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<SEC-DOCUMENT>0000912057-00-015156.txt : 20000331
<SEC-HEADER>0000912057-00-015156.hdr.sgml : 20000331
ACCESSION NUMBER: 0000912057-00-015156
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 28
CONFORMED PERIOD OF REPORT: 19991231
FILED AS OF DATE: 20000330

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: MJD COMMUNICATIONS INC
CENTRAL INDEX KEY: 0001062613
STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813]
IRS NUMBER: 133725229
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231

FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 333-56365
FILM NUMBER: 588540

BUSINESS ADDRESS:
STREET 1: 521 EAST MOREHEAD ST
STREET 2: STE 250
CITY: CHARLOTTE
STATE: NC
ZIP: 28202
BUSINESS PHONE: 7043448150
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>10-K405
<TEXT>

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-K

(MARK ONE)

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 333-56365
------------------------

MJD COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C>
DELAWARE 13-3725229
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

521 EAST MOREHEAD STREET, SUITE 250 28202
CHARLOTTE, NORTH CAROLINA (Zip Code)
(Address of Principal Executive Offices)
</TABLE>

------------------------

Registrant's Telephone Number, Including Area Code: (704) 344-8150.

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

As of March 15, 2000, the registrant had outstanding 11,522,508 shares of
Class A Common Stock, 12,543,728 shares of Class B Common Stock and 4,269,440
shares of Class C Common Stock. None of the shares of Class A Common Stock or
Class B Common Stock was held by non-affiliates. All of the shares of Class C
Common Stock were held by non-affiliates and the Company estimates the market
value of such shares as of March 15, 2000 was approximately $56 million.

MJD COMMUNICATIONS, INC. ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
- --------------------- --------
<S> <C> <C>
Index....................................................... 2

PART I
1. Business.................................................... 3
2. Properties.................................................. 9
3. Legal Proceedings........................................... 9
4. Submission of Matters to a Vote of Security Holders......... 9

PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
6. Selected Financial Data..................................... 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 20
8. Financial Statements and Supplementary Data................. 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 56

PART III
10. Directors and Executive Officers of the Registrant.......... 56
11. Executive Compensation...................................... 58
12. Security Ownership and Beneficial Management................ 62
13. Certain Relationships and Related Transactions.............. 63

PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8K.......................................................... 66
Independent Auditors Report and Schedule.................... 66
Signatures.................................................. S-2
Exhibit Index
</TABLE>

2
<PAGE>
PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

MJD Communications, Inc. ("MJD" or the "Company") is a rapidly growing
facilities-based integrated communications provider ("ICP") offering a suite of
bundled voice and data products to small to medium-sized business subscribers in
ex-urban markets (generally markets with populations of less than 100,000) and
predominantly residential subscribers in its rural markets. The Company is
seeking to position itself as a leading single source provider of voice
services, including local services, intra and inter-state access services, long
distance services and other voice communications services and data product
offerings, such as Internet access and digital subscriber line ("DSL") services,
to meet the growing demand for broadband services. The Company is continually
evaluating new product offerings, particularly with an emphasis on emerging data
services such as IP Centrex, managed services, e-commerce hosting, application
hosting and community portals. MJD believes it is executing a capital efficient
ICP business strategy by leveraging the switching infrastructure at its acquired
rural local exchange carriers ("RLEC") to edge out into new markets in proximity
to areas served by its RLECs. As of December 31, 1999, the Company was providing
service to over 190,000 access lines located in thirteen states throughout the
United States.

The Company was formed in 1991 to seek consolidation opportunities in the
RLEC market. The Company's senior management team has demonstrated its ability
to successfully acquire, integrate and operate RLECs and to expand its business
through its ICP business strategy. A key component of the Company's ICP business
strategy is to edge out into tier four and select tier three markets that are
within a 200 mile radius of areas served by its RLECs. MJD intends to seek and
acquire strategically located RLECs that will enable the Company to be an early
entrant in its target markets. By leveraging its existing RLEC switching
infrastructure, the Company believes it is deploying a highly capital efficient
network infrastructure that will support present and future broadband data and
voice services.

The Company launched its ICP business strategy in April 1998 thorough its
wholly-owned competitive local exchange carrier ("CLEC") subisidiary, FairPoint
Communications Corp. ("FairPoint"), and as of December 31, 1998, served
approximately 10,000 access lines in 10 markets. As of March 1, 2000, FairPoint
had entered an additional 121 markets, increasing the total number of markets
served to 131. As of March 1, 2000, FairPoint had provisioned an additional
41,000 access lines resulting in a total of approximately 51,000 access lines
located in the Northeast and Pacific Northwest region of the United States. The
Company intends to serve over 220 markets by December 31, 2000, including
markets in the Southeast and Southwestern regions and to increase the number of
access lines served by FairPoint to approximately 140,000 access lines. Since
1993, the Company has acquired 24 RLECs located in twelve states and as of
December 31, 1999, served over 150,000 access lines. The Company has announced
two pending acquisitions strategically located in the southeastern United States
that will increase the number of RLEC access lines served to approximately
210,000. The Company believes these two strategic RLEC acquisitions and future
RLEC acquisitions will facilitate continued ICP growth.

The Company believes it has identified a market opportunity in under-served
markets in tier four and select tier three tier markets. There are approximately
930 of these markets representing approximately 7.7 million business lines and
telecommunications spending of approximately $11.1 billion. By leveraging its
RLEC platform and entering these largely under-served markets, the Company
believes it can successfully compete against the incumbent local exchange
carrier ("ILEC") for voice services and continually evolve its ICP strategy to
drive additional market penetration and revenues. The Company's ICP business
strategy is to enter new markets on either an unbundled network element platform
("UNE-P") or resale basis. Once the Company has achieved sufficient market share
to justify the required capital investment, the Company will migrate its
customers to its own facilities-based services ("on-switch") by co-locating in
the ILEC's central office. This capital efficient strategy, together with the
Company's ability to leverage the RLEC switching infrastructure, allows the
Company to enter new markets and, following the co-location process, to
efficiently route its customer traffic back through its RLEC network and host
switching facility.

3
<PAGE>
As of March 1, 2000, the Company had completed co-locations in 12 markets and
expects to complete approximately additional 120 co-locations by December 31,
2000. The Company's co-located facilities include installation of both data and
voice network equipment. The Company's central office host remote sites have
advanced digital switches which allow the Company to provide advanced voice and
data services. Currently, the Company has deployed DSL technology in 15 of its
central offices. The Company is designing and expects to deploy an advanced
packet switching network and pursue voice over Internet protocol/voice telephony
over asynchronous transfer mode ("VOIP/VTOA") architecture to augment its RLEC
switching platform.

After giving effect to the conversion of the Company's Class B Common Stock
and Series D Preferred Stock (which will occur automatically upon the receipt of
all required regulatory approvals, the ("Conversion") as described herein,
senior management of the Company owned approximately 22.6% of the Class A Common
Stock of the Company on a fully diluted basis as of March 15, 2000.

RECENT DEVELOPMENTS

The Company has entered into a Stock Purchase Agreement dated as of December
23, 1999 to acquire TPG Communications, Inc. for approximately $210.0 million.
This company serves approximately 52,000 access lines located primarily in the
Florida panhandle region. The Company also has entered into a Stock Purchase
Agreement dated as of December 10, 1999, with Peoples Mutual Telephone Company
and certain other parties to acquire an RLEC for approximately $35.0 million.
This company serves approximately 7,600 access lines in Central Virginia. These
acquisitions (the "Pending Acquisitions") are expected to close during the
second quarter of 2000 and represent platforms which the Company will use to
expand its CLEC activities into the Southeast.

In January 2000, the Company completed an equity financing and
recapitalization (the "Equity Financing") pursuant to which (i) investment
partnerships and other parties affiliated with or related to Thomas H. Lee
Equity Fund IV, L.P. (collectively "THL"), investment partnerships affiliated
with Kelso & Company ("Kelso" and collectively with THL, the "Equity
Investors"), certain other institutional investors and members of management
acquired equity interests in the Company, and (ii) Carousel Capital Partners,
L.P. ("Carousel") sold all of its equity interests in the Company. The net cash
proceeds of approximately $159.3 million to the Company from the Equity
Financing have been and are expected to be used to repay certain amounts
outstanding under the Company's revolving credit facilities and to fund the
Company's Pending Acquisitions and its CLEC strategy. After giving effect to the
Conversion, THL and Kelso owned, as of March 15, 2000, approximately 37.8% and
32.1%, respectively, of the Class A Common Stock on a fully diluted basis. The
Equity Investors have invested an aggregate of approximately $375.5 million of
equity capital in MJD. The Company believes it benefits from the Equity
Investors' financial and management expertise and financial support.

INDUSTRY OVERVIEW

The Telecommunications industry is experiencing rapid growth driven by
deregulation and new technologies facilitating an increase in the number and
functionality of voice, data and broadband product offerings.

The emergence of CLECs has been promoted by Congress through the
Telecommunications Act of 1996, as amended (the "Telecommunications Act"), and
furthered by federal and state regulatory policies. The Telecommunications Act
and subsequent regulatory policy have provided CLECs with access to the ILEC's
infrastructure and, most importantly, an ability to reach the end user.
Legislation and regulatory policy, technological advances and increased demand
for broadband product offerings and bundled services have been the primary
drivers behind the growth of the CLEC sector.

The ILEC industry is recognized by the Federal Communications Commission
("FCC") as consisting of a few large non-rural carriers such as the regional
bell operating companies ("RBOCs") and rural carriers that are generally small
independently owned companies or RLECs.

4
<PAGE>
COMPETITIVE LOCAL EXCHANGE CARRIER INDUSTRY. The Telecommunications Act
enabled the creation Local market or long-distance of the CLEC industry by
facilitating competition in the local exchange for the end user's communications
business. It is estimated that the total U.S. communications market approximates
$240 billion, annually. Currently, industry analysts estimate that CLECs have
less than a five percent of that market share.

