FairPoint Communications 2003 Annual Report Download - page 38

compensation for the right. Valuation of stock appreciation rights is typically based on traditional valuation models utilizing multiples of cash
flows, unless there is a current market value for the Company's stock.
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At December 31, 2003, the Company has three stock-based employee compensation plans. The Company accounts for its stock option
plans using the intrinsic value-based method prescribed by Accounting Principles Board Opinion No. 25, 
 (APB No. 25), and related interpretations. As such, compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. SFAS No. 123,  (SFAS
No. 123), permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. SFAS
No. 123 allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income disclosures as if the fair-value
method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the intrinsic value-based method of
accounting under APB No. 25 and has adopted the disclosure requirements of SFAS No. 123.
The Company calculates stock-based compensation pursuant to the disclosure provisions of SFAS No. 123 using the straight-line
method over the vesting period of the option. Had the Company
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determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income
(loss) would have been:
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Net income (loss), as reported $(211,600)13,239 1,671
Stock-based compensation expense included
in reported net income (loss) 2,203 1,260 15
Stock-based compensation determined under
fair value based method 40 (1,387)(658)
Pro forma net income (loss) $(209,357)13,112 1,028
The pro forma impact on income for the year ended December 31, 2001 assumes estimated forfeitures for those employees subject to
termination due to the discontinued competitive communications operations. The pro forma impact on income for the year ended
December 31, 2002 assumes estimated forfeitures for an employee who retired in January 2003. The pro forma impact on income for the
year ended December 31, 2003 assumes estimated forfeitures for an employee who retired in December 2003. The stock-based
compensation expense does not agree to the consolidated statements of operations due to the credit adjustments related to the stock
appreciation rights of $(0.9) million and $(0.3) million for the years ended December 31, 2001 and 2002, respectively. There were no
adjustments to the stock appreciation rights in the year ended December 31, 2003, as the fair market value per share of the Company's
common stock remained flat during the year. The pro forma effects are not representative of the effects on reported net income for future
years.
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The Company prospectively adopted SFAS No. 150, effective July 1, 2003. The SFAS No. 150 adoption had no impact on net income
(loss) attributed to common shareholders for any of the periods presented. SFAS No. 150 requires the Company to classify as a long-term
liability its Series A Preferred Stock and to reclassify dividends and accretion from the Series A Preferred Stock as interest expense. Such
stock is now described as "Preferred Shares Subject to Mandatory Redemption" in the Consolidated Balance Sheet as of December 31, 2003
and dividends and accretion on these shares are now included in pre-tax income whereas previously they were presented as a reduction to
equity (a dividend) and, therefore, a reduction of net income available to common shareholders.
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Under the provisions of SFAS No. 131,  the Company's only
separately reportable business segment is its traditional telephone operations. The Company's traditional telephone operations are conducted
in rural, suburban and small urban communities in various states. The operating income of this segment is reviewed by the chief operating
decision maker to assess performance and make business decisions. Due to the sale of the Company's competitive communications
operations, such operations (which were previously reported as a separate segment) are classified as discontinued operations.
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Certain amounts previously reported have been reclassified to conform to current year presentation.