FairPoint Communications 2007 Annual Report Download - page 86

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Table of Contents


In addition, during 2007, the Company entered into six forward starting swap agreements, which are contingent upon the closing of
the merger, for a total notional amount of $600 million. These swaps did not meet the criteria for hedge accounting. For the year ended
December 31, 2007, the changes in fair value of the contingent swap contracts resulted in a $17.2 million pre-tax loss included in other
income (expense) on the consolidated statement of operations. Of the $17.2 million liability, $4.1 million is classified as current and
$13.1 million is classified as long term on the consolidated balance sheet.
Subsequent to December 31, 2007, we entered into two additional swap agreements that are contingent on the merger. One swap
agreement is for a notional amount of $300 million at a rate of 4.49% (or 6.24% including the applicable margin). This agreement is
effective as of December 31, 2010 and expires on December 31, 2012. The second swap agreement is for a notional amount of
$250 million at a rate of 3.25% (or 5.00% including the applicable margin). This agreement expires on December 31, 2010.
Subsequent to December 31, 2007, events in the global credit markets have impacted the expectation of near-term variable borrowing
rates. As a result, the Company has experienced an adverse impact to the fair value liability of its interest rate swaps. As of February 15,
2008, the fair value liability has increased approximately $24.3 million from a balance of $34.1 million as of December 31, 2007 to
$58.4 million as of February 15, 2008.

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),  (SFAS No. 123(R)).
SFAS No. 123(R) establishes accounting for stock-based awards granted in exchange for employee services. Accordingly, for employee
awards which are expected to vest, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and
is recognized as expense on a straight-line basis over the requisite service period, which generally begins on the date the award is granted
through the date the award vests. The Company elected to adopt the provisions of SFAS No. 123(R) using the prospective application
method for awards granted prior to becoming a public company and valued using the minimum value method, and using the modified
prospective application method for awards granted subsequent to becoming a public company.
Prior to the adoption of SFAS No. 123(R), the Company accounted for its stock option plans using the intrinsic-value-based method
prescribed by Accounting Principles Board Opinion No. 25, , and related interpretations. As
such, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the
exercise price.

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.

Earnings per share has been computed in accordance with SFAS No. 128, Basic earnings per share is
computed by dividing net income by the weighted average number of common shares outstanding for the period. Except when the effect
would be anti-dilutive, the diluted earnings per share calculation includes the impact of restricted units, restricted stock and shares that
could be issued under outstanding stock options.
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