MJD COMMUNICATIONS INC
S-4/A, 1998-10-01
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>
 
    
 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1998     
 
                                                     REGISTRATION NO. 333-56365
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                
                             AMENDMENT NO. 3     
                                      TO
                                   FORM S-4
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                               ----------------
                           MJD COMMUNICATIONS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                               ----------------
        DELAWARE                  4813                        13-3725229
     (STATE OR OTHER   (PRIMARY STANDARD INDUSTRIAL          (I.R.S. EMPLOYER
     JURISDICTION OF   CLASSIFICATION CODE NUMBER)        IDENTIFICATION NUMBER)
    INCORPORATION OR
      ORGANIZATION)                          
                                                          
                               ----------------
                      521 EAST MOREHEAD STREET, SUITE 250
                        CHARLOTTE, NORTH CAROLINA 28202
                                (704) 344-8150
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                               ----------------
                             WALTER E. LEACH, JR.
         SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
                      521 EAST MOREHEAD STREET, SUITE 250
                        CHARLOTTE, NORTH CAROLINA 28202
                                (704) 344-8150
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                  INCLUDING AREA CODE, OF AGENT FOR SERVICE)
 
                                  COPIES TO:
                             NEIL A. TORPEY, ESQ.
                     PAUL, HASTINGS, JANOFSKY & WALKER LLP
                                399 PARK AVENUE
                           NEW YORK, NEW YORK 10022
                                (212) 318-6000
 
                               ----------------
  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
 
  If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
 
  If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
 
  If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
                               ----------------
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   
                SUBJECT TO COMPLETION DATED OCTOBER 1, 1998     
 
PROSPECTUS                                                      [LOGO OF MJD
                                                                COMMUNICATIONS,
                                                                INC. APPEARS
                                                                HERE}
                            MJD COMMUNICATIONS, INC.            
                             OFFER TO EXCHANGE ITS              
              9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B
           AND FLOATING RATE CALLABLE SECURITIES DUE 2008, SERIES B,
                        WHICH HAVE BEEN REGISTERED UNDER
                    THE SECURITIES ACT OF 1933, AS AMENDED,
                       FOR ANY AND ALL OF ITS OUTSTANDING
                   9 1/2% SENIOR SUBORDINATED NOTES DUE 2008
                 AND FLOATING RATE CALLABLE SECURITIES DUE 2008
                                   --------
 
   THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON      ,
                             1998, UNLESS EXTENDED.
 
  MJD Communications, Inc., a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and together with this Prospectus, the "Exchange Offer"), to
exchange its 9 1/2% Senior Subordinated Notes due 2008, Series B (the "Fixed
Rate Exchange Notes") and Floating Rate Callable Securities due 2008, Series B
(the "Floating Rate Exchange Notes" and, together with the Fixed Rate Exchange
Notes, the "Exchange Notes"), which have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement (as defined in "Available Information") of which this Prospectus is a
part, for an equal principal amount of its outstanding 9 1/2% Senior
Subordinated Notes due 2008 (the "Fixed Rate Original Notes") and Floating Rate
Callable Securities due 2008 (the "Floating Rate Original Notes" and, together
with the Fixed Rate Original Notes, the "Old Notes") of which $125 million and
$75 million principal amount, respectively, is outstanding. The Exchange Notes
and the Old Notes are collectively referred to herein as the "Notes."
 
  The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on     ,
1998, unless the Exchange Offer is extended (the "Expiration Date"). Tenders of
Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time,
on the Expiration Date. The Exchange Notes will be issued and delivered
promptly after the Expiration Date. The Exchange Offer is not conditioned upon
any minimum principal amount of Old Notes being tendered for exchange. See "The
Exchange Offer." Old Notes may be tendered only in integral multiples of
$1,000. The Company has agreed to pay the expenses of the Exchange Offer.
 
  The Exchange Notes will be obligations of the Company evidencing the same
debt as the Old Notes and will be entitled to the benefits of the same
indenture, dated as of May 5,1998 (the "Indenture"), between the Company and
United States Trust Company of New York, as trustee (the "Trustee"). The form
and terms of the Exchange Notes are substantially the same as the form and
terms of the Old Notes except that the Exchange Notes have been registered
under the Securities Act. See "The Exchange Offer."
                                                   (continued on following page)
 
                                   --------
 
  SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR NOTES IN THE EXCHANGE
OFFER.
 
                                   --------
 
THESE SECURITIES HAVE  NOT BEEN APPROVED  OR DISAPPROVED BY  THE SECURITIES AND
EXCHANGE COMMISSION  OR ANY STATE SECURITIES COMMISSION NOR HAS  THE SECURITIES
 AND EXCHANGE COMMISSION  OR ANY  STATE SECURITIES COMMISSION  PASSED UPON THE
 ACCURACY OR ADEQUACY  OF THIS PROSPECTUS. ANY REPRESENTATION  TO THE CONTRARY
  IS A CRIMINAL OFFENSE.
 
                  The date of this Prospectus is      , 1998.
<PAGE>
 
(continued from cover page)
 
  The Exchange Notes will bear interest from May 5, 1998. Holders of Old Notes
whose Old Notes are accepted for exchange will be deemed to have waived the
right to receive any payment in respect of interest on the Old Notes accrued
up until the date of the issuance of the Exchange Notes. Such waiver will not
result in the loss of interest income to such holders, since the Exchange
Notes will bear interest from the issue date of the Old Notes.
 
  Interest on the Exchange Notes will be payable semi-annually on May 1 and
November 1 of each year, commencing on November 1, 1998 at the rate of 9 1/2%
per annum in the case of the Fixed Rate Exchange Notes, and at a rate per
annum equal to LIBOR (as defined in "Description of Notes) plus 418.75 basis
points in the case of the Floating Rate Exchange Notes. The rate of interest
on the Floating Rate Exchange Notes will be reset semi-annually. The Fixed
Rate Exchange Notes will be redeemable, in whole or in part, at the option of
the Company on or after May 1, 2003, and the Floating Rate Exchange Notes will
be redeemable, in whole or in part, at the option of the Company, at any time,
in each case, at the redemption prices, set forth herein, plus accrued and
unpaid interest to the redemption date. In addition, at any time on or prior
to May 1, 2001, the Company may redeem up to 35% of the aggregate principal
amount of the Fixed Rate Exchange Notes with the net cash proceeds of an
Equity Sale (as defined in "Description of Notes"), at 109.5% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the redemption
date; provided, that at least 65% of the original aggregate principal amount
of the Fixed Rate Exchange Notes originally issued remains outstanding
immediately after any redemption. Upon a Change of Control (as defined in
"Description of Notes"), each holder of the Exchange Notes shall have the
right to require the Company to repurchase such holder's Exchange Notes, at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the repurchase date. See "Description of Notes--
Repurchase at the Option of the Holders Upon a Change of Control."
 
  Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making or other trading
activities. The Company has agreed that for a period of 180 days after
consummation of the Exchange Offer, it will make this prospectus, as it may be
amended or supplemented from time to time, available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
 
  There has been no public market for the Old Notes. If a market for the
Exchange Notes should develop, the Exchange Notes could trade at a discount
from their principal amount. The Company does not intend to list the Exchange
Notes on a national securities exchange or quotation system. There can be no
assurance that an active public market for the Exchange Notes will develop.
<PAGE>
 
                             AVAILABLE INFORMATION
 
  The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Exchange Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the
rules and regulations of the Commission. For further information with respect
to the Company and the Exchange Notes offered hereby, reference is made to the
Registration Statement. Statements contained in this prospectus as to the
contents of certain documents filed as exhibits to the Registration Statement
are not necessarily complete and, in each case, are qualified by reference to
the copy of the document so filed. The Registration Statement can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 3475 Lenox Road, N.E., Suite 1000, Atlanta,
Georgia 30326-1232. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Such material also can be reviewed through
the Commission's Electronic Data Gathering, Analysis, and Retrieval System
("EDGAR"), which is publicly available through the Commission's web site
(http://www.sec.gov).
 
  The Company intends to furnish to each holder of the Exchange Notes annual
reports containing audited financial statements and quarterly reports
containing unaudited financial information for the first three quarters of
each fiscal year. The Company also will furnish to each holder of the Exchange
Notes such other reports as may be required by applicable law.
 
  The principal executive offices of the Company are located at 521 East
Morehead Street, Suite 250, Charlotte, North Carolina 28202 and its telephone
number is (704) 344-8150.
 
                DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
 
  THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING, WITHOUT
LIMITATION, STATEMENTS REGARDING THE COMPANY'S FUTURE FINANCIAL POSITION,
BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS
WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE FORWARD-
LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND
ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING
ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS. THE SAFE HARBOR PROVISIONS FOR FORWARD LOOKING STATEMENTS PROVIDED
BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE SECURITIES ACT
(AS DEFINED HEREIN) AND THE EXCHANGE ACT DO NOT APPLY TO INITIAL PUBLIC
OFFERINGS AND THE COMPANY CANNOT AVAIL ITSELF OF THE PROTECTIONS PROVIDED
THEREBY WITH RESPECT TO THE EXCHANGE OFFER.
 
                                       i
<PAGE>
 
                                    SUMMARY
 
  The following is a summary of certain information contained elsewhere in this
Prospectus. Reference is made to, and this Summary is qualified in its entirety
by, the more detailed information, including the Company's Consolidated
Financial Statements and notes thereto, and the Company's Pro Forma
Consolidated Financial Statements and notes thereto, contained herein. Unless
otherwise indicated, references to "MJD" or the "Company" include MJD
Communications, Inc., a Delaware corporation, and its consolidated
subsidiaries. On May 5, 1998 the Company sold and issued the Old Notes (the
"Offering"). The Company acquired Kadoka Telephone Company, Columbine Telephone
Company, Chautauqua & Erie Telephone Corporation and C-R Communications, Inc.
in separate transactions during 1997 (the "1997 Acquisitions"). The Company
acquired Taconic Telephone Corp. ("Taconic") on March 30, 1998, Ellensburg
Telephone Company ("Ellensburg") on April 30, 1998 and Chouteau Telephone
Company ("Chouteau" and collectively with the acquisitions of Ellensburg and
Taconic and the 1997 Acquisitions, the "Completed Acquisitions") on June 1,
1998. The Company expects to acquire Utilities, Inc. ("Utilities") in a
transaction during 1998 (the "Pending Acquisition" and together with the
Completed Acquisitions, the "Acquisitions"). The Offering, the New Credit
Facility (as defined in "Description of New Credit Facility"), the Taconic
acquisition, the Ellensburg acquisition and the Chouteau acquisition are
collectively referred to in this Prospectus as the "Completed Transactions."
See "Glossary" for definitions of certain other terms used in this Prospectus.
 
THE COMPANY
   
  MJD is a growing provider of local telecommunications services to customers
in rural communities in the United States. The Company also provides
complementary services such as long distance service, enhanced calling services
and wireless telephony. Upon completion of the Pending Acquisition, the Company
believes that it will be the eighteenth largest telephone company in the United
States, and the largest telephone company in the United States that focuses
primarily on acquiring and operating rural telecommunications service
companies. For the year ended December 31, 1997, the Company had revenue and
Adjusted EBITDA (as defined in "--Summary Consolidated Financial and Operating
Data") of $43.0 million and $22.7 million, respectively. The Company provided
net cash of $9.8 million from operating activities, used net cash of $39.0
million in investing activities and provided net cash of $31.7 million from
financing activities for the year ended December 31, 1997. On a pro forma basis
after giving effect to the Acquisitions, the Company would have had revenue and
Adjusted EBITDA of $104.6 million and $53.2 million, respectively, for the year
ended December 31, 1997. On a pro forma basis after giving effect to the
Acquisitions, the Company provided net cash of $16.7 million from operating
activities, used net cash of $269.6 million in investing activities, and
provided net cash of $239.1 million from financing activities for the year
ending December 31, 1997. For the six months ended June 30, 1998, the Company
had revenue and Adjusted EBITDA of $35.3 million and $17.6 million,
respectively. The Company provided net cash of $7.3 million from operating
activities, used net cash of $174.3 million in investing activities and
provided net cash of $174.2 million from financing activities during the six
months ended June 30, 1998. On a pro forma basis after giving effect to the
Acquisitions, the Company would have had revenue and Adjusted EBITDA of
$56.0 million and $24.9 million, respectively, for the six months ended June
30, 1998. On a pro forma basis after giving effect to the Acquisitions, the
Company provided net cash of $8.1 million from operating activities, used net
cash of $220.1 million in investing activities and provided net cash of $215.2
million from financing activities for the six months ended June 30, 1998.     
 
  The Company believes that the rural telecommunications market is particularly
attractive due to limited competition and a favorable regulatory environment;
in particular, pursuant to existing state and federal regulations, the Company
is able to charge rates which enable it to recover its operating and capital
costs, plus a reasonable (as determined by the relevant regulatory authority)
rate of return on its invested capital. Rural local exchange carriers ("RLECs")
which serve this market are characterized by stable operating results and
strong cash flow margins. The Company has successfully completed acquisitions
of fourteen RLECs in ten states
 
                                       1
<PAGE>
 
(Colorado, Illinois, Kansas, Maine, New Hampshire, New York, South Dakota,
Washington, Oklahoma and Vermont (the "Current States")) and, pro forma for the
Pending Acquisition, the Company will serve over 123,000 access lines and
provide local telephone service to customers in rural locations in ten states.
MJD has been successful in improving operating margins and reducing trailing
acquisition multiples by centralizing many of the acquired companies'
operations and increasing revenues through introducing innovative marketing
strategies for enhanced and ancillary services. The Company believes that the
attractive operating characteristics of rural markets and the Company's ability
to draw on its existing corporate resources create the opportunity to achieve
and maintain substantial operating efficiencies.
 
  The local telephone industry is comprised of a few large, well-known
companies such as the RBOCs and a large number of small independent telephone
companies. According to the United States Telecommunications Association
("USTA"), there are over 1,300 independent telephone companies with fewer than
25,000 access lines in the United States. The majority of these small telephone
companies operate in thinly populated, rural areas with limited competition due
to the unfavorable economics of constructing and operating a competing network
in such areas. Many of these RLECs are owned by families or small groups of
individuals and were founded shortly after World War I. The Company believes
that the owners of some of these RLECs are increasingly interested in selling
their companies, thereby creating significant future opportunities to acquire
additional properties. The Company also believes that the RBOCs are
increasingly likely to dispose of rural access lines in certain markets in
order to focus more attention and resources on their urban markets.
 
  The Company was formed in 1991 to capitalize on consolidation opportunities
in the RLEC market. The Company has assembled a senior management team with
significant industry experience and a strong track record of acquiring and
integrating RLECs. The seven most senior managers of the Company have an
average of approximately 20 years of experience in the telecommunications
industry with companies such as C&P Telephone (now a subsidiary of Bell
Atlantic Corporation), Sprint Corporation, Frontier Corporation and C-TEC
Corporation. As of May 31, 1998, senior management owned 24.0% of the common
stock of the Company on a fully diluted basis. MJD also benefits from the
financial and management expertise of its two primary equity investors, which
are investment partnerships affiliated with Kelso & Company ("Kelso") and
Carousel Capital Partners, L.P. ("Carousel" and collectively with Kelso, the
"Equity Investors"), each of which owned 38.0% of the common stock of the
Company on a fully diluted basis as of May 31, 1998. The Equity Investors have
invested a total of $47.8 million of equity capital in MJD through May 31,
1998. Kelso is one of the oldest and most established firms specializing in
leveraged investing, both as a principal and as a financial advisor, since
1971, and has significant experience with other media and communications
properties. Carousel, founded in 1996, is a merchant bank with over $160.0
million in equity commitments, focused on investing in middle market companies
located in the southeastern United States.
 
BUSINESS STRATEGY
 
  The Company's objective is to become the leading provider of
telecommunications services to rural communities and the preferred acquirer of
RLECs in the United States. Key strategies in the development and fulfillment
of the Company's objectives are discussed below.
 
  CONTINUED GROWTH THROUGH ACQUISITIONS. The Company expects to continue
growing primarily by acquiring independent RLECs and by purchasing rural
telephone operations from large telephone companies such as the RBOCs, GTE
Corporation and others. The Company focuses its acquisition efforts on rural
telephone companies that exhibit: (i) significant opportunities to realize
management and operating synergies and economies of scale; (ii) positive
economic and demographic characteristics; (iii) a positive regulatory and
operating environment; (iv) deployment of advanced technology; and (v) strong
mid-level management capabilities. Cellular, cable television, long distance
resale, paging and wireless operations may also be acquired, but primarily as
ancillary business segments of acquired RLECs.
 
 
                                       2
<PAGE>
 
  IMPROVE OPERATING EFFICIENCY OF ACQUIRED RLECS. By consolidating RLECs under
a single corporate organization, the Company has successfully achieved
significant operating efficiencies that the Company believes the independent
RLECs could not have individually attained. For example, the Company has
consolidated the regulatory, accounting and billing functions of its acquired
companies and has reduced the overhead costs associated with executive
management of such companies. The Company's acquisition strategy is to acquire
inherently sound operating RLECs which do not require dramatic changes to core
operations. Upon acquiring such companies, the Company applies its operating,
regulatory, marketing, technical and management expertise and its financial
resources to improve the operations and profitability of the acquired RLECs.
 
  INCREASE REVENUE THROUGH ENHANCED SERVICE OFFERINGS. The Company believes
that its local community presence and its brand recognition will allow it to
grow its revenues by offering enhanced and ancillary telecommunications
services to its existing customers. Unlike the RBOCs, MJD is not subject to
regulatory restrictions that prohibit it from marketing other services such as
long distance services in its existing franchise territories or elsewhere. The
Company intends to pursue incremental revenue growth through: (i) traditional
ancillary telephony service offerings such as enhanced calling services,
including voice mail and conference calling; (ii) long distance resale
services, including related products such as "800" service and long distance
calling cards; (iii) multimedia services such as Internet access, cable
television and other entertainment services; and (iv) various wireless
services, including cellular, PCS and paging. For example, during the year
ended December 31, 1997, ST Long Distance (the Company's long distance
subsidiary) introduced its long distance service program in selected markets
and realized an average first year penetration rate of approximately 57% in
these markets.
 
  EXPAND EXISTING MARKET PRESENCE BY LAUNCHING CLEC SERVICES. The Company
believes it has an opportunity to penetrate underserved markets adjacent to its
franchise areas as a competitive local exchange carrier ("CLEC"). The Company
believes that by pursuing this opportunity it may generate incremental revenue
and Adjusted EBITDA growth by utilizing its existing network infrastructure,
brand recognition and experienced personnel. The Company plans to offer an
array of telecommunications services, such as local, long distance, data and
wireless, to customers in rural and small urban markets (populations between
25,000 and 75,000) within approximately 200 miles of a Company-owned RLEC. The
Company intends to implement its CLEC strategy by entering a market before
other competitors and reselling the services of an incumbent LEC ("ILEC"),
capturing a significant market share and then migrating these customers to its
own facilities-based service. The Company is currently testing this strategy in
New Hampshire and New York and plans on determining whether or not to expand
its CLEC business based on the relative success achieved in these markets. See
"Business--Business Strategy" and "Risk Factors--Future Capital Requirements;
Expected CLEC Losses" and "--Competition--Risk of Inability to Compete as a
CLEC." The New Hampshire and New York markets are the initial markets in which
the Company's CLEC strategy is being evaluated. The Company plans to continue
providing service in these markets for the foreseeable future. Entry into new
markets will be based on a qualitative and quantitative assessment of our
performance in these two test markets. There is no set schedule for the Company
to perform such an assessment; rather, the testing and evaluation by the
Company is ongoing. For purposes of the Indenture relating to the Notes, the
Company will conduct its CLEC business through Unrestricted Subsidiaries, which
will limit the amount the Company can invest in the CLEC business and exempt
the CLEC subsidiaries from most of the covenants applicable to the Notes. See
"Description of Notes."
 
RECENT AND PENDING ACQUISITIONS
 
   The Company has recently completed, or plans to complete, the following RLEC
acquisitions:
 
  TACONIC TELEPHONE CORP. On March 30, 1998, the Company acquired Taconic.
Taconic, located in the Hudson Valley area of eastern New York, 30 miles
southeast of Albany, operates approximately 24,800 access lines (approximately
83% residential). The Company purchased the common stock of Taconic for
$67.5 million and assumed $9.2 million of debt of Taconic. In the year ended
December 31, 1997, Taconic had revenues of $20.4 million.
 
                                       3
<PAGE>
 
 
  ELLENSBURG TELEPHONE COMPANY. On April 30, 1998, the Company acquired
Ellensburg. Ellensburg, located in Ellensburg, Washington, 100 miles southeast
of Seattle, operates approximately 23,900 access lines (approximately 76%
residential). The Company purchased the common stock of Ellensburg for $91.0
million. In the year ended December 31, 1997, Ellensburg had revenues of $14.7
million.
 
  CHOUTEAU TELEPHONE COMPANY. On June 1, 1998, the Company acquired Chouteau.
Chouteau, located in Chouteau, Oklahoma, 30 miles east of Tulsa, operates
approximately 3,400 access lines (approximately 84% residential). The Company
purchased the common stock of Chouteau for $18.6 million and assumed $3.0
million of debt of Chouteau. In the year ended December 31, 1997, Chouteau had
revenues of $4.3 million.
 
  UTILITIES, INC. On April 3, 1998, the Company entered into an agreement to
acquire Utilities, which is expected to close in the third or fourth quarter of
1998. Utilities is headquartered in Standish, Maine, approximately 15 miles
west of Portland. Utilities operates approximately 22,200 access lines in
central and southern Maine, most of which are located in exchanges adjacent to
exchanges operated by subsidiaries of the Company. In the year ended December
31, 1997, Utilities had revenues of $16.2 million (which excludes the revenues
of certain cellular businesses of Utilities that are not being acquired by
MJD).
 
  The Pending Acquisition is subject to certain closing conditions. See "Risk
Factors--Risk That Pending Acquisition Will Not Be Consummated" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
ACQUISITION HISTORY
 
  The following summarizes each RLEC the Company has acquired to date and the
Pending Acquisition.
 
<TABLE>
<CAPTION>
                                                ACCESS LINES
                              LOCATION OF           AS OF           DATE         PURCHASE
     RLEC ACQUIRED            OPERATIONS      DECEMBER 31, 1997   ACQUIRED         PRICE
- ------------------------  ------------------- ----------------- ------------- ---------------
<S>                       <C>                 <C>               <C>           <C>
Sunflower Telephone       Kansas/Colorado            4,675      May 1993      $19.7 million
 Company, Inc.
Northland Telephone       Maine/New Hampshire       20,493      August 1994   $39.7 million
 Company of Maine, Inc.
STE/NE Acquisition Corp.  Vermont                    5,510      August 1994   $12.0 million
 d/b/a Northland
 Telephone Company
 of Vermont
Sidney Telephone Company  Maine                      1,359      January 1996  $ 3.0 million
Big Sandy Telecom, Inc.   Colorado                     893      June 1996     $ 3.1 million
Bluestem Telephone        Kansas                       992      August 1996   $ 3.9 million
 Company
Odin Telephone            Illinois                   1,164      August 1996   $ 5.0 million
 Exchange, Inc.
Kadoka Telephone Co.      South Dakota                 580      January 1997  $ 2.9 million
Columbine Telephone       Colorado                   1,085      April 1997    $ 4.6 million
 Company, Inc.
Chautauqua & Erie         New York                  11,070      July 1997     $22.0 million
 Telephone Corporation
C-R Communications, Inc.  Illinois                     910      October 1997  $ 4.0 million
Taconic Telephone Corp.   New York                  24,832      March 1998    $67.5 million
Ellensburg Telephone      Washington                23,910      April 1998    $91.0 million
 Company
Chouteau Telephone        Oklahoma                   3,394      June 1998     $18.6 million
 Company
                                                   -------
  Subtotal:                                        100,867
Utilities, Inc.           Maine                     22,239      Third/Fourth  Not consummated
                                                                 Quarter 1998
                                                                 (expected)
                                                   -------
  Total:                                           123,106
                                                   =======
</TABLE>
 
  The Company's principal executive offices are located at Morehead Place, 521
East Morehead Street, Suite 250, Charlotte, North Carolina 28202, and its phone
number is (704) 344-8150.
 
                                       4
<PAGE>
 
                               THE EXCHANGE OFFER
 
The Exchange Offer........    $1,000 principal amount of Fixed Rate Exchange
                              Notes and Floating Rate Exchange Notes will be
                              issued in exchange for each $1,000 principal
                              amount of Fixed Rate Original Notes and Floating
                              Rate Original Notes, respectively, validly
                              tendered pursuant to the Exchange Offer. As of
                              the date hereof, $125 million and $75 million in
                              aggregate principal amount of Fixed Rate Original
                              Notes and Floating Rate Original Notes,
                              respectively, are outstanding. The Company will
                              issue the Exchange Notes to tendering holders of
                              Original Notes promptly after the Expiration
                              Date.
 
Resales...................    Based on an interpretation by the staff of the
                              Commission set forth in Morgan Stanley & Co.,
                              Incorporated, SEC No-Action Letter (available
                              June 5, 1991) (the "Morgan Stanley Letter"),
                              Exxon Capital Holdings Corporation, SEC No-Action
                              Letter (available May 13, 1988) (the "Exxon
                              Capital Letter") and similar letters, the Company
                              believes that Exchange Notes issued pursuant to
                              the Exchange Offer in exchange for Old Notes may
                              be offered for resale, resold and otherwise
                              transferred by any person receiving such Exchange
                              Notes, whether or not such person is the holder
                              (other than any such holder or other person which
                              is (i) a broker-dealer that receives Exchange
                              Notes for its own account in exchange for Old
                              Notes, where such Old Notes were acquired by such
                              broker-dealer as a result of market-making or
                              other trading activities, or (ii) an "affiliate"
                              of the Company within the meaning of Rule 405
                              under the Securities Act (collectively,
                              "Restricted Holders")) without compliance with
                              the registration and prospectus delivery
                              provisions of the Securities Act, provided that
                              (a) such Exchange Notes are acquired in the
                              ordinary course of business of such holder or
                              other person, (b) neither such holder nor such
                              other person is engaged in or intends to engage
                              in a distribution of such Exchange Notes, and (c)
                              neither such holder nor other person has any
                              arrangement or understanding with any person to
                              participate in the distribution of such Exchange
                              Notes. If any person were to be participating in
                              the Exchange Offer for the purposes of
                              participating in a distribution of the Exchange
                              Notes in a manner not permitted by the
                              interpretation of the Staff of the Commission,
                              such person (a) could not rely upon the Morgan
                              Stanley Letter, the Exxon Capital Letter or
                              similar letters and (b) must comply with the
                              registration and prospectus delivery requirements
                              of the Securities Act in connection with a
                              secondary resale transaction. Each broker or
                              dealer that receives Exchange Notes for its own
                              account in exchange for Old Notes, where such Old
                              Notes were acquired by such broker or dealer as a
                              result of market-making or other activities, must
                              acknowledge that it will deliver a prospectus in
                              connection with any sale of such Exchange Notes.
                              See "Plan of Distribution."
 
Expiration Date...........    5:00 p.m., New York City time, on      , 1998
                              unless the Exchange Offer is extended, in which
                              case the term "Expiration Date" means the latest
                              date and time to which the Exchange Offer is
                              extended.
 
                                       5
<PAGE>
 
 
Accrued Interest on the
 Exchange Notes and Old       The Exchange Notes will bear interest from May 5,
 Notes....................    1998. Holders of Old Notes whose Old Notes are
                              accepted for exchange will be deemed to have
                              waived the right to receive any payment in
                              respect of interest on such Old Notes accrued to
                              the date of issuance of the Exchange Notes.
 
Conditions to the             The Exchange Offer is subject to certain
 Exchange Offer        ...    customary conditions. The conditions are limited
                              and relate in general to proceedings which have
                              been instituted or laws which have been adopted
                              that might impair the ability of the Company to
                              proceed with the Exchange Offer. As of the date
                              of this Prospectus, none of these events had
                              occurred, and the Company believes their
                              occurrence to be unlikely. If any such conditions
                              exist prior to the Expiration Date, the Company
                              may (a) refuse to accept any Old Notes and return
                              all previously tendered Old Notes, (b) extend the
                              Exchange Offer or (c) waive such conditions. See
                              "The Exchange Offer--Conditions."
 
Procedures for Tendering
 Old Notes................    Each holder of Old Notes wishing to accept the
                              Exchange Offer must complete, sign and date the
                              Letter of Transmittal, or a facsimile thereof, in
                              accordance with the instructions contained herein
                              and therein, and mail or otherwise deliver such
                              Letter of Transmittal, or such facsimile, or an
                              Agent's Message (as defined in "The Exchange
                              Offer") in connection with a book-entry transfer
                              together with the Old Notes to be exchanged and
                              any other required documentation to the Exchange
                              Agent (as defined in "The Exchange Offer") at the
                              address set forth herein and therein. Tendered
                              Old Notes, the Letter of Transmittal and
                              accompanying documents must be received by the
                              Exchange Agent by 5:00 p.m. New York City time on
                              the Expiration Date. See "The Exchange Offer--
                              Procedures for Tendering." By executing the
                              Letter of Transmittal, each holder will represent
                              to the Company that, among other things, the
                              Exchange Notes acquired pursuant to the Exchange
                              Offer are being obtained in the ordinary course
                              of business of the person receiving such Exchange
                              Notes, whether or not such person is the holder,
                              that neither the holder nor any such other person
                              is engaged in or intends to engage in a
                              distribution of the Exchange Notes or has an
                              arrangement or understanding with any person to
                              participate in the distribution of such Exchange
                              Notes, and that neither the holder nor any such
                              other person is an "affiliate," as defined under
                              Rule 405 of the Securities Act, of the Company.
 
Special Procedures for
 Beneficial Holders.......    Any beneficial holder whose Old Notes are
                              registered in the name of such holder's broker,
                              dealer, commercial bank, trust company or other
                              nominee and who wishes to tender in the Exchange
                              Offer should contact such registered holder
                              promptly and instruct such registered holder to
                              tender on such holder's behalf. If such
                              beneficial holder wishes to tender on such
                              holder's own behalf, such beneficial holder must,
                              prior to completing and executing the Letter of
                              Transmittal and delivering such holder's Old
                              Notes, either make
 
                                       6
<PAGE>
 
                              appropriate arrangements to register ownership of
                              the Old Notes in such holder's name or obtain a
                              properly completed bond power from the registered
                              holder. The transfer of record ownership may take
                              considerable time. See "The Exchange Offer--
                              Procedures for Tendering."
 
Guaranteed Delivery           Holders of Old Notes who wish to tender their Old
 Procedures...............    Notes and whose Old Notes are not immediately
                              available or who cannot deliver their Old Notes
                              and a properly completed Letter of Transmittal or
                              any other documents required by the Letter of
                              Transmittal to the Exchange Agent (or comply with
                              the procedures for book-entry transfer) prior to
                              the Expiration Date may tender their Old Notes
                              according to the guaranteed delivery procedures
                              set forth in "The Exchange Offer--Guaranteed
                              Delivery Procedures."
 
Withdrawal Rights.........    Tenders may be withdrawn at any time prior to
                              5:00 p.m., New York City time, on the Expiration
                              Date.
 
Acceptance of Old Notes
 and Delivery of Exchange     Subject to certain conditions, the Company will
 Notes....................    accept for exchange any and all Old Notes which
                              are properly tendered in the Exchange Offer prior
                              to 5:00 p.m., New York City time, on the
                              Expiration Date. The Exchange Notes issued
                              pursuant to the Exchange Offer will be delivered
                              promptly after the Expiration Date. See "The
                              Exchange Offer--Terms of the Exchange Offer."
 
Certain Federal Income
 Tax Consequences.........    The Company believes that the exchange of Old
                              Notes for Exchange Notes pursuant to the Exchange
                              Offer will not be a taxable event for federal
                              income tax purposes. A holder's holding period
                              for Exchange Notes will include the holding
                              period for Old Notes. For a discussion
                              summarizing certain U.S. federal income tax
                              consequences to holders of the Exchange Notes,
                              see "Certain Federal Income Tax Consequences."
 
Exchange Agent............    United States Trust Company of New York is
                              serving as exchange agent (the "Exchange Agent")
                              in connection with the Exchange Offer. The
                              mailing address of the Exchange Agent is United
                              States Trust Company of New York, P.O. Box 844
                              Cooper Station, New York 10276, Attention:
                              Corporate Trust Services. Deliveries by hand
                              before 4:30 p.m. should be delivered to United
                              States Trust Company of New York, 111 Broadway,
                              New York, New York 10006, Attention: Lower Level
                              Corporate Trust Window and by hand after 4:30
                              p.m. should be delivered to 770 Broadway, 13th
                              Floor, New York, New York 10003. For information
                              with respect to the Exchange Offer, contact the
                              Exchange Agent at telephone number 800-548-6565
                              or facsimile number (212) 420-6152.
 
