FairPoint Communications 2005 Annual Report Download - page 56

excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. We
expect 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. The Company will adopt SFAS No. 123(R) effective January 1, 2006, with no restatement of any prior periods.
In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB No. 143. FIN 47
clarifies that the term conditional asset retirement obligation as used in FASB No. 143 refers to a legal obligation to perform an asset retirement activity in
which the timing or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for the year ended
December 31, 2005. We account for our wireline operations under SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation”. Therefore, in
accordance with federal and state regulations, we are following the FCC’s Part 32 accounting. As a result of our accounting under SFAS No. 71, the adoption
of FIN 47 had no impact on us.

We do not believe inflation has a significant effect on our operations.

As of December 31, 2005, approximately 82% of our indebtedness bore interest at fixed rates or effectively at fixed rates. Our earnings are affected by
changes in interest rates as our long-term indebtedness under our credit facility has variable interest rates based on either the prime rate or LIBOR. If interest
rates on our variable rate indebtedness (excluding variable rate indebtedness which has its interest rate effectively fixed under interest rate swap agreements)
outstanding at December 31, 2005 increased by 10%, our interest expense would have increased, and our income from continuing operations before taxes
would have decreased, by approximately $0.7 million for the twelve months ended December 31, 2005.
We have entered into interest rate swaps to manage our exposure to fluctuations in interest rates on our variable rate indebtedness. The fair value of these
swaps was a net asset of approximately $8.8 million at December 31, 2005. The fair value indicates an estimated amount we would have received to cancel the
contracts or transfer them to other parties. In connection with our credit facility, on February 8, 2005, we entered into three interest rate swap agreements, with
notional amounts of $130.0 million each, to effectively convert a portion of our variable interest rate exposure to fixed rates ranging from 3.76% to 4.11%, plus
a 2.0% margin. These swap agreements expire beginning December 31, 2007 through December 31, 2009. On April 7, 2005, we entered into two additional
interest rate swap agreements, one with the notional amount of $50.0 million which will fix the interest rate at 4.69%, plus a 2.0% margin beginning on
April 29, 2005 and ending on March 31, 2011 and one with the notional amount of $50.0 million which will fix the interest rate at 4.72%, plus a 2.0%
margin, beginning on June 30, 2005 and ending on March 31, 2012.
In addition, effective on September 30, 2005, we amended our credit facility to reduce the effective interest rate margins on the $588.5 million term
facility by 0.25% to 1.75% on Eurodollar loans and to 0.75% for Base rate loans. This amendment also effectively reduced the fixed interest rates on our
interest rate swap agreements by 0.25%.
54