RURAL TELEPHONE INDUSTRY. The FCC estimates that RLECs serve approximately
eight percent of the nation's access lines and 38% of the US land area. The
average population density for areas served by RLECs is 13 persons per square
mile, compared to 105 persons per square mile for non-rural carriers. RLECs
serve approximately 19 access lines per square mile while non-rural carriers
serve 128 access lines per square mile.

According to United States Telecom Association data, there are approximately
1,200 independent telephone companies in the U.S., each of which serves less
than 25,000 access lines. Generally, these small, privately held telephone
companies operate in sparsely populated rural areas where competition from other
providers (wireline or wireless) is limited because of the generally unfavorable
economics of constructing and operating such competitive systems in rural areas.
The Company believes that many of these RLEC owners are increasingly interested
in selling their businesses as the growing technical, administrative and
regulatory complexities of the local telephone business challenge their existing
management capabilities. Also, certain large telephone companies are selling
many of their small rural exchanges to focus their attention on their major
metropolitan operations, which generate the greatest percentage of their
consolidated revenue and which are increasingly threatened by competition. The
Company believes the large companies will not continue to invest time and
capital in their rural operations, which represent a relatively insignificant
portion of their consolidated operations. Under these circumstances, the Company
believes that it will continue to have opportunities to acquire RLECs and rural
telephone operations currently owned by the large telephone companies which will
allow the Company to accelerate the growth of the CLEC business.

SERVICES

The Company is continually investing in its telecommunications network to
ensure that it is and will be capable of meeting the growing demand for advanced
voice and data communications services from its customers. These investments
include deployment of technology that maintains the traditional suite of
products, but also provides for broadband services by transitioning from a
circuit-switched to a packet-switched network. The Company believes it is able
to efficiently and reliably provide all of the telecommunications services
required by its customers, thereby enhancing the Company's ability to build upon
its recognized local brand identity within each of its markets.

The Company offers a bundled approach to its voice and data product
offerings.

Voice services include basic local service, intrastate and interstate
access, Centrex, enhanced calling features, long distance and other services
such as dedicated or private line, cable television services and wireless
telephony. Data products include full service Internet, dial up Internet access,
DSL or high-speed data connectivity services, frame relay/ATM and web hosting.
DSL is a technology enabling high-speed data access across existing telephone
lines.

The Company is continually evaluating new product offerings and is currently
developing IP Centrex, managed services, e-commerce hosting, application hosting
and community portals.

GENERATION OF REVENUE

The Company generates revenue primarily through: (i) the provision of local
telephone service to small to medium sized business and residential subscribers
that include: dial tone, ISDN, Centrex, private lines, and switched data
services; (ii) the provision of data services which include Internet access, DSL
(which provides high-speed connection to the Internet or other broadband
services over existing copper lines while simultaneously providing for
traditional voice dial up service.) and frame relay/asynchronous

5
<PAGE>
transfer mode network; (iii) the provision of network access to IXCs for
origination and termination of interstate and intrastate long distance calls;
(iv) in the case of the RLECs, Universal Service Support Fund payments that
supplement the RLECs high-cost of providing basic local service; and (v) the
provision of ancillary services such as billing and collection, long distance
resale, enhanced services, wireless services, cable television services, and
customer premises equipment sales.

SALES AND MARKETING

The Company's marketing approach emphasizes locally managed,
customer-oriented sales, marketing and service. The Company's objective is to
differentiate itself from its competitors by providing superior product and
customer support services in its markets.

The Company had 565 employees engaged in sales, marketing and customer
service at December 31, 1999. The Company targets business, government, and
institutional customers in tier four and select tier three markets and to its
predominantly residential RLEC customers by offering complete voice and data
solutions to meet its customers' communications needs.

COMPETITION

The Company believes that the Telecommunications Act and other recent
actions taken by the FCC and state regulatory authorities promote competition in
the provision of telecommunications services.

The Company is pursuing the opportunity to be the preferred
telecommunications provider of choice in the markets in which the Company
operates. The Company is executing a "first to market" strategy in ex-urban or
fourth and select third tier markets in proximity to the Company's RLEC markets.
The Company believes its targeted ex-urban markets will support only one or two
competitors in addition to the ILEC and, as a result, believes it is important
to be an early entrant in each of its markets. The Company has successfully
attracted and retained its customers through high quality customer service and
comprehensive voice and data product offerings. The Company believes that its
success-based, capital efficient business plan will provide a competitive
advantage in its markets.

The Company intends to pursue the acquisition of RLECs that are
strategically located and accelerate the capital efficient expansion of its ICP
business. The Company expects that there will be increased competition for
suitable acquisition candidates from other competitors engaged in the
acquisition of RLECs. There are approximately 1,200 small independent companies,
many of which may be suitable acquisition candidates. However, a continuing
trend toward business combinations and alliances in the telecommunications
industry may increase competition for such acquisition candidates.

NETWORK FACILITIES

The Company is designing and expects to deploy an advanced packet switching
network and to pursue VOIP/VTOA (voice over Internet protocol/voice telephony
over ATM) architecture to augment the RLEC host switches. The Company believes
this packet switched architecture will allow it to efficiently deliver
integrated voice and data services to its customers at a lower cost than
traditional circuit switched architecture. The Company expects to continue to
leverage use of the RLEC switches and technical personnel as it deploys its
network. The Company expects to continue co-locating remote switching facilities
in the incumbent RBOC central office with the traffic then transported to the
existing RLEC host switch. In some cases, the Company will build stand-alone
switches in markets where transport costs back to the RLECs are unusually high,
but in most cases the current host-remote network structure is utilized.
DSL-enabled integrated access technology is being deployed in all central office
co-locations to minimize the last-mile local loop expense, as well as to provide
significant broadband capacity to the Company's customers. The Company assembles
a long-haul network at low cost through dark fiber purchases, UNE leases,
selected builds and strategic partnerships. This provides lower-cost transport
for the host-remote links, lower the cost of long distance transport and enable
the company to continue the growth of its long distance wholesale operation.

6
<PAGE>
As of December 31, 1999, (i) the Company's RLEC franchise areas included 108
exchanges serving approximately 150,000 access lines that were located across
approximately 13,100 square miles and (ii) the Company maintained over 14,700
miles of copper plant and 1,200 miles of fiber optic plant that interconnect the
Company's remote central offices with IXCs serving the Company's subscribers.
Upon completion of the Pending Acquisitions, the Company's RLECs franchise area
will include 131 exchanges serving approximately 210,000 access lines. The
Company's central office host and remote sites have advanced digital switches
manufactured by Nortel or Siemens and current generic software which allows the
Company to provide advanced calling features, products and services to its
subscribers. The outside plant consists of transport and distribution delivery
networks connecting the Company's host central office with remote central
offices and ultimately with the Company's customers. Fiber optic technology is
being deployed throughout the Company's network and is the primary transport
technology between the Company's host and remote central offices and
interconnection points with the RBOCs, GTE, long distance carriers and other
RLECs. Where topography and geography permit, cable is generally buried,
reducing the risk of service interruption from adverse weather.

The Company's fiber optic transport systems are primarily synchronous
optical networks ("SONET"). This type of network allows the Company to build and
design more durable networks, while utilizing the less durable asynchronous
optical systems for limited local or specialized applications. The Company's
fiber optic transport system is capable of supporting increasing customer demand
for high bandwidth transport services and applications.

The Company has integrated numerous elements of its network to offer a
variety of services and applications that meet increasingly sophisticated rural
communications customers. These network elements include SS7 signaling networks,
voice-messaging platforms, DSL capability , and numerous customer located key
and PBX systems. As the telecommunications industry is subject to rapid and
significant changes in technology, customer demand and competitive pressures,
the Company endeavors to introduce additional elements of functionality to its
network, including frame relay and ATM switches, local number portability, AIN
services, and VOIP opportunities.

The Company has been segmenting its rural copper plant network into Carrier
Serving Areas ("CSA's"), effectively multiplying embedded copper plant capacity
and enabling unencumbered service deployment throughout the Company's service
areas. The Company's strategy is to push the intelligence and unencumbered
capabilities of host digital central office switch and transport closer to its
increasingly sophisticated rural communications customers by deploying remote
switches throughout the Company's service areas.

The Company plans to prudently invest capital to maintain, replace and
upgrade its entire telecommunications infrastructure. The Company continually
reviews expenditures to ensure they are economically justifiable and result from
an integrated network planning process.

EMPLOYEES

As of December 31, 1999, the Company employed a total of 947 full-time
employees of which 83 employees are represented by unions. The Company has
collective bargaining agreements with (i) Local 23-26 of the International
Brotherhood of Electrical Workers (AFL-CIO) 107 covering 7 employees employed by
its Northland Telephone Company of Vermont subsidiary; (ii) Local 1115 of the
Communications Workers of America, covering 15 employees employed by its
subsidiary, Chautauqua & Erie Telephone Corp., in New York; and (iii) Local 166
of the International Brotherhood Electrical Workers (AFL-CIO), covering 61
employees employed by its Taconic Telephone Corp. subsidiary in New York. The
contracts expire in February 2002, January 2003 and March 2000, respectively.
The Company is currently in final negotiation on the renewal of the March 2000
contract. The Company cannot predict whether agreement will be reached with the
union on such contract.

The Company believes the state of its relationship with its employees to be
good.

7
<PAGE>
ITEM 2. PROPERTIES

The Company either leases or owns its administrative offices and generally
owns its maintenance facilities, rolling stock, co-location equipment, central
office and remote switching platforms and outside plant. Administrative and
maintenance facilities are generally located in or near community centers. Co-
location equipment is located in leased space in the incumbent local exchange
carrier's central office. Central offices are often within the administrative
building and outlying customer service centers. Auxiliary battery or other
non-utility power sources are at each central office to provide uninterrupted
service in the event of an electrical power failure. Transport and distribution
network facilities (outside plant) include fiber optic backbone and copper wire
distribution facilities, which connect customers to remote switch locations or
to the central office and to points of presence or interconnection with the
IXCs. These facilities are located on land pursuant to permits, easements or
other agreements. Rolling stock includes service vehicles, construction
equipment and other required maintenance equipment.