Use of Proceeds...........    The Company will not receive any proceeds from
                              the Exchange Offer. See "Use of Proceeds." The
                              Company has agreed to bear the expenses of the
                              Exchange Offer pursuant to the Registration
                              Agreement (as defined in "Summary of Terms of
                              Exchange Notes"). No underwriter is being used in
                              connection with the Exchange Offer.
 
                                       7
<PAGE>
 
                       SUMMARY OF TERMS OF EXCHANGE NOTES
 
  The Exchange Offer constitutes an offer to exchange up to $125 million and
$75 million aggregate principal amount of the Fixed Rate Exchange Notes and
Floating Rate Exchange Notes, respectively, for up to an equal aggregate
principal amount of Fixed Rate Original Notes and Floating Rate Original Notes,
respectively. The Exchange Notes will be obligations of the Company evidencing
the same indebtedness as the Original Notes, and will be entitled to the
benefit of the same indenture (the "Indenture"). The form and terms of the
Fixed Rate Exchange Notes and the Floating Rate Exchange Notes are
substantially the same as the form and terms of the Fixed Rate Original Notes
and Floating Rate Original Notes, respectively, except that the Exchange Notes
have been registered under the Securities Act. See "Description of the Notes."
 
                           COMPARISON WITH OLD NOTES
 
Freely Transferable.......    The Exchange Notes will be freely transferable
                              under the Securities Act by holders who are not
                              Restricted Holders. Restricted Holders are
                              restricted from transferring the Exchange Notes
                              without compliance with the registration and
                              prospectus delivery requirements of the
                              Securities Act. The Fixed Rate Exchange Notes and
                              the Floating Rate Exchange Notes will be
                              identical in all material respects (including
                              interest rate, maturity and restrictive
                              covenants) to the Fixed Rate Old Notes and
                              Floating Rate Old Notes, respectively, with the
                              exception that the Exchange Notes will be
                              registered under the Securities Act. See "The
                              Exchange Offer--Terms of the Exchange Offer."
 
Registration Rights.......    The holders of Old Notes currently are entitled
                              to certain registration rights pursuant to the
                              Registration Agreement, dated as of April 30,
                              1998 (the "Registration Agreement"), by and among
                              the Company and Salomon Smith Barney, BT Alex.
                              Brown, NationsBanc Montgomery Securities LLC and
                              Donaldson, Lufkin & Jenrette Securities
                              Corporation, the initial purchasers of the Old
                              Notes (collectively, the "Initial Purchasers"),
                              including the right to cause the Company to
                              register the Old Notes under the Securities Act
                              if the Exchange Offer is not consummated prior to
                              the Exchange Offer Termination Date (as defined
                              in "The Exchange Offer"). See "The Exchange
                              Offer--Conditions." However, pursuant to the
                              Registration Agreement, such registration rights
                              will expire upon consummation of the Exchange
                              Offer. Accordingly, holders of Old Notes who do
                              not exchange their Old Notes for Exchange Notes
                              in the Exchange Offer will not be able to
                              reoffer, resell or otherwise dispose of their Old
                              Notes unless such Old Notes are subsequently
                              registered under the Securities Act or unless an
                              exemption from the registration requirements of
                              the Securities Act is available.
 
                          TERMS OF THE EXCHANGE NOTES
 
Securities Offered........    $125 million aggregate principal amount of 9 1/2%
                              Senior Subordinated Notes due 2008, Series B.
 
                              $75 million aggregate principal amount of
                              Floating Rate Callable Securities due 2008,
                              Series B.
 
                                       8
<PAGE>
 
 
Issuer....................    MJD Communications, Inc.
 
Maturity Date.............    The Floating Rate Exchange Notes and the Fixed
                              Rate Exchange Notes will mature on May 1, 2008.
 
                              Interest on the Exchange Notes will be payable
Interest Payment Dates....    semi-annually on each May 1 and November 1,
                              commencing November 1, 1998. The Fixed Rate
                              Exchange Notes will bear interest at a rate of 9
                              1/2% per annum. The Floating Rate Exchange Notes
                              will bear interest at a rate per annum equal to
                              LIBOR plus 418.75 basis points. The rate of
                              interest on the Floating Rate Exchange Notes will
                              be reset semi-annually.
 
Subordination.............       
                              The Exchange Notes are general unsecured
                              obligations of the Company, subordinated in right
                              of payment to all existing and future Senior Debt
                              (as defined in "Description of Notes") of the
                              Company, and effectively subordinated to all
                              existing and future debt and other liabilities
                              (including trade payables and accrued
                              liabilities) of the Company's subsidiaries. The
                              Company is a holding company that derives all of
                              its operating income and cash flow from its
                              subsidiaries. See "Risk Factors--Subordination;
                              Holding Company Structure." As of June 30, 1998,
                              after giving effect to the Pending Acquisition,
                              the Company would have had approximately $146.3
                              million of Senior Debt outstanding (excluding
                              unused commitments under the New Credit Facility)
                              and total balance sheet liabilities of the
                              Company's subsidiaries would have been
                              approximately $230.8 million (including
                              guaranties of $146.3 million of Senior Debt of
                              the Company). In addition, as of June 30, 1998,
                              the Company would have had $7.0 million of Debt
                              that ranked parri passu to the Notes and no Debt
                              outstanding that ranked subordinate to the Notes.
                              See "Description of the Notes--Subordination."
                                  
Sinking Fund..............    None.
 
Optional Redemption.......    The Fixed Rate Exchange Notes will be redeemable,
                              in whole or in part, at the option of the
                              Company, on or after May 1, 2003, and the
                              Floating Rate Exchange Notes will be redeemable,
                              in whole or in part, at the option of the
                              Company, at any time, in each case at the
                              redemption prices set forth herein, plus accrued
                              and unpaid interest to the date of redemption. In
                              addition, at any time on or prior to May 1, 2001,
                              the Company may redeem up to 35% of the aggregate
                              principal amount of the Fixed Rate Exchange Notes
                              with the net cash proceeds of an Equity Sale, at
                              a redemption price equal to 109.5% of the
                              principal amount thereof, plus accrued interest
                              to the date of redemption; provided that at least
                              65% of the aggregate principal amount of Fixed
                              Rate Exchange Notes originally issued remains
                              outstanding immediately after any redemption. See
                              "Description of the Notes--Optional Redemption."
 
                                       9
<PAGE>
 
 
Change of Control.........    Upon a Change of Control each holder of the
                              Exchange Notes will have the right to require the
                              Company to repurchase such holder's Exchange
                              Notes at a price equal to 101% of the principal
                              amount thereof, plus accrued and unpaid interest
                              to the date of repurchase. See "Description of
                              the Notes--Repurchase at Option of Holders upon a
                              Change of Control."
 
Certain Covenants.........
                              The Indenture contains limitations on, among
                              other things, (i) the ability of the Company and
                              the Restricted Subsidiaries to incur additional
                              Debt, (ii) the making of certain Restricted
                              Payments, including Investments, (iii) the
                              creation of certain Liens, (iv) the issuance and
                              sale of Capital Stock of Restricted Subsidiaries,
                              (v) Asset Sales, (vi) payment restrictions
                              affecting Restricted Subsidiaries, (vii)
                              transactions with Affiliates, (viii) the ability
                              of the Company to incur layered Debt, (ix) the
                              ability of the Company to enter lines of business
                              outside the Telecommunications Business and (x)
                              certain mergers, consolidations and transfers of
                              assets by or involving the Company (the foregoing
                              capitalized terms are defined in "Description of
                              the Notes--Certain Definitions"). All of these
                              limitations will be subject to a number of
                              important qualifications. See "Description of the
                              Notes--Certain Covenants."
 
                                  RISK FACTORS
 
  For a discussion of factors that should be considered in evaluating an
investment in the Exchange Notes, see "Risk Factors."
 
                                       10
<PAGE>
 
               SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
 
                             (DOLLARS IN THOUSANDS)
 
  The following table sets forth summary financial information of the Company.
The summary historical consolidated financial data for the years ended December
31, 1995, 1996, 1997 and the six months ended June 30, 1997 and 1998 are
derived from the consolidated financial statements of the Company included
elsewhere in this Prospectus which, in the case of the financial statements for
the years ended December 31, 1995, 1996 and 1997 have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The summary historical
consolidated financial statement data for the six months ended June 30, 1997
and 1998 have been derived from unaudited consolidated statements of the
Company, which, in the opinion of management, include all adjustments necessary
for a fair presentation of such data. The summary historical consolidated
financial statement data for the year ended December 31, 1994 are derived from
consolidated financial statements of the Company, not included herein, which
are audited by independent certified public accountants. The summary historical
consolidated financial statement data for the year ended December 31, 1993 have
been derived from unaudited consolidated financial statements of the Company,
not included herein, which, in the opinion of management, includes all
adjustments necessary for a fair presentation of such data. The summary pro
forma combined financial data for the year ended December 31, 1997 as of and
for the six months ended June 30, 1998 have been derived from Company prepared
financial information, the audited consolidated financial statements and notes
thereto of certain of the Acquisitions and the audited consolidated financial
statements and notes thereto of the Company, which financial statements appear
elsewhere in this Prospectus. The following summary pro forma combined
financial and operating data are presented as if each of the Acquisitions, the
New Credit Facility and the Offering had occurred on January 1, 1997 for the
year ended December 31, 1997 and the six-month period ended June 30, 1998 in
the case of operating data, and as of June 30, 1998 in the case of balance
sheet data. The summary pro forma combined financial data have been prepared
for comparative purposes only and do not purport to be indicative of the
results of operations that would have been achieved had the Acquisitions, the
New Credit Facility and the Offering been consummated as of the assumed dates,
nor are the results necessarily indicative of the Company's future results of
operations. See "Risk Factors--Other Risks associated with Acquisitions." The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements, and notes thereto, the Pro
Forma Consolidated Financial Statements, and notes thereto, and the individual
financial statements and notes thereto of certain of the Acquisitions appearing
elsewhere in this Prospectus.
 
<TABLE>   
<CAPTION>
                                         ACTUAL
                 ------------------------------------------------------------
                                                               SIX MONTHS
                                                                  ENDED
                        YEAR ENDED DECEMBER 31,                 JUNE 30,
                 ------------------------------------------  ----------------
                                                               (UNAUDITED)
                  1993    1994     1995     1996     1997     1997     1998
                 ------  -------  -------  -------  -------  -------  -------
<S>              <C>     <C>      <C>      <C>      <C>      <C>      <C>
STATEMENT OF
 OPERATIONS
 DATA:
Operating
 revenues....... $7,066  $14,025  $24,749  $30,258  $42,972  $17,887  $35,262
Operating
 expenses.......  5,789   10,056   17,343   20,060   30,533   12,099   25,720
Income from
 operations.....  1,276    3,968    7,406   10,198   12,439    5,788    9,542
Interest
 expense, net...   (791)  (3,772)  (7,267)  (9,605)  (9,293)  (3,998)  (9,707)
Other income
 (expense)......    750    1,755      892      829    1,515      127      759
Earnings (loss)
 before
 extraordinary
 item...........    930    1,011      484      (39)   2,785    1,077      205
Extraordinary
 item...........    --       --       --       --    (3,612)     --    (2,521)
Net earnings
 (loss)......... $  930  $   997  $   478  $   (72) $  (888) $ 1,055  $(2,352)
<CAPTION>
                                            PRO FORMA
                 ---------------------------------------------------------------
                                                           SIX MONTHS
                                                             ENDED
                  YEAR ENDED DECEMBER 31, 1997           JUNE 30, 1998
                 ------------------------------ --------------------------------
                     COMPLETED      AS ADJUSTED          COMPLETED
                 ACQUISITIONS, NEW  FOR PENDING      ACQUISITIONS, NEW
                  CREDIT FACILITY   ACQUISITION       CREDIT FACILITY,
                 AND OFFERING(1)(2)   (2)(3)    OFFERING AND UTILITIES(2)(4)
                 ------------------ ----------- ----------------------------
<S>              <C>                <C>         <C>                          <C>
STATEMENT OF
 OPERATIONS
 DATA:
Operating
 revenues.......      $ 88,391       $104,606             $ 56,033
Operating
 expenses.......        66,544         78,634               43,335
Income from
 operations.....        21,149         24,702               11,998
Interest
 expense, net...       (29,704)       (35,646)             (18,044)
Other income
 (expense)......         3,160          3,388                   90
Earnings (loss)
 before
 extraordinary
 item...........      $ (4,482)      $ (6,186)            $ (4,193)
Extraordinary
 item...........
Net earnings
 (loss).........
</TABLE>    
 
<TABLE>   
<CAPTION>
                                         ACTUAL                PRO FORMA
                              ------------------------------ --------------
                                   AS OF            AS OF      AS OF JUNE 30,
                                DECEMBER 31,      JUNE 30,          1998
                              -----------------  ----------- ------------------
                                                 (UNAUDITED)    PENDING
                               1996      1997       1998     ACQUISITION(4)
                              -------  --------  ----------- --------------
<S>                           <C>      <C>       <C>         <C>            <C>
BALANCE SHEET DATA:
Cash and cash equivalents...  $ 4,253  $  6,822   $ 14,045      $ 15,456
Working capital.............      596       108     18,766        17,968
Property, plant and
 equipment, net.............   41,615    61,207    122,590       144,328
Total assets................   97,020   144,613    370,714       450,767
Long-term debt..............   73,958   131,912    302,387       372,886
Redeemable preferred stock..   10,689       130        --            --
Total stockholders' equity
 (deficit)..................   (2,142)  (10,939)    18,783        15,783
</TABLE>    
 
                                       11
<PAGE>
 
 
<TABLE>   
<CAPTION>
                                                     ACTUAL
                            --------------------------------------------------------------
                                                                           SIX MONTHS
                                                                              ENDED
                                    YEAR ENDED DECEMBER 31,                 JUNE 30,
                            ------------------------------------------  ------------------
                                                                           (UNAUDITED)
                             1993   1994     1995     1996      1997     1997      1998
                            ------ -------  -------  -------  --------  -------  ---------
<S>                         <C>    <C>      <C>      <C>      <C>       <C>      <C>
OTHER FINANCIAL
 DATA:
Adjusted
 EBITDA(5)......               --  $ 8,808  $14,050  $17,639  $ 22,670  $ 9,902  $  17,565
Depreciation and
 amortization...            $1,240   3,099    5,757    6,644     8,777    4,010      7,300
Capital
 expenditures...               293   1,768    4,439    8,439     8,239    2,922      3,332
Ratio of
 earnings to
 fixed
 charges(7).....              2.5x    1.5x     1.1x     1.1x      1.5x     1.5x       1.1x
Deficiency of
 earnings to
 fixed
 charges(7).....               --      --       --       --        --       --         --
SUMMARY CASH
 FLOW DATA:
Net cash provided by
  operating
 activities.....                   $ 5,504  $ 6,039  $ 9,772  $  9,840  $ 4,253  $   7,325
Net cash provided by (used
 in) investing
 activities.....                   (50,846)  (4,481) (19,790)  (38,967)  (7,155)  (174,322)
Net cash provided by
  financing
 activities.....                    49,937   (2,903)  10,599    31,697    3,796    174,220
OPERATING DATA:
Access lines in
 service........             4,343  28,205   28,737   34,017    48,731   34,754    103,689
<CAPTION>
                                                       PRO FORMA
                            -----------------------------------------------------------------
                                                                        SIX MONTHS
                                                                          ENDED
                             YEAR ENDED DECEMBER 31, 1997             JUNE 30, 1998
                            -------------------------------- --------------------------------
                                COMPLETED      AS ADJUSTED            COMPLETED
                            ACQUISITIONS, NEW  FOR PENDING        ACQUISITIONS, NEW
                             CREDIT FACILITY   ACQUISITION         CREDIT FACILITY,
                            AND OFFERING(1)(2)   (2)(3)      OFFERING AND UTILITIES(2)(4)
                            ------------------ ------------- ----------------------------
<S>                         <C>                <C>           <C>                          <C>
OTHER FINANCIAL
 DATA:
Adjusted
 EBITDA(5)......                 $ 44,686       $ 53,209(6)            $ 24,895(6)
Depreciation and
 amortization...                   20,377         25,120                 12,806
Capital
 expenditures...                   15,688         19,241                  4,362
Ratio of
 earnings to
 fixed
 charges(7).....                      --             --                     --
Deficiency of
 earnings to
 fixed
 charges(7).....                 $  5,396       $  7,556               $  5,955
SUMMARY CASH
 FLOW DATA:
Net cash provided by
  operating
 activities.....                   13,216         16,655                  8,098
Net cash provided by (used
 in) investing
 activities.....                 (219,783)      (269,611)              (220,100)
Net cash provided by
  financing
 activities.....                  193,057        239,076                215,244
OPERATING DATA:
Access lines in
 service........                  100,867        123,106                126,340
</TABLE>    
- --------
(1) Gives effect to the Completed Acquisitions, the New Credit Facility and the
    Offering as if the closings thereof occurred on January 1, 1997.
(2) The summary pro forma combined operating data reflect adjustments in
    connection with the relevant Acquisitions including: (i) amortization
    expense to reflect goodwill recorded for purchase accounting, (ii)
    elimination of certain specifically identified expenses related to
    duplicative management services, directors fees, employee salaries and
    related benefits, (iii) interest expense, net after giving effect to the
    New Credit Facility and the Offering, and (iv) income tax expense to
    reflect the effect that would result if the relevant Acquisitions had been
    combined and subject to an assumed federal statutory rate and the
    applicable state statutory tax rate for each of the relevant Acquisitions.
(3) Gives effect to the Completed Acquisitions, the New Credit Facility, the
    Offering and the Pending Acquisition as if the closings thereof occurred on
    January 1, 1997. The Pending Acquisition is subject to certain closing
    conditions, See "Risk Factors--Risk that Pending Acquisition Will Not Be
    Consummated."
(4) Gives effect to the Completed Acquisitions, the New Credit Facility, the
    Offering and the Pending Acquisition as if the closings thereof occurred on
    January 1, 1997 in the case of statement of operations data, and as of June
    30, 1998 in the case of balance sheet data. The Pending Acquisition is
    subject to certain closing conditions. See "Risk Factors--Risk that Pending
    Acquisition Will Not Be Consummated."
   
(5) 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 measurement
    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 performance, or for cash flow as a measure of
    liquidity. 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 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 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.     
   
(6) Pro forma Adjusted EBITDA does not include the elimination of historical
    expenses for duplicative supervisory and staff-level employees and net
    incremental costs of outsourcing certain functions. If such historical
    expenses were eliminated, pro forma Adjusted EBITDA would be $54.4 million
    and $25.3 million for the year ended December 31, 1997 and the six months
    ended June 30, 1998, respectively.     
   
(7) For purposes of determining the ratio of earnings to fixed charges,
    earnings are defined as earnings before income taxes, minority interest and
    extraordinary items, plus 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.     
 
                                       12
<PAGE>
 
                                 RISK FACTORS
 
  In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the risk factors set forth
below in evaluating an investment in the Notes offered hereby.
 
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
   
  The Company is highly leveraged due to the Offering. As of June 30, 1998, on
a pro forma basis after giving effect to the Pending Acquisition, the Company
would have had approximately $373.7 million of outstanding total consolidated
indebtedness and stockholders' equity of $15.8 million (on an historical
basis, the Company had stockholders' equity of approximately $18.8 million at
June 30, 1998). The Indenture permits, subject to certain conditions, the
incurrence of additional indebtedness, all of which may be Senior Debt or
indebtedness of subsidiaries. The Company intends to incur substantial
additional indebtedness (including secured indebtedness) following the
Offering for the acquisition and expansion of RLECs and the introduction of
new service offerings (including but not limited to the Company's proposed
CLEC business). Moreover, although the CLEC business is expected to result in
operating losses, at least in initial years, such losses will not reduce the
Company's debt capacity under the Indenture because the business will be
conducted through Unrestricted Subsidiaries. The Company expects its CLEC
business to generate negative operating cash flow in the first three years of
operation. See "--Future Capital Requirements; Expected CLEC Losses," "--
Subordination; Holding Company Structure" and "Description of Notes--Certain
Covenants--Limitation on Debt."     
 
  The Company's high degree of leverage could have important consequences,
including (i) a substantial portion of the Company's sources of capital and
cash flow from operations must be dedicated to debt service payments, thereby
reducing the funds available to the Company for other purposes; (ii) the
Company's ability to obtain additional debt financing in the future for
working capital, capital expenditures, acquisitions, repayment of indebtedness
or other purposes may be impaired, whether as a result of the covenants and
other terms of its debt instruments or otherwise; (iii) the Company is
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; (iv) the Company's high degree of
leverage may limit its ability to effect acquisitions, offer new services and
otherwise meet its growth objectives; and (v) the Company's high degree of
leverage may hinder its ability to adjust rapidly to changing market
conditions. In addition, the Company's operating and financial flexibility is
limited by the Indenture and the New Credit Facility and may be limited by
covenants contained in agreements governing future indebtedness of the Company
and its subsidiaries. Such covenants will impose significant operating and
financial restrictions on the Company and its subsidiaries and will restrict,
limit or prohibit, among other things, the ability of the Company and its
subsidiaries to incur additional indebtedness, pay dividends, repay
indebtedness prior to its stated maturity, sell assets, make investments,
engage in transactions with affiliates, create liens or engage in mergers or
acquisitions. There can be no assurance that such covenants will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities that may be in the interest of the
Company. See "Description of the Notes."
 
SUBORDINATION; HOLDING COMPANY STRUCTURE
 
  The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future Senior Debt of the Company. As of
June 30, 1998, after giving effect to the Pending Acquisition, the Company
would have had approximately $146.3 million of Senior Debt outstanding
(excluding unused commitments under the New Credit Facility). In the event of
the bankruptcy, liquidation or reorganization of the Company, the assets of
the Company will be available to pay the Notes only after all Senior Debt of
the Company has been paid in full. Sufficient funds may not exist to pay
amounts due on the Notes in such event. In addition, the subordination
provisions of the Indenture provide that no cash payment may be made with
respect to the Notes during the continuance of a
 
                                      13
<PAGE>
 
payment default under any Senior Debt of the Company. Furthermore, if certain
nonpayment defaults exist with respect to certain Senior Debt of the Company,
the holders of such Senior Debt will be able to prevent payments on the Notes
for certain periods of time. See "Description of Notes--Subordination."
   
  The Company is a holding company that derives all of its operating income
from the Company's subsidiaries. In addition to the Company, certain minority
investors also hold (or have the right to purchase) a portion of the capital
stock of such subsidiaries. To the extent that the capital stock of such
subsidiaries is owned by persons other than the Company, such persons are
generally entitled to receive a pro rata share of any distributions made by
such subsidiaries to the Company. The holders of the Notes will have no direct
claims against the Company's subsidiaries. Consequently, the right of holders
of the Notes to participate in any distribution of assets of such subsidiaries
upon any liquidation, bankruptcy, reorganization or otherwise will be subject
to prior claims of creditors of such subsidiaries (including, the lenders
under the Credit Facility, by virtue of guarantees of such indebtedness by the
Company's subsidiaries). Therefore, the Notes will be effectively subordinated
to all existing and future debt and other liabilities (including trade
payables and accrued liabilities) of the Company's subsidiaries. As of June
30, 1998, after giving pro forma effect to the Pending Acquisition, total
balance sheet liabilities of the Company's subsidiaries would have been
approximately $230.8 million (including guarantees of $146.3 million of Senior
Debt of the Company under the New Credit Facility). The Company's subsidiaries
have other liabilities, including contingent liabilities, that could be
substantial. The Company is dependent on the earnings and cash flow of its
subsidiaries to meet its debt obligations, including its obligations with
respect to the Notes. The ability of the Company's subsidiaries to make such
payments or advances to the Company is limited by the laws of the relevant
states in which such subsidiaries are organized or located, including, in some
instances, by minimum capitalization requirements imposed by state regulatory
bodies that oversee the telecommunications industry in such states. In certain
circumstances, the prior or subsequent approval of such payments or advances
by such subsidiaries to the Company is required from such regulatory bodies or
other governmental entities. In addition, certain subsidiaries of the Company
have debt the terms of which, under certain circumstances, could prohibit such
subsidiaries' ability to pay dividends or make other payments or advances to
the Company. Accordingly, there can be no assurance that the Company's
subsidiaries will be able to, or will be permitted to, pay to the Company
amounts necessary to service the Notes. In the event such amounts are not paid
to the Company, the Company would be unable to make required principal and
interest payments on the Notes.     
 
RISK THAT PENDING ACQUISITION WILL NOT BE CONSUMMATED
 
  The Pending Acquisition is subject to regulatory approvals, including the
approval of the relevant public utilities commission in the state of the
company to be acquired. No assurance can be given that the necessary approvals
will be received. The agreement pertaining to the Pending Acquisition provides
that if the acquisition is not completed by December 31, 1998, such agreement
terminates. The Pending Acquisition is subject to certain other closing
conditions, and there can be no assurance as to when, or if, such acquisition
will be consummated. Failure to consummate the Pending Acquisition will not
have any effect on the Company's historical financial statements. Investors
should see the Unaudited Pro Forma Consolidated Financial Statements included
elsewhere in this Prospectus to determine the impact on the Company's
financial statements if the Pending Acquisition does occur. The Company
believes that the failure to consummate the Pending Acquisition would not have
a material adverse effect on its financial condition or results of operations.
 
OTHER RISKS ASSOCIATED WITH ACQUISITIONS
 
  As part of its growth strategy, the Company regularly engages in, and is
currently engaging in, discussions and negotiations with respect to possible
acquisitions, some of which would be larger than the largest acquisitions
completed or contemplated to date, and would involve substantially more than
25,000 access lines, if such acquisitions were consummated. This acquisition
strategy presents certain substantial risks, including the following:
 
  RISK OF LACK OF FUTURE ACQUISITION OPPORTUNITIES. A significant portion of
the Company's future growth is expected to come from acquisitions of other
companies. The Company's ability to acquire additional businesses
 
                                      14
<PAGE>
 
will depend, among other things, on the Company's ability to identify suitable
acquisition candidates, to negotiate acceptable terms for their acquisition
and to complete the acquisitions. The Company will be subject to competition
for suitable acquisition candidates and the number of acquisition candidates
may be diminished in the future. The nature of the market for independent
telecommunications companies is such that many acquisition opportunities come
to the Company's attention only when the owners of such businesses approach
the Company seeking a buyer. Accordingly, there can be no assurance that other
independent telecommunications companies will approach the Company with
similar opportunities in the same manner as has occurred in the past, or that
such acquisition opportunities will otherwise come to the Company's attention.
As a result, there can be no assurance that any such acquisitions will occur
or that any such acquisitions, if made, would be made in a timely manner or on
terms favorable to the Company.
 
  RISK OF UNAVAILABILITY OF CAPITAL TO FUND FUTURE ACQUISITIONS. The
acquisitions made by the Company have required the expenditure of significant
amounts of capital, a substantial portion of which the Company has had to fund
through additional debt or equity financings. The Company's growth strategy
hinges on its ability to continue to complete acquisitions beyond the Pending
Acquisition. The Company does not presently have financing commitments
sufficient to allow it to effect significant acquisitions. Inability to secure
such financing could, therefore, have a substantial impact on the Company's
ability to grow beyond the completion of the Pending Acquisition, or otherwise
consummate any other acquisitions that it may wish to undertake. See "--Future
Capital Requirements; Expected CLEC Losses."
 
  RISK OF FAILURE TO REALIZE ACQUISITION SYNERGIES. While the Company has
previously been able to increase the profitability of the businesses it has
acquired, there can be no assurance that it will continue to be able to do so
in the future. Specifically, each of the Taconic, Utilities and Ellensburg
acquisitions are significantly larger than any of the individual acquisitions
that the Company has previously undertaken. The size and nature of such
acquisitions could present complexities that the Company has not previously
encountered, and could therefore interfere with the Company's ability to
achieve results comparable to those it has achieved in the past.
 
  Furthermore, many of the acquisition synergies that the Company has
recognized in the past have resulted from its ability to substitute the costs
of the former senior management of acquired companies with management fees
charged by the Company to its subsidiaries. To the extent regulators recognize
such inter-company management fees as legitimate costs, the Company's
operating subsidiaries are allowed, under current regulations, to recover such
costs from their customers. However, the Company's ability to recover such
costs is subject to periodic review by regulators. In addition, regulations
governing the Company's ability to recover such costs are subject to change.
There can be no assurance, therefore, that the Company will continue to be
able to recover such costs, and failure to be able to do so could have a
substantial impact on the Company's growth strategy, as well as a material
adverse effect on its financial condition and results of operations. See "Risk
Factors--Regulation" and "Regulation."
 
  In addition, the Company believes it will have opportunities to acquire
access lines from RBOCs and other large companies. The Company expects that
such opportunities would be limited to the possible acquisition of certain
facilities and access lines, rather than businesses that have previously
operated independently. Such acquisitions, should the Company be in a position
to make them, would in all likelihood be more difficult for the Company to
integrate into its existing operations. This in turn could interfere with the
Company's ability to obtain the same results from such acquisitions as it
might be able to obtain from the acquisition of a previously independent
company. See "--Implementation of Growth Strategy."
 
FUTURE CAPITAL REQUIREMENTS; EXPECTED CLEC LOSSES
 
  Expansion of the Company's existing RLEC networks and services, and the
acquisition of new RLECs and other facilities, will require significant
capital expenditures. Furthermore, the Company's plan to enter additional
markets as a CLEC anticipates the Company's incurring initial losses, followed
by significant capital expenditures. The Company's ability to succeed in its
CLEC strategy is therefore predicated on its having
 
                                      15
<PAGE>
 
sufficient capital to sustain such losses and make such capital expenditures.
The Indenture limits the Company's ability to make investments in the
subsidiaries conducting the CLEC business, which could adversely affect its
ability to successfully develop this business. In addition, there can be no
assurances that the Company will be successful in implementing its CLEC
strategy, or that it will be able to recover the initial losses it expects to
sustain in relation to such business. Because the CLEC business will be
conducted through Unrestricted Subsidiaries, any operating losses sustained
will not reduce the Company's debt capacity under the Indenture. See
"Description of Notes--Certain Covenants--Limitation on Debt."
 
  The Company will also require additional capital to complete its
acquisitions, or if customer demand in the Company's markets exceeds current
expectations, the Company's funding needs may increase. In addition, the
Company expects to incur additional capital requirements as it seeks to take
advantage of future opportunities. In order to take advantage of such
opportunities, the Company expects that it will need to secure additional debt
or equity financing. There can be no assurance, however, that the Company will
be successful in raising sufficient additional debt or equity capital on terms
that it will consider acceptable or that the Company's operations will produce
cash flow in sufficient amounts to make up any shortfall. Failure to raise and
generate sufficient funds may require the Company to delay or abandon some of
its planned future expansion or expenditures, which could have a material
adverse effect on the Company's growth and its ability to compete in the
telecommunications industry. The Company's expectations of required future
capital expenditures are based on the Company's current estimates. There can
be no assurance that actual expenditures will not be significantly higher or
lower.
 
IMPLEMENTATION OF GROWTH STRATEGY
 
  The expansion and development of the Company's operations will depend, among
other things, on the Company's ability to recruit and hire personnel, install
facilities, implement and improve its operating and administrative systems and
obtain and maintain any required government authorizations, franchises and
permits, all in a timely manner, at reasonable costs and on satisfactory terms
and conditions. As a result, there can be no assurance that the Company will
be able successfully to expand its existing networks, integrate newly acquired
businesses or offer additional products and services in a timely manner in
accordance with its strategic objectives. In addition, as a result of the
Company's strategy to achieve rapid growth, the operating complexity of the
Company is expected to increase. The Company's ability to manage its expansion
effectively will depend on, among other things, the expansion, training and
management of the Company's employee base and the Company's successful
development of operational, financial and management plans, systems and
controls. There can be no assurance that the Company will be able to satisfy
these requirements or otherwise manage its growth effectively. Such failures
could have a material adverse effect on the Company's results and financial
condition.
 
DEPENDENCE ON KEY PERSONNEL
 
  The Company's businesses are managed by a relatively small number of senior
management and operating personnel, the loss of certain of whom could have a
material adverse effect on the Company. The Company believes that its ability
to manage its planned growth successfully will depend in large part on its
continued ability to attract and retain highly skilled and qualified
personnel. There can be no assurance that the Company will be able to retain
its key employees or that the Company can attract or retain additional skilled
personnel in the future.
 
COMPETITION
 
  Industry trends of consolidation, deregulation and the utilization of new
technologies all pose substantial risks to the Company's ability to compete
effectively in the markets it serves and in the market for acquisitions. The
effects of these trends on the Company could be substantial. The summary below
sets forth a general summary of certain of the competitive risks facing the
Company, and is not meant to be comprehensive.
 
