FairPoint Communications 2011 Annual Report Download - page 85

Table of Contents
As of March 2, 2012, claims totaling $4.9 billion were filed with the Bankruptcy Court against the Company, $3.6 billion of which have been settled
and $1.1 billion of which have been disallowed by the Bankruptcy Court. Additionally, $10.0 million of these claims have been withdrawn by the respective
creditors and $190.5 million of these claims remain open, pending settlement or objection, including $169.1 million of duplicative claims filed by one
company and its affiliates. The Company expects the majority of these pending claims to be disallowed. In light of the Company’s emergence from
bankruptcy on the Effective Date, the Company does not anticipate a significant number of new and amended claims to be filed in the future. The Company
has identified claims that the Company believes should be disallowed by the Bankruptcy Court because they are duplicative, have been later amended or are
overstated or for other reasons. The Company expects to either settle or file an objection to the remaining claims. Because of the duplicative claims, the amount
of disallowed and settled claims may increase significantly in the future.
On the Effective Date, the Company distributed cash, entered into the Credit Agreement, and issued shares of New Common Stock and Warrants to
satisfy $2.8 billion of claims. In addition, on the Effective Date, the Company established a cash reserve to pay outstanding bankruptcy claims and various
other bankruptcy related fees (the “Cash Claims Reserve”) of $82.8 million and reserved 72,754 shares of New Common Stock and Warrants to purchase
124,012 shares of New Common Stock for satisfaction of pending claims. Subsequent to the Effective Date, the Company has made additional cash
distributions from its Cash Claims Reserve and issued additional shares of New Common Stock to satisfy claims as they are resolved. As a result of these
distributions, the Cash Claims Reserve as of March 2, 2012, has been decreased to $22.1 million. As of March 2, 2012, 69,194 shares of New Common
Stock and Warrants to purchase 117,943 shares of New Common Stock remain to be distributed in satisfaction of pending claims.
Through the claims resolution process, differences in amounts scheduled by the Company and claims filed by creditors have been and are being
investigated and resolved, including through the filing of objections with the Bankruptcy Court where appropriate. As a result of pending obligations, the
claims resolution process will continue to take time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor
is the exact recovery with respect to allowed claims presently known.
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, fresh start accounting principles were applied on the Effective Date pursuant to the provisions of the Reorganizations Topic of the ASC. The adoption of
fresh start accounting resulted in a new reporting entity. The financial statements as of January 24, 2011 and for subsequent periods will report the results of a
new entity with no beginning retained earnings. All periods after the adoption of fresh start accounting and the Plan on the Effective Date are referred to as the
Successor Company, whereas all periods preceding these applications are referred to as the Predecessor Company. With the exception of deferred taxes and
assets and liabilities associated with pension and post-retirement health plans, which were recorded in accordance with the Income Taxes Topic of the ASC and
the Compensation Topic of the ASC, respectively, all Successor Company 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 income were eliminated. Any presentation of the Successor
Company represents the financial position and results of operations of the new reporting entity and is not comparable to prior periods.
Under the Reorganization Topic of the ASC, the Company was required to apply the provisions of fresh start accounting to its financial statements
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’s common stock immediately before confirmation received less
than 50 percent of the voting shares of the emerging entity.
In accordance with fresh start accounting, which incorporated the acquisition method of accounting for business combinations in the Business
Combinations Topic of the ASC, the Company recorded the assets and non-interest bearing liabilities at fair value, with the exception of deferred taxes and
assets and liabilities associated with pension and post-retirement health plans which were recorded in accordance with the Income Taxes Topic of the ASC and
the Compensation Topic of the ASC, respectively. The Company also recorded the Successor Company debt and equity at fair value utilizing the total
enterprise value of approximately $1.5 billion, which was determined in conjunction with the confirmation of the Plan in part based on a set of financial
projections for the Successor Company. The enterprise value was dependent upon achieving the future financial results set forth in the Company’s projections,
as well as the realization of certain other assumptions. There can be no assurance that the projections will be achieved or that the assumptions will be realized.
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