ITEM 3. LEGAL PROCEEDINGS

The Company currently and from time to time is involved in litigation and
regulatory proceedings incidental to the conduct of its business, but the
Company is not a party to any lawsuit or proceeding which, in the opinion of the
Company, is likely to have a material adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the security holders of MJD during
the fourth quarter of the fiscal year.

8
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

There is no established public market for the common equity of the Company.
Substantially all of the Company's outstanding common equity securities are
owned by Kelso, certain institutional investors and the Company's executive
officers and directors. THL owns all of the Company's outstanding preferred
equity.

There were 5,359,860 options to purchase shares of Class A Common Stock
outstanding as of March 15, 2000, of which 592,460 were fully vested. Upon
receipt of all required regulatory approvals, all of the outstanding shares of
Class B Common Stock and Series D Preferred Stock will be automatically
converted into an equal number of shares of Class A Common Stock.

There are no shares of common stock that could be sold pursuant to Rule 144
under the Securities Act or, other than pursuant to the Registration Rights
Agreement (as defined herein), that MJD has agreed to register under the
Securities Act for sale by the security holders.

There are no shares that are being, or have been publicly proposed to be,
publicly offered by MJD in which such offering could have a material effect on
the market price of MJD's common equity.

The ability of the Company to pay dividends is governed by restrictive
covenants contained in the indenture governing its publicly held debt as well as
restrictive covenants in the Company's bank lending arrangement. The Company has
never paid cash dividends on its equity securities and currently has no
intention of paying cash dividends on its equity securities for the foreseeable
future.

On January 20, 2000, the Company declared a stock split in the form of a
stock dividend of 19 shares for each share of capital stock held of record as of
January 31, 2000 (the "Stock Split"). All share numbers and purchase price
amounts disclosed herein have been adjusted to give effect to this stock
dividend.

ITEM 6. SELECTED FINANCIAL DATA

The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1999, are derived from the
consolidated financial statements of MJD Communications, Inc. and its
subsidiaries, which have been audited by KPMG LLP, independent certified public
accountants. Dollar amounts are presented in thousands.

9
<PAGE>

<TABLE>
<CAPTION>
ACTUAL
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total operating expenses.................... 135,839 75,445 35,324 20,157 17,343
-------- --------- ------- ------- -------
Income from operations...................... 11,700 16,562 12,439 10,198 7,406
-------- --------- ------- ------- -------
Other income (expense):
Net gain (loss) on sale of investments and
other assets............................ 512 651 (19) (3) (30)
Interest income........................... 446 442 212 180 225
Dividend income........................... 1,452 1,119 1,182 667 664
Interest expense.......................... (51,185) (27,170) (9,293) (9,605) (7,267)
Other, net................................ 2,520 885 140 (15) 33
-------- --------- ------- ------- -------
Total other expense......................... (46,255) (24,073) (7,778) (8,776) (6,375)
-------- --------- ------- ------- -------
Earnings (loss) before income taxes and
extraordinary item........................ (34,555) (7,511) 4,661 1,423 1,031
Income tax (expense) benefit................ 5,615 2,112 (1,876) (1,462) (547)
-------- --------- ------- ------- -------
Earnings (loss) before extraordinary item
and minority interest..................... (28,940) (5,399) 2,785 (39) 484
Extraordinary item.......................... -- (2,521) (3,611) -- --
-------- --------- ------- ------- -------
Earnings (loss) before minority interest.... (28,940) (7,920) (826) (39) 484
Minority interest in income of
subsidiaries.............................. (100) (80) (62) (33) (6)
-------- --------- ------- ------- -------
Net earnings (loss)......................... $(29,040) (8,000) (888) (72) 478
======== ========= ======= ======= =======

BALANCE SHEET DATA:
Cash and cash equivalents................... $ 9,923 $ 13,241 $ 6,822 $ 4,253 $ 3,672
Working capital............................. 13,880 10,778 108 596 1,026
Property, plant and equipment, net.......... 178,296 142,321 61,207 41,615 37,048
Total assets................................ 516,255 442,112 144,613 97,020 79,218
Long-term debt, net of current portion...... 458,529 364,610 131,912 73,958 64,180
Redeemable preferred stock.................. -- -- 130 10,689 6,701
Total stockholders' equity (deficit)........ (11,581) 9,886 (10,939) (2,142) 103

OTHER FINANCIAL DATA:
Adjusted EBITDA(1).......................... $ 48,162 $ 39,668 $22,669 $17,639 $14,050
Capital expenditures........................ 43,509 12,433 8,262 8,439 4,439
Ratio of earnings to fixed charges(2) (3)... -- -- 1.5x 1.1x 1.1x

SUMMARY CASH FLOW DATA:
Net cash provided by operating activities... $ 7,704 $ 14,867 $ 9,839 $ 9,772 $ 6,039
Net cash provided by (used in) investing
activities................................ (76,610) (225,522) (38,967) (19,790) (4,481)
Net cash provided by (used in) financing
activities................................ 65,588 217,074 31,697 10,599 (2,903)

OPERATING DATA:
Access lines in service..................... 190,722 136,374 48,731 34,017 28,737
</TABLE>

- ------------------------

(1) Adjusted EBITDA represents net earnings (loss) plus interest expense, income
taxes, depreciation and amortization, and extraordinary items. Adjusted
EBITDA is presented because management believes it provides useful
information regarding the Company's ability to incur and/or service debt.
Management expects that investors may use this data to analyze and compare
other telecommunications companies with the Company in terms of operating
performance, leverage and liquidity. Adjusted EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be construed as a substitute for consolidated net earnings (loss)
as a

10
<PAGE>
measure of performance, or for cash flow as a measure of liquidity. The
definition of EBITDA in the indenture governing the Notes (as defined
herein) (the "Indenture") is designed to determine EBITDA for the purposes
of contractually limiting the amount of debt which the Company may incur.
Adjusted EBITDA presented herein differs from the definition of EBITDA in
the Indenture, which excludes from the calculation of EBITDA (i) net income
of Unrestricted Subsidiaries (as defined in the Indenture) unless such net
income is actually dividended to the Company or a Restricted Subsidiary (as
defined in the Indenture) and (ii) net income of any Restricted Subsidiary
to the extent there is any restriction on the ability of such Restricted
Subsidiary to pay dividends to the Company (except that the Company's equity
in the net income of any such Restricted Subsidiary is included to the
extent of dividends actually received by the Company from such Restricted
Subsidiary). The definition of EBITDA in the Indenture is a component of the
term "Pro Forma EBITDA" in the Indenture, which is used in a financial
covenant calculation therein. Pro Forma EBITDA, as defined in the Indenture,
differs from Adjusted EBITDA primarily because it is calculated after giving
effect to cost savings the Company believes will be achieved during the
applicable period. Adjusted EBITDA as calculated by the Company is not
necessarily comparable to similarly captioned amounts of other companies.

(2) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes, minority interest, income or
loss from equity investees and extraordinary items, plus distributed income
of equity investees, amortization of capitalized interest, and fixed
charges. Fixed charges include interest expense on all indebtedness,
capitalized interest and rental expense on operating leases representing
that portion of rental expense deemed to be attributable to interest. The
Company had a deficiency of $34.5 million and $7.5 million to cover fixed
charges in 1999 and 1998, respectively.

(3) On January 20, 2000, the Company repaid borrowings of approximately
$75.2 million under the Company's senior secured revolving credit facility
and approximately $27.1 million under FairPoint's revolving credit facility.
See note 2 to the consolidated financial statements for additional
information. Interest expense on these borrowings was approximately $1.3
million. Interest expense under the Company's revolving credit facility was
approximately $0.06 million during 1998. During 1998, FairPoint did not
incur debt; therefore there was no interest expense reported. For purposes
of calculation of the pro forma ratio of earnings to fixed charges, the net
pro forma change to interest expense of $1.3 million and $0.06 million in
1999 and 1998, respectively, was added to the Company's earnings as defined
in note (2) above. The Company had a pro forma deficiency of $33.2 million
and $7.5 million to cover fixed charges in 1999 and 1998, respectively.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

GENERAL. MJD is a rapidly growing facilities-based ICP offering a suite of
bundled voice and data products to small to medium-sized business subscribers in
ex-urban markets (generally markets with populations of less than 100,000) and
predominantly residential subscribers in its rural markets residential. The
Company is seeking to position itself as a leading single source provider of
voice services, including local services, intra and inter-state access services,
long distance services and other voice communications services, and data product
offerings, such as Internet access and DSL services, to meet the growing demand
for broadband services. MJD believes it is executing a capital efficient ICP
business strategy by leveraging the switching infrastructure at its acquired
RLECs to edge out into new markets in proximity to areas served by its RLECs. As
of December 31, 1999, the Company was providing service to over 190,000 access
lines located in thirteen states throughout the United States.

For the year ended December 31, 1999, the Company had operating revenues and
Adjusted EBITDA (as defined in Note 1 to "Selected Financial Data") of
approximately $147.5 million and approximately $48.2 million, respectively. The
Company provided net cash of approximately $7.7 million from operating

11
<PAGE>
activities, used net cash of approximately $76.6 million in investing activities
and provided net cash of approximately $65.6 million from financing activities
for the year ended December 31, 1999.

The growth realized by the Company through its ICP business strategy is
supported by the stable growth and cash flow from its RLECs that typifies the
stable economic and demographic characteristics of the RLECs rural markets.
Historically, the primary reason for the Company's growth in revenue and cash
flow has been the acquisition of additional RLECs. In the future, the Company
believes FairPoint's growth will have an increasing impact on the Company's
results of operations, the Company expects that its rate of growth will
accelerate and its results of operations will be impacted by the negative cash
flow to be reported by FairPoint during the market expansion phase of its ICP
business plan.