  COMPETITION FOR ACQUISITIONS. The telecommunications industry is subject to
a continuing trend toward combinations and strategic alliances, including
consolidations among existing telecommunications providers, and
 
                                      16
<PAGE>
 
between such providers and new entrants into the field. This trend could lead
to increased competition with the Company for acquisitions, which could have
the effect of increasing the price for acquisitions or reducing the number of
suitable acquisitions, thereby having an adverse effect on the Company's
growth strategy. In addition, the Company's eligibility for certain subsidies
decreases as the Company increases in size, thereby creating the potential
that certain acquisition candidates will be less attractive to the Company
than they would be to other potential buyers. The number of suitable
acquisition candidates for the Company could therefore decrease as the Company
increases in size. See "Risk Factors--Regulation" and "Regulation."
 
  COMPETITION FROM NEW MARKET ENTRANTS. In each of the areas served by the
Company's networks, the services offered by the Company may compete with
services offered by current and potential market entrants, including CLECs,
IXCs, cable television companies, electric utilities, microwave carriers,
wireless telephone system operators and private networks built by large end
users. Many of the Company's current and potential competitors may have
financial, personnel and other resources substantially greater than those of
the Company, as well as other competitive advantages over the Company.
 
  The Company believes that various legislative initiatives, including the
Telecommunications Act of 1996 (the "Telecommunications Act"), as well as a
recent series of completed and proposed transactions between ILECs, IXCs and
cable companies, may result in the introduction of competition in areas served
by the Company, including from entities that do not currently compete with the
Company in any significant way. The timing and effectiveness of any
competitive entry will be affected by the implementation of the
Telecommunications Act. This implementation is subject to change, and its full
effect cannot be predicted with any accuracy.
 
  In addition, aggressive competition for customers in communities served by
the Company could result in, among other things, reductions in the Company's
customer base, the lowering of rates in order to compete, and increased
marketing expenditures by the Company. Resulting reductions in the Company's
customer base and rates and increases in the Company's costs could have a
material adverse effect on the Company's financial condition and results of
operations.
 
  COMPETING TECHNOLOGIES. Changes in technology, including in wireless
technology, could lead to the introduction of competitive telecommunications
systems in the rural areas served by the Company in ways that have not
heretofore been economically viable. Such technologies could result in the
introduction of novel services that the Company may be unable to provide, or
would be ill-equipped to compete with using its existing facilities.
 
  RISK OF INABILITY TO COMPETE AS A CLEC. Finally, the Company's plans to
enter new markets as a CLEC pose significant risks. Such plans call for the
Company to compete as a new entrant in markets where its competitors will have
established customers and brand identity. The CLEC market, therefore, is
highly competitive and poses a significant competitive challenge for the
Company. In particular, several well capitalized and experienced long distance
carriers and others have entered or announced that they intend to enter the
CLEC business. In addition, this market differs significantly from the markets
in which the Company usually operates. Normally, the Company's markets are
characterized by a protective regulatory environment that puts potential
competitors at a significant disadvantage to the Company. See "Risk Factors--
Regulation." The Company, however, is inexperienced in competing for business
in such a competitive marketplace, and there can be no assurance that it will
be able to do so effectively. Moreover, the Indenture will limit the Company's
ability to invest in the subsidiaries conducting the CLEC business, which
could represent a competitive disadvantage. See "Description of Notes--Certain
Covenants--Limitation on Restricted Payments."
 
  Because of such high levels of competition, the Company's ability to expand
its operations and increase market share is uncertain. No assurance can be
given that the Company can achieve growth in products or revenues or that the
Company will not lose market share due to competitive pricing, the greater
resources of its competitors or other factors. See "Business--Competition."
 
                                      17
<PAGE>
 
REGULATION
 
  The Company operates in a heavily regulated industry, and the majority of
the Company's revenues generally have been supported by regulations. See
"Regulation." Laws and regulations applicable to the Company and its
competitors may be, and have been, challenged in the courts, and could be
changed by Congress or regulators at any time. In addition, any of the
following have the potential to have a significant impact on the Company:
 
  RISK OF LOSS OR REDUCTION OF ACCESS CHARGE REVENUES. The majority of the
Company's revenues come from access charges, which are paid to the Company by
intrastate carriers and interstate long distance carriers for originating and
terminating calls in the regions served by the Company's RLECs. The amount of
access charge revenues that the Company receives is calculated based on
guidelines set by federal and state regulatory bodies, and such guidelines
could change at any time. The FCC has indicated that it intends to begin a
rulemaking during 1998 to reform the federal access charge system. States
often mirror these federal rules in establishing intrastate access charges. It
is unknown at this time what changes, if any, the FCC may eventually adopt.
The FCC did adopt some changes to the federal access charge rules in May 1997.
These rules are currently the subject of review by courts, the outcome of
which review cannot be predicted. Furthermore, to the extent the Company's
RLECs become subject to competition in their own local exchange areas, such
access charges could be paid to competing local exchange providers rather than
to the Company. Either of the above circumstances could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business--Products and Services" and "Regulation."
 
  RISK OF LOSS OR REDUCTION OF UNIVERSAL SERVICE SUPPORT SUBSIDIES. The USSF
revenues received by the Company are paid to the Company to support the high
cost of its operations in rural markets. Revenues from such USSF subsidies
represented 13.1% of the Company's revenues for the year ended December 31,
1997. If the Company's RLECs were unable to receive USSF subsidies, or if such
subsidies were reduced, many of such RLECs would be unable to operate
profitably. Furthermore, under the current regulatory scheme, as the number of
access lines that the Company has in any given state increases, the rate at
which it can recover certain subsidies decreases. Therefore, as the Company
implements its growth strategy, its ability to recoup such subsidies is likely
to decrease.
 
  In addition, the Company's RLECs generally benefit from a special status
under the current laws, which prohibits potential competitors from receiving
the same universal service support subsidies enjoyed by the Company. The
effect of this advantage is that the Company's RLECs enjoy a significant
barrier to entry by competitors, which could be removed by regulators at any
time. The Telecommunications Act provides that competitors could obtain the
same subsidies as the Company if a state commission determines that granting
such subsidies to competitors would be in the public interest. If such
universal service subsidies were to become available to potential competitors,
there could be no assurance that the Company would be able to compete
effectively or otherwise continue to operate profitably. Any shift in
universal service regulation could, therefore, have a material adverse effect
on the Company's financial condition and results of operations.
 
  Recently, the FCC made certain modifications to the universal service
support system that limit the subsidies available to the Company, and which
could adversely impact the Company's operations in the future. Furthermore,
the method for calculating the amount of such subsidies is set to change in
2001. Subject to certain pending proceedings, it is expected that at such
time, such subsidies will be calculated based on forward looking economic
costs. This will be a new means of calculating such costs, and it is unclear
whether such a methodology will accurately reflect the costs incurred by the
Company's RLECs, and whether it will provide for the same amount of universal
service support subsidies that such RLECs have enjoyed in the past. In
addition, several parties have raised objections to the size of the universal
service support fund and the types of services eligible for subsidization. The
outcome of any of these events or issues, including any legislative or
regulatory changes to universal service subsidies, could affect the amount of
universal service support subsidies that the Company receives, and could have
a material adverse effect on the Company's financial condition and results of
operations.
 
                                      18
<PAGE>
 
  RISK OF LOSS OF PROTECTED STATUS UNDER INTERCONNECTION RULES. The Company's
RLECs enjoy certain protections under the Telecommunications Act against
having to comply with the Telecommunications Act's more burdensome
requirements governing the rights of competitors to interconnect to the
Company's networks. See "Regulation." If state regulators make the public
interest and other factual findings necessary to impose these interconnection
requirements on the Company, more competitors could enter the Company's
markets than is currently expected, and the Company could incur additional
administrative and regulatory expenses as a result of such inter-connection
requirements.
 
  RISK OF INABILITY TO OBTAIN INTERCONNECTION IN ADJACENT TERRITORIES. The
Company seeks to enter the local telephone service business in neighboring
geographic territories to its RLECs. If neighboring LECs are entitled to the
same protections that the Company enjoys in its operating territories, the
Company may be unable to obtain access to such networks, which could
significantly detract from the Company's ability to implement its CLEC
strategy. Even if neighboring LECs are not entitled to such protections, the
Company could nonetheless be unable to obtain interconnection on favorable
terms.
 
  RISKS POSED BY COSTS OF REGULATORY COMPLIANCE. Regulations create
significant compliance costs for the Company. In addition, because regulations
differ from state to state, the Company could face significant obstacles in
obtaining information necessary to compete effectively as it tries to enter
markets in different regulatory environments. Such information barriers could
cause the Company to suffer substantial costs, obstacles and delays in
entering such markets. Compliance costs and information barriers could also
affect the Company's ability to evaluate and compete for new acquisition
opportunities as they arise, and pose other obstacles to the Company's ability
to grow or operate, any of which could be material.
 
  The Company's subsidiaries that provide intrastate services are also
generally subject to certification and tariff filing requirements by state
regulators. Challenges to these tariffs by regulators or third parties could
cause the Company to incur substantial legal and administrative expenses. In
addition, as the Company seeks to enter new mandates and ancillary business
segments, it will be required to obtain necessary authorizations and be
subject to a variety of additional ongoing regulatory requirements.
 
CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS
 
  The telecommunications industry is subject to rapid and significant changes
in technology, frequent new service introductions and evolving industry
standards, the effect of which cannot be predicted. Thus, there can be no
assurance that technological developments will not have a material adverse
effect on the Company. The Company's future success may depend, to some
extent, on its ability to anticipate such changes and to offer services that
meet these standards on a timely basis.
 
CONTROL BY LIMITED NUMBER OF STOCKHOLDERS; POTENTIAL CONFLICTS OF INTEREST
 
  As of May 31, 1998, the Equity Investors controlled approximately 76.0% on a
fully diluted basis of the total voting power in the Company. As a result of
such control and pursuant to the terms of certain agreements among the
Company's stockholders, the Equity Investors will continue to have the ability
to effectively control the future operations of the Company. See "Security
Ownership of Certain Beneficial Owners and Management." The Company pays
substantial management and consulting fees to its shareholders. See "Certain
Relationships and Related Transactions." In addition to their investment in
the Company, the Equity Investors or their affiliates currently have
significant investments in other telecommunications companies and may in the
future invest in other entities engaged in the telecommunications business or
in related businesses (including entities engaged in business in areas in
which the Company operates). As a result, the Equity Investors have, and may
develop, relationships with businesses that are or may be competitive with the
Company. In addition, the Company and the Equity Investors have agreed that
such investors are under no obligation to offer the Company any investment or
business opportunities of which they become aware, even if such opportunities
are within the primary objectives of the Company.
 
 
                                      19
<PAGE>
 
LACK OF PUBLIC MARKET FOR THE NOTES
 
  The Exchange Notes will be new securities for which there is currently no
public market. The Company does not intend to list the Exchange Notes on any
national securities exchange or quotation system. The Initial Purchasers have
advised the Company that they currently intend to make a market in the
Exchange Notes but they are not obligated to do so and, if commenced, may
discontinue such market making at any time. Accordingly, there can be no
assurance as to the development of any market or liquidity of any market that
may develop for the Exchange Notes. To the extent that Old Notes are tendered
and accepted in the Exchange Offer, the aggregate principal amount of Old
Notes outstanding will decrease, with a resulting decrease in the liquidity of
the market therefor.
 
CONSEQUENCES OF FAILURE TO EXCHANGE
 
  Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of the Old Notes set forth in the legend thereon as a consequence
of the issuance of the Old Notes pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act. In general, Old Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company currently does not anticipate that it will register the Old Notes
under the Securities Act.
 
LIMITATIONS ON REPURCHASE OF NOTES
 
  Upon a Change of Control, each holder of Notes will have the right, at the
holder's option, to require the Company to repurchase all, or a portion, of
such holder's Notes, as the case may be. If a Change of Control were to occur,
there can be no assurance that the Company would have sufficient funds to pay
the repurchase price for all Notes tendered by the holders thereof. In
addition, the Company's repurchase of Notes as a result of the occurrence of a
Change of Control may be prohibited or limited by, or create an event of
default under, the terms of agreements related to borrowings that the Company
may enter into from time to time, including Senior Debt. See "Description of
Notes--Repurchase at the Option of Holders upon a Change of Control."
 
IMPACT OF THE YEAR 2000 ISSUE
 
  The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
 
  The Company has assessed its systems and believes them to be year 2000
compliant. In addition, the Company has received assurance from its major
software vendors that the products used by the Company are or will be year
2000 compliant by early 1999. If the systems of other companies on whose
services the Company depends or with whom the Company's systems interface are
not year 2000 compliant, it could have a material adverse effect on the
Company.
 
  The Company will continue its year 2000 issue assessment and, if it comes to
the attention of the Company's management that any of its systems, or the
systems of those on whom the Company relies, are not year 2000 compliant, the
Company expects to develop an action plan and devote the resources to address
such problem. There can be no assurance that devoting further resources of the
Company to the year 2000 issue, if the need should arise, would not have a
material adverse effect on the Company.
 
ENVIRONMENTAL AND WORKER HEALTH AND SAFETY MATTERS
 
  The Company's operations and properties are subject to federal, state and
local laws and regulations relating to protection of the environment, natural
resources, and worker health and safety, including laws and regulations
governing the management, storage and disposal of hazardous substances,
materials and wastes. Under certain
 
                                      20
<PAGE>
 
environmental laws, the Company could be held liable, jointly and severally
and without regard to fault, for the costs of investigating and remediating
any contamination at currently-owned or operated properties; or for
contamination arising from the disposal by it or its predecessors of hazardous
wastes at formerly-owned properties or at third party waste disposal sites. In
addition, the Company could be held responsible for third-party property or
personal injury claims relating to any such contamination or relating to
violations of environmental laws, depending on proof of causation and similar
matters. Although the Company has in the past been able to maintain
substantial compliance with all such laws and regulations without incurring
significant costs, changes in existing laws or regulations or future
acquisitions of RLECs (or of other properties or businesses) could require the
Company to incur substantial costs in the future relating to such matters.
 
                                USE OF PROCEEDS
 
  The Company will not receive any proceeds from the Exchange Offer. In
consideration of issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive in exchange Old Notes of like principal
amount, the terms of which are identical in all material respects to the
Exchange Notes. The Old Notes surrendered in exchange for Exchange Notes will
be retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase in the indebtedness of the
Company. The Company has agreed to bear the expenses of the Exchange Offer
pursuant to the Registration Agreement. No underwriter is being used in
connection with the Exchange Offer.
 
                                      21
<PAGE>
 
                                CAPITALIZATION
                            (DOLLARS IN THOUSANDS)
 
  The following table sets forth the total capitalization of the Company as of
June 30, 1998, and such capitalization presented on a pro forma basis to give
effect to the Pending Acquisition. The Pending Acquisition is subject to
certain closing conditions. See "Risk Factors--Risk that Pending Acquisition
Will Not Be Consummated." The information set forth below should be read in
conjunction with the Company's consolidated financial statements, and notes
related thereto, the financial statements related to certain of the
Acquisitions and the unaudited pro forma consolidated financial statements,
and notes related thereto, included elsewhere in this Prospectus. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
 
<TABLE>   
<CAPTION>
                                                          AS OF JUNE 30, 1998
                                                        ------------------------
                                                         ACTUAL     PRO FORMA
                                                        -------- ---------------
                                                                   PENDING
                                                                 ACQUISITION
                                                                 -----------
<S>                                                     <C>      <C>         <C>
Cash and cash equivalents.............................. $ 14,045  $ 15,456
                                                        ========  ========
Demand notes payable................................... $    815  $    815
                                                        --------  --------
Put warrant obligation.................................    3,626     3,626
                                                        --------  --------
Long-term debt, including current portion:
 Existing term debt(1).................................    6,814     6,814
 Acquired term debt(2).................................      --     12,504
 Revolving credit facility.............................      --        --
 Tranche B loan facility...............................   13,965    71,960
 Tranche C loan facility...............................   74,326    74,326
 Other debt(3).........................................    7,282     7,282
 Senior subordinated notes(4)..........................  200,000   200,000
                                                        --------  --------
  Total long-term debt.................................  302,387   372,886
                                                        --------  --------
Minority interest......................................      397       430
                                                        --------  --------
Common stock subject to put option.....................      --      3,000
                                                        --------  --------
Stockholders' equity:
 Common stock..........................................        2         2
 Additional paid-in capital............................   48,747    45,747
 Retained earnings (deficit)........................... (30,203)  (30,203)
 Accumulated other comprehensive income................      237       237
                                                        --------  --------
  Total stockholders' equity...........................   18,783    15,783
                                                        --------  --------
  Total capitalization................................. $326,008  $396,540
                                                        ========  ========
</TABLE>    
- --------
(1) Existing term debt consists of fixed rate notes owed to Rural Utilities
    Service at 8.7% and 10.8% due December 31, 2009 and 2016, respectively.
(2) Includes the acquired term debt of Utilities. Term debt of Utilities
    payable to RTFC includes the following terms: (i) variable rate through
    October 2008, (ii) fixed rate of 9.2% annually through October 2008 and
    (iii) fixed rate of 8.8% annually through October 2001, then variable.
(3) Other debt consists of notes in the aggregate principal amount of $282,000
    which bear interest at rates ranging between 5.8% to 9.5% annually and
    have maturity dates between 1998 and 2002. Other debt also consists of a
    note payable in the principal amount of $7.0 million which bears interest
    at 7% annually and matures in year 2005.
(4) Includes $125 million of 9 1/2% Senior Subordinated Notes due 2008 and $75
    million Floating Rate Callable Securities due 2008.
 
                                      22
<PAGE>
 
              SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
 
                            (DOLLARS IN THOUSANDS)
 
  The following table sets forth selected financial information of the
Company. The selected historical consolidated financial data for the years
ended December 31, 1995, 1996, 1997 and the six months ended June 30, 1997 and
1998 are derived from the consolidated financial statements of the Company
included elsewhere in this Prospectus which, in the case of the financial
statements for the years ended December 31, 1995, 1996 and 1997 have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
The selected historical consolidated financial statement data for the six
months ended June 30, 1997 and 1998 have been derived from unaudited
consolidated statements of the Company, which, in the opinion of management,
include all adjustments necessary for a fair presentation of such data. The
selected historical consolidated financial statement data for the year ended
December 31, 1994 are derived from consolidated financial statements of the
Company, not included herein, which are audited by independent certified
public accountants. The selected historical consolidated financial statement
data for the year ended December 31, 1993 have been derived from unaudited
consolidated financial statements of the Company, not included herein, which,
in the opinion of management, includes all adjustments necessary for a fair
presentation of such data. The selected pro forma combined financial data for
the year ended December 31, 1997 and as of and for the six months ended June
30, 1998 have been derived from Company prepared financial information, the
audited consolidated financial statements and notes thereto of certain of the
Acquisitions and the audited consolidated financial statements and notes
thereto of the Company, which financial statements appear elsewhere in this
Prospectus. The following selected pro forma combined financial and operating
data are presented as if each of the Acquisitions, the New Credit Facility and
the Offering had occurred on January 1, 1997 for the year ended December 31,
1997 and the period ended June 30, 1998, respectively, in the case of
statement of operations data, and as of June 30, 1998, in the case of balance
sheet data. The selected pro forma combined financial data have been prepared
for comparative purposes only and do not purport to be indicative of the
results of operations that would have been achieved had the Acquisitions, the
New Credit Facility and the Offering been consummated as of the assumed dates,
nor are the results necessarily indicative of the Company's future results of
operations. See "Risk Factors--Other Risks Associated with Acquisitions." The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements, and notes thereto, the Pro
Forma Consolidated Financial Statements, and notes thereto, and the individual
financial statements and notes thereto of certain of the Acquisitions
appearing elsewhere in this Prospectus.
 
<TABLE>   
<CAPTION>
                                            ACTUAL                                                   PRO FORMA
                    ------------------------------------------------------------  ------------------------------------------------
                                                                  SIX MONTHS                                         SIX MONTHS
                                                                     ENDED                   YEAR ENDED                 ENDED
                           YEAR ENDED DECEMBER 31,                 JUNE 30,              DECEMBER 31, 1997          JUNE 30, 1998
                    ------------------------------------------  ----------------  -------------------------------- ---------------
                                                                                                                      COMPLETED
                                                                                    COMPLETED                       ACQUISITIONS,
                                                                                  ACQUISITIONS,                      NEW CREDIT
                                                                                    NEW CREDIT      AS ADJUSTED     FACILITY AND
                                                                  (UNAUDITED)      FACILITY AND     FOR PENDING     OFFERING AND
                     1993    1994     1995     1996     1997     1997     1998    OFFERING(1)(2) ACQUISITION(2)(3) UTILITIES(2)(4)
                    ------  -------  -------  -------  -------  -------  -------  -------------- ----------------- ---------------
 <S>                <C>     <C>      <C>      <C>      <C>      <C>      <C>      <C>            <C>               <C>
 STATEMENT OF OP-
  ERATIONS DATA:
 Operating reve-
  nues:
 Switched servic-
  es.............   $4,803  $12,655  $22,763  $27,876  $39,257  $16,542  $29,456     $ 76,751        $ 91,589         $ 47,480
 Other...........    2,263    1,369    1,986    2,383    3,715    1,346    5,776       11,640          13,017            8,553
                    ------  -------  -------  -------  -------  -------  -------     --------        --------         --------
 Total operating
  revenues.......    7,066   14,025   24,749   30,258   42,972   17,887   35,262       88,391         104,606           56,033
                    ------  -------  -------  -------  -------  -------  -------     --------        --------         --------
 Operating ex-
  penses:
 Plant opera-
  tions..........      595    1,886    3,746    4,181    6,857    2,277    5,731       15,592          20,241           11,683
 Corporate and
  customer serv-
  ice............    2,270    3,991    6,433    7,577   11,581    4,532    8,762       23,361          26,040           12,960
 Depreciation and
  amortization...    1,240    3,099    5,757    6,644    8,777    4,010    7,300       20,377          25,120           12,806
 Other...........    1,684    1,081    1,407    1,658    3,318    1,280    3,927        7,913           8,504            6,586
                    ------  -------  -------  -------  -------  -------  -------     --------        --------         --------
 Total operating
  expenses.......    5,789   10,056   17,343   20,060   30,533   12,099   25,720       67,242          79,905           44,035
                    ------  -------  -------  -------  -------  -------  -------     --------        --------         --------
 Income from op-
  erations.......    1,276    3,968    7,406   10,198   12,439    5,788    9,542       21,149          24,702           11,998
                    ------  -------  -------  -------  -------  -------  -------     --------        --------         --------
 Other income
  (expense):
 Net income
  (loss) on sale
  of investments
  and other
  assets.........      598    1,030      (29)      (3)     (19)     --       390           (9)             (9)             430
 Interest in-
  come...........       60      143      225      180      212      103      126          595             595              140
 Dividend in-
  come...........      --       553      664      667    1,182      --        45        1,182           1,381              180
 Interest ex-
  pense..........     (791)  (3,772)  (7,267)  (9,605)  (9,293)  (3,998)  (9,707)     (29,704)        (35,646)         (18,044)
 Other nonoperat-
  ing, net.......       62       29       33      (15)     140       24      198        1,392           1,421             (660)
                    ------  -------  -------  -------  -------  -------  -------     --------        --------         --------
 Total other in-
  come (ex-
  pense).........      (71)  (2,017)  (6,375)  (8,776)  (7,778)  (3,872)  (8,947)     (26,544)        (32,258)         (17,953)
                    ------  -------  -------  -------  -------  -------  -------     --------        --------         --------
 Earnings (loss)
  before income
  taxes
  and
  extraordinary
  item...........    1,235    1,951    1,031    1,422    4,661    1,916      595       (5,396)         (7,556)          (5,955)
 Income tax (ex-
  pense) bene-
  fit............     (305)    (940)    (547)  (1,462)  (1,876)    (839)    (389)         914           1,371            1,761
                    ------  -------  -------  -------  -------  -------  -------     --------        --------         --------
 Earnings (loss)
  before
  extraordinary
  item and
  minority
  interest ......      930    1,011      484      (39)   2,785    1,077      205     $ (4,482)       $ (6,186)        $ (4,193)
                                                                                     ========        ========         ========
 Extraordinary
  item...........      --       --       --       --    (3,612)     --    (2,521)
                    ------  -------  -------  -------  -------  -------  -------
 Earnings (loss)
  before minority
  interest.......      930    1,011      484      (39)    (826)   1,077   (2,316)
 Minority
  interest in
  income of
  subsidiaries...      --       (14)      (6)     (33)     (62)     (22)     (37)
                    ------  -------  -------  -------  -------  -------  -------
 Net earnings
  (loss).........   $  930  $   997  $   478  $   (72) $  (888) $ 1,055  $(2,352)
                    ======  =======  =======  =======  =======  =======  =======
<CAPTION>
 <S>                <C> <C> <C> <C> <C> <C>
 STATEMENT OF OP-
  ERATIONS DATA:
 Operating reve-
  nues:
 Switched servic-
  es.............
 Other...........
 Total operating
  revenues.......
 Operating ex-
  penses:
 Plant opera-
  tions..........
 Corporate and
  customer serv-
  ice............
 Depreciation and
  amortization...
 Other...........
 Total operating
  expenses.......
 Income from op-
  erations.......
 Other income
  (expense):
 Net income
  (loss) on sale
  of investments
  and other
  assets.........
 Interest in-
  come...........
 Dividend in-
  come...........
 Interest ex-
  pense..........
 Other nonoperat-
  ing, net.......
 Total other in-
  come (ex-
  pense).........
 Earnings (loss)
  before income
  taxes
  and
  extraordinary
  item...........
 Income tax (ex-
  pense) bene-
  fit............
 Earnings (loss)
  before
  extraordinary
  item and
  minority
  interest ......
 Extraordinary
  item...........
 Earnings (loss)
  before minority
  interest.......
 Minority
  interest in
  income of
  subsidiaries...
 Net earnings
  (loss).........
</TABLE>    
 
                                      23
<PAGE>
 
<TABLE>   
<CAPTION>
                                                ACTUAL                            PRO FORMA
                         ------------------------------------------------------ --------------
                                                                       AS OF        AS OF
                                    AS OF DECEMBER 31,               JUNE 30,   JUNE 30, 1998
                         -----------------------------------------  ----------- --------------
                                                                    (UNAUDITED)
                                                                                   PENDING
                          1993     1994    1995    1996     1997       1998     ACQUISITION(4)
                         -------  ------- ------- ------- --------  ----------- --------------
<S>                      <C>      <C>     <C>     <C>     <C>       <C>         <C>
BALANCE SHEET DATA:
Cash and cash equiva-
 lents.................. $   421  $ 5,016 $ 3,672 $ 4,253 $  6,822   $  14,045     $15,456
Working capital.........      19    1,406   1,026     596      108      18,766      17,968
Property, plant and
 equipment, net.........   8,353   37,616  37,048  41,615   61,207     122,590     144,328
Total assets............  24,324   82,281  79,218  97,020  144,613     370,714     450,767
Long-term debt..........  18,034   66,991  64,180  73,958  131,912     302,387     372,886
Redeemable preferred
 stock..................     --     6,618   6,701  10,689      130         --          --
Total stockholders' eq-
 uity (deficit).........    (275)   (333)     103 (2,142)  (10,939)     18,783      15,783
</TABLE>    
 
<TABLE>   
<CAPTION>
                                         ACTUAL                                                  PRO FORMA
                  -----------------------------------------------------------  ----------------------------------------------
                                                                                                                 SIX MONTHS
                                                                                                                    ENDED
                                                               SIX MONTHS                 YEAR ENDED              JUNE 30,
                         YEAR ENDED DECEMBER 31,             ENDED JUNE 30,           DECEMBER 31, 1997             1998
                  -----------------------------------------  ----------------  -------------------------------- -------------
                                                                                                                  COMPLETED
                                                                                                                ACQUISITIONS,
                                                                                 COMPLETED                       NEW CREDIT
                                                                               ACQUISITIONS,                      FACILITY
                                                                                 NEW CREDIT      AS ADJUSTED     OFFERING AND
                                                               (UNAUDITED)      FACILITY AND     FOR PENDING      UTILITIES
                  1993    1994     1995     1996     1997     1997     1998    OFFERING(1)(2) ACQUISITION(2)(3)    (2)(4)
                  -----  -------  -------  -------  -------  ------  --------  -------------- ----------------- -------------
<S>               <C>    <C>      <C>      <C>      <C>      <C>     <C>       <C>            <C>               <C>
OTHER FINANCIAL
 DATA:
Adjusted EBITDA
 (5)............    --   $ 8,808  $14,050  $17,639  $22,670  $9,902  $ 17,565     $ 44,686        $ 53,209(6)     $ 24,895(6)
Capital expendi-
 tures..........  $ 293    1,768    4,439    8,439    8,239   2,922     3,332       15,688          19,241           4,362
Ratio of
 earnings to
 fixed charges
 (7)............    2.5x     1.5x     1.1x     1.1x     1.5x    1.5x      1.1x         --              --              --
Deficiency of
 earnings to
 fixed charges
 (7)............    --       --       --       --       --      --        --      $  5,396        $  7,556        $  5,955
SUMMARY CASH
 FLOW DATA:
Net cash
 provided by
 operating
 activities.....           5,504    6,039    9,772    9,840   4,253     7,325       13,216          16,655           8,098
Net cash
 provided by
 (used in)
 investing
 activities.....         (50,846)  (4,481) (19,790) (38,967) (7,155) (174,322)    (219,783)       (269,611)       (220,100)
Net cash
 provided by
 financing
 activities.....          49,937   (2,903)  10,599   31,697   3,796   174,220      193,057         239,076         215,244
OPERATING DATA:
Access lines in
 service........  4,343   28,205   28,737   34,017   48,731  34,754   103,689      100,867         123,106         126,340
</TABLE>    
- -------
(1) Gives effect to the Completed Acquisitions, the New Credit Facility and
    the Offering as if the closings thereof occurred on January 1, 1997.
(2) The selected pro forma combined operating data reflect adjustments in
    connection with the relevant Acquisitions including: (i) amortization
    expense to reflect goodwill recorded for purchase accounting, (ii)
    elimination of certain specifically identified expenses related to
    duplicative management services, directors fees, employee salaries and
    related benefits, (iii) interest expense, net after giving effect to the
    New Credit Facility and the Offering, and (iv) income tax expense to
    reflect the effect that would result if the relevant Acquisitions had been
    combined and subject to an assumed federal statutory rate and the
    applicable state statutory tax rate for each of the relevant Acquisitions.
(3) Gives effect to the Completed Acquisitions, the New Credit Facility, the
    Offering and the Pending Acquisition as if the closings thereof occurred
    on January 1, 1997. The Pending Acquisition is subject to certain closing
    conditions, See "Risk Factors--Risk that Pending Acquisition Will Not Be
    Consummated."
(4) Gives effect to the Completed Acquisitions, the New Credit Facility, the
    Offering and the Pending Acquisition as if the closings thereof occurred
    on January 1, 1997, in the case of statement of operations data, and as of
    June 30, 1998 in the case of balance sheet data. The Pending Acquisition
    is subject to certain closing conditions. See "Risk Factors--Risk that
    Pending Acquisition Will Not Be Consummated."
   
(5) 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
    measurement 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 performance, or for cash flow as a
    measure of liquidity. 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 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 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.     
   
(6) Pro forma Adjusted EBITDA does not include the elimination of historical
    expenses for duplicative supervisory and staff-level employees and net
    incremental costs of outsourcing certain functions. If such historical
    expenses were eliminated, pro forma Adjusted EBITDA would be $54.4 million
    and $25.3 million for the year ended December 31, 1997 and the six months
    ended June 30, 1998, respectively.     
   
(7) For purposes of determining the ratio of earnings to fixed charges,
    earnings are defined as earnings before income taxes, minority interest
    and extraordinary items, plus 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.     
 
                                      24
<PAGE>
 
                              THE EXCHANGE OFFER
 
TERMS OF THE EXCHANGE OFFER
 
  GENERAL
 
  In connection with the sale of Old Notes to the Initial Purchasers pursuant
to the Purchase Agreement, dated April 30, 1998, among the Company and Salomon
Smith Barney, BT Alex. Brown Incorporated, NationsBanc Montgomery Securities
LLC and Donaldson, Lufkin & Jenrette Securities Corporation (collectively, the
"Initial Purchasers"), the holders of the Old Notes became entitled to the
benefits of the Registration Agreement.
 
  Under the Registration Agreement, the Company became obligated to (a) file a
registration statement in connection with a registered exchange offer within
60 days after May 5, 1998, the date the Old Notes were issued (the "Issue
Date"), and (b) cause the registration statement relating to such registered
exchange offer to become effective within 150 days after the Issue Date. The
Exchange Offer being made hereby, if consummated within the required time
periods, will satisfy the Company's obligations under the Registration
Agreement. This Prospectus, together with the Letter of Transmittal, is being
sent to all such beneficial holders known to the Company.
 
  Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Old Notes accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer.
 
  Based on an interpretation by the staff of the Commission set forth in the
Morgan Stanley Letter, the Exxon Capital Letter and similar letters, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any person who received such Exchange Notes, whether or not
such person is the holder (other than Restricted Holders) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such holder's or other person's business, neither such holder nor such other
person is engaged in or intends to engage in any distribution of the Exchange
Notes and such holders or other persons have no arrangement or understanding
with any person to participate in the distribution of such Exchange Notes.
 
  If any person were to be participating in the Exchange Offer for the purpose
of participating in a distribution of the Exchange Notes in a manner not
permitted by the interpretation by the Staff of the Commission, such person
(a) could not rely upon the Morgan Stanley Letter, the Exxon Capital Letter or
similar letters and (b) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction.
 
  Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Old Notes where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of 180 days after consummation of
the Exchange Offer, it will make this Prospectus, as it may be amended or
supplemented from time to time, available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
 
  The Company will not receive any proceeds from the Exchange Offer. See "Use
of Proceeds." The Company has agreed to bear the expenses of the Exchange
Offer pursuant to the Registration Agreement. No underwriter is being used in
connection with the Exchange Offer.
 
                                      25
<PAGE>
 
  The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the Exchange Notes from the Company
and delivering Exchange Notes to such holders.
 
  If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain conditions set forth herein under
"--Conditions" without waiver by the Company, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering
holder thereof as promptly as practicable after the Expiration Date.
 
  Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes, pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes in connection with the Exchange
Offer. See "--Fees and Expenses."
 
  In the event the Exchange Offer is consummated, the Company will not be
required to register the Old Notes. In such event, holders of Old Notes
seeking liquidity in their investment would have to rely on exemptions to
registration requirements under the securities laws, including the Securities
Act. See "Risk Factors--Consequences of Failure to Exchange."
 
 EXPIRATION DATE; EXTENSIONS; AMENDMENT
 
  The term "Expiration Date" shall mean the expiration date set forth on the
cover page of this Prospectus, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall
mean the latest date to which the Exchange Offer is extended.
 
  In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will issue a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period of time.
 
  The Company reserves the right (a) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept
Old Notes not previously accepted if any of the conditions set forth herein
under "--Conditions" shall have occurred and shall not have been waived by the
Company (if permitted to be waived by the Company), by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (b)
to amend the terms of the Exchange Offer in any manner deemed by it to be
advantageous to the holders of the Old Notes. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the Old Notes of such amendment and the
Company may extend the Exchange Offer, depending upon the significance of the
amendment and the manner of disclosure to holders of the Old Notes, if the
Exchange Offer would otherwise expire during such extension period.
 
  Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely
release to an appropriate news agency.
 
INTEREST ON THE EXCHANGE NOTES
 
  The Exchange Notes will bear interest from May 5, 1998 payable semiannually
on May 1 and November 1 of each year, commencing November 1, 1998, at the rate
of 9 1/2 per annum in the case of the Fixed Rate Exchange
 
                                      26
<PAGE>
 
Notes and at a rate per annum equal to LIBOR plus 418.75 basis points in the
case of the Floating Rate Exchange Notes. The rate of interest on the Floating
Rate Exchange Notes will be reset semi-annually. Holders of Old Notes whose
Old Notes are accepted for exchange will be deemed to have waived the right to
receive any payment in respect of interest on the Old Notes accrued up until
the date of the issuance of the Exchange Notes.
 
PROCEDURES FOR TENDERING
 
  To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by instruction 2 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile or an
Agent's Message in connection with a book entry transfer, together with the
Old Notes and any other required documents. To be validly tendered, such
documents must reach the Exchange Agent before 5:00 p.m., New York City time,
on the Expiration Date. Delivery of the Old Notes may be made by book-entry
transfer in accordance with the procedures described below. Confirmation of
such book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
 
  The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent, forming a part of a
confirmation of a book-entry transfer, which states that such book-entry
transfer facility has received an express acknowledgment from the participant
in such book-entry transfer facility tendering the Notes that such participant
has received and agrees to be bound by the terms of the Letter of Transmittal
and that the Company may enforce such agreement against such participant.
 
  The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
 
  Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
 
  The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery to the Exchange Agent before 5:00 p.m. New
York City time, on the Expiration Date. No Letter of Transmittal or Old Notes
should be sent to the Company.
 
  Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
 
  Any beneficial holder whose Old Notes are registered in the name of its
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on its behalf. If such beneficial holder wishes to
tender on its own behalf, such registered holder must, prior to completing and
executing the Letter of Transmittal and delivering its Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
holder's name or obtain a properly completed bond power from the registered
holder. The transfer of record ownership may take considerable time.
 
  Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States (an "Eligible Institution") unless the Old Notes tendered
pursuant thereto are tendered (a) by a registered holder who has not completed
the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (b) for the account of an
Eligible Institution. In the event that signatures on a Letter of Transmittal
 
                                      27
<PAGE>
 
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be by an Eligible Institution.
 
  If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers and a proxy which authorizes such
person to tender the Old Notes on behalf of the registered holder, in each
case signed as the name of the registered holder or holders appears on the Old
Notes.
 
  If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority so to act must be
submitted with the Letter of Transmittal.
 
  All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes the Company's acceptance of which would, in
the opinion of counsel for the Company, be unlawful. The Company also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within
such time as the Company shall determine. None of the Company, the Exchange
Agent or any other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Old Notes, nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such irregularities have
been cured or waived. Any Old Notes received by the Exchange Agent that are
not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned without cost to such holder by the
Exchange Agent to the tendering holders of Old Notes, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
 
  In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth under "--Conditions," to terminate the
Exchange Offer in accordance with the terms of the Registration Agreement and
(b) to the extent permitted by applicable law, purchase Old Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers will differ from the terms of the Exchange Offer.
 
  By tendering, each holder will represent to the Company that, among other
things, (a) the Exchange Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of such holder or other
person, (b) neither such holder nor such other person is engaged in or intends
to engage in a distribution of the Exchange Notes, (c) neither such holder or
other person has any arrangement or understanding with any person to
participate in the distribution of such Exchange Notes, and (d) such holder or
other person is not an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company or, if such holder or other person is such an
affiliate, will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
 
  Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Old Notes where such Old Notes were acquired by such broker-
dealer as result of market-making activities or other trading activities. The
Company has agreed that, for a period of 180 days after consummation of the
Exchange Offer, it will make this Prospectus, as it may be amended or
 
                                      28
<PAGE>
 
supplemented from time to time, available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
 
  The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at DTC for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in DTC's system may make book-entry delivery of Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with DTC's procedures for such
transfer. Although delivery of the Old Notes may be effected through book-
entry transfer into the Exchange Agent's account at DTC, an appropriate Letter
of Transmittal properly completed and duly executed with any required
signature guarantee, or an Agent's Message in lieu thereof, and all other
required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
Delivery of documents to DTC does not constitute delivery to the Exchange
Agent.
 
  The Old Notes were issued on May 5, 1998 and there is no public market for
them at present. To the extent Old Notes are tendered and accepted in the
Exchange Offer, the principal amount of outstanding Old Notes will decrease
with a resulting decrease in the liquidity in the market therefor. Following
the consummation of the Exchange Offer, holders of Old Notes will continue to
be subject to certain restrictions on transfer. Accordingly, the liquidity of
the market for the Old Notes could be adversely affected.
 
GUARANTEED DELIVERY PROCEDURES
 
  Holders who wish to tender their Old Notes and (a) whose Old Notes are not
immediately available or (b) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if: (i) the tender is made through an
Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder of the Old Notes,
the certificate number or numbers of such Old Notes and the principal amount
of Old Notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within three business days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof or Agent's Message in lieu
thereof) together with the certificate(s) representing the Old Notes to be
tendered in proper form for transfer and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and (iii) such properly completed and executed Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing all tendered Old Notes in proper form for transfer and all other
documents required by the Letter of Transmittal are received by the Exchange
Agent within three business days after the Expiration Date.
 
WITHDRAWAL OF TENDERS
 
  Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
 
  To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (a) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (b) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes or, in
the case of Old Notes transferred by book-entry transfer, the name and number
of the account at DTC to be credited), (c) be signed by the Depositor in the
same manner as the original signature on the Letter of Transmittal by which
such Old Notes were tendered (including any required signature guarantees) or
be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
 
                                      29
<PAGE>
 
of the Depositor withdrawing the tender and (d) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Old Notes so withdrawn are validly retendered. Any Old Notes which
have been tendered but which are not accepted for exchange will be returned to
the holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
 
CONDITIONS
 
  Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange, any Exchange Notes for any
Old Notes, and may terminate or amend the Exchange Offer before the acceptance
of any Old Notes for exchange, if the Exchange Offer violates any applicable
law or interpretation by the staff of the Commission.
 
  If the Company determines in its sole discretion that the foregoing
condition exists, the Company may (i) refuse to accept any Old Notes and
return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders who tendered
such Old Notes to withdraw their tendered Old Notes, or (iii) waive such
condition, if permissible, with respect to the Exchange Offer and accept all
properly tendered Old Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the holders, and the Company will extend the Exchange Offer as
required by applicable law.
 
  Pursuant to the Registration Agreement, if an Exchange Offer shall not be
consummated prior to the Exchange Offer Termination Date, the Company will be
obligated to cause to be filed with the Commission a shelf registration
statement with respect to the Old Notes (the "Shelf Registration Statement")
as promptly as practicable after the Exchange Offer Termination Date and
thereafter use its best efforts to have the Shelf Registration Statement
declared effective.
 
  "Exchange Offer Termination Date" means the date on which the earliest of
any of the following events occurs: (a) applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange
Offer, (b) any holder of Notes notifies the Company that either (i) such
holder is not eligible to participate in the Exchange Offer or (ii) such
holder participates in the Exchange Offer and does not receive freely
transferable Exchange Notes in exchange for tendered Old Notes or (c) the
Exchange Offer is not consummated within 180 days after the Issue Date.
 
  If any of the conditions described above exists, the Company will refuse to
accept any Old Notes and will return all tendered Old Notes to exchanging
holders of the Old Notes.
 
                                      30
<PAGE>
 
EXCHANGE AGENT
 
  United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal and
deliveries of completed Letters of Transmittal with tendered Old Notes should
be directed to the Exchange Agent addressed as follows:
 
     By Registered, Certified or               By Hand (before 4:30 p.m.)
           Overnight Mail:
 
 
                                           UNITED STATES TRUST COMPANY OF NEW
 UNITED STATES TRUST COMPANY OF NEW                       YORK
                YORK                                  111 Broadway
   Attn: Corporate Trust Services               New York, New York 10006
     P.O. Box 844 Cooper Station            Attention: Lower Level Corporate
      New York, New York 10276                        Trust Window
 
     By Hand (after 4:30 p.m.):                       By Facsimile:
 
                                            (For Eligible Institutions Only)
 UNITED STATES TRUST COMPANY OF NEW                  (212) 420-6152
                YORK
 
      770 Broadway, 13th Floor                      Telephone Number:
      New York, New York 10003                       (800) 548-6565
 
  The Company will indemnify the Exchange Agent and its agents for any loss,
liability or expense incurred by them, including reasonable costs and expenses
of their defense, except for any such loss, liability or expense caused by
negligence or bad faith.
 
FEES AND EXPENSES
 
  The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telephone or facsimile.
 
  The Company will not make any payments to brokers, dealers, or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, Letters of
Transmittal and related documents to the beneficial owners of the Old Notes,
and in handling or forwarding tenders for exchange.
 
  The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees and expenses, will be paid by the Company.
 
  The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes (or Old Notes for principal amounts not tendered
or accepted for exchange) are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
 
ACCOUNTING TREATMENT
 
  The Company will not recognize any gain or loss for accounting purposes upon
the consummation of the Exchange Offer. The expense of the Exchange Offer will
be amortized by the Company over the term of the Exchange Notes under GAAP.
 
                                      31
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   
  The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto and the
other financial data appearing elsewhere in this Prospectus. 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 measurement 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 performance,
or for cash flow as a measure of liquidity. 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 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 designed
to determine EBITDA for the purposes of contractually limiting the amount of
debt which the Company may incur. 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.
    
OVERVIEW
 
  General. MJD was founded in 1991 to participate in the consolidation
opportunities that exist in the highly fragmented, independent, largely
family-owned and operated, rural segment of the telecommunications industry.
According to the USTA, as of December 31, 1997, there were over 1,300
independent telephone companies serving small towns in rural America. RLEC
subscribers are predominantly residential and typically exhibit the stable
economic and demographic characteristics often associated with rural America.
   
  As of December 31, 1997, the Company owned and operated eleven RLECs with
48,731 access lines in rural locations in eight states. For the year ended
December 31, 1997, the Company had revenue and Adjusted EBITDA of $43.0
million and $22.7 million, respectively. The Company provided net cash of $9.8
million from operating activities, used net cash of $39.0 million in investing
activities and provided net cash of $31.7 million from financing activities
for the year ended December 31, 1997. Pro forma as of December 31, 1997, the
Company believes it will be the eighteenth largest telephone company in the
United States with over 123,000 access lines in ten states, and pro forma
revenue and Adjusted EBITDA for the year ended December 31, 1997 of
$104.6 million and $53.2 million, respectively. On a pro forma basis after
giving effect to the Acquisitions, the Company provided net cash of $16.7
million from operating activities, used net cash of $269.6 million in
investing activities, and provided net cash of $239.1 million from financing
activities for the year ending December 31, 1997.     
 
  The Company's operations have been characterized by stable growth and cash
flow. The primary reasons for the growth in the Company's cash flow has been
the acquisition of additional RLECs. In addition, the RLECs owned by the
Company have realized access line growth and increases in minutes of use
("MOU"). Although new access line growth is correlated with general economic
activity, economic downturns typically have not significantly impacted the
Company's established base of access lines or MOU.
 
 
                                      32
<PAGE>
 
                TOTAL MINUTES OF USE GROWTH UNDER MJD OWNERSHIP
 
<TABLE>
<CAPTION>
                            1993       1994         1995        1996         1997
                         ---------- -----------  ----------- -----------  -----------
<S>                      <C>        <C>          <C>         <C>          <C>
Sunflower-Kansas........ 51,176,520  50,895,394   51,274,642  52,393,074   60,791,553
Sunflower-Colorado......  5,129,418   5,122,171    4,998,707   5,338,954    5,474,730
Northland-Maine.........             91,695,162* 227,850,913 245,268,456  291,489,937
Northland-Vermont.......             23,123,900*  55,819,538  63,293,970   68,263,915
Sidney..................                                      21,169,908   23,411,177
Big Sandy...............                                       8,018,156*  17,149,198
Bluestem................                                       2,657,899*   7,308,376
Odin....................                                       6,775,410*  17,128,665
Kadoka..................                                                    6,686,692
Columbine...............                                                   13,165,980
Chautauqua & Erie.......                                                   76,854,224
C-R.....................                                                    4,443,983
                         ---------- -----------  ----------- -----------  -----------
    Total MJD........... 56,305,938 170,836,627  339,943,800 404,915,827  592,168,430
                         ========== ===========  =========== ===========  ===========
</TABLE>
- --------
* Period includes less than 12 months.
 
                    ACCESS LINE GROWTH UNDER MJD OWNERSHIP
 
<TABLE>
<CAPTION>
                                               1993   1994   1995   1996   1997
                                               ----- ------ ------ ------ ------
<S>                                            <C>   <C>    <C>    <C>    <C>
Sunflower--Kansas.............................   306    302    305    326    332
Sunflower--Colorado........................... 4,037  4,097  4,140  4,232  4,343
Northland of Maine............................       18,629 18,978 19,728 20,493
Northland of Vermont..........................        5,177  5,314  5,409  5,510
Sidney........................................                      1,295  1,359
Big Sandy.....................................                        865    893
Bluestem......................................                      1,018    992
Odin..........................................                      1,144  1,164
Kadoka........................................                               580
Columbine.....................................                             1,085
C&E...........................................                            11,070
C-R...........................................                               910
                                               ----- ------ ------ ------ ------
    Total..................................... 4,343 28,205 28,737 34,017 48,731
                                               ===== ====== ====== ====== ======
</TABLE>
- --------
Note: Data is as of December 31 of the relevant year.
       
  REVENUES: The Company generates revenue primarily through: (i) the provision
of basic local telephone service to customers within its service areas
(including federal and state USSF revenues, which accounted for approximately
13.1% of 1997 revenue); (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 ancillary services such as billing
and collection, long distance resale, enhanced services, wireless services,
cable services, Internet services and customer premises equipment sales. The
revenues listed in clauses (i) and (ii) above are classified by the Company as
"Switched Revenue." The revenues listed in clause (iii) above are classified
by the Company as "Other Revenue."
 
<TABLE>   
<CAPTION>
                                                                % OF REVENUE
                                                               ----------------
     REVENUE SOURCE                                            1995  1996  1997
     --------------                                            ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     Basic Local Service...................................... 16.8% 18.5% 17.8%
     Interstate and Intrastate Access......................... 67.2% 63.1% 63.6%
     USSF.....................................................  8.0% 10.5% 10.0%
     Other Services...........................................  8.0%  7.9%  8.6%
</TABLE>    
 
 
                                      33
<PAGE>
 
   
  The Company's historically stable revenues are the result of the basic
utility of telecommunications services, the highly regulated nature of the
telecommunications industry and underlying cost recovery settlement and
support mechanisms. The Company's subscribers are predominantly residential.
Basic local service allows the user to place unlimited calls within a defined
local calling area. USSF revenues are a subsidy paid to the Company to support
the high cost of its operations in rural markets. Access revenues are
generated by providing IXCs access to the Company's local network and its
customers. Other service revenue is generated from the ancillary services
described above.     
 
  The Company's RLECs have two basic tiers of customers: (i) local customers
located in the RLEC's LATA(s) who pay for local telephone service and (ii) the
IXCs which pay the RLEC, directly or via NECA, for access to customers located
within the RLEC's LATA(s). The RLECs provide access service to numerous IXCs
and also bill and collect long distance charges from customers on behalf of
the IXCs. The amount of access charge revenue associated with a particular IXC
varies depending upon the RLEC's local customers' long distance calling
patterns and choice of long distance carrier.
 
  OPERATING EXPENSES: The Company's operating expenses are categorized as
plant operations, corporate and customer service, other expenses and
depreciation and amortization. Year to year changes in such expenses are
typically influenced by access line growth and general business inflationary
adjustments. 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. Other expenses consist of miscellaneous expenses such as operating
taxes.
 
  OTHER (INCOME) EXPENSES: The Company's income includes interest income,
dividends, gain or loss on sale of 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
 
  The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the "Selected
Consolidated Financial and Operating Data" and the Financial Statements and
related notes thereto of the Company included elsewhere in this Prospectus.
 
 SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
   
  OPERATING REVENUE. Net revenue increased $17.4 million or 97.1% to $35.3
million for the six months ended June 30, 1998 from $17.9 million for the six
months ended June 30, 1997. Revenue contribution from the RLECs acquired by
the Company during 1997 and year-to-date 1998 provided approximately $6.0
million and $8.4 million of this increase, respectively, for the six months
ended June 30, 1998. For RLECs owned and operated for a comparable period in
1998 and 1997, operating revenue improved approximately $3.0 million or 16.7%
to $20.9 million from $17.9 million in 1997.     
       
          
  Basic local service revenue increased $3.6 million to $6.8 million for the
six months ended June 30, 1998 from $3.2 million for the six months ended June
30, 1997. This revenue increase is primarily attributable to an increase in
access lines. The Company's access lines increased by 67,437 to 103,689 access
lines from 36,252 access lines for the six months ended June 30, 1998 and
1997, respectively. The inclusion of access lines from the RLECs acquired by
the Company during 1997 and year-to-date 1998 provided an increase of 65,815
access lines and internal growth in RLECs owned and operated by the Company at
June 30, 1998 provided an increase of 1,622 access lines. Revenue contribution
from the RLECs acquired during 1997 and year-to-date 1998 provided
approximately $1.1 million and $2.2 million, respectively, of the increase in
basic local service revenue for the six months ended June 30, 1998. For the
RLECs owned and operated for a comparable period by the Company, basic local
service revenues increased by $0.3 million to $3.5 million for the six months
ended June 30, 1998 from $3.2 million for the six months ended June 30, 1997.
    
                                      34
<PAGE>
 
   
  USSF revenues were approximately $2.4 million and $2.1 million in each of
the six month periods ended June 30, 1998 and June 30, 1997, respectively.
       
  Interstate and intrastate revenues increased $9.0 million to $20.3 million
for the six months ended June 30, 1998 from $11.3 million for the six months
ended June 30, 1997. This revenue increase is attributable to an increase in
access lines and MOUs and an increase in interstate and intrastate settlement
revenues administered by NECA or a respective state's settlement
methodologies. Revenue contribution from the RLECs acquired by the Company
during 1997 and year-to-date 1998 provided approximately $3.1 million and $4.1
million, respectively, of the increase in interstate and intrastate revenues
for the six months ended June 30, 1998. For the RLECs owned and operated for a
comparable period in 1998 and 1997, interstate and intrastate revenues
increased by $1.8 million to $13.1 million for the six months ended June 30,
1998 from $11.3 million for the six months ended June 30, 1997.     
   
  Other services revenue increased $4.4 million to $5.8 million for the six
months ended June 30, 1998 from $1.4 million for the six months ended June 30,
1997. Other services revenues consist of directory advertising, billing and
collection for IXCs and other related telephone services. Revenue contribution
from RLECs acquired by the Company during 1997 and year-to-date 1998 provided
$1.4 million and $2.1 million, respectively, of the increase in Other services
revenues for the six months ended June 30, 1998. For RLEC's owned and operated
for a comparable period by the Company, Other services revenue increased by
$0.9 million to $2.2 million for the six months ended June 30, 1998 from $1.3
million for the six months ended June 30, 1997.     
 
  OPERATING EXPENSES. Operating expenses, which include plant operations,
corporate and customer service, other operating expenses, and depreciation and
amortization increased $13.6 million or 112.6% to $25.7 million for the six
months ended June 30, 1998 from $12.1 million for the six months ended June
30, 1997. The increase was primarily due to the inclusion of operating
expenses from the RLECs acquired by the Company during 1997 and year-to-date
1998, which contributed approximately $4.2 million and $6.1 million,
respectively, for the six months ended June 30, 1998. For RLECs owned and
operated for a comparable period in 1998 and 1997, operating expenses
increased approximately $3.3 million or 27.3% to $15.4 million in 1998 from
$12.1 million in 1997. The operating expense increase was primarily due to an
increase in corporate and customer service expense driven by the Company's
acquisition activities during the first and second quarter of 1998. The
Company has grown the number of its access lines by approximately 100% since
December 31, 1997, as a result of its acquisition of over 51,000 access lines.
To support its expanded operations, the Company increased corporate staff in
areas such as accounting, finance and human resources. Additionally, operating
expense increases were attributable to start-up expenses of the Company's
competitive local exchange carrier ("CLEC") subsidiary and an increase in
depreciation and amortization.
 
  INCOME FROM OPERATIONS. As a result of the factors described above, income
from operations increased $3.8 million or 64.8% to $9.5 million for the six
months ended June 30, 1998 from $5.8 million for the six months ended June 30,
1997. The increase was primarily due to the inclusion of income from
operations for RLECs acquired in 1997 and year-to-date 1998, which provided
approximately $1.8 million and during the six months ended June 30, 1998 was
$2.3 million of this increase, respectively, for the six months ended June 30,
1998. The income from operations margin was 27.1% in 1998 as compared to 32.4%
in 1997. For RLECs owned and operated for a comparable period in 1997, income
from operations decreased $330,000 or 5.7% to $5.5 million in 1998 from $5.8
million in 1997 and the income from operations margin was 26.1% in 1998
compared to 32.4% in 1997. The decrease in income from operations and its
margin as a percent of revenues was related to the increase in operating
expenses, as described above.
   
  OTHER INCOME (EXPENSE). Other expense increased $5.1 million or 131.1% to
$8.9 million for the six months ended June 30, 1998 from $3.9 million for the
six months ended June 30, 1997. The increase was primarily due to an increase
in interest expense caused by the additional debt borrowed to complete
acquisitions during 1997, to effect the Company's recapitalization in July
1997 and to complete acquisitions in the six months ended June 30, 1998.     
 
                                      35
<PAGE>
 
 YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
   
  OPERATING REVENUE. Net revenue increased $12.7 million or 42.0% to $43.0
million in the year ended December 31, 1997 from $30.3 million in the year
ended December 31, 1996. The inclusion of revenue from the acquisition by the
Company in 1997 of Kadoka Telephone Co., Columbine Telephone Company,
Chautauqua & Erie Telephone Corp. ("C&E") and C-R Communications, Inc.
(collectively, the "1997 Acquisitions") as well as the full year results for
the RLECs acquired by the Company in 1996 (collectively, the "1996
Acquisitions"), provided for 61.5% of the increase. For RLECs owned and
operated for a comparable period in 1997 and 1996, net revenue improved
approximately $4.9 million or 17.8% to $32.4 million in 1997 from $27.5
million in 1996.     
          
  Basic local service revenue increased $2.0 million to $7.6 million for the
year ended December 31, 1997 from $5.6 million for the year ended December 31,
1996. This revenue increase is attributable to an increase in access lines.
The Company's access lines increased 14,714 to 48,731 access lines from 34,017
access lines for the years ended December 31, 1997 and 1996, respectively. The
inclusion of access lines from the RLECs acquired by the Company during 1997
provided an increase of 13,645 access lines and internal growth in RLECs owned
and operated by the Company at December 31, 1997 provided an increase of 1,069
access lines. Revenue contribution from the RLECs acquired in 1997 and 1996
provided $1.6 million of the increase in basic local service revenue for the
year ended December 31, 1997. For the RLECs owned and operated for a
comparable period by the Company, basic local service revenue increased by
$0.4 million to $6.0 million for the year ended December 31, 1997 from $5.6
million for the year ended December 31, 1996.     
   
  USSF revenues increased $1.1 million to $4.3 million for the year ended
December 31, 1997 from $3.2 million for the year ended December 31, 1996. This
increase is attributable to an increase in costs allocated to universal
service support. For the RLECs owned and operated for a comparable period by
the Company, USSF revenues increased by $0.4 million to $3.6 million dollars
for the year ended December 31, 1997 from $3.2 million for the year ended
December 31, 1996.     
   
  Interstate and intrastate revenues increased $8.2 million to $27.3 million
for the year ended December 31, 1997 from $19.1 million for the year ended
December 31, 1996. This revenue increase is attributable to an increase in
access lines and MOUs and an increase in interstate and intrastate settlement
revenue administered by NECA or a respective state's settlement methodologies.
Revenue contribution from the RLECs acquired in 1997 and 1996 provided $1.5
million and $2.8 million, respectively, of the increase in interstate and
intrastate revenues for the year ended December 31, 1997. For the RLECs owned
and operated for a comparable period by the Company, interstate and intrastate
revenues increased by $3.9 million to $23.1 million for the year ended
December 31, 1997 from $19.1 million for the year ended December 31, 1996.
       
  Other services revenues increased $1.3 million to $3.7 million for the year
ended December 31, 1997 from $2.4 million for the year ended December 31,
1996. Revenue contribution from the RLECs acquired by the Company during 1997
and 1996 provided $0.1 million and $1.0 million, respectively, of the increase
in Other services revenues for the year ended December 31, 1997. For the RLECs
owned and operated for a comparable period by the Company, Other services
revenues increased by $0.2 million to $2.6 million for the year ended December
31, 1997 from $2.4 million for the year ended December 31, 1996.     
       
  OPERATING EXPENSES. Operating expenses, which include plant operations,
corporate and customer service, other operating expenses, and depreciation and
amortization, increased $10.5 million or 52.2% to $30.5 million in the year
ended December 31, 1997 from $20.1 million during the year ended December 31,
1996. The increase was primarily attributable to the operating expenses
incurred by the 1996 Acquisitions and the 1997 Acquisitions, which contributed
an aggregate of $6.0 million to the increase. For RLECs owned and operated for
a comparable period in 1997 and 1996, operating expenses increased
approximately $4.5 million or 24.1% to $23.0 million in 1997 from $18.6
million in 1996. Most of this increase can be attributed to a $1.2 million
increase in corporate and customer service, a $0.9 million change in other
expense related to a change in regulatory treatment for a reciprocal use
agreement with Bell Atlantic Corporation, and a $1.7 million increase in other
expenses related to start-up expenses at STLD and an increase in toll costs
related to new ISP activity.
 
                                      36
<PAGE>
 
  INCOME FROM OPERATIONS. As a result of the factors described above, income
from operations increased $2.2 million or 22.0% to $12.4 million in the year
ended December 31, 1997 from $10.2 million in the year ended December 31,
1996. The income from operations margin was 28.9% in 1997 as compared to 33.7%
in 1996. For RLECs owned and operated for comparable periods in 1997 and 1996,
the income from operations increased $0.4 million or 4.7% to $9.3 million in
1997 from $8.9 million in 1996 and the income from operations margin decreased
to 28.8% from 32.4%. The lower margins in 1997 are attributable to other
expenses related to the Company's long distance business.
   
  OTHER INCOME (EXPENSE). Other expense decreased $1.0 million or 11.4% to
$7.8 million in the year ended December 31, 1997 from $8.8 million during the
year ended December 31, 1996. The increase was primarily due to the interest
expense associated with the additional debt incurred to complete the 1996
Acquisitions and the 1997 Acquisitions. Such increase in other expenses was
partially offset by an increase of $0.5 million in dividend and interest
income on the Company's investments in 1997, which increase in dividend and
interest income represented a 64.6% increase over 1996.     
 
  EXTRAORDINARY ITEM. For the year ended December 31, 1997, the Company
recognized $3.6 million (net of taxes) in expenses related to the early
retirement of subordinated debt.
 
 YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
   
  OPERATING REVENUE. Net revenue increased $5.5 million or 22.3% to $30.3
million in the year ended December 31, 1996 from $24.7 million in the year
ended December 31, 1995. The inclusion of revenue from the RLECs acquired by
the Company during 1996 provided approximately $2.8 million of the increase.
For RLECs owned and operated for a comparable period in 1996 and 1995,
operating revenue improved approximately $2.7 million or 11.0% to $27.5
million in 1996 from $24.7 million in 1995.     
          
  Basic local service revenue increased $1.4 million to $5.6 million for the
year ended December 31, 1996 from $4.2 million for the year ended December 31,
1995. This revenue increase is attributable to an increase in access lines.
The Company's access lines increased 5,280 access lines to 34,017 access lines
from 28,737 access lines for the year ended December 31, 1996 and 1995,
respectively. The inclusion of access lines from the RLECs acquired by the
Company during 1996 provided an increase of 4,322 access lines and internal
growth in subsidiaries owned and operated by the Company at December 31, 1996
provided an increase of 958 access lines. Revenue contribution from the RLECs
acquired by the Company during 1996 provided $0.6 million of the increase in
basic local service for the year ended December 31, 1996. For the RLECs owned
and operated for a comparable period by the Company, basic local service
revenue increased by $0.8 million to $5.0 million for the year ended December
31, 1996 from $4.2 million for the year ended December 31, 1995.     
   
  USSF revenues increased $1.2 million to $3.2 million for the year ended
December 31, 1996 from $2.0 million for the year ended December 31, 1995. This
increase is attributable to an increase in costs allocated to universal
support services. Revenue contribution from the RLECs acquired by the Company
during 1996, provided $0.3 million of the increase USSF revenues for the year
ended December 31, 1996. For the RLECs owned and operated for a comparable
period by the Company, USSF revenues increased by $0.9 million to $2.9 million
for the year ended December 31, 1996 from $2.0 million for the year ended
December 31, 1995.     
   
  Interstate and intrastate revenues increased $2.5 million to $19.1 million
for the year ended December 31, 1996 from $16.6 million for the year ended
December 31, 1995. This revenue increase is attributable to an increase in
access lines and MOUs and an increase in interstate and intrastate settlement
revenues administered by NECA or a respective state's settlement
methodologies. Revenue contribution from the RLECs acquired by the Company
during 1996 provided $1.5 million of the increase in interstate and intrastate
revenues for the year ended December 31, 1996. For the RLECs owned and
operated for a comparable period by the Company, interstate and intrastate
revenues increased by $1.0 million to $17.6 million for the year ended
December 31, 1996 from $16.6 million for the year ended December 31, 1995.
    
                                      37
<PAGE>
 
   
  Other services revenues increased $0.4 million to $2.4 million for the year
ended December 31, 1996 from $2.0 million for the year ended December 31,
1995. Revenue contribution from the RLECs acquired by the Company during 1996
provided $0.4 million of this increase. For the RLECs owned and operated for a
comparable period by the Company, there was no significant increase in other
services revenues for the year ended December 31, 1996 over the year ended
December 31, 1995.     
       
