
The accompanying consolidated financial statements have been prepared in accordance with the Reorganizations Topic of the ASC through the Effective
Date. All pre-petition liabilities subject to compromise have been segregated in the consolidated balance sheets and classified as liabilities subject to compromise
at the estimated amount of the allowable claims. Liabilities not subject to compromise are separately classified as current or noncurrent. The Company’s
consolidated statements of operations for the twenty-four days ended January 24, 2011, the year ended December 31, 2010 and the sixty-six days ended
December 31, 2009, include 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.
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