OPERATING REVENUES: The Company generates revenue primarily through: (i) the
provision of local telephone service to customers within its service areas;
(ii) the provision of network access to IXCs for origination and termination of
interstate and intrastate long distance telephone calls; and (iii) the provision
of other services such as billing and collection, long distance resale, enhanced
services, wireless services, cable television services, Internet access services
and customer premises equipment sales; and (iv) FairPoint's operations. The
revenues listed in clauses (i) and (ii) above are classified by the Company as
"Switched services." The revenues listed in clause (iii) above are classified by
the Company as "Other revenue", except for services resold which are classified
as "Resold services". The FairPoint revenues are classified by the Company as
"Resold services".

<TABLE>
<CAPTION>
% OF REVENUE
----------------------------------
REVENUE SOURCE 1999 1998 1997
- -------------- -------- -------- --------
<S> <C> <C> <C>
Switched services..................................... 73.5% 78.4% 82.2%
Resold services....................................... 15.1% 8.5% 9.5%
Other services........................................ 11.4% 13.1% 8.3%
</TABLE>

OPERATING EXPENSES: The Company's operating expenses are categorized as plant
operations, corporate and customer service, depreciation and amortization, cost
of services resold and other general and administrative expenses. Year to year
operating expense changes are influenced by access line growth, the Company's
acquisition activity, general business inflationary adjustments and the expenses
of FairPoint. Plant operations expenses consist of operating expenses incurred
by the Company in connection with the operation of its central offices and
outside plant facilities and related operations. Corporate and customer service
expenses consist of expenses generated by the Company's general management,
accounting, engineering, marketing and customer service functional groups. Cost
of services resold are the expenses incurred to provide long distance resale by
STLD and local and long distance resale by FairPoint. Other general and
administrative expenses are expenses such as property taxes and other
miscellaneous expenses.

OTHER (INCOME) EXPENSES: The Company's other income includes interest income,
dividends, gain or loss on sale of investments and other assets and other
miscellaneous, non-operating income. The Company's other expenses consist
primarily of interest on the Company's debt and other non-operating expenses.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998

OPERATING REVENUES. Operating revenues increased $55.5 million to
$147.5 million in 1999 from $92.0 million in 1998 for the year ended
December 31. The 1999 Acquisitions and the acquisitions completed by the Company
in 1998 (the "1998 Acquisitions") accounted for $40.3 million of the revenue
increase while for the RLECs owned and operated for a comparable period,
operating revenues increased by $4.6 million to $61.9 million from
$57.3 million. FairPoint's operating revenues increased $10.6 million to
$11.7 million in 1999 compared to $1.1 million in 1998, as a result of the
growth of FairPoint's operations.

Basic local service revenue increased $9.1 million to $26.8 million in 1999
from $17.7 million in 1998 for the year ended December 31. This revenue increase
is primarily attributable to an increase in access

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<PAGE>
lines from internal growth and access lines acquired in the 1999 Acquisitions
and the 1998 Acquisitions. The 1999 Acquisitions and the 1998 Acquisitions
accounted for 96,523 access lines, or 64%, the total RLEC access lines operated
by the Company at December 31, 1999. The RLECs owned and operated by the Company
for the comparable periods achieved internal growth of 3,103 access lines. The
1999 Acquisitions and the 1998 Acquisitions contributed $8.4 million of the
increase in basic local service revenue in 1999 while the RLECs owned and
operated for a comparable period contributed $0.7 million of the increase.

USSF revenue increased $2.5 million to $7.2 million in 1999 from
$4.7 million in 1998 for the year ended December 31. The 1999 Acquisitions and
1998 Acquisitions contributed $1.6 million of the increase in USSF revenue,
while for the RLECs owned and operated for a comparable period, USSF revenues
increased by $0.9 million to $5.2 million.

Network access revenue increased $24.7 million to $74.4 million in 1999 from
$49.7 million in 1998 for the year ended December 31. This revenue increase is
primarily attributable to the increase in minutes of use contributed from
internal growth and by the 1999 Acquisitions and the 1998 Acquisitions. Network
access revenue contributed by the 1999 Acquisitions and the 1998 Acquisitions
was $22.4 million. For the RLECs owned and operated for a comparable period,
network access revenue increased by $2.3 million to $34.8 million. The increase
in network access revenues in 1999 was primarily associated with cost study true
up payments received as a result of 1998 traffic pattern shifts that resulted in
higher network access revenue.

Resold service revenue increased $14.5 million to $22.3 million in 1999 from
$7.8 million in 1998 for the year ended December 31. Revenue contributed by the
1999 Acquisitions and the 1998 Acquisitions provided $2.9 million of the
increase in resold service revenues. Long distance service resold contributed
$1.0 million. FairPoint's operations provided $10.6 million of the increase in
resold service revenue.

Other revenues increased $4.7 million to $16.8 million in 1999 from
$12.1 million in 1998 for the year ended December 31. Revenue contributed by the
1999 Acquisitions and the 1998 Acquisitions provided a $4.9 million increase in
other revenues for the year ended December 31, 1999. For the RLECs owned and
operated for the comparable period by the Company, other revenues decreased
$0.2 million to $5.1 million.

OPERATING EXPENSES. Operating expenses, which include plant operations,
corporate and customer service, depreciation and amortization, cost of services
resold and other general and administrative expenses, increased $60.4 million to
$135.8 million in 1999 from $75.4 million in 1998 for the year ended
December 31. The increase was attributable in part to operating expenses
associated with the 1999 Acquisitions and the 1998 Acquisitions, which in the
aggregate accounted for $24.3 million of the increase. In addition, for the
RLECs owned and operated for a comparable period, operating expenses increased
approximately $8.3 million, or 18.8%, to $52.4 million in 1999 from
$44.1 million in 1998. The change was primarily attributable to an increase in
corporate and customer service expenses and in cost of services resold at
FairPoint. The corporate expense increase can be attributed to approximately
$0.8 million in acquisition due diligence costs incurred as a result of
unsuccessful bids to acquire certain RLEC assets, approximately $0.8 million
associated with the buyout of an employee contract and approximately
$3.4 million in executive compensation expense related to stock appreciation
rights of certain management members. Long distance toll costs increased
$1.8 million as the number of companies that receive wholesale services from
STLD has increased. In addition, the wholesale rates in the state of Maine
increased dramatically during 1999. FairPoint's operating expenses increased
$25.9 million from $5.5 million to $31.4 million in 1999.

INCOME FROM OPERATIONS. As a result of the factors described above, income from
operations decreased $4.9 million to $11.7 million in 1999 from $16.6 million in
1998 for the year ended December 31. As a percentage of revenues, income from
operations was 7.9% as compared to 18.0% in 1999 and 1998, respectively. This
margin decline in 1999 is primarily attributable to the expenses associated with
FairPoint, an increase in corporate and customer services expenses and long
distance cost of services resold. This

13
<PAGE>
trend is expected to continue for the foreseeable future as the implementation
of the FairPoint business is completed. For the RLECs owned and operated for a
comparable period, the income from operations decreased $3.7 million to
$9.5 million. The income from operations margin decreased to 15.4% from 23.1%.
This decrease was primarily attributable to an increase in corporate and
customer services expenses and the $3.4 million in executive compensation
expense related to stock appreciation rights of certain management members. The
income from operations margin for the RLECs owned and operated for a comparable
period was approximately 21% when adjusted for the $3.4 million in executive
compensation expense related to stock appreciation rights of certain management
members.

OTHER INCOME (EXPENSE). Total other expense increased $22.2 million to
$46.3 million in 1999 from $24.1 million in 1998 for the year ended
December 31. The increase was primarily attributable to an increase in interest
expense associated with the additional debt incurred to complete the 1999
Acquisitions and 1998 Acquisitions and a $13.3 million increase associated with
the retirement of certain warrants issued by our subsidiary, ST
Enterprises, Ltd. See also note 9 to the consolidated financial statements for
additional information.

EXTRAORDINARY ITEM. For the year ended December 31, 1998, the Company
recognized an extraordinary loss of $2.5 million (net of taxes) related to the
early retirement of debt.

YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

OPERATING REVENUES. Operating revenues increased $44.2 million to
$92.0 million in 1998 from $47.8 million in 1997 for the year ended
December 31. The 1998 Acquisitions and the acquisitions completed by the Company
in 1997 (the "1997 Acquisitions") accounted for $42.1 million of the revenue
increase while for the RLECs owned and operated for a comparable period,
operating revenues increased by $1.0 million to $43.9 million from
$42.9 million. FairPoint reported first year revenues of $1.1 million in 1998.

Basic local service revenue increased $10.1 million to $17.7 million in 1998
from $7.6 million in 1997 for the year ended December 31. This revenue increase
is primarily attributable to an increase in access lines from internal growth
and access lines acquired in the 1998 Acquisitions and the 1997 Acquisitions.
The 1998 Acquisitions accounted for 78,700 access lines, or 61% of total access
lines operated by the Company at December 31, 1998. The RLECs owned and operated
by the Company for the comparable periods achieved internal growth of 2,300
access lines. The 1998 Acquisitions and the 1997 Acquisitions contributed
$9.7 million of the increase in basic local service revenue in 1998 while the
RLECs owned and operated for a comparable period contributed $0.4 million of the
increase.

USSF revenue increased $0.4 million to $4.7 million in 1998 from
$4.3 million in 1997 for the year ended December 31. The 1998 Acquisitions and
1997 Acquisitions contributed $0.7 million of the increase in USSF revenue,
while for the RLECs owned and operated for a comparable period, USSF revenues
decreased by $0.3 million to $3.7 million

Network access revenue increased $22.4 million to $49.7 million in 1998 from
$27.3 million in 1997 for the year ended December 31. This revenue increase is
primarily attributable to the increase in minutes of use contributed from
internal growth, the 1998 Acquisitions and the 1997 Acquisitions, and an
increase in interstate and intrastate settlement revenue administered by NECA or
a respective state's settlement methodologies. Network access revenue
contributed by the 1998 Acquisitions and the 1997 Acquisitions was
$21.5 million. For the RLECs owned and operated for a comparable period, network
access revenue increased by $0.9 million to $26.0 million.