  OPERATING EXPENSES. Operating expenses, which include plant operations,
corporate and customer service, other operating expenses, and depreciation and
amortization, increased $2.7 million or 15.7% to $20.1 million in the year
ended December 31, 1996 from $17.3 million in the year ended December 31,
1995. This increase was primarily due to the inclusion of operating expenses
from the RLECs acquired by the Company, which contributed approximately $1.6
million to the increase. For RLECs owned and operated for a comparable period
in 1996 and 1995, operating expenses increased approximately $1.1 million or
6.2% to $18.4 million in 1996 from $17.3 million in 1995 primarily due to an
increase in corporate and customer service.
 
  INCOME FROM OPERATIONS. As a result of the factors described above, income
from operations increased $2.8 million or 37.7% to $10.2 million in the year
ended December 31, 1996 from $7.4 million in the year ended December 31, 1995.
The inclusion of income from operations for the 1996 Acquisitions accounted
for most of the increase. The income from operations margin was 33.7% in 1996
as compared to 29.9% in 1995. For RLECs owned and operated for a comparable
period in 1996, income from operations increased $1.7 million or 22.3% to $9.1
million in 1996 from $7.4 million in 1995 and the income from operations
margin increased to 33.0% from 29.9%.
   
  OTHER INCOME (EXPENSES). Other expense increased $2.4 million or 37.7% to
$8.8 million in the year ended December 31, 1996 from $6.4 million in the year
ended December 31, 1995. The increase was due primarily to interest expense
associated with additional debt incurred to complete the 1996 Acquisitions.
    
LIQUIDITY AND CAPITAL RESOURCES
 
  Implementation of the Company's acquisition strategy has required a
significant portion of the Company's capital resources. The Company
historically has used the proceeds of bank debt and private equity offerings,
supplemented by the Company's available cash flow, to fund the implementation
of the Company's acquisition strategy.
 
  As a result of the financing of its acquisitions, the Company has a
substantial amount of long-term indebtedness. The Company expects that
payments under the New Credit Facility and payments to the holders of the
Notes will be one of the Company's principal uses of cash for the foreseeable
future. In the year ended December 31, 1997, the Company made principal
payments of $22.1 million, or 116.0% of Adjusted EBITDA, to service its debt.
 
  In addition to debt service, the Company's principal liquidity requirements
are expected to be for general corporate purposes, capital expenditures and to
consummate the Pending Acquisition. The Company believes that the proceeds
from the New Credit Facility and the Notes provide sufficient resources to
find the acquisition of the Pending Acquisition. The Company's annual capital
expenditures for existing operations have historically been significant.
Because existing regulations allow the Company to recover its operating and
capital costs, plus a reasonable return on its invested capital in regulated
telephone assets, capital expenditures constitute an attractive use of the
Company's cash flow. The Company has historically generated sufficient cash
flow from operations to meet all of its capital expenditure requirements for
existing operations. In 1996 and 1997, the Company spent approximately $8.4
million and $8.2 million on capital expenditures, respectively. The Company
expects capital expenditures in 1998 for all existing operations and the
Pending Acquisition to be approximately $15.0 million.
 
  The Company may require additional financing for future acquisitions, if
any, and there can be no assurance that it will be able to obtain such
financing on favorable terms, if at all. Management evaluates potential
acquisitions on an ongoing basis and has had, and continues to have,
preliminary discussions concerning the purchase of additional RLECs and other
telecommunications properties.
 
                                      38
<PAGE>
 
  The Company's plan to enter additional markets as a CLEC is expected to
result in the Company's incurring initial operating losses followed by
significant capital expenditures. The Company currently estimates that it will
invest approximately $5.0 million and $15.0 million in 1998 and 1999,
respectively, related to the planned rollout of nine CLEC markets in 1998 and
fifteen CLEC markets in 1999. In addition, the Company anticipates that
building facilities to migrate CLEC customers to the Company's existing
networks will require substantially more capital expenditures in 1999 and
2000. The New Credit Facility limits the funding of such losses and capital
expenditures to (i) $5.0 million per year so long as the senior debt leverage
ratio exceeds 4.0x and (ii) $15.0 million per year whenever such leverage
ratio is under 4.0x. The terms of the Notes also impose certain restrictions
on the Company's ability to fund its CLEC expansion. See "Description of the
Notes--Certain Covenants--Limitation on Debt" and "--Limitation on Restricted
Payments." If the CLEC plan does not prove successful in the next few years,
the Company will likely not continue to invest capital in the business. If the
CLEC plan proves to be successful, the Company believes it will be able to
raise separate financing for future CLEC capital requirements as permitted
under the New Credit Facility and the Indenture for the Notes.
 
  Net cash provided by operating activities was $9.8 million for each of the
years ended December 31, 1997 and 1996. Net cash provided by operating
activities was $7.3 million and $4.3 million for the six months ended June 30,
1998 and 1997, respectively. Net cash used in investing activities was $39.0
million and $19.8 million for the years ended December 31, 1997 and 1996,
respectively, and $174.3 million and $7.2 million for the six months ended
June 30, 1998 and 1997, respectively. These cash flows primarily reflect
expenditures relating to acquisitions of telephone properties of $30.8 million
and $11.3 million for the years ended December 31, 1997 and 1996,
respectively, and $171.3 million and $4.6 million for the six months ended
June 30, 1998 and 1997, respectively, and capital expenditures of $8.2 million
and $8.4 million for the years ended December 31, 1997 and 1996, respectively,
and $3.3 million and $2.9 million for the six months ended June 30, 1998 and
1997, respectively.
 
  Net cash provided by financing activities was $31.7 million and $10.6
million for the years ended December 31, 1997 and 1996, respectively. Net cash
provided by financing activities was $174.2 million and $3.8 million for the
six months ended June 30, 1998 and 1997, respectively. These cash flows
primarily represent borrowings, the proceeds of which were $71.1 million in
1997 and $451.0 million in the first six months of 1998 and proceeds from the
issuance of common stock of $15.9 million in 1997 and $31.8 million in the
first six months of 1998. A majority of the 1997 proceeds were utilized to
repay long-term debt of $22.1 million and repurchase preferred stock and
warrants for an aggregate amount of $31.5 million. A majority of the 1998
proceeds were utilized to repay long-term debt of $292.6 million and to
purchase Taconic, Ellensburg and Chouteau. On July 31, 1997, a
recapitalization (the "Recapitalization") of the Company was completed. The
Company (i) issued 43,794 shares of the Company's Class A voting common stock
for proceeds of $15.0 million in the aggregate to Carousel and Kelso and (ii)
issued 440 shares to members of management for proceeds of $150,705. Proceeds
from the Recapitalization and related borrowings of $39.2 million from CoBank
ACB ("CoBank") were utilized to (i) retire certain subordinated notes issued
by STE/NE Acquisition Corp. d/b/a/ Northland Telephone Company of Vermont, a
wholly-owned subsidiary of the Company; (ii) repurchase all of the outstanding
shares of preferred stock of MJD not owned by management; and (iii) repurchase
certain common stock purchase warrants that were owned by Fleet Equity
Partners and its affiliates. In October 1997, the Company issued an additional
4,379 shares of common stock to Kelso and Carousel for an aggregate of
approximately $1.5 million. The proceeds of this stock issuance were utilized
to finance the acquisition of C-R Communications, Inc.
   
  Adjusted EBITDA is not a measure of performance under generally accepted
accounting principles and should not be construed as a substitute for
consolidated net earnings (loss) as a measure of 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 applicable to
the covenants for the Notes. 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.     
 
  Adjusted EBITDA increased 77.4% to $17.6 million for the six months ended
June 30, 1998 from $9.9 million for the six months ended June 30, 1997.
Adjusted EBITDA increased 28.5% from $17.6 million in the year ended December
31, 1996 to $22.7 million in the year ended December 31, 1997. Adjusted EBITDA
 
                                      39
<PAGE>
 
increased 25.5% from $14.1 million in the year ended December 31, 1995 to
$17.6 million in the year ended December 31, 1996.
 
  Adjusted EBITDA is presented because management believes it provides useful
information regarding a 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.
 
  As of December 31, 1997, the four individuals who founded the Company in
1991 (the "Co-Founders") (through their partnership interests in MJD Partners,
L.P.) and management, Kelso, and Carousel owned 47%, 26% and 26% of the
Company, respectively, on a fully diluted basis. The Equity Investors invested
an additional $16.3 million on March 30, 1998 to finance the acquisition of
Taconic and an additional $15.0 million on April 30, 1998 to finance the
acquisition of Ellensburg, resulting in a total of $47.8 million of equity
capital invested in MJD through April 30, 1998. As of May 31, 1998, the Co-
Founders and management, Kelso and Carousel owned approximately 24%, 38% and
38% of the Company, respectively, on a fully-diluted basis.
       
  As of December 31, 1997, in connection with the implementation of its
business plan, the Company had incurred an aggregate of approximately $128.0
million of long term debt from CoBank and the Rural Telephone Finance
Cooperative ("RTFC"). Such debt typically had a term of 14 years and an
interest rate fixed at a spread of 200 basis points above the commensurate
Treasury rate, resulting in an average rate approximating 8.12%.
 
  On March 30, 1998, the Company closed a $315.0 million senior secured credit
facility (the "New Credit Facility") which included (i) $75.0 million of term
debt (Tranche C) amortized over nine years, (ii) $155.0 million of term debt
(Tranche B) amortized over eight years and (iii) an $85.0 million reducing
revolving credit facility (the "Revolver") with a term of six and one-half
years. The borrower under the New Credit Facility is the same entity in the
corporate structure as the Issuer of the Notes. All obligations of the Company
under the New Credit Facility are guaranteed by four of the intermediary
subsidiaries of the Company; STE, MJD Holdings Corp., MJD Services Corp. and
MJD Ventures, Inc. The ability of such subsidiaries to guarantee the
obligations of the Company under certain circumstances may be restricted. See
"Risk Factors--Subordination; Holding Company Structure." The Company is
obligated to comply with certain financial ratios and tests, including the
following (which ratios tighten over time subject to loosening upon the
Company achieving a ratio of senior debt to annualized EBITDA ratio of 4.0 to
1.0 or less): (i) maintain a ratio of annualized EBITDA to interest expense of
1.5 to 1.0; (ii) maintain a ratio of debt to annualized EBITDA of not more
than 6.5 to 1.0; and (iii) maintain a ratio of senior debt to annualized
EBITDA of not more than 6.4 to 1.0. The Company is currently in compliance
with all covenants under the New Credit Facility. The Company believes that
the New Credit Facility, when combined with the proceeds of the Offering,
provides sufficient resources to fund the Pending Acquisition. See
"Description of New Credit Facility."
 
  The Company may secure additional funding through the sale of public or
private debt and equity securities or enter into another bank credit facility
to fund future acquisitions. 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 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way
 
                                      40
<PAGE>
 
that public business enterprises report information regarding their operating
segments in annual financial statements and requires that those enterprises
report selected information regarding their operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures regarding products and services, geographic areas, and
major customers. SFAS 131 is effective for fiscal years beginning after
December 15, 1997. The Company believes that adopting this accounting
pronouncement in 1998 will not have a significant effect on the level of
disclosures in its consolidated financial statements.
 
  In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pensions and other Postretirement
Benefits" ("SFAS 132"), which is effective for fiscal years beginning after
December 15, 1997. SFAS 132 revises disclosure requirements for pension and
other postretirement benefits plans. The Company believes that adopting this
accounting pronouncement in 1998 will not have a significant effect on the
level of disclosures in its consolidated financial statements.
 
  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 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company anticipates adopting this accounting pronouncement in 2000; however,
management believes it will not have a significant impact on the Company's
annual consolidated financial statements.
 
INFLATION
 
  The Company does not believe that inflation has a significant effect on its
operations.
 
YEAR 2000
 
  The year 2000 issue involves the risk that computer systems using two-digit
date fields will fail to recognize properly the year 2000, resulting in
computer failures for businesses, government agencies, service providers,
vendors and customers. The Company has assessed its systems and believes them
to be year 2000 compliant. In addition, the Company has received assurance
from its major software vendors that the products used by the Company are or
will be compliant by early 1999. If the systems of other companies on whose
services the Company depends or with whom the Company's systems interface are
not year 2000 compliant, it could have a material adverse effect on the
Company. The Company has budgeted $100,000 to review the year 2000 issue
during 1998 and will continue its year 2000 issue assessment and, if it comes
to the attention of management that any of its systems, or the systems of
those on whom the Company relies, are not year 2000 compliant, the Company
expects to develop an action plan and devote the resources to address such
problem. There can be no assurance that devoting further resources of the
Company to the year 2000 issue, if the need should arise, would not have a
material adverse effect on the Company.
 
                                      41
<PAGE>
 
                                   BUSINESS
 
COMPANY OVERVIEW
   
  MJD is a growing provider of local telecommunications services to customers
in rural communities in the United States. The Company also provides
complementary services such as long distance service, enhanced calling
services and wireless telephony. Upon completion of the Pending Acquisition,
the Company believes that it will be the eighteenth largest telephone company
in the United States, and the largest telephone company in the United States
that focuses primarily on acquiring and operating rural telecommunications
service companies. For the year ended December 31, 1997, the Company had
revenue and Adjusted EBITDA of $43.0 million and $22.7 million, respectively.
The Company provided net cash of $9.8 million from operating activities, used
net cash of $39.0 million in investing activities and provided net cash of
$31.7 million from financing activities for the year ended December 31, 1997.
On a pro forma basis after giving effect to the Acquisitions, the Company
would have had revenue and Adjusted EBITDA of $104.6 million and $53.2
million, respectively, for the year ended December 31, 1997. On a pro forma
basis after giving effect to the Acquisitions, the Company provided net cash
of $16.7 million from operating activities, used net cash of $269.6 million in
investing activities, and provided net cash of $239.1 million from financing
activities for the year ending December 31, 1997. For the six months ended
June 30, 1998, the Company had revenue and Adjusted EBITDA of $35.3 million
and $17.6 million, respectively. The Company provided net cash of $7.3 million
from operating activities, used net cash of $174.3 million in investing
activities and provided net cash of $174.2 million from financing activities
during the six months ended June 30, 1998. On a pro forma basis after giving
effect to the Acquisitions, the Company would have had revenue and Adjusted
EBITDA of $56.0 million and $24.9 million, respectively, for the six months
ended June 30, 1998. On a pro forma basis after giving effect to the
Acquisitions, the Company provided net cash of $8.1 million from operating
activities, used net cash of $220.1 million in investing activities and
provided net cash of $215.2 million from financing activities for the six
months ended June 30, 1998.     
 
  The Company believes that the rural telecommunications market is
particularly attractive due to limited competition and a favorable regulatory
environment; in particular, pursuant to existing state and federal
regulations, the Company is able to charge rates which enable it to recover
its operating and capital costs, plus a reasonable (as determined by the
relevant regulatory authority) rate of return on its invested capital. RLECs
which serve this market are characterized by stable operating results and
strong cash flow margins. The Company has successfully completed acquisitions
of fourteen RLECs in ten states (Colorado, Illinois, Kansas, Maine, New
Hampshire, New York, South Dakota, Washington, Oklahoma and Vermont (the
"Current States")) and, pro forma for the Ellensburg acquisition and the
Pending Acquisition, the Company will serve over 123,000 access lines and
provide local telephone service to customers in rural locations in ten states.
MJD has been successful in improving operating margins and reducing trailing
acquisition multiples by centralizing many of the acquired companies'
operations and increasing revenues through introducing innovative marketing
strategies for enhanced and ancillary services. The Company believes that the
attractive operating characteristics of rural markets and the Company's
ability to draw on its existing corporate resources creates the opportunity to
achieve and maintain substantial operating efficiencies.
 
  The local telephone industry is comprised of a few large, well-known
companies such as the RBOCs and a large number of small independent telephone
companies. According to USTA, there are over 1,300 independent telephone
companies with fewer than 25,000 access lines in the United States. The
majority of these small telephone companies operate in thinly populated, rural
areas with limited competition due to the unfavorable economics of
constructing and operating a competing network in such areas. Many of these
RLECs are owned by families or small groups of individuals and were founded
shortly after World War I. The Company believes that the owners of some of
these RLECs are increasingly interested in selling their companies, thereby
creating significant future opportunities to acquire additional properties.
The Company also believes that the RBOCs are increasingly likely to dispose of
rural access lines in certain markets in order to focus more attention and
resources on their urban markets.
 
                                      42
<PAGE>
 
  The Company was formed in 1991 to capitalize on consolidation opportunities
in the RLEC market. The Company has assembled a senior management team with
significant industry experience and a strong track record of acquiring and
integrating RLECs. The seven most senior managers of the Company have an
average of approximately 20 years of experience in the telecommunications
industry with companies such as C&P Telephone (now a subsidiary of Bell
Atlantic Corporation), Sprint Corporation, Frontier Corporation and C-TEC
Corporation. As of May 31, 1998, senior management owned 24.0% of the common
stock of the Company on a fully diluted basis. MJD also benefits from the
financial and management expertise of its two primary equity investors, which
are Kelso and Carousel, each of which owned 38.0% of the common stock of the
Company on a fully diluted basis as of May 31, 1998. The Equity Investors have
invested a total of $47.8 million of equity capital in MJD through May 31,
1998. Kelso is one of the oldest and most established firms specializing in
leveraged investing, both as a principal and as a financial advisor, since
1971, and has significant experience with other media and communications
properties. Carousel, founded in 1996, is a merchant bank with over $160.0
million in equity commitments, focused on investing in middle market companies
located in the southeastern United States.
 
BUSINESS STRATEGY
 
  The Company's objective is to become the leading provider of
telecommunications services to rural communities and the preferred acquirer of
RLECs in the United States. Key strategies in the development and fulfillment
of the Company's objectives are discussed below.
 
  CONTINUED GROWTH THROUGH ACQUISITIONS. The Company expects to continue
growing primarily by acquiring independent RLECs and by purchasing rural
telephone operations from large telephone companies such as the RBOCs, GTE
Corporation and others. The Company focuses its acquisition efforts on rural
telephone companies that exhibit: (i) significant opportunities to realize
management and operating synergies and economies of scale; (ii) positive
economic and demographic characteristics; (iii) a positive regulatory and
operating environment; (iv) deployment of advanced technology; and (v) strong
mid-level management capabilities. Cellular, cable television, long distance
resale, paging and wireless operations may also be acquired, but primarily as
ancillary business segments of acquired RLECs.
 
  IMPROVE OPERATING EFFICIENCY OF ACQUIRED RLECS. By consolidating RLECs under
a single corporate organization, the Company has successfully achieved
significant operating efficiencies that the Company believes the independent
RLECs could not have individually attained. For example, the Company has
consolidated the regulatory, accounting and billing functions of its acquired
companies and has reduced the overhead costs associated with executive
management of such companies. The Company's acquisition strategy is to acquire
inherently sound operating RLECs which do not require dramatic changes to core
operations. Upon acquiring such companies, the Company applies its operating,
regulatory, marketing, technical and management expertise and its financial
resources to improve the operations and profitability of the acquired RLECs.
 
  INCREASE REVENUE THROUGH ENHANCED SERVICE OFFERINGS. The Company believes
that its local community presence and its brand recognition will allow it to
grow its revenues by offering enhanced and ancillary telecommunications
services to its existing customers. Unlike the RBOCs, MJD is not subject to
regulatory restrictions that prohibit it from marketing other services such as
long distance services in its existing franchise territories or elsewhere. The
Company intends to pursue incremental revenue growth through: (i) traditional
ancillary telephony service offerings such as enhanced calling services,
including voice mail and conference calling; (ii) long distance resale
services, including related products such as "800" service and long distance
calling cards; (iii) multimedia services such as Internet access, cable
television and other entertainment services; and (iv) various wireless
services, including cellular, PCS and paging. For example, during the year
ended December 31, 1997, ST Long Distance (the Company's long distance
subsidiary) introduced its long distance service program in selected markets
and realized an average first year penetration rate of approximately 57% in
these markets.
 
                                      43
<PAGE>
 
  EXPAND EXISTING MARKET PRESENCE BY LAUNCHING CLEC SERVICES. The Company is
currently initiating a plan to introduce CLEC services in targeted rural and
small urban markets that are within 200 miles of certain of its existing
RLECs. The plan contemplates the Company entering nine such markets in 1998
and fifteen such markets in 1999. In the first phase of this strategy, the
Company plans to enter markets as a reseller of local exchange services and
attempt to capture market share without owning facilities in the targeted
market. If the Company succeeds in capturing a meaningful portion of the
market, the Company then plans to migrate its customers to its own facilities-
based service that incorporates unbundled elements from the ILEC connected
back to the Company's RLEC network and switching facilities. This second phase
contemplates significant capital expenditures that the Company believes would
be required to make such a venture profitable. Once these facilities have been
installed, all new CLEC customers would be serviced from the Company's
network. The Company believes that this strategy will permit an efficient use
of the Company's capital resources and rapid deployment of service. The
Company also believes that its target markets are likely to sustain only one
or two competitors in addition to the ILEC. For this reason, the Company
intends to enter its target markets as quickly as is possible.
 
  The targeted markets are small urban markets with residential populations
between 25,000 and 75,000. The Company plans to target its CLEC services
initially to small and medium businesses, which management believes to be a
lucrative and underserved customer segment. The Company has identified more
than 500 small urban markets throughout the United States that could be served
by MJD as a CLEC.
 
  The Company's customer acquisition strategy is expected to emphasize local,
personal sales and customer service. Under its CLEC plan, the Company expects
to establish an office in each of its markets, staffed with locally-hired
salespeople and customer service personnel who will be trained to provide a
high level of customer service. The Company plans to utilize the technical and
administrative personnel of its RLECs, thereby reducing the expenses required
to operate the CLEC business. The implementation of the Company's CLEC
strategy is in the early stages, and there can be no assurance that the
Company will be able to implement its CLEC strategy successfully. See "Risk
Factors--Future Capital Requirements; Expected CLEC Losses" and "--
Competition--Risk of Inability to Compete as a CLEC." The New Hampshire and
New York markets are the Company's initial markets in which the Company's CLEC
strategy is being evaluated. The Company plans to continue providing service
in these markets for the foreseeable future. Entry into new markets will be
based on a qualitative and quantitative assessment of the Company's
performance in these two test markets. There is no set schedule for the
Company to perform such an assessment; rather, the testing and evaluation by
the Company is ongoing. For purposes of the Indenture relating to the Notes,
the Company will conduct its CLEC business through Unrestricted Subsidiaries,
which will limit the amount the Company can invest in the CLEC business and
exempt the CLEC subsidiaries from most of the covenants applicable to the
Notes. See "Description of Notes."
 
RECENT AND PENDING ACQUISITIONS
 
  The Company has recently completed, or plans to complete, the following RLEC
acquisitions:
 
  TACONIC TELEPHONE CORP. On March 30, 1998, the Company acquired Taconic.
Taconic, located in the Hudson Valley area of eastern New York, 30 miles
southeast of Albany, operates approximately 24,800 access lines (approximately
83% residential). The Company purchased the common stock of Taconic for
$67.5 million and assumed $9.2 million of debt of Taconic. In the year ended
December 31, 1997, Taconic had revenues of $20.4 million.
 
  ELLENSBURG TELEPHONE COMPANY. On April 30, 1998, the Company acquired
Ellensburg. Ellensburg, located in Ellensburg, Washington, 100 miles southeast
of Seattle, operates approximately 23,900 access lines (approximately 76%
residential). The Company will purchase the common stock of Ellensburg for
$91.0 million. In the year ended December 31, 1997, Ellensburg had revenues of
$14.7 million.
 
                                      44
<PAGE>
 
  CHOUTEAU TELEPHONE COMPANY. On June 1, 1998, the Company acquired Chouteau.
Chouteau, located in Chouteau, Oklahoma, 30 miles east of Tulsa, operates
approximately 3,400 access lines (approximately 84% residential). The Company
purchased the common stock of Chouteau for $18.6 million and assumed $3.0
million of debt of Chouteau. In the year ended December 31, 1997, Chouteau had
revenues of $4.3 million.
 
  UTILITIES, INC. On April 3, 1998, the Company entered into an agreement to
acquire Utilities, which is expected to close in the third or fourth quarter
of 1998. Utilities is headquartered in Standish, Maine, approximately 15 miles
west of Portland. Utilities operates approximately 22,200 access lines in
central and southern Maine, most of which are located in exchanges adjacent to
exchanges operated by subsidiaries of the Company. In the year ended December
31, 1997, Utilities had revenues of $16.2 million (which excludes the revenues
of certain cellular businesses of Utilities which are not being acquired by
MJD).
 
  The Pending Acquisition is subject to certain closing conditions. See "Risk
Factors--Risk that Pending Acquisition Will Not Be Consummated" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
ACQUISITION HISTORY
 
  The following summarizes each RLEC the Company has acquired to date and the
Pending Acquisition.
 
<TABLE>
<CAPTION>
                                                ACCESS LINES
                              LOCATION OF           AS OF           DATE         PURCHASE
     RLEC ACQUIRED            OPERATIONS      DECEMBER 31, 1997   ACQUIRED         PRICE
- ------------------------  ------------------- ----------------- ------------- ---------------
<S>                       <C>                 <C>               <C>           <C>
Sunflower Telephone       Kansas/Colorado            4,675      May 1993      $19.7 million
 Company, Inc.
Northland Telephone       Maine/New Hampshire       20,493      August 1994   $39.7 million
 Company of Maine, Inc.
STE/NE Acquisition Corp.  Vermont                    5,510      August 1994   $12.0 million
 d/b/a Northland
 Telephone Company
 of Vermont
Sidney Telephone Company  Maine                      1,359      January 1996  $ 3.0 million
Big Sandy Telecom, Inc.   Colorado                     893      June 1996     $ 3.1 million
Bluestem Telephone        Kansas                       992      August 1996   $ 3.9 million
 Company
Odin Telephone Exchange,  Illinois                   1,164      August 1996   $ 5.0 million
 Inc.
Kadoka Telephone Co.      South Dakota                 580      January 1997  $ 2.9 million
Columbine Telephone       Colorado                   1,085      April 1997    $ 4.6 million
 Company, Inc.
Chautauqua & Erie         New York                  11,070      July 1997     $22.0 million
 Telephone Corporation
C-R Communications, Inc.  Illinois                     910      October 1997  $ 4.0 million
Taconic Telephone Corp.   New York                  24,832      March 1998    $67.5 million
Ellensburg Telephone      Washington                23,910      April 1998    $91.0 million
 Company
Chouteau Telephone        Oklahoma                   3,394      June 1998     $18.6 million
 Company
                                                   -------
  Subtotal:                                        100,867
Utilities, Inc.           Maine                     22,239      Third/Fourth  Not consummated
                                                                 Quarter 1998
                                                                 (expected)
                                                   -------
  Total:                                           123,106
                                                   =======
</TABLE>
 
INDUSTRY OVERVIEW
 
  The LEC industry is composed of a small number of large, well-known
companies such as the RBOCs and GTE, and a very large number of relatively
small independent companies. These small, independent telephone companies
provide telephone service to more than five million residences and businesses
in secondary and rural marketplaces.
 
                                      45
<PAGE>
 
  According to USTA, there are over 1,300 independent telephone companies with
less than 25,000 access lines in the U.S., many of which could be potential
acquisition candidates for the Company. A majority of these small telephone
companies operate in sparsely populated rural areas where competition from
bypass companies including CAPs, CATV operators or wireless telecommunications
companies (such as cellular or PCS providers) is limited due to the generally
unfavorable economics of constructing and operating such competitive systems.
Most RLECs are owned by families or small groups of individuals, and were
founded soon after World War I. The Company believes that the owners of these
small companies are increasingly interested in selling such companies as the
growing technical, administrative and regulatory complexities of the local
telephone business challenge the capabilities of the existing management. In
addition, certain large telephone companies are selling many of their small
rural exchanges to focus their attention on their major metropolitan
operations that generate the bulk of their consolidated revenue and which are
increasingly threatened by competition. The Company believes that these
companies cannot continue to invest time and capital in rural operations that
make up a relatively insignificant portion of their consolidated operations.
As a result of these circumstances, the Company believes that it has, and in
the future will have, numerous opportunities to acquire RLECs and rural
telephone operations currently owned by the large telephone companies.
 
  The FCC has taken steps to limit the ability of companies to gain regulatory
subsidies when large telephone companies sell individual telephone exchanges
to small companies. A smaller company can be entitled to significant increases
in universal service subsidies relating to the same exchange because of
specific rules that favor small companies and because small companies do not
have to average their costs over wide geographic areas, which could include
low cost areas, as do larger carriers. In the past, on a case by case basis,
the FCC has only approved the sale of individual exchanges if such sale did
not increase the amount of universal service subsidy going to the acquiring
company. The FCC has proposed to make this policy a permanent rule. Several
LECs and industry organizations have requested the FCC not to adopt this
policy. However, the acquiring company can request a waiver to increase the
amount of universal service support based on its own cost characteristics,
demographics and particular situation. If the FCC continues to enforce this
policy or adopts it as a final rule, it could adversely affect the Company's
ability to acquire additional individual exchanges from large telephone
companies.
 
  RURAL TELEPHONE INDUSTRY. RLECs typically exhibit the stable economic and
demographic characteristics often associated with rural America. All of the
Company's telephone company subsidiaries qualify as "RLECs" under the
Telecommunications Act, and are therefore entitled to benefit from a number of
cost recovery mechanisms associated with the "rural carrier" designation. See
"Regulation."
 
  Because RLECs serve primarily rural areas and small towns, they tend to have
unique characteristics that differentiate them from larger LECs. For instance,
the per minute cost of operating both telephone switches and interoffice
facilities is higher in rural areas as RLECs typically have fewer, more
geographically dispersed customers and lower calling volumes. Also, the
distance from the telephone switch to the customer is typically longer in
rural areas, which results in increased distribution facilities costs. These
relatively high costs tend to discourage competitors from entering territories
served by RLECs. As a result, RLECs are rarely faced with the threat of
competition, as compared to the RBOCs which often serve densely populated
areas that contain a high concentration of profitable business accounts. As a
result of legislative and regulatory initiatives, however, it is possible that
RLECs, including the Company, may become subject to competition. See "Risk
Factors--Competition," "Risk Factors--Regulation" and "Business--Competition."
 
  HIGH RURAL SWITCHING COSTS DUE TO LACK OF ECONOMIES OF SCALE. RLECs
typically lack the economies of scale in switching associated with high call
traffic volume and inherently have considerably higher costs per access line
and per minute for switching than do larger LECs. Also, RLECs typically serve
much smaller communities and therefore typically have smaller central offices
than the RBOCs; however, this often does not translate into lower costs for
RLECs because software costs, which can account for most of the cost of a
switch, are similar regardless of the size of the office. Additionally, RLECs
typically own only a few central offices and do not have the negotiating power
to demand the discounts enjoyed by larger LECs, which purchase a significant
number of switches each year.
 
                                      46
<PAGE>
 
  REVENUE COMPONENTS. RLECs typically receive the majority of their revenue
from access charges (the rates IXCs pay to a LEC for use of the LEC's network
to originate and terminate toll calls), as compared to the RBOCs which receive
a greater percentage of their revenues from basic local service charges. In
addition, RLECs on average receive greater USSF revenue to support local
telephone service rates in high cost locations than do RBOCs.
 
  Although RLECs' residential customers may have lower local service bills
than their urban counterparts, they typically have higher long distance bills,
which makes the total amount of a typical telephone bill for rural and urban
residential customers about the same. The higher long distance bills are the
result of smaller local calling areas for rural customers, which requires many
of the calls placed for routine daily activities to be toll calls. Unlike
urban customers, rural customers often must pay toll rates to make calls
considered "local" in the urban settings, including calls to schools, stores,
doctors and government agencies.
 
  CAPITAL EXPENDITURES. In most years, RLECs' capital expenditures are for (i)
capital expenditures for maintenance and (ii) expenditures for any expansions
required for growth within the RLEC's service area. Occasionally, however,
RLECs are required to make significant capital investments in a particular
year to replace a central switch, or to rebuild or upgrade elements or
components of the RLEC's local loop.
 
  Due to the relatively high cost associated with serving rural telephone
properties, universal telephone service could not be provided without the
support mechanisms historically made available to RLECs. The government has
preserved these support mechanisms in the Telecommunications Act with an
established system of cost recovery mechanisms that ensure a minimum rate of
return on capital investment in rural telephone assets. As a result, RLECs are
entitled to recover a minimum rate of return on all capital invested in
regulated telephone assets. See "Regulation."
 
SERVICES
 
  The Company offers a broad portfolio of high-quality telecommunications
services for residential, business, government and carrier customers in each
of the markets in which it operates. The Company's service offerings are
locally managed to better serve the needs of each community. The Company
believes it is able to efficiently and reliably provide, by using local
personnel, all of the telecommunications services required by its customers,
thereby allowing the Company to establish and maintain a recognized and
respected brand identity within each of its service areas. These include
services traditionally associated with local telephone companies, as well as
other services such as long distance, multimedia and wireless, and Internet
services. Based on its understanding of its local customers' needs, the
Company has attempted to be proactive by offering bundled services designed to
simplify the customer's purchasing and management process.
 
