FairPoint Communications 2003 Annual Report Download - page 37

The Company uses variable and fixed-rate debt to finance its operations, capital expenditures, and acquisitions. The variable-rate debt
obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes it is prudent to
limit the variability of a portion of its interest payments. To meet this objective, the Company enters into interest rate swap agreements to
manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt
obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes
fixed interest rate
53
payments, thereby creating the equivalent of fixed-rate debt. As of December 31, 2003, the Company had two interest rate swap agreements
with a combined notional amount of $50.0 million and expiration dates of May 2004.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, 
 (SFAS No. 133). In June 2000, the FASB issued SFAS No. 138, 
 (SFAS No. 138). SFAS No. 133 and SFAS No. 138 require
that all derivative instruments be recorded on the balance sheet at their respective fair values. The Company adopted SFAS No. 133 and
SFAS No. 138 on January 1, 2001. In accordance with the transition provisions of SFAS No. 133, the Company recorded a cumulative-effect-
type loss adjustment (the "transition adjustment") of $(4.7) million in other comprehensive income (loss) to recognize at fair value all interest
rate swap agreements. The fair value of the Company's interest rate swap agreements is determined from valuations received from financial
institutions. The fair value indicates an estimated amount the Company would pay if the contracts were cancelled or transferred to other
parties. At December 31, 2003, the Company expects to reclassify to nonoperating income (expense) during the next 12 months $0.1 million
from the transition adjustment that was recorded in other comprehensive income (loss).
Effective January 1, 2001, the Company discontinued hedge accounting prospectively on its existing interest rate swap agreements
because the agreements do not qualify as accounting hedges under SFAS No. 133. As of December 31, 2002 and 2003, the fair value of all
outstanding interest rate swap agreements used in continuing operations was $8.6 million and $0.9 million, respectively.
On May 1, 2001, the Company entered into an interest swap with a notional amount of $25 million that was being accounted for as a
cash flow hedge under the provisions of SFAS No. 133. The effective portion of the loss on this interest rate swap ($0.6 million) was being
recorded in other comprehensive income (loss) through the third quarter of 2001. In association with the discontinued operations of the
competitive communications business at Carrier Services and the bank negotiations in relation to Carrier Services' Credit Facility, as of
December 31, 2001, the Company discontinued hedge accounting on this swap. As of December 31, 2001, the fair value of this interest rate
swap was $0.6 million, and was recorded in the statements of operations as a charge to discontinued operations. In addition, the Company
reclassified $0.6 million from other comprehensive income (loss) to discontinued operations from the translation adjustment recorded on
January 1, 2001 for the other remaining interest rate swap (notional amount of $50 million) used by the Company for Carrier Services'
Credit Facility. The fair market value of this swap was $2.6 million at December 31, 2001. At December 31, 2001, these interest rate swaps
were classified as current liabilities of discontinued operations on the consolidated balance sheet at their respective fair values. These interest
rate swaps were settled in May 2002 in conjunction with the restructuring of Carrier Services' Credit Facility.
Amounts receivable or payable under interest rate swap agreements are accrued at each balance sheet date and included as adjustments
to realized and unrealized gains (losses) on interest rate swaps.
54
The following is a summary of amounts included in realized and unrealized gains (losses) on interest rate swaps (dollars in thousands):







Change in fair value of interest rate swaps $(6,896)2,135 7,693
Reclassification of transition adjustment included in
other comprehensive income (loss) (1,238)(1,437)(1,029)
Realized gains (losses) (4,739)(10,275)(8,051)
Total $(12,873)(9,577)(1,387)

Stock appreciation rights have been granted to certain members of management by principal shareholders of the Company. The
Company accounts for stock appreciation rights in accordance with FASB Interpretation No. 28, 
 The Company measures compensation as the amount by which the market value of the
shares of the Company's stock covered by the grant exceeds the option price or value specified, by reference to a market price or otherwise,
subject to any appreciation limitations under the plan and a corresponding credit to additional paid-in capital. Changes, either increases or
decreases, in the market value of those shares between the date of the grant and the measurement date result in a change in the measure of