Resold service revenue increased $3.3 million to $7.8 million in 1998 from
$4.5 million in 1997 for the year ended December 31. Revenue contributed by the
1998 Acquisitions and the 1997 Acquisitions provided $1.8 million of the
increase in resold service revenues. Long distance service resold contributed
$0.4 million. FairPoint reported first year revenue of $1.1 million.

Other revenues increased $8.1 million to $12.1 million in 1998 from
$4.0 million in 1997 for the year ended December 31. Revenue contributed by the
1998 Acquisitions and the 1997 Acquisitions provided

14
<PAGE>
$8.5 million in other revenues for the year ended December 31, 1998. For the
RLECs owned and operated for the comparable period by the Company, other
revenues decreased $0.4 million for the year ended December 31, 1998.

INCOME FROM OPERATIONS. As a result of the factors described above, income from
operations increased $4.2 million to $16.6 million in 1998 from $12.4 million in
1997 for the year ended December 31. As a percentage of revenues, income from
operations was 18.0% as compared to 26.0% for the years ended December 31, 1998
and 1997, respectively. This margin decline in 1998 is primarily attributable to
the expenses associated with FairPoint. For the RLECs owned and operated for a
comparable period, the income from operations decreased $1.8 million to
$9.7 million. The income from operations margin decreased to 22.4% from 26.9%.
This decrease was primarily attributable to an increase in corporate and
customer services expenses.

OTHER INCOME (EXPENSE). Total other expense increased $16.3 million to
$24.1 million in 1998 from $7.8 million in 1997 for the year ended December 31.
The increase was primarily attributable to an increase in interest expense
associated with the additional debt incurred to complete the 1998 Acquisitions.
The increase in other expenses was partially offset by a net gain from sale of
assets of $0.7 million and an increase of $0.2 million in dividend and interest
income from the Company's investments.

EXTRAORDINARY ITEM. For the year ended December 31, 1998, the Company
recognized an extraordinary loss of $2.5 million (net of taxes) related to the
early retirement of debt.

LIQUIDITY AND CAPITAL RESOURCES

The Company's strategy requires significant capital resources. The Company
historically has used the proceeds from institutional and bank debt, private
equity offerings, and available cash flow to fund the Company's strategy.

The Company maintains a senior secured credit facility (the "Credit
Facility"), which within the Credit Facility is an $85.0 million reducing
revolving term facility with a remaining term of five years. This facility is
available for general corporate purposes, capital expenditures and acquisitions.
At December 31, 1999, there was an outstanding balance of approximately
$76.0 million and approximately $9.0 million was available under this revolving
term facility. On January 20, 2000, this revolving term facility was repaid from
the net cash proceeds generated from the Equity Financing and as of March 15,
2000, the Company had available under the revolving term facility
$85.0 million. Borrowings under the Credit Facility are guaranteed by the
Company's four mid-tier subsidiary companies and secured by a pledge of the
stock of certain subsidiaries. Also, the Credit Facility provides for an
additional $165.0 million Acquisition Facility. On March 14, 2000, this facility
was committed and made available to the Company to finance the Pending
Acquisitions, which are expected to be completed during the second quarter of
2000. Pursuant to the Credit Facility, the Company is required to comply with
certain financial covenants. For the year ended December 31, 1999, the Company
was in compliance with such covenants. See note 6 to the consolidated financial
statements for additional information.

15
<PAGE>
On May 5, 1998, the Company completed a public offering of debt consisting
of $125.0 million in aggregate principal amount of 9 1/2% Senior Subordinated
Notes (the "Fixed Rate Note") and $75.0 million in aggregate principal amount of
Floating Rate Callable Securities (the "Floating Rate Note"), each due in 2008
(collectively, the "Notes"). The Notes are general unsecured obligations of the
Company, subordinated in right of payment to all existing and future senior debt
of the Company and effectively subordinated to all existing and future debt and
other liabilities of the Company's subsidiaries. Interest on the Notes is
payable semi-annually.

FairPoint has and expects to continue to establish operations in additional
ex-urban markets, which is expected to result in continuing operating losses
reported by FairPoint. The Company invested equity of approximately
$4.2 million in 1998 and approximately $13.7 million in 1999 to enable FairPoint
to expand into 86 additional markets and increase the total number of CLEC
markets served by FairPoint to approximately 96. In addition, FairPoint has
invested and expects to continue to invest in telecommunications facilities to
migrate its customers to the Company's existing networks. FairPoint expects it
will require substantial funds for capital expenditures in 2000 and 2001. The
Credit Facility limits the Company's investment in its CLEC business to
(i) $5.0 million per year so long as the senior debt leverage ratio (as
calculated under the Credit Facility) exceeds 4.5x and (ii) $15.0 million per
year whenever such leverage ratio is under 4.5x.

On October 20, 1999, FairPoint closed a $100.0 million convertible senior
secured revolving credit facility (the "FairPoint Credit Facility"). On
March 27, 2000, this credit facility was increased from $100.0 million to
$165.0 million. Under the FairPoint Credit Facility, funds are available on a
revolving basis until March 2001; provided that upon receiving certain
approvals, the maturity date will be extended until October 2004. Subsequently,
all existing and future assets of FairPoint (including the stock of its
restricted subsidiaries) secure the borrowings under the FairPoint Credit
Facility. Pursuant to the terms of the FairPoint Credit Facility, FairPoint is
required to comply with certain financial covenants. Upon default of certain
covenants or non-payment at final maturity, at the lenders' option, the lender
may exchange all outstanding indebtedness plus outstanding and accrued interest
for an equal dollar amount of payment-in-kind preferred stock issued by the
Company. FairPoint has only a limited operating history and operates in a
competitive environment. In addition, FairPoint has significant capital
requirements due to the significant expenditures necessary to sell and market
its CLEC services and to purchase equipment to conduct operations. FairPoint has
relied, and is expected to continue to rely, on the Company to fund its equity
capital requirements and provide credit support for its debt financing needs.
The FairPoint Credit Facility, together with cash invested and to be invested by
the Company, is expected to fund FairPoint's current business plan through the
first quarter of 2001. At December 31, 1999, there was an outstanding balance of
approximately $21.7 million under the FairPoint Credit Facility, which was
subsequently retired from proceeds received from the Equity Financing as
discussed below. For the year ended December 31, 1999, the Company was in
compliance with the covenants set forth in the FairPoint Credit Facility. See
Note 6 to the consolidated financial statements for additional information.

On January 20, 2000, in connection with the Equity Financing, THL purchased
a total of 21,461,720 shares of the Company's Series D Preferred Stock for an
aggregate purchase price of approximately $281.5 million. THL acquired 3,580,860
shares of Series D Preferred Stock from the Company for an aggregate purchase
price of approximately $47.0 million, 13,955,760 shares of Series D Preferred
Stock (representing all of Carousel's equity interest in the Company) from
Carousel for an aggregate purchase price of approximately $183.0 million and
3,925,100 shares of Series D Preferred Stock from the founding stockholders and
members of senior management for an aggregate purchase price of approximately
$51.5 million. All of the shares of Series D Preferred Stock sold by Carousel
and senior management to THL and a portion of the shares of Series D Preferred
Stock sold by the founding stockholders to THL were acquired from the Company in
exchange for an equal number of shares of Class A Common Stock. The remaining
shares of Series D Preferred Stock sold by the founding stockholders to THL were
acquired from Kelso as described below.

16
<PAGE>
Kelso acquired 4,243,728 shares of the Company's Class B Common Stock for an
aggregate purchase price of approximately $55.7 million and 1,093,060 shares of
Series D Preferred Stock for an aggregate purchase price of approximately
$14.3 million. Kelso assigned the shares of Series D Preferred Stock to the
founding stockholders in satisfaction of certain obligations to such
stockholders under the Company's previous stockholders agreement. Kelso also
exchanged 8,300,000 shares of Class A Common Stock for an equal number of shares
of Class B Common Stock.

Both the Series D Preferred Stock and the Class B Common Stock will
automatically convert into an equal number of shares of Class A Common Stock
upon receipt of all required regulatory approvals. In addition, as part of this
Equity Financing, the Company sold 4,269,440 shares of non-voting Class C Common
Stock to certain institutional investors for an aggregate purchase price of
approximately $56.0 million.

On January 31, 2000, the Company completed the Equity Financing by selling
100,160 shares of Class A Common Stock to certain members of the Company's
management for an aggregate purchase price of approximately $1.3 million.

The net cash proceeds to the Company from the Equity Financing of
approximately $159.3 million have been and will be used to repay long term debt,
to fund the expansion of FairPoint's CLEC business and to complete the Pending
Acquisitions.

The Company's principal liquidity requirements are expected to be for
capital expenditures, expansion of FairPoint's CLEC business, finance the
Company's pending and future acquisition activities, debt service and general
corporate purposes.

Net cash provided by operating activities was $7.7 million and
$14.9 million for the years ended December 31, 1999 and 1998, respectively. Net
cash used in investing activities was $76.6 million and $225.5 million for the
years ended December 31, 1999 and 1998, respectively. These cash flows primarily
reflect expenditures relating to RLEC acquisitions of $53.9 million and
$217.1 million for the years ended December 31, 1999 and 1998, respectively, and
capital expenditures of $43.5 million and $12.4 million for the years ended
December 31, 1999 and 1998, respectively. Net cash provided by financing
activities was $65.6 and $217.1 million for the years ended December 31, 1999
and 1998, respectively. These cash flows primarily represent borrowings, the
proceeds of which were $138.9 million in 1999 and $510.6 million in 1998, and
the proceeds from the issuance of common stock of $31.8 million in 1998. There
was no common stock issued in 1999. A majority of the proceeds received in 1999
were used to repay long-term debt of $52.1 million and to complete the 1999
Acquisitions. A majority of the proceeds received in 1998 were utilized to repay
long-term debt of $307.8 million and to complete the 1998 Acquisitions.