GENERATION OF REVENUE
 
  The Company primarily generates revenue through: (i) the provision of basic
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 phone calls; (iii) USSF payments; and
(iv) the provision of ancillary services such as billing and collection, long
distance resale, enhanced services, wireless services, cable television
services, Internet services and customer premises equipment sales.
 
                                      47
<PAGE>
 
  The following chart summarizes each component of the Company's revenue
sources for the year ended December 31, 1997:
 
<TABLE>   
<CAPTION>
                     % 1995  % 1996  % 1997
 REVENUE SOURCE      REVENUE REVENUE REVENUE             DESCRIPTION
 --------------      ------- ------- ------- ----------------------------------
 <C>                 <C>     <C>     <C>     <S>
 Basic Local Service  16.8%   18.5%   17.8%  Enables the local customer to
                                             originate and receive an unlimited
                                             number of calls within a defined
                                             "exchange" area. The customer is
                                             charged a flat monthly fee which
                                             is regulated by state agencies.
 Intrastate Access    35.4%   32.0%   32.8%  Enables an IXC to utilize the
                                             Company's local network to
                                             originate or terminate an
                                             intrastate call. The access charge
                                             is paid by the IXC to the Company
                                             and is regulated by state
                                             regulatory agencies.
 Interstate Access    31.8%   31.1%   30.8%  Enables an IXC to utilize the
                                             Company's local network to
                                             originate or terminate an
                                             interstate call. The access charge
                                             is
                                             paid by the IXC to the Company and
                                             is regulated by the FCC.
 USSF Revenue          8.0%   10.5%   10.0%  The Company receives funds to
                                             subsidize the cost of providing
                                             high cost local telephone service
                                             in rural locations. The funds are
                                             allocated and distributed to the
                                             Company from pools of funds
                                             generated by IXCs and LECs.
 Other Services        8.0%    7.9%    8.6%  The Company generates revenues
                                             from billing and collection, long
                                             distance resale, enhanced
                                             services, wireless services, cable
                                             services, Internet services and
                                             customer premises equipment sales.
</TABLE>    
 
BASIC LOCAL SERVICE
 
  Basic local service includes basic local lines, ISDN, Centrex, foreign
exchange, private lines and switched data services. The Company provides basic
local services to residential, business and government customers, generally
for a fixed monthly charge. In the RLECs' territories, the amount that the
Company can charge a customer for local service is determined by rate
proceedings involving the appropriate state regulatory authorities.
 
NETWORK ACCESS CHARGES
 
  Network access charges relate to long distance, or toll calls, that
typically involve more than one company in the provision of telephone service.
Since toll calls are generally billed to the customer originating the call, a
mechanism is required to compensate each company providing services relating
to the call. The Company bills access charges to the IXC for the use of the
Company's facilities to access the customer, as described below:
 
  INTRASTATE ACCESS CHARGES. The Company generates intrastate access revenue
when an intrastate long distance call (which involves an IXC) is originated by
a customer within the same state but in another local access and transport
area ("LATA," i.e., the calling area controlled by a LEC). The IXC pays the
Company an intrastate access payment for either terminating or originating the
call. The Company records the details of the call through its carrier access
billing system ("CABS") and receives the access payment from the IXC. When a
customer of the Company originates the call, the Company typically provides
billing and collecting for the IXC through a billing and collection agreement.
The access charge for the Company's intrastate service is regulated and
approved by the state regulatory authority.
 
  INTERSTATE ACCESS CHARGES. The Company generates interstate access revenue
when an interstate long distance call is originated by a customer calling from
a LATA in one state to a LATA in another state. The Company bills interstate
access charges in the same manner as it bills intrastate access charges;
however, the interstate access charge is regulated and approved by the FCC
instead of the state regulatory authority.
 
                                      48
<PAGE>
 
USSF REVENUE
 
The USSF supplements the amount of local service revenue received by the
Company to ensure that basic local service rates for customers in high cost
rural areas are consistent with rates charged in lower cost urban and suburban
areas. The USSF is funded by monthly customer fees charged to IXCs and
administered by the USAC which then distributes funds to the Company on a
monthly basis based upon the Company's costs for providing local service. See
"Regulation."
 
OTHER SERVICES
 
  The Company seeks to capitalize on its local presence and network
infrastructure by offering services to customers such as long distance,
enhanced services, wireless services, cable services, Internet services,
billing and collection for IXCs and customer premises equipment sales.
 
  LONG DISTANCE RESALE. In 1997, the Company began offering long distance
services to its customers in select markets. The Company offers switched and
dedicated long distance services throughout its service areas through resale
agreements with national IXCs. In addition, in late 1997, the Company began to
offer wholesale long distance services to other independent telephone
companies. Currently, the Company provides long distance services to four
other independent telephone companies, principally in the northeastern United
States. As of June 30, 1998, the Company's wholesale customers had subscribed
to approximately 8,200 access lines of the Company's long distance service.
The Company plans to increase its wholesale marketing effort, with a
continuing emphasis on independent telephone companies. No formal budget or
schedule has been prepared for expanding the wholesale marketing effort since
management is still in the planning stages of such effort including:
(1) concluding negotiations with a nationwide, facilities-based carrier; and
(2) building relationships from which prospective companies, or consortiums of
companies, are identified. Management is attempting to formulate strategies
and gather the data which it believes necessary to successfully grow this
business segment.
 
  ENHANCED SERVICES. The Company's advanced digital switch platform allows it
to offer enhanced services such as call waiting, call forwarding, call return,
continuous redial, caller ID, voice mail, teleconferencing, video
conferencing, store-and-forward fax and follow-me numbers. As of June 30,
1998, approximately 36% of the Company's customers subscribed to one or more
enhanced services.
 
  WIRELESS SERVICES. The Company owns interests in various RSA or MSA
properties and also operates a paging subsidiary in western Kansas. The
Company resells cellular services in western New York State and may expand
this wireless reseller strategy to other markets. The Company owns a PCS
license in the Yakima Valley region.
 
  CABLE AND DIRECT BROADCAST SATELLITE ("DBS") SERVICES. The Company currently
offers cable television services to customers in its New York and Colorado
telephone markets. The Company continually evaluates opportunities to expand
these markets or add DBS resale to its existing markets where appropriate.
 
  INTERNET SERVICES. The Company offers dedicated and dial-up Internet access
services in certain of its service areas. The Company operates and manages its
own servers and is also an agent for a third-party Internet service provider.
The Company currently provides Internet services to over 3,460 customers in
select markets, representing an average penetration rate in such markets of
9.2%.
 
  BILLING AND COLLECTION. Many IXCs provide long distance services to the
Company's RLEC customers and elect to use the Company's billing and collection
services. The Company charges IXCs a billing and collection fee for each call
record generated by the IXC's customer.
 
  CUSTOMER PREMISES EQUIPMENT SALES. In its New York markets, the Company
sells and services equipment on its customers' premises. This equipment
includes private branch exchanges, key systems, telephone sets and
accessories. In addition, the Company offers inside wire maintenance plans to
most of its customers.
 
                                      49
<PAGE>
 
SALES AND MARKETING
 
  The Company's marketing approach emphasizes locally-managed, customer-
oriented sales, marketing and service. The Company believes most
telecommunications companies devote their resources and attention primarily
toward customers in more densely populated markets. The Company seeks to
differentiate itself from its competitors by providing a superior level of
service to each of the customers in the rural market it serves.
 
  Each of the Company's RLECs has a long history in the communities it serves.
It is the Company's policy to maintain and enhance the strong brand identity
and reputation that it enjoys in its markets, as it believes this is a
significant competitive advantage. As the Company markets new services, or
reaches out from its franchised territories to serve other markets as a CLEC,
it will seek to continue to utilize its brand identity in order to attain
higher recognition with potential customers.
 
  To demonstrate its commitment to the markets it serves, the Company
maintains local offices in most of the population centers within its service
territories. These offices are typically staffed by local residents and
provide sales and customer support services in the community. The Company
believes that local offices facilitate a direct connection to the community,
which improves customer satisfaction and loyalty. The Company intends to open
additional offices in its larger markets as it expands its CLEC operations.
 
  Many of the RLECs acquired by the Company have not traditionally devoted a
substantial amount of their operating budget to sales and marketing
activities. After acquiring the RLECs, the Company typically changes this
practice to provide additional support for existing products and services as
well as to support the introduction of one or more new services. The Company
expects to substantially increase its sales and marketing staff over the
coming years, particularly to support expansion of its CLEC activities. As of
May 31, 1998, the Company had 107 employees engaged in sales, marketing and
customer service.
 
  The Company has two basic tiers of customers: (i) local customers located in
the Company's LATAs who pay for local phone service and (ii) the IXCs which
pay the Company for access to customers located within the Company's LATAs. In
general, the vast majority of the Company's local customers are residential,
as opposed to business, which is typical for rural telephone companies. In
addition, no single customer within any of the Company's RLECs represents more
than one half of one percent of such RLEC's total revenue.
 
  Compensation for interstate access services is based on reimbursement of
costs and an allowed rate of return. This compensation is received from the
National Exchange Carrier Association in the form of monthly settlements. Such
compensation amounted to 31.8%, 30.8% and 30.0% of revenues in 1995, 1996 and
1997, respectively. The Company also derives significant revenues from Nynex,
principally from network access and billing and collecting service. Such
compensation amounted to 27.5%, 20.1% and 16.3% of revenues in 1995, 1996 and
1997, respectively.
 
COMPETITION
 
  The Company believes that the Telecommunications Act of 1996 (the
"Telecommunications Act") as well as other recent actions by the FCC and state
regulatory authorities promote competition in the provision of
telecommunications services; however, many of the competitive threats now
confronting the large telephone companies do not currently exist in the RLEC
marketplace. Since the enactment of the Communications Act of 1934 and its
reaffirmation in the Telecommunications Act, regulations promoting "universal
service" have allowed RLECs to maintain advanced technology while keeping
prices affordable for rural customers. In light of the high cost per access
line of installing lines and switches and providing telephone service in
sparsely-populated rural areas, a system of cost recovery mechanisms has been
established to, among other things, keep rural customer telephone charges at a
"reasonable" level and yet allow owners of rural telephone companies to earn a
fair return on their investment. These cost recovery mechanisms, which are
generally unavailable to an RLEC's competitors, have resulted in robust RLEC
telecommunications networks and an economic barrier to entry for potential
competitors. All of the Company's telephone operating subsidiaries currently
qualify as RLECs as defined under the Telecommunications Act. See
"Regulation."
 
                                      50
<PAGE>
 
  In markets where the Company implements its CLEC strategy, the Company will
be subject to competition from ILECs in those markets, and possibly other
CLECs. In addition, the Company may compete against other CLECs for customer
business. The ongoing consolidation in the CLEC industry could change the
nature of the Company's competitive environment.
 
  The Company will be subject to competition for suitable acquisition
candidates from other competitors engaged in the acquisition of RLECs. There
is a pool of over 1,300 small independent companies from which the Company has
historically chosen its acquisition candidates; however, a continuing trend
toward business combinations and alliances in the telecommunications industry
may increase competition for such acquisition candidates. The Company believes
it has a proven track record of identifying suitable acquisition candidates,
negotiating acceptable terms for their acquisition and successfully completing
acquisitions, which gives it a competitive advantage in identifying and
completing future acquisitions.
 
NETWORK FACILITIES
 
  As of December 31, 1997, (i) the Company's RLEC franchise areas included 60
exchanges serving 48,731 access lines that were located across approximately
9,400 square miles and (ii) the Company maintained over 6,700 miles of copper
plant and 600 miles of fiber optic plant that interconnects the Company's
remote central offices with IXCs serving the Company's subscribers. Upon
completion of the Taconic acquisition, Chouteau acquisition, Ellensburg
acquisition and the Pending Acquisition, as of December 31, 1997, the Company
on a pro forma basis would have operated 92 exchanges serving over 123,000
access lines that were located across approximately 12,000 square miles served
by over 12,500 miles of copper and 900 miles of fiber optic plant. All of the
Company's host and central office sites have advanced digital switches
manufactured by Nortel or Siemens and up to date software which allows the
Company to provide advanced calling features, products and services to its
rural subscribers. The outside plant consists of transport and distribution
delivery networks connecting the Company's host central office with remote
central offices and ultimately to 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
or other RLECs. Where topography and geography permit, cable is generally
buried reducing the risk of service interruption from adverse weather. The
Company believes that its facilities exceed generally accepted industry
standards and are maintained to provide high quality customer service.
 
  The Company's fiber optic transport systems are primarily synchronous
optical networks ("SONET"), 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. For example, the Company
has deployed 100Mb/sec transport systems for high speed data and fiber optic
based Interactive Video Distance Learning Systems to serve certain area
schools and education consortia. In addition, the Company is considering the
deployment of asynchronous digital subscriber line ("ADSL") technologies,
which allow for improved technical performance on rural copper plant. The
Company believes that the addition of ADSL technology on rural copper plant
combined with the Company's advanced fiber optic facilities will significantly
enhance the Company's competitive position and ability to deploy higher
revenue services throughout its entire network.
 
  The Company has integrated numerous elements of its network to offer a
variety of services and applications that it believes are required to serve
increasingly sophisticated rural communications customers. These network
elements include SS7 signaling networks, voice messaging platforms, switch
based large Meet-Me Conference Bridges, switched 56Kb/sec digital data and
ISDN lines, and numerous customer located key and PBX systems. Since the
telecommunications industry is subject to rapid and significant changes in
technology, the Company consistently endeavors to introduce additional
elements of functionality to its network, including Frame Relay and ATM
switches, Local Number Portability, Advanced Intelligent Network (AIN)
services, and Voice over I/P (Internet) opportunities.
 
                                      51
<PAGE>
 
  The Company has been segmenting its predominantly 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 all of the
intelligence and unencumbered capabilities of the 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 believes that this strategy will enable it to build
a high bandwidth, fully digital, data capable and ready communications
infrastructure.
 
  The Company maintains numerous communications vendor relationships that the
Company believes have resulted in favorable equipment prices for the Company
due to its increased aggregate purchase volumes. Although Nortel and Siemens
currently supply the Company with most of its digital central office
equipment, the Company believes that vendor competition will result in
additional unit costs reductions which will be made available to the Company.
 
  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 that considers age, maintenance
history, market requirements, customer growth and acceptable returns on
capital. For the year ending December 31, 1998, the Company has budgeted
annual capital expenditures of approximately 22% for normal growth and
maintenance, 15% for general support facilities, 37% for central office, and
26% for outside plant requirements.
 
INTERSTATE BILLING AND SETTLEMENT
 
  Most of the Company's billing is administered by Mid America Computer
Corporation ("MACC"), a billing company located in Blair, Nebraska, as
follows:
 
  LOCAL SERVICE. On a monthly basis, the Company provides MACC with local
service billing information from the Company's accounting center located in
Dodge City, Kansas. Both local service and long distance charges are printed
on the local customer's bill. Although a few of the Company's customers mail
their payments to a lock box, most of its customers mail payments, or deliver
payments personally, to the Company's local offices.
 
  LONG DISTANCE. All information necessary to bill the local customers for
long distance calls on behalf of IXCs is stored in the memory of the Company's
central office switches. MACC polls these switches on a scheduled basis,
downloads the billing data, calculates the charges and includes them on the
local customer's bill. MACC then mails the bills to the local customers and
simultaneously credits the IXCs with the same amount of long distance revenue.
MACC also determines and bills the IXCs a per message billing and collection
charge to cover the Company's cost for handling the IXCs' long distance
billing functions.
 
  From time to time, various IXCs consider assuming responsibilities for their
own billing. If one or more IXCs decide to perform their own billing, revenues
that the Company receives for performing such billing and collection services
could decline.
 
  CARRIER ACCESS BILLING SYSTEM. During the process of calculating long
distance charges to bill the local customers, MACC also calculates access
charges and bills the IXCs through CABS. The IXCs then remit these access
charges to the Company which in turn returns such charges to the National
Exchange Carrier Association ("NECA"). The monthly settlement payment the
Company receives from NECA is an amount based upon the invested capital and
operating expenses of the Company allocated to the interstate jurisdiction.
See "Regulation."
 
                                      52
<PAGE>
 
EMPLOYEES
 
  As of May 31, 1998, the Company employed a total of 427 full-time employees,
of whom 86 were 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 Chautauqua & Erie Telephone
Corp. subsidiary in New York; and (iii) Local 166 of the International
Brotherhood Electrical Workers (AFL-CIO), covering 64 employees employed by
its Taconic Telephone Corp. subsidiary in New York. The contracts expire in
February 1999, January 2000 and March 2000, respectively. The Company believes
that its relations with its employees are good. Following the Pending
Acquisition, the Company expects to employ approximately 522 employees.
 
PROPERTIES
 
  The Company owns most of its administrative and maintenance facilities,
rolling stock, central office and remote switching platforms and outside
plant. Administrative and maintenance facilities are generally located in or
near community centers. 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. The
Company believes that all facilities are well maintained and generally meet or
exceed industry standards.
 
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.
 
  On April 6, 1998, Latin World Communications, Inc., ("LWC") and Debra A.
Boudrot, LWC's principal (collectively, "Plaintiffs") sued B. Stephen May
("May"), who is a former officer of S T Long Distance (a subsidiary of STE),
Siesta Telecom, Inc. ("Siesta"), which is a company controlled by May, and S T
Long Distance in the Circuit Court for the Twelfth Judicial Circuit, Sarasota
County, Florida. From March 1997 through early 1998, S T Long Distance
provided long distance services to Plaintiffs in connection with Plaintiffs'
prepaid telephone card distribution business. Plaintiffs have alleged, among
other things, that May, Siesta and S T Long Distance have engaged in fraud,
misappropriation of trade secrets, unfair competition, deceptive trade
practices and trade slander; and that May, Siesta and S T Long Distance have
breached various contractual obligations to the Plaintiffs and received
certain overpayments from the Plaintiffs. Plaintiffs seek approximately $1
million in damages relating to such alleged overpayments, and unspecified
monetary damages and injunctive relief relating to certain other matters. The
Company intends to vigorously contest all of the Plaintiffs' allegations, and
believes that it has no liability to the Plaintiffs. While the outcome of such
litigation cannot be predicted, the Company does not believe that such
litigation, even if determined adversely to the Company, would have a material
adverse effect on its financial condition or results of operations.
 
                                      53
<PAGE>
 
                                  REGULATION
 
INTRODUCTION
 
  The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state, and local
regulations and legislation affecting the telecommunications industry. Other
existing federal and state laws and regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals that
could change, in varying degrees, the manner in which this industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry or the Company, can be predicted at this time.
This section also sets forth a brief description of regulatory and tariff
issues pertaining to the operation of the Company.
 
  OVERVIEW. The Company's services are subject to varying degrees of federal,
state and local regulation. The FCC exercises jurisdiction over all
telecommunications common carriers, including the Company, that provide,
originate or terminate interstate or international communications. State
regulatory commissions retain jurisdiction over most of the same companies to
the extent they originate or terminate intrastate communications.
 
  FEDERAL REGULATION. The Company must comply with the Communications Act of
1934, as amended (the "Communications Act"). The Telecommunications Act of
1996 (the "Telecommunications Act") brought about comprehensive changes to the
Communications Act, effecting plenary changes in regulation at both the
federal and state levels that affect virtually every segment of the
telecommunications industry. The Telecommunications Act is intended to promote
competition in all areas of telecommunications and to reduce regulation. While
the Company believes that it will take years for the industry to experience
the full impact of the Telecommunications Act, it is already clear that the
legislation provides the Company with both opportunities and challenges.
 
  Although the Telecommunications Act substantially revised the Communications
Act and was intended, among other things, to eliminate certain regulatory
burdens, telecommunications carriers such as the Company continue to be
subject to ongoing regulatory requirements. Among other regulatory mandates,
the FCC requires common carriers to file periodic reports concerning
interstate circuits and deployment of network facilities. The FCC also
requires carriers providing access services to file tariffs with the FCC
reflecting the rates, terms and conditions of those services. These tariffs
are subject to review and potential objection by the FCC or third parties.
 
  The FCC also requires prior approval of transfers of control and assignments
of operating authorizations by FCC-regulated entities. The FCC generally has
the authority to condition, modify, cancel, terminate or revoke operating
authority for failure to comply with applicable federal laws or rules,
regulations and policies of the FCC.  Fines or other penalties also may be
imposed for such violations.
 
  The FCC has required that telephone operating companies, like the Company,
that provide interstate or international long distance services originating
from their local exchange service territories, must do so in accordance with
structural separation rules. These rules require that the Company's long
distance affiliate (1) maintain separate books of account, (2) not own
transmission or switching facilities jointly with the local exchange
affiliate, and (3) acquire any services from its affiliated local exchange
telephone company at tariffed rates, terms and conditions. This ruling is
currently being challenged on reconsideration before the FCC. If the ruling is
upheld, the Company could face increased costs related to the operation of its
long distance business.
 
  STATE REGULATION. Local service rates generally are regulated by state
regulatory agencies, which usually are called public service commissions or
public utility commissions ("PUCs"). Many PUCs have traditionally regulated
pricing through "rate of return" regulation that focuses on authorized levels
of earnings by LECs. As part of the movement toward deregulation, several
states are moving away from traditional rate of return regulation towards
"price cap" regulation and incentive regulation. Currently, however, in most
states the Company continues to be regulated under rate of return regulation.
 
  Many PUCs also regulate the purchase and sale of LECs, prescribe certain
accounting procedures, and regulate various other matters, including service
standards and operating procedures. PUCs, like the FCC, can
 
                                      54
<PAGE>
 
sanction a carrier, order fines and penalties, or revoke authorizations for
violations of applicable state laws and PUC regulations. In most states, the
Company is required to file tariffs setting forth the terms, conditions, and
prices for services that are classified as intrastate. While state procedures
with respect to tariffs vary, these tariffs generally are subject to review
and potential objection by PUCs or third parties.
 
  LOCAL REGULATION. The Company is also subject to numerous local regulations,
such as building code requirements. These regulations may vary greatly from
state to state and from city to city.
 
TELECOMMUNICATIONS ACT
 
  As discussed in greater detail below, passage of the Telecommunications Act,
coupled with certain state legislative and regulatory initiatives and
technological changes, has fundamentally altered the telecommunications
industry by permitting additional competition and reducing some regulations.
Although the Company anticipates that these trends towards reduced regulation
and increased competition will continue, the Company cannot predict the form
or degree of future regulation and competition which will exist in the
Company's service areas.
 
  As a result of the passage of the Telecommunications Act, LECs, including
RLECs, face the prospect of being subject to competition for the first time in
the provision of traditional local telephone and intrastate toll services.
However, the Telecommunications Act also provides for the codification of the
principles of "universal service" and establishes safeguards to foster the
provision of telecommunications services in the areas served by RLECs by
adopting an explicit federal USSF. See "--Promotion of Universal Service." The
implementation of the Telecommunications Act has included the establishment of
new rules for interconnection between competing carriers and the development
of new universal service fund programs. The Telecommunications Act provides
that LECs are entitled to recover their costs and may receive a reasonable
profit for providing interconnection to competitors. In addition, the
Telecommunications Act requires that the FCC and states ensure that affordable
service is provided to consumers in rural, insular and high cost areas of the
country (i.e., universal service). Nevertheless, the ability to recover
adequately costs of interconnection and to ensure universal service are
dependent on the decisions of the FCC and state regulatory bodies, which could
in the future take actions that affect the Company's ability to continue to
operate at a profit.
 
  The Telecommunications Act makes competitive entry into the
telecommunications industry more attractive to other carriers by, among other
things, removing most state and local barriers to competition, and may
increase the level of competition the Company faces. In particular, after
notice and an opportunity for comment, the FCC may preempt a state requirement
that prohibits or has the effect of prohibiting a carrier from providing
intrastate or interstate telecommunications services.
 
THE PROMOTION OF LOCAL SERVICE COMPETITION AND RURAL TELEPHONE COMPANIES
 
  As discussed above, the Telecommunications Act provides, in general, for the
removal of barriers to entry into the telecommunications industry in order to
promote local service competition. Congress, however, recognized that states
should not be prohibited from taking actions necessary to preserve and advance
universal service, and further recognized that special consideration should be
given to the appropriate conditions for competitive entry in areas served by
RLECs.
 
 
  Pursuant to the Telecommunications Act, LECs, including both ILECs and new
competitive carriers, are required to: (i) allow others to resell their
services at retail rates; (ii) ensure that customers can keep their telephone
numbers when changing carriers; (iii) ensure that competitors' customers can
use the same number of digits when dialing and receive nondiscriminatory
access to telephone numbers, operator service, directory assistance and
directory listings; (iv) ensure access to telephone poles, ducts, conduits and
rights of way; and (v) compensate competitors for the competitors' costs of
completing calls to competitors' customers. Competitors are required to
compensate the ILEC for the cost of providing these interconnection services.
 
                                      55
<PAGE>
 
  Under the Telecommunications Act, the Company, as a rural carrier, is
eligible to request exemption, suspension or modification of any or all of the
requirements described above from state PUCs. A PUC may grant such a petition
to the extent that it determines that such suspension or modification is
necessary to avoid a significant adverse economic impact on telecommunications
users generally, to avoid imposing a requirement that is technically
unfeasible or unduly economically burdensome, and that such suspension or
modification is consistent with the public interest. It is not known at this
time how state regulators will respond to such a request. If the regulators
deny some or all of a request and if the regulators do not allow the Company
adequate compensation for the costs of providing interconnection, the
Company's costs could increase. In addition, with such a denial, competitors
could enjoy benefits that would make their services more attractive than if
they did not receive such interconnection rights.
 
  Pursuant to the Telecommunications Act, with certain exceptions, ILECs are
required to: (i) interconnect their facilities and equipment with any
requesting telecommunications carrier at any technically feasible point; (ii)
unbundle and provide nondiscriminatory access to network elements (such as
local loops, switches and transport facilities) at nondiscriminatory rates and
on nondiscriminatory terms and conditions; (iii) offer their retail services
for resale at wholesale rates; (iv) provide reasonable notice of changes in
the information necessary for transmission and routing of services over the
ILEC's facilities or in the information necessary for interoperability; and
(v) provide, at rates, terms and conditions that are just, reasonable and
nondiscriminatory, for the physical co-location of equipment necessary for
interconnection or access to unbundled network elements at the premises of the
ILEC. Competitors are required to compensate the ILEC for the cost of
providing these interconnection services.
 
  However, pursuant to the Telecommunications Act, the Company, as a rural
telephone carrier, is also automatically exempt from these additional ILEC
requirements. This exemption can be lifted or modified by a state PUC if a
competing carrier files a bona fide request for such interconnection,
services, or network elements. If such a request is filed by a potential
competitor with respect to one of the Company's operating territories, the
Company is likely to ask a state PUC to retain the exemption. A PUC may grant
such a potential competitor's petition to the extent that it determines such
interconnection request is not unduly economically burdensome, is technically
feasible and is consistent with universal service obligations. If a state PUC
lifts such exemption in whole or in part and if the state PUC does not allow
the Company adequate compensation for the costs of providing the
interconnection, the Company's costs would significantly increase and it could
suffer a significant loss of customers to competition. Finally, the FCC issued
an order in May 1997 that directed that ILECs could not impose access charges
on long distance and other carriers that purchase unbundled network elements
from the ILECs. This decision could serve to reduce access revenues for the
Company and other ILECs. Several parties have appealed this and other aspects
of the FCC's May 1997 order, but the Company is unable to predict the outcome
of such appeals at this time.
 
  The risk to the Company from competitive entrants into its local telephone
markets must be weighed against any new opportunities the Company could take
advantage of in terms of new services offerings, such as interstate service,
Internet access, PCS or other wireless service, cable TV or international
services.
 
  The Company believes that competition in its telephone service areas will
ultimately increase as a result of the Telecommunications Act, although the
form and degree of competition cannot be ascertained until such time as the
FCC (and, in certain instances, state regulatory bodies), adopts final
regulations.
 
PROMOTION OF UNIVERSAL SERVICE
 
  Newly codified universal service principles are being implemented by both
the FCC and the state PUCs. One of the initial changes that has been
implemented is that USSF funds are distributed only to carriers that are
designated as eligible telecommunications carriers ("ETCs") by a state PUC.
All of the Company's telephone operating companies have been designated as
ETCs pursuant to the Telecommunications Act.
 
  In order to promote competition in areas served by incumbents that are not
RLECs, the Telecommunications Act requires the designation of two or more
ETCs. In areas served by RLECs, however, the Telecommunications
 
                                      56
<PAGE>
 
Act provides that a state PUC may designate more than one ETC only after
determining that the designation of an additional ETC will serve the public
interest. As a result, an incumbent RLEC has an opportunity to maintain its
status as the sole recipient of USSF payments in its service area even if it
is subsequently subjected to competition. All of the Company's telephone
operating companies have been designated as RLECs pursuant to the
Telecommunications Act.
 
  RLECs temporarily will receive USSF payments pursuant to existing mechanisms
for determining the amounts of such payments with some limitations, such as on
the amount of corporate operating expense that can be recovered from the USSF.
In 2001, after a transition period, RLECs will secure USSF payments based upon
forward-looking economic costs. The FCC is expected to initiate a proceeding
in October 1998 to develop "cost proxy models" to establish the forward-
looking costs of RLECs, and the Federal-State Joint Board on Universal Service
is establishing a working group to assist in that process. The FCC is engaged
in a proceeding to revise the methodology for determining universal service
support.
 
  It is uncertain whether the proxy model will allow for an accurate cost
assessment for rural telephone companies. Also, even if the model accurately
predicts the forward looking economic costs of an RLEC, if that number is
significantly less than its embedded costs, full cost recovery will not be
assured. Several parties have expressed objections to the size of the fund and
the services eligible for subsidization. In addition, the FCC also decided
that it would fund only 25% of the nationwide universal service costs, leaving
to the states the responsibility to fund the remaining 75% of the costs.
Parties, including state PUCs, also have objected to the recovery of only 25%
of costs in the federal USSF, arguing that the remaining burden on states will
result in increased rates for local services.
 
  In addition, there are a number of petitions for reconsideration challenging
several aspects of the Commission's universal service rules. Legislation has
been introduced that would require the FCC to modify the rules. It is not
possible to predict at this time whether the FCC or Congress will order
modification to the fund, or the ultimate impact from any such modification on
the Company.
 
COST RECOVERY OF REGULATED SERVICES; SOURCES OF REGULATED REVENUES
 
  INTRODUCTION
 
  As regulated common carriers, RLECs are entitled by law to an opportunity to
recover the reasonable costs they incur in the provision of regulated
telecommunications services and to earn a reasonable rate of return on the
investment required to provide the regulated services.
 
  The costs of providing regulated services are recovered through rates
established by the appropriate regulatory authority (i.e., the FCC for
interstate services and generally the state PUC for intrastate services). For
RLECs, the cost recovery process may also be achieved through the application
of "pooling" and distributions from the USSF. In general, the rate regulated
services provided by RLECs include basic local exchange services and
interexchange access service that entails originating and terminating
connections of the local telephone network to long distance networks. The rate
making process for LEC rate regulated services is complicated by the fact that
the costs incurred by LECs in the provision of rate regulated services are
utilized for both local exchange services and interexchange access services.
Moreover, the provision of interexchange access service is required for the
origination and termination of both interstate and intrastate long distance
calls.
 
  The fact that a cost incurred by a carrier may be simultaneously associated
with the provision of both interstate and intrastate services results in the
need to allocate the costs between the jurisdictions for rate making purposes.
This process is referred to as "separations" and is governed by the FCC's
rules and regulations. The underlying legal purpose of the separations rules
is to define how a carrier's expenses are to be allocated between the federal
and state jurisdiction--i.e., how much of the company's costs are recovered
from the interstate jurisdiction and how much from the intrastate
jurisdiction.
 
  Because government regulators generally recognize that such an allocation
could have a significant impact on RLECs' abilities to provide needed services
to their customers, such regulators typically allow RLECs to
 
                                      57
<PAGE>
 
recover a reasonable level of expenses and return on investment while
concurrently charging acceptable service rates regardless of the demographics
and economic market conditions of their rural service areas.
 
  INTERSTATE REGULATION
 
  Although the network of a RLEC may be confined to its facilities within a
state, the RLEC is subject to FCC regulation of the rates it charges for
interstate access service.
 
  ESTABLISHMENT OF INDIVIDUAL ACCESS SERVICE COSTS. To the extent that a
telecommunications carrier engages in the provision of any nonregulated
services, interstate or otherwise, the applicable law requires that the
provision of any such services can not be subsidized by the provision of
regulated services. Accordingly, when a carrier incurs an expense that is
utilized for the provision of both regulated and nonregulated service, the FCC
requires the carrier to engage in a process similar to the separations process
described above in order to first allocate expenses between regulated and
nonregulated services.
 
  After identifying the LEC's regulated costs, the carrier applies a
separation analysis to identify the company's interstate costs or revenue
requirements including its authorized rate of return. The rates for interstate
access services are established to allow LECs to recover their identified
interstate costs.
 
  One of the most significant of such costs are those associated with
deployment of the local loop. As a general rule, the FCC has determined that,
with certain limited exceptions, 25% of the cost of a local loop will be
allocated to the interstate jurisdiction. The FCC has established a rate
structure that provides for the recovery of these costs (up to an established
level per month) directly from the end user customer through the assessment of
a subscriber line charge. Generally, the remaining interstate portion of the
loop costs are recovered from access charges, assessed in accordance with FCC
rules, to the long distance carriers for the utilization of the local loop to
originate and terminate interstate long distance calls.
 
  As a result of the market and geographic conditions in rural areas, the
costs of providing local loop and switching services are often higher for
RLECs than for other LECs. In the absence of an accommodation in the FCC rules
to address this fact, a substantial portion of an RLEC's costs would remain
unrecovered, and it would have little alternative other than to charge very
high rates for intrastate services. Accordingly, the FCC provides for
additional interstate recovery by eligible RLECs through the USSF, which is
available to those companies whose loop costs are significantly above the
national average as calculated pursuant to the FCC rules. In addition, the FCC
rules also provide for additional interstate cost recovery of switching costs
for smaller companies serving fewer than 50,000 access lines.
 
  INDIVIDUAL COMPANY ACCESS TARIFFS OR THE NECA TARIFF. The purpose of
applying the FCC's separations and access rules is to identify the interstate
allocation of costs to be recovered from each of the various access rate
elements. Individual LEC interstate access service rates are developed on the
basis of the individual LEC's determination of its access costs divided by its
projected demand for each service. The resulting individual company rates are
published in a company's interstate access tariff and filed with the FCC,
where they are subject to challenge by third parties and FCC review.
 
  The FCC recognized that this individual company rate making and tariff
filing process may be administratively and economically burdensome for small
LECs. In order to address this concern, the FCC established the National
Exchange Carrier Association ("NECA") in 1983. Among the duties and
responsibilities assigned to NECA is the development of interstate access
service tariff rates, terms, and conditions in which LECs may concur.
 
  NECA develops interstate access rates on the basis of data that is provided
individually by each LEC that participates in the various portions of its
tariff and that is aggregated for presentation to the FCC. The result yields
blended rates based upon averaged costs of all of the participating LECs that
reflect a level intended to generate revenue equal to the aggregate costs and
a return on the investment of all of the participants. As a result of this
process, individual participating LECs are likely to have costs of providing
service that are either higher
 
                                      58
<PAGE>
 
or lower than the revenues generated by applying the NECA tariff rate. In
order to rectify this result, the revenues generated by applying the NECA
rates are pooled by all of the participating companies and redistributed on
the basis of each individual company's costs. The result of this process not
only eliminates the burden of individual tariff filing, it also produces a
system whereby small companies can share and spread risk. For example, if an
RLEC filed its own tariff and subsequently suffered the loss of major
customers that utilize interstate access service, the RLEC could suffer
significant under-recovery of its costs. In the NECA pool environment, the
impact of the loss of access usage and associated revenues is reduced because
it is spread over all of the pool participants and may be offset by increases
in usage and associated revenues realized through service provided by another
pool member.
 
  Many of the NECA pool participants derive their interstate revenues from the
NECA pool on the basis of "average schedule" settlements as an alternative to
reporting their individual company specific costs. By participating in this
process, a LEC avoids the requirement of applying the procedures otherwise
necessary to separate regulated and nonregulated costs and interstate and
intrastate regulated costs. In order to be an average schedule company, a LEC
must have been utilizing the average schedules since December 1, 1983, or have
been permitted to convert to average schedule status pursuant to an FCC
waiver.
 
  All average schedule companies must participate in the NECA tariff and, as
with all other NECA tariff pool participants, average schedule companies
charge for interstate access services on the basis of the rates, terms and
conditions set forth in the NECA tariff, and they report their interstate
access revenues to NECA. Instead of recovering their company specific
identified interstate revenue requirement, however, a company that utilizes
average schedules receives payments based on formulas developed by NECA and
submitted for approval to the FCC. The average schedule formulas are applied
to each average schedule company and produce average schedule settlements for
each company that are based in part on the number of access lines served by
each company and in part on the number of interstate access messages handled
by each company.
 
  The average schedule formulas are developed in a manner intended to yield
results that would approximate the results derived from the utilization of
actual costs based on individual company costs and jurisdictional separations.
In practice, an average schedule company will typically receive either more or
less revenues than its individual company interstate costs. If the company
experiences significant growth in messages without a proportionate increase in
costs the formulas provide, to an extent, for growth in revenue. A company
that is not currently receiving settlements on an average schedule basis
cannot convert to average schedule status without a waiver from the FCC, which
has clearly made known its intent that it is not likely to grant any such
waiver requests.
 
  If a company that utilizes average schedules experiences a decline in usage,
or if its growth does not generate revenues that keep pace with increased
costs, the company may not recover its actual costs from the average
schedules. The FCC rules do permit a LEC to address this concern by converting
from average schedule status to an actual cost basis for the determination of
its interstate access costs. The FCC rules, however, do not permit a LEC to
convert back to average schedules subsequent to its election to convert to a
cost based settlement. However, the Company is not an average schedule
company.
 
  In May 1997, the FCC issued a decision modifying its rules and policies
governing interstate exchange access services of ILECs. This decision applied,
with limited exceptions, solely to ILECs that are governed by the FCC's price
cap system of regulation. As for ILECs that are subject to federal rate-of-
return regulation, the FCC stated that it plans to initiate a separate
proceeding in 1998. The FCC has also proposed modification of its existing
separations procedures, which allocate the costs of facilities providing
intrastate and interstate services between the federal and state
jurisdictions. The outcome of each of these proceedings, and their ultimate
impact on the Company, cannot be predicted at this time.
 
  INTRASTATE JURISDICTION
 
  Intrastate Revenue Requirement and Rate Regulation. A LEC incurs expenses
that are utilized for the provision of both interstate and intrastate
services. The FCC rules establish the separations process that identifies
 
                                      59
<PAGE>
 
the LEC's interstate costs. The remainder of the costs represent the LEC's
intrastate costs. Generally, the LEC's intrastate regulated revenue
requirement is recovered by the revenues the rates for which are established
by the LEC generates from its intrastate regulated services, in accordance
with the applicable rules of each state.
 
  Although the rules and processes vary from state to state, general
principles emerge that are useful in understanding intrastate regulated cost
recovery. The following discussion is limited to those general principles and
does not address specific states or the development of intrastate incentive
regulation mechanisms. As with federal incentive regulation programs, however,
these alternative regulatory systems are generally useful only for RLECs that
have lower than average costs and serve areas with a likelihood of continued
high growth.
 
  INTRASTATE INTRALATA TOLL AND INTRASTATE ACCESS CHARGES. Intrastate
regulated services are generally subject to traditional "rate of return"
regulation. The intrastate regulated services provided by RLECs can typically
be divided into three categories: intrastate interLATA access service;
intrastate intraLATA access and long distance service; and local services. The
term LATA is a remnant from the break-up of the Bell system. In connection
with the divestiture of the local operating companies from AT&T, the RBOCs
were limited to providing service within a LATA or a group of LATAs; AT&T and
other long distance carriers handled traffic between LATAs. As a result, the
shorter haul long distance calls within a LATA were generally handled by an
RBOC together with any other LECs providing service within the LATA. The rules
regarding the provision of intraLATA toll service are changing to provide for
competitive choice in the same way interLATA toll service is offered. In
addition, the Telecommunications Act permits RBOCs to provide intraLATA
services outside of their regions, and within their region conditioned upon a
demonstration that the RBOC had opened its local markets to competition. To
date, no RBOC has been deemed by the FCC to have made this demonstration. The
amount of competition to which the Company is subject may also be affected by
a recent decision of the U.S. District Court in Texas invalidating those
portions of the Telecommunications Act that prohibit RBOCs from providing
certain services, including in-region intraLATA services. The decision has
been stayed, and an appeal is currently pending.
 
  While all states have established an access charge environment for LECs to
charge long distance carriers for originating and terminating intrastate long
distance calls, variations exist among the states with respect to the
treatment of the role of the RLECs in the provision of intrastate intraLATA
toll service.
 
  The development of service specific costs and rates for the establishment of
intrastate regulated services also varies among the states. Some states
require the utilization of the FCC separations rules with state specific
modifications to specifically identify an intrastate toll and access revenue
requirement. In other states, intrastate access rates are adopted that mirror
interstate access rates as an alternative to the development of LEC specific
intrastate access costs and rates. Another variation that has developed is a
process that has resulted in the establishment of intrastate access charges
and subsequent modifications through industry negotiation and consensus.
 
  LOCAL SERVICE RATES. Regardless of the variation of the process utilized to
establish the intrastate access rates, the local service revenue requirement
is residually derived as the remaining costs. Local services include basic
service rates, custom calling features, installation and repair services, and
any other services that are not designated interexchange (including extended
area service, measured usage, area calling plans and other variations of
services that are not subject to long distance charges).
 
  PENDING REGULATORY CHANGE AND CONCLUSION. Although there is no single model
for state regulatory change, many states have initiated proceedings to review
the level of intrastate access charges and to consider changes in the
provision of intraLATA toll services. Concurrent consideration is often given
to issues regarding whether decreased revenue resulting from reduced access
charges should be offset by increases in local service rates; or support from
a state universal service funding mechanism.
 
                                      60
<PAGE>
 
                                  MANAGEMENT
 
  The directors and executive officers of the Company are listed below.
Executive officers are generally elected annually by the Board of Directors to
serve, subject to the discretion of the Board of Directors, until their
successors are appointed. There are currently eight members of the Board of
Directors.
 
<TABLE>
<CAPTION>
          NAME           AGE                                POSITION
- ------------------------ --- -----------------------------------------------------------------------
<S>                      <C> <C>
Daniel G. Bergstein.....  54 Co-Founder, Director
Meyer Haberman..........  56 Co-Founder, Director
Jack H. Thomas..........  56 Co-Founder, Chairman of the Board of Directors, Chief Executive Officer
Eugene B. Johnson.......  51 Co-Founder, Vice Chairman of the Board of Directors,
                              Executive Vice President, Assistant Secretary
Walter E. Leach, Jr.....  46 Senior Vice President, Chief Financial Officer and Secretary
John P. Duda............  51 President and Chief Executive Officer--Local Telecom Group
Timothy W. Henry........  42 Vice President of Finance and Treasurer
George E. Matelich......  41 Director
Reid G. Leggett.........  42 Director
Nelson Schwab III.......  53 Director
Frank K. Bynum, Jr. ....  35 Director
</TABLE>
 
DANIEL G. BERGSTEIN. Mr. Bergstein is a founder and has been a director of the
Company since 1991. Since 1988, Mr. Bergstein has been a senior partner in the
New York office of the national law firm Paul, Hastings, Janofsky & Walker
LLP, where he is the Chairman of the Firm's Corporate Department as well as
its National Telecommunications Practice. Mr. Bergstein is a corporate and
securities lawyer, specializing in mergers and acquisitions and corporate
finance transactions.
 
MEYER HABERMAN. Mr. Haberman is a founder and has been a director of the
Company since 1991. Since 1973, Mr. Haberman has been the principal
shareholder, President and Chief Executive Officer of Interquest Incorporated,
an international management consulting and executive search firm which he
founded.
 
JACK H. THOMAS. Mr. Thomas is a founder and has been a director of the Company
since 1991 and has acted as President and Chief Executive Officer since 1993.
Mr. Thomas has served as Chairman of the Board of Directors of the Company
since August 1998. From 1985 to 1993, Mr. Thomas was Chief Operating Officer
of C-TEC Corporation, a diversified telecommunications concern which at the
time owned Commonwealth Telephone Company, a 240,000 access line LEC. From
1982 to 1985, Mr. Thomas served as Vice President, Operations of United
Telephone Company of Ohio and was a member of its board of directors. Prior to
his service with United Telephone Company of Ohio, Mr. Thomas worked for
nearly twenty years at C&P Telephone (now a Bell System company) in various
positions including division manager from 1976-1982.
 
EUGENE B. JOHNSON. Mr. Johnson is a founder and has been a director of the
Company since 1991. Mr. Johnson has served as Senior Vice President of the
Company since 1993 and Executive Vice President since February 1998. Mr.
Johnson has served as Vice Chairman of the Company since August 1998. From
1987 to 1993, Mr. Johnson served as President and principal shareholder of
JC&A, Inc., an investment banking and brokerage firm providing services to the
cable television, telephone and related industries. From 1985 to 1987, Mr.
Johnson served as the director of the mergers and acquisitions department of
Cable Investments, Inc., an investment banking firm. From 1980 to 1985, Mr.
Johnson served as President of a cable television construction and engineering
company. Mr. Johnson currently is director of OPASTCO, the primary industry
organization for small independent telephone companies and serves on its
membership education and finance committees.
 
WALTER E. LEACH, JR. Mr. Leach has served as Chief Financial Officer and
Secretary of the Company since October 1994 and Senior Vice President since
February of 1998. From 1984 through September 1994, Mr. Leach served as
Executive Vice President of Independent Hydro Developers, where he had
responsibility for all project acquisition, financing and development
activities. From 1980 to 1984, Mr. Leach served as Vice President, Investor
Relations for The Pillsbury Company and served as Treasurer, Assistant
Treasurer and Controller for Burger King Corporation. Mr. Leach's career also
includes various finance-related positions at Sambo's Restaurants, Inc. and
First Union National Bank where he was the Manager of their New York City
office. He is currently a member of the finance committee of the National
Telephone Cooperative Association ("NTCA").
 
                                      61
<PAGE>
 
JOHN P. DUDA. Mr. Duda has served as Chief Operating Officer of the Company
since January 1994 and President and Chief Executive Officer of the Company's
Local Telecom Group since August 1998. From 1993 to 1994, Mr. Duda served as
Vice President, Operations and Engineering of Rochester Tel Mobile
Communications. From 1985 to 1993, Mr. Duda served as State Vice President--
Minnesota, Nebraska and Wyoming and Director of Network Planning and
Operations for Pennsylvania and New Jersey for Sprint and from 1970 to 1985 he
served in various management positions with C&P Telephone and Bell Atlantic
including District Manager--Planning and New Technology for Bell Atlantic
Corporation. Mr. Duda is currently on the United States Telephone
Association's Board of Directors and serves on its Executive, Regulatory
Policy and Small Company committees. He also serves on OPASTCO's Separations
and Access Committee.
 
TIMOTHY W. HENRY. Mr. Henry has served as Vice President of Finance and
Treasurer of the Company since December 1997. From 1992 to December 1997, Mr.
Henry served as Vice President/Portfolio Manager at CoBank, ACB, and managed a
$225 million telecommunications loan portfolio which included responsibility
for CoBank's relationship with the Company. From 1985 to 1992, he was a Loan
Officer/Assistant Vice President for Springfield Bank for Cooperatives.
 
GEORGE E. MATELICH. Mr. Matelich has served as a Director of the Company since
July 1997. Mr. Matelich is currently a Managing Director of Kelso & Company
("Kelso"), with which he has been associated since 1985. Mr. Matelich serves
on the Boards of Directors of CCA Holdings Corp., CCT Holdings Corp., Charter
Communications Long Beach Inc., Harris Specialty Chemicals, Inc. and Humphreys
Inc. Mr. Matelich is also a Trustee of the University of Puget Sound.
 
REID G. LEGGETT. Mr. Leggett has served as a Director of the Company since
July 1997. Mr. Leggett is currently serving as a Managing Director of Carousel
Capital Partners, L.P., with which he has been associated since 1996. From
1988 to 1996, Mr. Leggett served as Managing Director of Bowles Hollowell
Conner & Co. From 1993 to 1996, Mr. Leggett served as President and Managing
Director of Bowles Hollowell Conner & Co.
 
NELSON SCHWAB III. Mr. Schwab has served as a Director of the Company since
July 1997. Mr. Schwab is currently serving as a Managing Director of Carousel
Capital Partners, L.P., with which he has been associated since 1996. From
1992 to 1995, Mr. Schwab was Chairman and Chief Executive Officer of Paramount
Parks. From 1984 to 1992, Mr. Schwab served as Chairman and Chief Executive
Officer of Kings Entertainment Company ("KECO") from which Paramount Parks
acquired its regional theme parks in 1992. Mr. Schwab serves on the Boards of
Directors of Burlington Industries Inc., First Union National Bank of North
Carolina, Summit Properties, Inc., and two privately-held middle market
companies.
 
FRANK K. BYNUM, JR. Mr. Bynum has served as a Director of the Company since
May 1998. He is also a Managing Director of Kelso. Prior to joining Kelso in
1987, he was an Investment Analyst with The New York Life Insurance Company
("New York Life"). While with New York Life, Mr. Bynum served primarily in the
Risk Capital Group, which focused on leveraged buyout and venture capital
investments. Mr. Bynum received a B.A. in History from the University of
Virginia. Mr. Bynum is a director of Cygnus Publishing, Inc., Hillside
Broadcasting of NC, Hosiery Corporation of America, IXL Holdings, Inc. and
21st Century Newspapers, Inc.
 
                                      62
<PAGE>
 
                            EXECUTIVE COMPENSATION
 
  The following table sets forth the compensation paid or accrued for services
rendered to the Company in all capacities, for the year ended December 31,
1997, by the Chief Executive Officer and each of the other executive officers
of the Company employed as of December 31, 1997 (the "Named Executive
Officers"). The compensation paid to Mr. Thomas and Mr. Johnson was paid by
MJD in the form of management fees paid to MJD Partners, L.P.
 
SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                              LONG-TERM
                                                             COMPENSATION
                                    ANNUAL COMPENSATION         AWARDS
                               ----------------------------- ------------
                                                   OTHER      SECURITIES
   NAME AND PRINCIPAL                              ANNUAL     UNDERLYING   ALL OTHER
        POSITION          YEAR  SALARY   BONUS  COMPENSATION OPTIONS (#)  COMPENSATION
- ------------------------  ---- -------- ------- ------------ ------------ ------------
<S>                       <C>  <C>      <C>     <C>          <C>          <C>
Jack H. Thomas..........  1997 $300,000 $82,500   $69,128        --           --
 Chief Executive Officer  1996  260,000  70,000    68,528        --           --
 and
 President
                          1995  250,000  12,500    99,030        --           --
Eugene B. Johnson.......  1997  240,000  62,000    29,535        --           --
 Executive Vice Presi-    1996  182,000  56,000    31,990        --           --
 dent and
 Assistant Secretary
                          1995  175,000   8,750    29,607        --           --
John P. Duda............  1997  131,000  31,000    24,018        --           --
 President and Chief Ex-  1996  123,000  35,000    22,188        --           --
 ecutive
 Officer--Local Telecom   1995  115,000  30,500    71,337        --           --
 Group
Walter E. Leach, Jr.....  1997  108,000  32,400    15,598        --           --
 Senior Vice President,   1996  100,000  27,000    13,372        --           --
 Chief
 Financial Officer and
 Secretary
                          1995   90,000  22,500    15,017        --           --
Patrick Morse...........  1997   86,500  27,850    14,108        --           --
 Vice President and Gen-  1996   84,000  16,300    12,970        --           --
 eral
 Manager--STE
                          1995   84,000  15,500    11,027        --           --
</TABLE>
 
STOCK OPTION PLAN
 
  The Company's Stock Option Plan (the "Plan") was adopted on February 22,
1995. The Plan provides for the grant of options to purchase up to an
aggregate of 5,684 shares of the Company's common stock (the "Common Stock").
The Plan is administered by the Board of Directors which makes discretionary
grants of options to officers or directors and employees of the Company.
 
  Options granted under the Plan may be Incentive Stock Options, which qualify
for favorable Federal income tax treatment under Section 422A of the Internal
Revenue Code of 1986, or Nonstatutory Stock Options.
 
  The selection of participants, allotment of shares, determination of price
and other conditions of purchase of such options are determined by the Board,
in its sole discretion. Each option grant is evidenced by a written Incentive
Stock Option Agreement or Nonstatutory Stock Option Agreement dated as of the
date of grant and executed by the Company and the optionee. Such agreement
also sets forth the number of options granted, the option price, the option
term and such other terms and conditions as may be determined by the Board of
Directors. As of January 1, 1998, the Board of Directors had granted options
to purchase at $50 per share a total of 4,264 shares of the Company's Class A
Voting Common Stock to officers, directors and employees.
 
  Options granted under the Plan are nontransferable, other than by will or by
the laws of descent and distribution.
 
WARRANTS
 
  Certain members of management were issued warrants pursuant to their
purchases of Series C Preferred Stock of the Company in 1996 and 1997. The
Series C Preferred Stock has since been redeemed by the Company. The warrants
are exercisable into 83 shares of Common Stock at an exercise price of $0.01
per share.
 
 
                                      63
<PAGE>
 
                         Warrants Issued to Management
 
<TABLE>
<CAPTION>
      ISSUED TO                                  SHARES DATE OF ISSUE EXPIRATION
      ---------                                  ------ ------------- ----------
<S>                                              <C>    <C>           <C>
Jack Thomas.....................................  3.7      6/7/96      7/16/16
Jack Thomas.....................................  6.63     8/1/96      7/16/16
Eugene Johnson..................................  7.39     6/7/96      7/16/16
Eugene Johnson.................................. 13.25     8/1/96      7/16/16
John Duda.......................................  5.91     6/7/96      7/16/16
John Duda....................................... 10.6      8/1/96      7/16/16
Walter Leach....................................  5.31     6/7/96      7/16/16
Walter Leach....................................  9.51     8/1/96      7/16/16
Daniel Bergstein/Bugger Assoc., Inc.............  7.39     6/7/96      7/16/16
Daniel Bergstein/Bugger Assoc., Inc............. 13.25     8/1/96      7/16/16
                                                 -----
 Total.......................................... 82.94
                                                 =====
</TABLE>
 
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
 
  The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1997,
the number of securities underlying options at the 1997 year end and the year
end value of all unexercised in-the-money options held by such individuals.
 
<TABLE>
<CAPTION>
                                                                 NUMBER OF SECURITIES      VALUE OF UNEXERCISED
                                                                UNDERLYING UNEXERCISED         IN-THE-MONEY
                                                                OPTIONS/SARS AT FISCAL    OPTIONS/SARS AT FISCAL
                         SHARES ACQUIRED ON                    YEAR-END (#) EXERCISABLE/ YEAR-END ($) EXERCISABLE/
          NAME              EXERCISE (#)    VALUE REALIZED ($)       UNEXERCISABLE           UNEXERCISABLE(1)
- ------------------------ ------------------ ------------------ ------------------------- -------------------------
<S>                      <C>                <C>                <C>                       <C>
Jack H. Thomas..........        --                 --                    1,421                   408,537.5
Eugene B. Johnson.......        --                 --                    1,066                   311,805.0
Walter E. Leach.........        --                 --                      711                   207,967.5
John Duda...............        --                 --                    1,066                   311,805.0
</TABLE>
- --------
(1) Represents the difference between the exercise price and the fair market
    value of the Company's common stock at December 31, 1997.
 
EMPLOYEE AGREEMENTS
 
  The Company has entered into severance agreements (the "Severance
Agreements") with John P. Duda, Jack H. Thomas, Eugene B. Johnson and Walter
E. Leach, Jr. (each an "Executive" and, collectively, the "Executives"). Each
of the Severance Agreements provides that upon the termination of the
Executive's employment due to a Change of Control (as defined below), the
Executive is entitled to receive from the Company in a lump sum payment an
amount equal to such Executive's base salary as of the date of termination for
a period ranging from twelve months to twenty-four months. For purposes of the
previous sentence, a "Change of Control" shall be deemed to have occurred if:
(a) certain stockholders of the Company no longer own, either directly or
indirectly, shares of capital stock of the Company entitling them to 51% in
the aggregate of the voting power for the election of the directors of the
Company, as a result of a merger or consolidation of the Company, a transfer
of capital stock of the Company or otherwise, or (b) the Company sells,
assigns, conveys, transfers, leases or otherwise disposes of, in one
transaction or a series of related transactions, all or substantially all of
its property or assets to any other person or entity. In addition, the Company
has agreed to maintain the Executives' long term disability and medical
benefits for a similar period. In the event that any Executive's employment
with the Company is terminated without cause and not as a result of a Change
of Control, such Executive is entitled to receive a lump sum payment from the
Company in an amount equal to such Executive's base salary for a period
ranging from six months to twelve months and is also entitled to long term
disability and medical benefits for a similar period. In the event that any
Executive's employment is terminated for cause, such Executive is not entitled
to any benefits pursuant to the Severance Agreements.
 
                                      64
<PAGE>
 
                   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                             OWNERS AND MANAGEMENT
 
  The following table sets forth information regarding beneficial ownership of
the Company's common stock ("Common Stock") as of May 31, 1998 for (i) each of
the Named Executive Officers and each director of the Company, (ii) all
officers and directors of the Company as a group, and (iii) each stockholder
of the Company who beneficially owns 5% or more of the Company's Common Stock.
 
<TABLE>
<CAPTION>
                                                       NUMBER OF
                                                         SHARES    PERCENT OF
                                                      BENEFICIALLY OUTSTANDING
                                                       OWNED (1)   SHARES (1)
                                                      ------------ -----------
<S>                                                   <C>          <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Daniel G. Bergstein (2)..............................    15,258        8.4%
Meyer Haberman (3)...................................     9,536        5.3%
Jack H. Thomas (4)...................................    11,157        6.1%
Eugene B. Johnson (5)................................     5,501        3.0%
John P. Duda (6).....................................     1,390        0.8%
Walter E. Leach, Jr. (7).............................       916        0.5%
Timothy W. Henry.....................................        85       0.05%
George E. Matelich (8)...............................    69,779       38.5%
Frank K. Bynum, Jr. (8)..............................    69,779       38.5%
Reid G. Leggett (9)..................................    69,779       38.5%
Nelson Schwab III (9)................................    69,779       38.5%
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
 (10 STOCKHOLDERS)...................................   181,015       99.0%
5% STOCKHOLDERS:
MJD Partners, L.P. (10)..............................    38,145       21.1%
 521 East Morehead Street, Suite 250
 Charlotte, North Carolina 28202
Carousel Capital Partners, L.P. (9)..................    69,779       38.5%
 201 North Tryon Street, Suite 2450
 Charlotte, North Carolina 28202
Kelso Investment Associates V, L.P. and Kelso Equity
 Partners V, L.P. (8) ...............................    69,779       38.5%
 320 Park Avenue, 24th Floor
 New York, New York 10022
</TABLE>
- --------
(1) Unless otherwise indicated below, the persons and entities named in the
    table have sole voting and sole investment power with respect to all
    shares beneficially owned by them, subject to community property laws
    where applicable. The percentage of beneficial ownership is based on
    181,015 shares of common stock outstanding as of May 31, 1998. Vested
    options granted to purchase 3,766 shares and warrants to purchase 83
    shares result in 184,864 fully diluted shares as of May 31, 1998.
(2) Includes 15,258 shares owned by MJD Partners, L.P. Mr. Bergstein has an
    interest of approximately 40% in MJD Partners, L.P. through JED
    Associates, Inc., a corporation owned 100% by Mr. Bergstein and his
    immediate family. JED Associates, Inc. beneficially owns 21 warrants to
    purchase Common Stock.
(3) Includes 9,536 shares owned by MJD Partners, L.P. Mr. Haberman has an
    approximately 25% interest in MJD Partners, L.P.
(4) Includes 9,536 shares owned by MJD Partners, L.P. Mr. Thomas has an
    approximately 25% interest in MJD Partners, L.P. Includes 1,421 shares of
    Common Stock issuable upon exercise of options that are either currently
    exercisable or exercisable during the next 60 days; and 200 shares of
    Common Stock owned by Mr. Thomas individually. Excludes warrants to
    purchase 10 shares of Common Stock.
(5) Includes 3,815 shares owned by MJD Partners, L.P. Mr. Johnson has a 10%
    interest in MJD Partners, L.P. Includes 1,066 Common Stock issuable upon
    exercise of options that are either currently exercisable or exercisable
    during the next 60 days. Excludes warrants to purchase 21 shares of Common
    Stock and includes 620 shares of Common Stock owned by Mr. Johnson
    individually.
 
                                      65
<PAGE>
 
(6) Includes 1,066 shares of Common Stock issuable upon exercise of options
    that are either currently exercisable or exercisable during the next 60
    days. Excludes warrants to purchase 17 shares of Common Stock, and
    includes 537 shares individually owned.
(7) Includes 711 shares of Common Stock issuable upon exercise of options that
    are either currently exercisable or exercisable during the next 60 days.
    Excludes warrants to purchase 15 shares of Common Stock, and includes 490
    shares individually owned.
(8) Includes 63,498 shares owned by Kelso Investment Associates V, L.P.
    ("KIAV") and 6,280 shares owned by Kelso Equity Partners V, L.P. ("KEPV").
    KIAV and KEPV, due to their common control, could be deemed to
    beneficially own each others' shares, but each disclaims such beneficial
    ownership. Joseph S. Schuchert, Frank T. Nickell, Thomas R. Wall, IV,
    George E. Matelich, Michael B. Goldberg, David I. Wahrhaftig and Frank K.
    Bynum, Jr. may be deemed to share beneficial ownership of shares of Common
    Stock owned of record by KIAV and KEPV, by virtue of their status as
    general partners of the general partner of KIAV and as general partners of
    KEPV. Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and
    Bynum share investment and voting power with respect to securities owned
    by KIAV and KEPV, but disclaim beneficial ownership of such securities.
    The business address for each such person and KIAV and KEPV is c/o Kelso &
    Company, 320 Park Avenue, 24th Floor, New York, New York 10022.
(9) Includes 47,882 shares owned by Carousel Capital Partners, L.P.
    ("Carousel"). Reid Leggett and Nelson Schwab III may be deemed to share
    beneficial ownership of the shares of Common Stock owned of record by
    Carousel, by virtue of their status as general partners of Carousel.
    Messrs. Leggett and Schwab share investment and voting power with respect
    to securities owned by Carousel, but disclaim beneficial ownership of such
    securities. The business address for each such person and Carousel is 201
    North Tryon Street, Suite 2450, Charlotte, North Carolina 28202.
(10) The partnership interests of MJD Partners, L.P. are held as follows: MJD
     Partners, Inc. holds a 1% interest as a general partner; JED Associates,
     Inc. holds a 39.6% interest as a limited partner; Jack H. Thomas holds a
     24.75% interest as a limited partner; Meyer Haberman holds a 24.75%
     interest as a limited partner; and Eugene B. Johnson holds a 9.9%
     interest as a limited partner. JED Associates, Inc., a company wholly
     owned by Mr. Bergstein, and Messrs. Thomas, Haberman and Johnson own MJD
     Partners, Inc. in proportions similar to their ownership interests in MJD
     Partners L.P.
 
                                      66
<PAGE>
 
                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
MANAGEMENT SERVICES AGREEMENTS
 
  On July 31, 1997, the Company entered into Management Services Agreement
with MJD Partners, L.P. ("Partners LP") pursuant to which Partners LP provided
certain management services to the Company, including, maintaining and
supervising the engineering and operations of the Company and its
subsidiaries, monitoring the payment of all expenses and capital expenditures,
and advising and assisting the Company and its subsidiaries regarding various
other matters. The terms of the contract provided that Partners LP receive
$75,000 per month from the Company for rendering such services. In 1997,
Partners L.P. was paid $1,020,000 under the agreement, a significant portion
of which was for compensation paid to Mr. Thomas and Mr. Johnson, whose sole
compensation came from Partners, L.P. The Management Services Agreement was
terminated on April 1, 1998 and, in lieu thereof, Messrs. Thomas and Johnson
will receive compensation directly from the Company.
 
FINANCIAL ADVISORY AGREEMENTS
 
  In connection with the Recapitalization, the Company entered into Financial
Advisory Agreements, dated July 31, 1997, with each of the Equity Investors,
pursuant to which the Equity Investors provide certain consulting and advisory
services, related, but not limited to equity financings and strategic
planning. Pursuant to these agreements, the Company pays annual advisory fees
in an aggregate amount of $400,000 to the Equity Investors, payable on a
quarterly basis until December 31, 2007. During 1997, the Company paid $45,833
in such fees to the Equity Investors. The agreements also provide that the
Company will reimburse the Equity Investors for travel relating to the
Company's Board of Directors meetings. In the event of additional equity
investments in the Company by the Equity Investors, the parties have agreed to
negotiate in good faith to increase the advisory fee. The Indenture for the
Notes provides that the payment of such fees may be increased above the
amounts currently stipulated in such Financial Advisory Agreements. See
"Description of Notes--Certain Covenants--Limitation on Transactions with
Affiliates."
 