Net cash provided by operating activities was $14.9 million and
$9.8 million for the years ended December 31, 1998 and 1997, respectively. Net
cash used in investing activities was $225.5 million and $39.0 million for the
years ended December 31, 1998 and 1997, respectively. These cash flows primarily
reflect expenditures relating to acquisitions of RLECs of $217.1 million and
$30.8 million for the years ended December 31, 1998 and 1997, respectively, and
capital expenditures of $12.4 million and $8.3 million for the years ended
December 31, 1998 and 1997, respectively. Net cash provided by financing
activities was $217.1 million and $31.7 million for the years ended
December 31, 1998 and 1997, respectively. These cash flows primarily represent
borrowings, the proceeds of which were $510.6 million in 1998 and $71.1 million
in 1997, and from the proceeds of the issuance of common stock of $31.8 million
and $15.9 million in 1998 and 1997, respectively. A majority of the proceeds
received in 1997 were utilized to repay long-term debt of $22.1 million and to
repurchase preferred stock and warrants for an aggregate amount of
$31.5 million.

Adjusted EBITDA represents net earnings (loss) plus interest expense, income
taxes, depreciation, amortization, and extraordinary items.

Adjusted EBITDA is not a measure of financial performance under generally
accepted accounting principles and should not be construed as a substitute for
consolidated net earnings (loss) as a measure of

17
<PAGE>
performance or as a substitute for cash flow as a measure of liquidity. Adjusted
EBITDA presented herein differs from the definition of EBITDA in the Indenture.
The definition of EBITDA in the Indenture is designed to determine EBITDA for
the purposes of contractually limiting the amount of debt which the Company may
incur. Adjusted EBITDA as calculated by the Company is not necessarily
comparable to similarly captioned amounts of other companies.

Management believes Adjusted EBITDA provides useful information regarding
the Company's ability to incur and/or service debt. Increases or decreases in
Adjusted EBITDA may indicate improvements or decreases, respectively, in the
Company's free cash flows available to incur and/or service debt and cover fixed
charges. Management expects that, because Adjusted EBITDA is commonly used in
the telecommunications industry as a measure of performance, investors may use
this data to analyze and compare other telecommunications companies with the
Company in terms of operating performance, leverage and liquidity.

Adjusted EBITDA increased 21.4% to $48.2 million for the year ended
December 31, 1999 from $39.7 million for the year ended December 31, 1998.
Adjusted EBITDA reported by the RLECs was $69.0 million, by STLD was $(0.9)
million and by FairPoint was $(19.9) million for the year ended December 31,
1999. Adjusted EBITDA increased 74.9% from $22.7 million in the year ended
December 31, 1997 to $39.7 million in the year ended December 31, 1998. Adjusted
EBITDA reported by the RLECs was $44.6 million, by STLD was $(0.3) million and
by FairPoint was $(4.6) million for the year ended December 31, 1998. Adjusted
EBITDA reported by the RLECs was $24.1 million and by STLD was $(1.4) million
for the year ended December 31, 1997.

The Company may secure additional funding through the sale of public or
private debt and/or equity securities or enter into another bank credit facility
to fund future acquisitions and operations. If the Company's growth occurs more
rapidly than is currently anticipated or if its operating results are below
expectations, there can be no assurance that the Company will be successful in
raising sufficient additional capital on terms that it will consider acceptable,
or that the Company's operations will produce positive cash flow in sufficient
amounts to meet its debt obligations. The Company's failure to raise and
generate sufficient funds may require it to delay or abandon some of its planned
future growth or expenditures, which could have a material adverse effect on the
Company's growth and its ability to compete in the telecommunications industry.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 137
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133", delays the effective date of this
statement to all fiscal years beginning after June 15, 2000. The Company
anticipates adopting this accounting pronouncement in 2001; however, management
believes it will not have a significant impact on the Company's consolidated
financial statements.

INFLATION

The Company does not believe inflation has a significant effect on its
operations.

YEAR 2000

The Company did not experience significant disruptions in its operations as
a result of the Year 2000 issue.

18
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt, since approximately
82% of the Company's debt is at fixed rates or effectively at fixed rates
through the use of interest rate swaps. At December 31, 1999, the fair value of
the Company's long-term debt is estimated by discounting the future cash flows
of each instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities. At December 31, 1999, the Company had
long-term debt with a carrying value of approximately $462.4 million and
estimated fair value of approximately $447.6 million. The market risk is
estimated as the potential decrease in fair value of the Company's long-term
debt resulting from a hypothetical increase of 91.9 basis points in interest
rates (ten percent of the rates currently offered to the Company). An increase
of 10% in interest rates would result in approximately a $0.9 million decrease
in the fair value of the Company's long-term debt.

The Company has entered into interest rate swaps to manage its exposure to
fluctuations in interest rates of its variable rate debt. The fair value of
these swaps was approximately $1.0 million at December 31, 1999. The positive
fair value indicates an estimated amount the Company would be paid to cancel the
contracts or transfer them to other parties. In connection with the Credit
Facility, the Company used an interest rate swap agreement with a notional
amount of $25 million to effectively convert a portion of its variable interest
rate exposure to a fixed rate of 9.91%. The swap agreement expires on
September 29, 2000. In connection with the Floating Rate Notes, the Company used
two interest rate swap agreements, with notional amounts of $50 million and
$25 million, respectively, to effectively convert its variable interest rate
exposure to a fixed rate of 10.01% and 9.95%, respectively. The swap agreements
expire on November 1, 2001 and 2000, respectively.

19
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
MJD Communications, Inc.:

We have audited the accompanying consolidated balance sheets of MJD
Communications, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity (deficit),
comprehensive loss and cash flows for each of the years in the three-year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MJD
Communications, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.

/s/ KPMG LLP

March 1, 2000, except as to the fourth
and twelfth paragraphs of note 6
which are as of March 27, 2000
Lincoln, Nebraska

20
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1999 AND 1998,
INCLUDING UNAUDITED PRO FORMA INFORMATION
AS OF DECEMBER 31, 1999 (SEE NOTE 2)

<TABLE>
<CAPTION>
PRO FORMA
1999
(SEE NOTE 2) 1999 1998
------------ -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 72,200 9,923 13,241
Accounts receivable, net of allowance for doubtful
accounts of $921 in 1999 and $704 in 1998............... 25,658 25,658 19,112
Prepaid and other assets.................................. 4,039 4,039 3,283
Investments available-for-sale............................ 7,327 7,327 --
Income taxes recoverable.................................. 1,453 1,453 --
Deferred income taxes..................................... -- -- 1,221
-------- ------- -------
Total current assets.................................... 110,677 48,400 36,857
-------- ------- -------
Property, plant, and equipment, net......................... 178,296 178,296 142,321
-------- ------- -------
Other assets:
Investments............................................... 36,246 36,246 37,894
Goodwill, net of accumulated amortization................. 229,389 229,389 203,867
Debt issue costs, net of accumulated amortization......... 17,948 17,948 16,121
Covenants not to compete, net of accumulated
amortization............................................ 3,706 3,706 2,938
Other..................................................... 2,270 2,270 2,114
-------- ------- -------
Total other assets...................................... 289,559 289,559 262,934
-------- ------- -------
Total assets............................................ $578,532 516,255 442,112
======== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

21
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1999 AND 1998,
INCLUDING UNAUDITED PRO FORMA INFORMATION
AS OF DECEMBER 31, 1999 (SEE NOTE 2)

<TABLE>
<CAPTION>
PRO FORMA
1999
(SEE NOTE 2) 1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ------------ ---------- ----------
(UNAUDITED) (DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 12,778 12,778 10,153
Current portion of long-term debt......................... 3,866 3,866 3,502
Demand notes payable...................................... 752 752 754
Current portion of obligation for covenants not to
compete................................................. 1,236 1,236 881
Accrued interest payable.................................. 4,200 4,396 3,947
Accrued property taxes.................................... 2,078 2,078 1,847
Other accrued liabilities................................. 7,647 7,647 4,407
Income taxes payable...................................... -- -- 588
Deferred income taxes..................................... 1,767 1,767 --
-------- -------- --------
Total current liabilities............................. 34,324 34,520 26,079
-------- -------- --------
Long-term liabilities:
Long-term debt, net of current portion.................... 361,585 458,529 364,610
Put warrant obligation.................................... -- -- 4,169
Unamortized investment tax credits........................ 577 577 632
Obligation for covenants not to compete, net of current
portion................................................. 2,622 2,622 2,162
Deferred income taxes..................................... 25,039 25,039 27,950
Other liabilities......................................... 11,551 3,106 3,189
-------- -------- --------
Total long-term liabilities........................... 401,374 489,873 402,712
-------- -------- --------
Minority interest........................................... 443 443 435
-------- -------- --------
Common stock subject to put option, 1,752,000 shares........ -- 3,000 3,000
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock:
Series D nonvoting, convertible, cumulative
participating, par value $.01 per share, authorized
30,000,000 shares..................................... 215 -- --
Common stock:
Class A voting, par value $.01 per share, authorized
60,000,000 shares, issued and outstanding 34,450,940
shares................................................ 115 345 345
Class B nonvoting, convertible, par value $.01 per
share, authorized 50,000,000 shares................... 125 -- --
Class C nonvoting, convertible, par value $.01 per
share, authorized 4,600,000 shares.................... 42 -- --
Additional paid--in capital............................... 230,862 48,793 45,407
Unearned compensation..................................... (15,926) -- --
Accumulated other comprehensive income.................... 4,187 4,187 --
Accumulated deficit....................................... (77,229) (64,906) (35,866)
-------- -------- --------
Total stockholders' equity (deficit).................. 142,391 (11,581) 9,886
-------- -------- --------
Total liabilities and stockholders' equity............ $578,532 516,255 442,112
======== ======== ========
</TABLE>

22
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues:
Switched services......................................... $108,430 72,124 39,257
Resold services........................................... 22,323 7,803 4,531
Other..................................................... 16,786 12,080 3,975
-------- ------- ------
Total operating revenues.............................. 147,539 92,007 47,763
-------- ------- ------
Operating expenses:
Plant operations.......................................... 21,088 14,293 6,857
Corporate and customer service............................ 54,901 27,635 12,483
Depreciation and amortization............................. 31,632 20,089 8,777
Cost of services resold................................... 19,190 6,163 4,791
Other general and administrative.......................... 9,028 7,265 2,416
-------- ------- ------
Total operating expenses.............................. 135,839 75,445 35,324
-------- ------- ------
Income from operations................................ 11,700 16,562 12,439
-------- ------- ------
Other income (expense):
Net gain (loss) on sale of investments and other assets... 512 651 (19)
Interest income........................................... 446 442 212
Dividend income........................................... 1,452 1,119 1,182
Interest expense.......................................... (51,185) (27,170) (9,293)
Other nonoperating, net................................... 2,520 885 140
-------- ------- ------
Total other expense................................... (46,255) (24,073) (7,778)
-------- ------- ------
Earnings (loss) before income taxes and extraordinary
item................................................ (34,555) (7,511) 4,661
Income tax (expense) benefit................................ 5,615 2,112 (1,876)
-------- ------- ------
Earnings (loss) before extraordinary item............. (28,940) (5,399) 2,785
Extraordinary item -- loss on early retirement of debt, net
of income tax benefit of $1,755 in 1998 and $2,296 in
1997...................................................... -- (2,521) (3,611)
-------- ------- ------
Loss before minority interest......................... (28,940) (7,920) (826)
Minority interest in income of subsidiaries................. (100) (80) (62)
-------- ------- ------
Net loss.............................................. $(29,040) (8,000) (888)
======== ======= ======
</TABLE>

See accompanying notes to consolidated financial statements.

23
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS` EQUITY (DEFICIT)

YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
ACCUMULATED TOTAL
CLASS A ADDITIONAL OTHER ACCUMU- STOCKHOLDERS'
COMMON PAID-IN COMPREHENSIVE LATED EQUITY
STOCK CAPITAL INCOME DEFICIT (DEFICIT)
-------- ---------- ------------- -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.............. $ 79 (75) -- (2,146) (2,142)
Net loss................................ -- -- -- (888) (888)
Issuance of 9,751,600 shares of common
stock................................. 98 15,777 -- -- 15,875
Conversion of redeemable preferred
stock................................. -- 112 -- -- 112
Capital contribution.................... -- 924 -- -- 924
Repurchase of redeemable preferred
stock................................. -- -- -- (24,541) (24,541)
Redeemable preferred stock dividends.... -- -- -- (279) (279)
---- ------- ------ -------- --------
Balance, December 31, 1997.............. 177 16,738 -- (27,854) (10,939)
Net loss................................ -- -- -- (8,000) (8,000)
Preferred stock dividends............... -- -- -- (12) (12)
Issuance of 18,590,800 shares of common
stock................................. 185 31,652 -- -- 31,837
Reclassification of 1,752,000 shares of
common stock subject to put option.... (17) (2,983) -- -- (3,000)
---- ------- ------ -------- --------
Balance, December 31, 1998.............. 345 45,407 -- (35,866) 9,886
Net loss................................ -- -- -- (29,040) (29,040)
Change in unrealized gain on securities
available-for-sale, net of tax effect
of $2,566............................. -- -- 4,187 -- 4,187
Increase in stock appreciation rights... -- 3,386 -- -- 3,386
---- ------- ------ -------- --------
Balance, December 31, 1999.............. $345 48,793 4,187 (64,906) (11,581)
==== ======= ====== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

24
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss.................................................... $(29,040) (8,000) (888)
Change in unrealized gain on securities
available--for--sale, net of tax effect of $2,566......... 4,187 -- --
-------- ------- -----
Comprehensive loss.................................... $(24,853) (8,000) (888)
======== ======= =====
</TABLE>

See accompanying notes to consolidated financial statements.

25
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(29,040) (8,000) (888)
-------- -------- -------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 33,342 21,534 9,093
Provision for uncollectible revenue....................... 634 390 --
Deferred income taxes..................................... (6,711) (1,653) 207
Income from equity method investments..................... (2,497) (931) --
Deferred patronage dividends.............................. (380) (265) (585)
Minority interest in income of subsidiaries............... 100 80 62
Increase (decrease) in put warrant obligation............. 13,331 714 (295)
Compensation charge for stock appreciation rights......... 3,386 -- --
Net (gain) loss on sale of investments and other assets... (512) (630) 17
Loss on early retirement of debt.......................... -- 2,897 1,864
Amortization of investment tax credits.................... (193) (130) (31)
Changes in assets and liabilities arising from operations,
net of acquisitions:
Accounts receivable..................................... (853) 5,988 (1,563)
Prepaid and other assets................................ (23) 253 (106)
Accounts payable........................................ (2,117) (1,398) 1,664
Acscrued interest payable............................... 384 1,128 720
Accrued liabilities..................................... 2,773 689 636
Income taxes recoverable/payable........................ (3,920) (5,799) (956)
-------- -------- -------
Total adjustments..................................... 36,744 22,867 10,727
-------- -------- -------
Net cash provided by operating activities............. 7,704 14,867 9,839
-------- -------- -------
Cash flows from investing activities:
Acquisitions of telephone properties, net of cash
acquired................................................ (53,949) (217,080) (30,845)
Acquisition of property, plant, and equipment............. (43,509) (12,433) (8,262)
Proceeds from sale of property, plant, and equipment...... 116 107 121
Distributions from investments............................ 2,590 118 63
Payment on covenants not to compete....................... (988) (219) (94)
Acquisition of investments................................ (349) (8) (241)
Proceeds from sale of investments......................... 20,065 4,088 403
Payments received on direct financing leases.............. -- -- 249
Decrease in other assets/liabilities, net................. (586) (95) (361)
-------- -------- -------
Net cash used in investing activities................. (76,610) (225,522) (38,967)
-------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 138,943 510,583 71,134
Repayment of long-term debt............................... (52,056) (307,763) (22,104)
Purchase of stock warrants................................ (17,500) -- --
Repurchase of preferred stock and warrants................ -- (175) (31,487)
Dividends paid to preferred stockholders.................. -- (12) (279)
Net proceeds from the issuance of common stock............ -- 31,837 15,875
Loan origination costs.................................... (3,703) (17,345) (1,949)
Payment of early retirement benefits...................... -- -- (25)
Dividends paid to minority stockholders................... (4) (6) (4)
Release of restricted funds............................... -- -- 561
Repayment of capital lease obligation..................... (92) (45) (25)
-------- -------- -------
Net cash provided by financing activities............. 65,588 217,074 31,697
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents.......................................... (3,318) 6,419 2,569
Cash and cash equivalents, beginning of year................ 13,241 6,822 4,253
-------- -------- -------
Cash and cash equivalents, end of year...................... $ 9,923 13,241 6,822
======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

26
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1999, 1998, AND 1997

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

MJD Communications, Inc. (MJD) provides management services to its
wholly-owned subsidiaries: S T Enterprises, Ltd. (STE); MJD Ventures, Inc.
(Ventures); MJD Services Corp. (Services); MJD Holdings Corp. (Holdings);
FairPoint Communications Corp. (FairPoint); and MJD Capital Corp. STE, Ventures,
Services, and Holdings also provide management services to their wholly-owned
subsidiaries.

Collectively, the wholly-owned subsidiaries of STE, Ventures, Services, and
Holdings primarily provide telephone local exchange services in various states.
Operations also include resale of long distance services, internet services,
cable services, equipment sales, and installation and repair services. MJD
Capital Corp. leases equipment to other subsidiaries of MJD. FairPoint is a
competitive local exchange carrier (CLEC) offering local and long distance,
internet, and data services in various states.

STE's wholly-owned subsidiaries include Sunflower Telephone Company
(Sunflower); Northland Telephone Company of Maine, Inc. and Northland Telephone
Company of Vermont, Inc. (the Northland Companies); S T Communications, Inc.;
and S T Long Distance, Inc. (S T Long Distance); Venture's wholly-owned
subsidiaries include Sidney Telephone Company (Sidney); C-R
Communications, Inc. (C-R); Taconic Telephone Corp. (Taconic); Ellensburg
Telephone Company (Ellensburg); Chouteau Telephone Company (Chouteau);
Utilities, Inc. (Utilities); Chautauqua & Erie Telephone Corporation (C&E);
Columbus Grove Telephone Company (Columbus); The Orwell Telephone Company
(Orwell) and Telephone Services Company (TSC). Services' wholly-owned
subsidiaries include Bluestem Telephone Company (Bluestem); Big Sandy
Telecom, Inc. (Big Sandy); Columbine Telecom Company (Columbine); Odin Telephone
Exchange, Inc. (Odin); Kadoka Telephone Co. (Kadoka); Ravenswood
Communications, Inc. (Ravenswood); Union Telephone Company of Hartford (Union);
Armour Independent Telephone Co. (Armour); Yates City Telephone Company (Yates)
and WMW Cable TV Co. (WMW).

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of MJD
Communications, Inc. and its subsidiaries (the Company). All intercompany
transactions and accounts have been eliminated in consolidation.

The accompanying unaudited pro forma balance sheet gives effect to
significant subsequent events occurring in January and February 2000, as if they
had occurred on December 31, 1999. Those subsequent events include authorizing
additional classes of capital stock, issuing and reacquiring capital stock for
net proceeds of $159,282,000, borrowing additional debt of $5,400,000, repaying
debt and accrued interest payable in the amount of $102,540,077, being released
from put obligations on its common stock and recognizing compensation expense in
the amount of $28,249,011 for stock-based compensation to employees. See also
note 2 for a description of these subsequent events.

The consolidated financial statements have been prepared using generally
accepted accounting principles applicable to regulated entities. The Company's
telephone subsidiaries follow the accounting for regulated enterprises
prescribed by Statement of Financial Accounting Standards (SFAS) No. 71,
ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION. This accounting
recognizes the economic effects of rate regulation by recording costs and a
return on investment, as such amounts are recovered through rates authorized by
regulatory authorities. Accordingly, SFAS No. 71 requires the Company's
telephone subsidiaries to depreciate telephone plant over useful lives that
would otherwise be determined by management.

27
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999, 1998, AND 1997

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS No. 71 also requires deferral of certain costs and obligations based
upon approvals received from regulators to permit recovery of such amounts in
future years. The Company's telephone subsidiaries periodically review the
applicability of SFAS No. 71 based on the developments in their current
regulatory and competitive environments.

REVENUE RECOGNITION FROM TELEPHONE OPERATIONS

Revenues are recognized as services are rendered and are primarily derived
from the usage of the Company's networks and facilities or under revenue sharing
arrangements with other telecommunications carriers. Revenues are derived from
primarily three sources: access, pooling, and miscellaneous. Local access
charges are billed to local end users under tariffs approved by each state's
Public Utilities Commission. Access revenues are derived on the intrastate
jurisdiction by billing access charges to interexchange carriers and to regional
Bell operating companies. These charges are billed based on toll or access
tariffs approved by the local state's Public Utilities Commission. Access
charges for the interstate jurisdiction are billed in accordance with tariffs
filed by the National Exchange Carrier Association (NECA) or by the individual
company and approved by the Federal Communications Commission.

Revenues are determined on a bill and keep basis or a pooling basis. If on a
bill and keep basis, the Company bills the charges to either the access provider
or the end user and keeps the revenue. If the Company participates in a pooling
environment (interstate or intrastate), the toll or access billed are
contributed to a revenue pool. The revenue is then distributed to individual
companies based on their company-specific revenue requirement. This distribution
is based on individual state Public Utilities Commission (intrastate) or Federal
Communications Commission's (interstate) approved separation rules and rates of
return. Distribution from these pools can change relative to changes made to
expenses, plant investment, or rate of return. Some companies participate in
federal and certain state universal service programs that are pooling in nature
but are regulated by rules separate from those described above. These rules vary
by state.

Miscellaneous revenues are derived by billing to either end users, access
providers, or other parties, services such as directory advertising, billing and
collecting services, rent, etc. These services are typically billed under
contract or under tariff supervision.

The costs of services resold are based primarily on the direct costs
associated with owned and leased transmission capacity and the cost of
transmitting and terminating traffic on other carriers' facilities. Revenues and
costs of services resold are recognized as services are provided to local and
long-distance end users.

CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and temporary cash
investments and trade receivables. The Company places its cash and temporary
cash investments with high quality financial institutions. Concentrations of
credit risk with respect to trade receivables are limited due to the Company's
large number of customers in several states. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends, and other information.

28
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999, 1998, AND 1997

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.

INVESTMENTS

Investments consist of stock in CoBank, ACB (CoBank), Rural Telephone Bank
(RTB), the Rural Telephone Finance Cooperative (RTFC), Illuminet Holdings, Inc.
(Illuminet), and various cellular companies and partnerships and other minority
equity investments in nonregulated entities. For the investments in
partnerships, the equity method of accounting is used. All other investments are
stated at cost. To determine if an impairment of an investment exists, the
Company monitors and evaluates the financial performance of the business in
which it invests and compares the carrying value of the investee to the fair
values of similar investments, which in certain instances, is based on
traditional valuation models utilizing multiples of cash flows. When
circumstances indicate that a decline in the fair value of the investment has
occurred and the decline is other than temporary, the Company records the
decline in value as a realized loss and a reduction in the cost of the security.
The Company did not incur any losses from other than temporary declines in fair
value in 1999, 1998, and 1997.

At December 31, 1999, the investment in Illuminet stock was classified as
available-for-sale in accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS No. 115 requires fair value
reporting for certain investments in debt and equity securities with readily
determinable fair values. Available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses, net of the related tax effect, are
excluded from earnings and are reported as a separate component of comprehensive
income until realized.

The Company currently receives patronage dividends from its investments in
businesses organized as cooperatives for federal income tax purposes (CoBank and
RTFC stock). Patronage dividends represent cash distributions of the
cooperative's earnings and notices of allocations of earnings to the Company.
Deferred and uncollected patronage dividends are included as part of the basis
of the investment until collected. The RTB investment pays dividends annually
based on the discretion of its Board of Directors.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are carried at cost. Repairs and maintenance
are charged to expense as incurred; major renewals and improvements are
capitalized. For telephone companies, the original cost of depreciable property
retired, together with removal cost, less any salvage realized, is charged to
accumulated depreciation. For all other companies, the original cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in the results of operations. The telephone companies capitalize
estimated costs of debt and equity funds used for construction purposes for
projects greater than $100,000. Depreciation is determined using the
straight-line method for financial reporting purposes.

29
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999, 1998, AND 1997

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEBT ISSUE COSTS

Debt issue costs are being amortized over the life of the related debt,
ranging from five to ten years. Accumulated amortization of loan origination
costs was $3,104,714 and $1,255,730 at December 31, 1999 and 1998, respectively.

INTANGIBLE ASSETS

The covenants not to compete are being amortized over their useful life of
three to five years. Accumulated amortization of covenants not to compete was
$1,470,000 and $437,500 at December 31, 1999 and 1998, respectively.

Goodwill consists of the difference between the purchase price incurred in
acquisitions using the purchase method of accounting and the fair value of net
assets acquired. Goodwill is being amortized using the straight-line method over
an estimated useful life of forty years. Accumulated amortization of goodwill
was approximately $12.4 million and $6.9 million at December 31, 1999 and 1998,
respectively.

The Company reviews its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

PENSION AND OTHER POSTRETIREMENT PLANS

One of the Company's subsidiaries sponsored a defined benefit plan covering
substantially all of their employees. The benefits were based on years of
service and the employee's compensation levels prior to retirement. Benefits
under this plan were frozen in connection with the Company's acquisition of the
company. Two of the Company's subsidiaries also sponsor other postretirement
healthcare benefits for substantially all retirees. The net periodic costs of
pension and other postretirement benefit plans are recognized as employees
render the services necessary to earn the postretirement benefits.

30
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MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999, 1998, AND 1997

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses interest rate swaps to manage its exposure to fluctuations
in interest rates of its variable rate debt. Amounts receivable or payable under
interest rate swap agreements are accrued at each balance sheet date and
included as adjustments to interest expense.

STOCK-BASED COMPENSATION

The Company accounts for its stock option plan using the intrinsic
value-based method prescribed by Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (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, ACCOUNTING FOR STOCK-BASED COMPENSATION, 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 described above, and has adopted the disclosure requirements of SFAS
No. 123.

STOCK APPRECIATION RIGHTS

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 Financial Accounting Standards Board
Interpretation No. 28, ACCOUNTING FOR STOCK APPRECIATION RIGHTS AND OTHER
VARIABLE STOCK OPTION OR AWARD PLANS. 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 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.

RECLASSIFICATIONS

Certain amounts have been reclassified for comparability with the 1999
presentation.

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and reported amounts of
revenues and expenses, to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

(2) SUBSEQUENT EVENTS

The accompanying unaudited pro forma balance sheet gives effect to
significant subsequent events occurring in January and February 2000, as if they
had occurred on December 31, 1999. Those subsequent

31
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MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999, 1998, AND 1997

(2) SUBSEQUENT EVENTS (CONTINUED)
events include authorizing additional classes of capital stock, issuing and
reacquiring capital stock for net proceeds of $159,282,000, borrowing additional
debt of $5,400,000, repaying debt and accrued interest payable in the amount of
$102,540,077, being released from put obligations on its common stock and
recognizing compensation expense in the amount of $28,249,011 for stock-based
compensation to employees.

ADDITIONAL CLASSES OF CAPITAL STOCK

On January 19, 2000, the Company amended its articles of incorporation to
authorize an aggregate of 144,600,000 shares of capital stock. Following the
amendment, the authorized share capital of the Company includes the following:

CLASS A COMMON STOCK--authorized 60,000,000 voting common shares at a par
value of $.01 per share. Class A common shares carry one vote per share.

CLASS B COMMON STOCK--authorized 50,000,000 nonvoting, convertible common
shares at a par value of $.01 per share. The Class B common shares are
automatically convertible into Class A common shares upon the receipt of all
governmental approvals necessary to effectuate a change in control. The
conversion rate for the Class B common shares to Class A common shares is
one-for-one.

CLASS C COMMON STOCK--authorized 4,600,000 nonvoting, convertible common
shares at a par value of $.01 per share. The Class C common shares are
automatically convertible into Class A common shares upon either the
completion of an initial public offering of at least $150 million of the
Company's Class A common stock or the occurrence of certain conversion
events, as defined in the articles of incorporation. The conversion rate for
the Class C common shares to Class A common shares is one-for-one.

SERIES D PREFERRED STOCK--authorized 30,000,000 nonvoting, convertible,
cumulative participating preferred shares at a par value of $.01 per share.

The Series D preferred shares are automatically convertible into Class A
common shares upon the receipt of all regulatory approvals necessary to
effectuate a change in control. Series D preferred shares may be converted
into Class B common shares at any time. The conversion rate for the
Series D preferred shares to either Class A or B common shares is
one-for-one. Any portion of the accrued and unpaid dividends is also
convertible into additional Class A or B common shares based upon a
conversion rate of $13.12 per share.

The Series D preferred shares do not provide for the payment of dividends
for up to one year following their issuance. If the Series D preferred
shares are not converted into Class A common shares within one year of
issue, dividends accrue on a daily basis at a rate of 7.0% per annum,
retroactively from the date of issue. If not converted by the eighth annual
anniversary of their issuance, the dividend rate per annum increases by 2.0%
annually up to a maximum dividend rate of 13.0%. In the event that the
Company provides a stock dividend to its Class A common shareholders, the
holders of Series D preferred shares are entitled to receive a dividend of
preferred shares at an equal rate. The Company also has the option of
redeeming all outstanding shares of Series D preferred shares at a price
equal to liquidation value plus accrued dividends.

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MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999, 1998, AND 1997

(2) SUBSEQUENT EVENTS (CONTINUED)
On January 23, 2000, the Company declared a twenty-for-one stock split in