CONSULTING AGREEMENT
 
  The Company has entered into a consulting agreement dated as of July 31,
1997 with an entity controlled by Daniel G. Bergstein pursuant to which Mr.
Bergstein has agreed to provide general consulting and advice to the Company
as reasonably requested from time to time. Pursuant to the terms of the
agreement, the consulting company is paid an annual fee of $120,000 in monthly
installments plus all of Mr. Bergstein's out-of-pocket business expenses up to
$30,000. The term of the agreement is one year, subject to automatic renewal
for successive periods of one year each thereafter.
 
LEGAL SERVICES
 
  Daniel G. Bergstein, a senior partner of Paul, Hastings, Janofsky & Walker
LLP ("Paul Hastings"), is a Director of the Company and a significant
stockholder. Paul Hastings regularly provides legal services to the Company,
including in connection with the Offering, the New Credit Facility and the
Acquisitions. In the year ended December 31, 1997, Paul Hastings was paid
approximately $1,100,000 by the Company for legal services.
 
CONTRIBUTION OF SHAREHOLDER LOANS
 
  Prior to July 31, 1997, the Company was obligated to Messrs. Bergstein,
Thomas, Haberman and Johnson ("Founders") pursuant to promissory notes (the
"Founders' Notes") in the principal amounts of approximately $373,053,
$227,679, $233,158 and $89,610, respectively. In connection with the
Recapitalization, the Company paid to each of the Founders all accrued and
unpaid interest on their respective Founders' Note and each Founder
contributed his respective Founders' Note to Partners, L.P. in exchange for an
increased partnership interest in Partners LP. Partners LP subsequently
contributed the Founders Notes to the Company and the Founders Notes were
cancelled.
 
                                      67
<PAGE>
 
STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS AGREEMENT
 
  The Company and its stockholders entered into a Stockholders Agreement dated
as of July 31, 1997 (the "Stockholders Agreement") which contains certain
provisions, including but limited to: (i) the designation of members to the
Board of Directors of the Company (including, initially, two members to be
designated by Carousel, one member by Kelso and four members by Partners
L.P.), (ii) certain restrictions on transfers of shares by the stockholders of
the Company, (iii) the requirement that stockholders take certain actions upon
the approval by a majority of the stockholders in connection with an initial
public offering or a sale of the Company, (iv) the requirement of the Company
to sell shares to the stockholders under certain circumstances upon
authorization of an issuance or sale of additional shares, (v) certain of the
participation rights of certain stockholders in connection with a sale of
shares by other stockholders, and (vi) the right of the Company to purchase
all (but not less than all) of the shares of a stockholder in the event of
resignation or termination of employment or death or disability. The
Stockholders Agreement also provides that the Company must obtain consent from
the Equity Investors in order for the Company to incur debt in excess of $5
million. In addition, the Board shall increase to nine members with the two
additional members to be designated for nomination and election by Kelso.
 
  The Company and its stockholders entered into a Registration Rights
Agreement dated as of July 31, 1997 (the "Registration Rights Agreement")
pursuant to which the stockholders have the right in certain circumstances
and, subject to certain conditions, to require the Company to register shares
of Common Stock held by them under the Securities Act. Under the Registration
Rights Agreement, except in limited circumstances, the Company is obligated to
pay all expenses in connection with such registration.
 
CONTINGENT LIABILITIES
   
  Daniel G. Bergstein and Meyer Haberman (collectively, the "Borrowers")
intend to enter into certain Time Promissory Notes in an aggregate amount not
to exceed $3,000,000 ("Notes") and JED Communications Associates, Inc. ("JED")
and Meyer Haberman intend to enter into Pledge Agreements ("Pledge Agreements"
and collectively with the Notes, the "Loan Documents"), in October 1998, with
Bankers Trust Company ("BT"), pursuant to which Borrowers will be (i) entitled
to borrow money from BT and (ii) JED and Meyer Haberman will be required to
pledge certain of their shares of common stock of the Company (the "Shares")
to BT as collateral for loans extended under the Loan Documents. In
conjunction with such transactions, the Company intends to enter into a
certain Purchase Agreement and Subordination Agreement in October 1998, with
BT, pursuant to which the Company may be required, in the event of a default
by the Borrowers of their respective obligations under the Loan Documents, to
purchase the Shares and will have the option to purchase, the Notes, Pledge
Agreements and other instruments and documents relating thereto from BT. The
Company plans to enter into such agreements in order to retain control of the
Shares and because such agreements provide for the Company to purchase such
Shares at a substantial discount to the Share's current fair market value.
    
PURCHASE OF COMMON STOCK BY MANAGEMENT
 
  In conjunction with the New Credit Facility, 1,570 shares of the Company's
common stock were purchased by certain members of management for $537,741 as
follows.
 
<TABLE>
<CAPTION>
NAME OF MANAGEMENT
PERSONNEL                PER SHARE PRICE NUMBER OF SHARES AGGREGATE PURCHASE PRICE
- ------------------       --------------- ---------------- ------------------------
<S>                      <C>             <C>              <C>
John P. Duda............     $342.50           100               $ 34,250.0
Jack. H. Thomas.........     $342.50           200               $ 68,500.0
Eugene P. Johnson.......     $342.50           400               $137,000.0
Walter E. Leach, Jr. ...     $342.50           200               $ 68,500.0
Michael J. Stein........     $342.50           275               $ 94,187.5
Pamela D. Clark.........     $342.50            45               $ 15,412.5
Lisa R. Hood............     $342.50            15               $  5,137.5
Timothy W. Henry........     $342.50            85               $ 29,112.5
Patrick R. Eudy.........     $342.50           150               $ 51,375.0
Patrick L. Morse........     $342.50           100               $ 34,250.0
</TABLE>
 
                                      68
<PAGE>
 
                      DESCRIPTION OF NEW CREDIT FACILITY
 
  The Summary of the New Credit Facility set forth below does not purport to
be complete and is qualified in its entirety by reference to all the
provisions of the definitive Credit Agreement governing the New Credit
Facility, a copy of which Credit Agreement may be obtained by contacting the
office of the Secretary at the principal executive offices of the Company, 521
East Morehead Street, Suite 250, Charlotte, North Carolina 28202.
 
GENERAL
 
  The Company (the "Borrower") has entered into a credit facility (the "New
Credit Facility") with various lenders, Bankers Trust Company, as
Administrative Agent, and NationsBank of Texas, N.A., as Syndication Agent.
The New Credit Facility consists of term loan facilities (the "Term Loan
Facilities") in an aggregate principal amount of $230.0 million, a revolving
credit facility (the "Revolving Credit Facility") in an aggregate principal
amount of up to $85.0 million and an uncommitted acquisition loan facility in
an aggregate principal amount of up to $165.0 million (the "Acquisition
Facility", together with the Term Loan Facilities and the Revolving Credit
Facility (the "Facilities")). The following is a summary description of the
principal terms of the New Credit Facility and is subject to, and qualified in
its entirety by reference to, the definitive credit agreement.
 
  All obligations of the Company under the New Credit Facility are
unconditionally and irrevocably guaranteed jointly and severally by four of
the intermediary subsidiaries of the Company; STE, MJD Holdings Corp., MJD
Services Corp. and MJD Ventures, Inc. ("Loan Guarantors"). Indebtedness under
the New Credit Facility is secured by a first priority perfected security
interest in all of the capital stock of the Company's subsidiaries (subject to
certain exceptions) and in promissory notes evidencing all intercompany
advances made by the Company and the Loan Guarantors.
 
TERM LOAN FACILITIES
 
  The Term Loan Facilities consist of two tranches of term loans in an
aggregate principal amount of $230.0 million. The term loans under the tranche
B term loan facility ("B Term Loans") are in an aggregate principal amount of
$155.0 million and the term loans under the tranche C term loan facility ("C
Term Loans") are in an aggregate principal amount of $75.0 million. The
tranche C term loan facility is divided into approximately a $51.5 million
subfacility, funded entirely by CoBank, ACB (the "CoBank C Term Subfacility"),
and approximately a $23.5 million subfacility, funded by a syndicate of other
lenders (the "Other C Term Subfacility"). The B Term Loans will mature on
March 31, 2006 and the C Term Loans will mature on March 31, 2007.
Installments of the B Term Loans are due in equal quarterly amounts totaling
per annum in each of years one through six of $1.55 million, approximately
$49.1 million in year seven and approximately $96.6 million in year eight.
Installments of the CoBank C Term Subfacility are due in varying quarterly
amounts totaling approximately $1.2 million to $2.3 million per annum in each
of years one through six and in equal quarterly amounts totaling $19.9 million
per annum in each of years eight and nine. Installments of the Other C Term
Subfacility are due in equal quarterly amounts totaling approximately $0.2
million per annum in years one through seven and approximately $10.9 million
per annum in years eight and nine.
 
REVOLVING CREDIT FACILITY
 
  The Revolving Credit Facility is in an aggregate principal amount of $85.0
million. The Company is entitled to draw amounts under the Revolving Credit
Facility for ongoing working capital, capital expenditure requirements and
general corporate purposes (including to finance acquisitions and permitted
acquisitions). The Revolving Credit Facility will be reduced quarterly,
commencing on the date 39 months after the Closing Date in equal quarterly
amounts until maturity on September 30, 2004.
 
ACQUISITION FACILITY
 
  The Acquisition Facility consists of an uncommitted revolving credit
facility in an aggregate principal amount of up to $165.0 million. The Company
will be entitled to draw amounts under the Acquisition Facility to
 
                                      69
<PAGE>
 
finance capital expenditure requirements and permitted acquisitions and/or to
repay revolving loans under the Revolving Credit Facility to the extent the
proceeds of such revolving loans had been used to finance capital expenditure
requirements and/or permitted acquisitions. Although the Acquisition Facility
was uncommitted at the closing of the New Credit Facility (the "Closing"), the
Company intends to obtain commitments under the Acquisition Facility as may be
required to achieve its acquisition objectives. The Acquisition Facility will
be reduced quarterly, commencing on the date 48 months after the Closing Date
in equal quarterly amounts until maturity on September 30, 2004.
 
USE OF PROCEEDS
 
  The use of proceeds from the Term Facilities is limited to the following
"Specified Purposes": (i) to finance acquisitions, (ii) to refinance the
existing indebtedness of the Borrower and its subsidiaries, (iii) to
repurchase $130,164 face amount of outstanding shares of preferred stock of
the Company for an aggregate price equal to such face amount plus accrued
dividends, (iv) retire certain existing warrants and (v) to finance
transaction fees and expenses.
 
AVAILABILITY
 
  The availability under the New Credit Facility is subject to various
conditions precedent typical of bank facilities to this type. The full amount
of the C Term Loans were drawn in a single drawing at the Closing. B Term
Loans may be drawn pursuant to one or more drawings on and after the Closing
Date and prior to nine months from Closing. In addition, upon repayment of B
Term Loans with the Offering proceeds, certain Lenders under the tranche B
term loan facility have committed to reinstate $90.0 million in tranche B term
commitments for a period of up to 9 months from the Closing Date. Loans under
the Revolving Credit Facility and the Acquisition Facility (to the extent
commitments become available) may be borrowed, repaid and reborrowed after
Closing.
 
INTEREST RATE
 
  Some or all of the C Term Loans under the CoBank C Term Subfacility shall
bear interest at fixed rates as agreed upon. Otherwise, Base Rate loans and
Eurodollar loans are available as follows:
 
  Interest will accrue quarterly on the loans with reference to the base rate
(the "Base Rate") plus the applicable interest margin. In addition, the
Company may elect that all or a portion of the loans bear interest at the
eurodollar rate (the "Eurodollar Rate") plus the applicable interest margin.
The Base Rate is defined as the higher of the Federal Funds Rate, as published
by the Federal Reserve Bank of New York, plus 1/2 of 1%, or the prime rate of
the Administrative Agent, as announced from time to time. The Eurodollar Rate
is defined as, for interest periods of one, two, three or six months or (if
and when available to each of the Lenders under the respective Facility), nine
or twelve months (as selected by the Borrower), the offered quotation to first
class banks in the interbank eurodollar market by the Administrative Agent for
dollar deposits of amounts in same day funds divided by a percentage equal to
100% minus the then stated maximum rate of all reserved requirements
applicable to any member bank of the Federal Reserve System in respect of
Eurocurrency liabilities as defined in Regulation D. The applicable interest
margin for loans under the Revolving Credit Facility and the Acquisition
Facility will be 1.50% for Base Rate loans and 2.50% for Eurodollar Rate
loans. The applicable interest margin for Tranche B Term Loans will be 1.75%
for Base Rate Loans and 2.75% for Eurodollar Loans. The applicable interest
margin for C Term Loans under the Other C Term Subfacility will be 2.00% for
Base Rate loans and 3.00% for Eurodollar Rate loans. The interest margins for
the loans under the New Credit Facility as provided above will be subject to
reduction based on the achievement of specified leverage ratios, so long as no
default or event of default exists under the New Credit Facility.
 
                                      70
<PAGE>
 
COVENANTS
 
  The New Credit Facility contains certain customary covenants and other
requirements of the Company and its subsidiaries. The affirmative covenants
provide for, among other things, mandatory reporting by the Company of
financial and other information to the lenders and notice by the Company to
the lenders upon the occurrence of certain events. The affirmative covenants
also include customary covenants requiring the Company to operate its business
in an orderly manner and consistent with past practice and requiring
maintenance of interest rate protection.
 
  The New Credit Facility also contains certain customary negative covenants
and restrictions on action by the Company and its subsidiaries, including,
without limitation, restrictions on indebtedness, liens, guarantee
obligations, mergers, asset dispositions, investments, loans, advances,
acquisitions, dividends and other restricted junior payments, transactions
with affiliates, changes in business conducted and prepayments and amendments
of subordinated indebtedness. The New Credit Facility also requires the
Company to meet certain customary financial covenants.
 
MANDATORY PREPAYMENT/REDUCTIONS
 
  Mandatory prepayment or reduction of Term Loan Facilities and, once all Term
Loans have been repaid and no unutilized Term Facilities remain, Revolving
Credit Facility and Acquisition Facility reductions (pro rata among them),
will result from the net proceeds of equity and permitted subordinated debt
issuances, including the Offering, until such time as the senior leverage
ratio is reduced to 4.0x or below, provided that proceeds of permitted
subordinated debt issuances consummated prior to the first anniversary of the
Closing that otherwise would be applied as provided in this paragraph will
first be applied to repay outstanding Revolving Loans and thereafter to the B
Term Loans.
 
  Net cash proceeds from asset sales shall be applied as mandatory prepayments
of principal on outstanding loans unless such proceeds are used by the Company
to finance acquisitions permitted under the New Credit Facility within 180
days of the Company's receipt of such proceeds.
 
  Change of control transactions trigger a mandatory prepayment.
 
OPTIONAL PREPAYMENT
 
  Voluntary prepayments of loans, including interim prepayments ("Interim
Prepayments") of Revolving Loans with proceeds of asset sales that are not
used to prepay Term Loans in anticipation of being subsequently applied to
fund a Permitted Acquisition or Acquisitions within 180 days of the asset sale
may be made at any time without premium or penalty, provided that voluntary
prepayments of Eurodollar Loans made on a date other than the last day of an
interest period applicable thereto shall be subject to customary breakage
costs. Voluntary prepayments of Terms Loans shall be made pro rata between the
Term Facilities and applied to reduce future scheduled amortization payments
(z) for the 12 month period after any such prepayment, in direct order of
maturity and (y) thereafter, on a pro rata basis.
 
EVENTS OF DEFAULT
 
  The New Credit Facility specifies certain customary events of default
including, without limitation, nonpayment of principal, non-payment of
interest or fees (with a customary grace period), violation of covenants,
inaccuracy of representations and warranties in any material respect, cross-
default to certain other indebtedness, bankruptcy and insolvency events,
material judgments, violations of the Employees Retirement Income Security Act
of 1974, as amended, failure to maintain security interests, invalidity or
asserted invalidity of credit documents, including guarantees and failure of
the New Credit Facility and guarantees thereof to be senior in right of
payment.
 
                                      71
<PAGE>
 
                             DESCRIPTION OF NOTES
 
  The Fixed Rate Notes and the Floating Rate Notes will be issued together as
a single series under a single indenture (the "Indenture"), to be dated as of
May 5, 1998, between the Company and United States Trust Company of New York,
as trustee (the "Trustee"). A copy of the Indenture may be obtained by
contacting the Office of the Secretary at the principal executive offices of
the Company, 521 East Morehead Street, Suite 250, Charlotte, North Carolina
28202. The following summaries of certain provisions of the Indenture do not
purport to be complete and are subject, and are qualified in their entirety by
reference, to the Trust Indenture Act of 1939 (the "Trust Indenture Act") and
to all the provisions of the Notes and the Indenture, including the
definitions of certain terms. For purposes of this Section, references to the
"Company" shall mean MJD Communications, Inc., excluding its subsidiaries.
Capitalized terms used in this Section and not otherwise defined below have
the meanings assigned to them in the Indenture.
 
  The Indenture provides for the issuance of up to $200.0 million of Offered
Notes, of which $125.0 million will be Fixed Rate Notes (the "Offered Fixed
Rate Notes") and $75.0 million will be Floating Rate Notes (the "Offered
Floating Rate Notes"). The Indenture also provides for the issuance of up to
$100.0 million, in the aggregate, of additional Floating Rate Notes and Fixed
Rate Notes (as part of the same or an additional series under the Indenture).
Any such additional Notes will be identical to the Offered Floating Rate Notes
or the Offered Fixed Rate Notes, as the case may be, other than with respect
to issue price and issuance date.
 
  Except as otherwise set forth below, the terms of the Fixed Rate Notes and
the Floating Rate Notes will be identical. The Fixed Rate Notes and the
Floating Rate Notes will vote together as a single class on all matters.
 
GENERAL
 
  The Notes will mature on May 1, 2008, and will be limited to an aggregate
principal amount of $300.0 million. The Offered Notes will be issued in an
aggregate principal amount of $200.0 million. The Offered Notes will bear
interest at the rates set forth below from May 5, 1998, or from the most
recent date to which interest has been paid, payable semiannually on May 1 and
November 1 of each year, beginning on November 1, 1998, to the persons who are
registered holders of the Offered Notes at the close of business on the
preceding April 15 or October 15, as the case may be. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
 
  Principal of, and premium, if any, and interest on, the Notes will be
payable in immediately available funds, and the Notes will be exchangeable and
transferable, at an office or agency of the Company, one of which will be
maintained for such purpose in The City of New York (which initially will be
the corporate trust office of the Trustee); provided, however, that payment of
interest may be made at the option of the Company by check mailed to the
Person entitled thereto as shown on the Security Register. The Notes will be
issued only in fully registered form without coupons, in denominations of
$1,000 or any integral multiple thereof. No service charge will be made for
any registration of transfer or exchange of Notes, except for any tax or other
governmental charge that may be imposed.
 
INTEREST
 
  The interest rate on the Offered Notes is subject to increase in certain
circumstances if the Company does not file a registration statement relating
to an exchange offer or a resale shelf registration statement for the Offered
Notes, if such registration statement is not declared effective on a timely
basis or if certain other conditions are not satisfied, all as further
described under "Exchange Offer; Registration Rights".
 
  FIXED RATE NOTES. Interest on the Fixed Rate Notes will accrue at the rate
of 9 1/2% per annum.
 
  FLOATING RATE NOTES. The Floating Rate Notes will bear interest at a rate
per annum, reset semiannually, equal to LIBOR plus 418.75 basis points, as
determined by the calculation agent (the "Calculation Agent"), which shall
initially be the Trustee.
 
                                      72
<PAGE>
 
  "LIBOR", with respect to an Interest Period, means the rate (expressed as a
percentage per annum) for deposits in United States dollars for a six-month
period beginning on the second London Banking Day after the Determination Date
that appears on Telerate Page 3750 as of 11:00 a.m., London time, on the
Determination Date. If Telerate Page 3750 does not include such a rate or is
unavailable on a Determination Date, LIBOR for the Interest Period shall be
the arithmetic mean of the rates (expressed as a percentage per annum) for
deposits in a Representative Amount in United States dollars for a six-month
period beginning on the second London Banking Day after the Determination Date
that appears on Reuters Screen LIBO Page as of 11:00 a.m., London time, on the
Determination Date. If Reuters Screen LIBO Page does not include two or more
rates or is unavailable on a Determination Date, the Calculation Agent shall
request the principal London office of each of four major banks in the London
interbank market, as selected by the Calculation Agent, to provide such bank's
offered quotation (expressed as a percentage per annum), as of approximately
11:00 a.m., London time, on such Determination Date, to prime banks in the
London interbank market for deposits in a Representative Amount in United
States dollars for a six-month period beginning on the second London Banking
Day after the Determination Date. If at least two such offered quotations are
so provided, LIBOR for the Interest Period shall be the arithmetic mean of
such quotations. If fewer than two such quotations are so provided, the
Calculation Agent shall request each of three major banks in New York City, as
selected by the Calculation Agent, to provide such bank's rate (expressed as a
percentage per annum), as of approximately 11:00 a.m., New York City time, on
such Determination Date, for loans in a Representative Amount in United States
dollars to leading European banks for a six-month period beginning on the
second London Banking Day after the Determination Date. If at least two such
rates are so provided, LIBOR for the Interest Period will be the arithmetic
mean of such rates. If fewer than two such rates are so provided, then LIBOR
for the Interest Period will be LIBOR in effect with respect to the
immediately preceding Interest Period.
 
  "Determination Date," with respect to an Interest Period, means the second
London Banking Day preceding the first day of the Interest Period.
 
  "Interest Period" means the period commencing on and including an interest
payment date and ending on and including the day immediately preceding the
next succeeding interest payment date, with the exception that the first
Interest Period shall commence on and include May 5, 1998.
 
  "London Banking Day" means any day in which dealings in United States
dollars are transacted or, with respect to any future date, are expected to be
transacted in the London interbank market.
 
  "Representative Amount" means a principal amount of not less than
U.S.$1,000,000 for a single transaction in the relevant market at the relevant
time.
 
  "Telerate Page 3750" means the display designated as "Page 3750" on the Dow
Jones Telerate Service (or such other page as may replace Page 3750 on that
service).
 
  "Reuters Screen LIBO Page" means the display designated as page "LIBO" on
The Reuters Monitor Money Rates Service (or such other page as may replace the
LIBO page on that service).
 
  The amount of interest for each day of a 30-day month that the Floating Rate
Notes are outstanding (the "Daily Interest Amount") will be calculated by
dividing the interest rate in effect for such day by 360 and multiplying the
result by the principal amount of the Floating Rate Notes. The amount of
interest to be paid on the Floating Rate Notes for each Interest Period will
be calculated by adding the Daily Interest Amounts for each day in the
Interest Period.
 
  All percentages resulting from any of the above calculations will be
rounded, if necessary, to the nearest one hundred-thousandth of a percentage
point, with five one-millionths of a percentage point rounded upwards (e.g.,
9.876545% being rounded to 9.87655%), and all dollar amounts used in or
resulting from such calculations will be rounded to the nearest cent (with
one-half cent being rounded upwards).
 
                                      73
<PAGE>
 
  The interest rate on the Floating Rate Notes will in no event be higher than
the maximum rate permitted by New York law as the same may be modified by
United States law of general application. Under current New York law, the
maximum rate of interest is 25.0% per annum on a simple interest basis. This
limit may not apply to Floating Rate Notes in which a holder has invested $2.5
million or more.
 
  The Calculation Agent will, upon the request of the holder of any Floating
Rate Note, provide the interest rate then in effect with respect to the
Floating Rate Notes. All calculations made by the Calculation Agent in the
absence of manifest error will be conclusive for all purposes and binding on
the Company and the holders of the Floating Rate Notes.
 
SUBORDINATION
 
  The Notes will be senior subordinated, unsecured obligations of the Company.
The payment of the principal of, and premium, if any, and interest on, the
Notes, will be subordinated in right of payment to the payment when due of all
Senior Debt of the Company. The Fixed Rate Notes and the Floating Rate Notes
will rank pari passu in right of payment with each other, and with all future
Senior Subordinated Debt, and senior to all future Subordinated Obligations of
the Company. As of June 30, after giving pro forma effect to the Pending
Acquisition, the Company would have had approximately $146.3 million of Senior
Debt.
   
  In addition, all existing and future liabilities of the Company's
Subsidiaries, including the claims of trade creditors and preferred
stockholders, if any, will be effectively senior to the Notes. The total
balance sheet liabilities of the Company's Subsidiaries, after giving effect
to the Pending Acquisition, as of June 30, 1998, would have been approximately
$230.8 million (including guarantees of $146.3 million of Senior Debt of the
Company and excluding unused commitments). The Company's Subsidiaries have
other liabilities, including contingent liabilities, that may be significant.
    
  Although the Indenture contains limitations on the amount of additional Debt
that the Company and the Restricted Subsidiaries may Incur, the amounts of
such Debt could be substantial and all such Debt may be Senior Debt or Debt of
Subsidiaries (which will be effectively senior in right of payment to the
Notes). In addition, the definition of "Senior Debt" includes a provision that
in certain circumstances subordinates the Notes to the claims of lenders who
extend credit in reliance on the Company's calculation of debt capacity under
the covenant described under "--Certain Covenants--Limitation on Debt," even
if such interpretation is incorrect or is not made in good faith. See "--
Certain Covenants--Limitation on Debt" and "--Certain Definitions."
 
  The Notes are obligations exclusively of the Company. Since all the
operations of the Company are conducted through Subsidiaries, the Company's
ability to service its debt, including the Notes, is dependent upon the
earnings of its Subsidiaries and the distribution of those earnings, or upon
loans or other payments of funds, by those Subsidiaries to the Company. The
payment of dividends and the making of loans and advances to the Company by
its Subsidiaries are subject to various restrictions. Existing Debt of certain
of the Subsidiaries contains provisions that may under certain circumstances
prohibit the payment of dividends or the making of other payments or advances
to the Company. In addition, the ability of Subsidiaries of the Company to
make such payments or advances to the Company may be limited by the laws of
the relevant states in which such Subsidiaries are organized or located,
including, in some instances, by minimum capitalization requirements imposed
by state regulatory bodies that oversee the telecommunications industry in
such states. In certain circumstances, the prior or subsequent approval of
such payments or advances by such Subsidiaries to the Company is required from
such regulatory bodies or other governmental entities.
 
  The Notes also will be effectively subordinated to any secured debt of the
Company to the extent of the value of the assets securing such debt. As of
June 30, 1998, after giving pro forma effect to the Completed Transactions and
the Pending Acquisition, there would have been no outstanding secured debt of
the Company that is not Senior Debt.
 
  The Company may not pay principal of, or premium, if any, or interest on,
the Notes, or make any deposit pursuant to the provisions described under "--
Defeasance," and may not repurchase, redeem or otherwise retire any Notes
(collectively, "pay the Notes"), if (a) any principal, premium or interest in
respect of any Senior Debt is not paid within any applicable grace period
(including at maturity) or (b) any other default on Senior Debt
 
                                      74
<PAGE>
 
occurs and the maturity of such Senior Debt is accelerated in accordance with
its terms unless, in either case, (i) the default has been cured or waived and
any such acceleration has been rescinded or (ii) such Senior Debt has been
paid in full in cash; provided, however, that the Company may pay the Notes
without regard to the foregoing if the Company and the Trustee receive written
notice approving such payment from the Representative of such issue of Senior
Debt. During the continuance of any default (other than a default described in
clause (a) or (b) of the preceding sentence) with respect to any Designated
Senior Debt pursuant to which the maturity thereof may be accelerated
immediately without further notice (except any notice required to effect the
acceleration) or the expiration of any applicable grace period, the Company
may not pay the Notes for a period (a "Payment Blockage Period") commencing
upon the receipt by the Company and the Trustee of written notice of such
default from the Representative of the holders of such Designated Senior Debt
specifying an election to effect a Payment Blockage Period (a "Payment
Blockage Notice") and ending 179 days thereafter (unless such Payment Blockage
Period is earlier terminated (a) by written notice to the Trustee and the
Company from the Representative that gave such Payment Blockage Notice, (b)
because such default is no longer continuing or (c) because such Designated
Senior Debt has been repaid in full in cash). Unless the holders of such
Designated Senior Debt or the Representative of such holders have accelerated
the maturity of such Designated Senior Debt and not rescinded such
acceleration, the Company may (unless otherwise prohibited as described in the
first sentence of this paragraph) resume payments on the Notes after the end
of such Payment Blockage Period. Not more than one Payment Blockage Notice
with respect to all issues of Designated Senior Debt may be given in any
consecutive 360-day period, irrespective of the number of defaults with
respect to one or more issues of Designated Senior Debt during such period.
 
  Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation, dissolution or winding up of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its Property, the holders of Senior Debt will be
entitled to receive payment in full in cash before the holders of the Notes
are entitled to receive any payment of principal of or interest on the Notes,
except that holders of Notes may receive and retain shares of stock and any
debt securities that are subordinated to Senior Debt to at least the same
extent as the Notes. Until the Senior Debt is paid in full in cash, any
distribution to which holders of the Notes would be entitled but for the
subordination provisions of the Indenture will be made to holders of the
Senior Debt. If a payment or distribution is made to holders of Notes that,
due to the subordination provisions, should not have been made to them, such
holders are required to hold it in trust for the holders of Senior Debt and
pay it over to them as their interests may appear.
 
  If payment of the Notes is accelerated when any Designated Senior Debt is
outstanding, the Company may not pay the Notes until three Business Days after
the Representatives of all issues of Designated Senior Debt receive notice of
such acceleration and, thereafter, may pay the Notes only if the Indenture
otherwise permits payment at that time.
 
  By reason of the subordination provisions contained in the Indenture, in the
event of bankruptcy or similar proceedings relating to the Company, holders of
Senior Debt and other creditors (including trade creditors) of the Company may
recover more ratably, even if the Notes are pari passu with their claims, than
the holders of the Notes. In such event, there may be insufficient assets or
no assets remaining to pay the principal of or interest on the Notes.
 
  Payment from the money or the proceeds of U.S. Government Obligations held
in any defeasance trust pursuant to the provisions described under "--
Defeasance" will not be subject to the subordination provisions described
above.
 
  See "Risk Factors--Subordination; Holding Company Structure," "--Substantial
Leverage; Ability to Service Debt" and "Description of New Credit Facility".
 
OPTIONAL REDEMPTION
 
  Except as set forth below, the Fixed Rate Notes will not be redeemable at
the option of the Company prior to May 1, 2003. Thereafter, the Fixed Rate
Notes will be redeemable, in whole or in part, at any time and
 
                                      75
<PAGE>
 
from time to time, at the option of the Company upon not less than 30 nor more
than 60 days' prior notice, at the following redemption prices (expressed as
percentages of principal amount), plus accrued and unpaid interest, if any, to
the redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on May 1 of the years set forth
below:
 
<TABLE>
<CAPTION>
                                                                      REDEMPTION
       YEAR                                                             PRICE
       ----                                                           ----------
       <S>                                                            <C>
       2003..........................................................  104.750%
<CAPTION>
       2004..........................................................   103.167%
       2005..........................................................   101.583%
       <S>                                                            <C>
       2006 and thereafter...........................................  100.000%
</TABLE>
 
  The Floating Rate Notes will be redeemable, in whole or in part, at any time
and from time to time, at the option of the Company upon not less than 30 nor
more than 60 days' prior notice, at the following redemption prices (expressed
as percentages of principal amount), plus accrued and unpaid interest, if any,
to the redemption date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period commencing on May 1 of the years
set forth below:
 
<TABLE>
<CAPTION>
                                                                      REDEMPTION
       YEAR                                                             PRICE
       ----                                                           ----------
       <S>                                                            <C>
       1998..........................................................  105.000%
<CAPTION>
       1999..........................................................   104.000%
       2000..........................................................   103.000%
       2001..........................................................   102.000%
       2002..........................................................   101.000%
       <S>                                                            <C>
       2003 and thereafter...........................................  100.000%
</TABLE>
 
  At any time and from time to time, prior to May 1, 2001, the Company may
redeem up to a maximum of 35.0% of the aggregate principal amount of the Fixed
Rate Notes theretofore issued under the Indenture (including any Fixed Rate
Notes issued after completion of the Offering) with the proceeds of an Equity
Sale, at a redemption price equal to 109.5% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided,
however, that after giving effect to any such redemption, at least 65.0% of
the original aggregate principal amount of the Offered Fixed Rate Notes
remains outstanding. Any such redemption shall be made within 75 days of such
Equity Sale upon not less than 30 nor more than 60 days' prior notice.
 
SINKING FUND
 
  There will be no mandatory sinking fund payments for the Notes.
 
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
 
  Upon the occurrence of a Change of Control, each holder of Notes shall have
the right to require the Company to repurchase all or any part of such
holder's Notes pursuant to the offer described below (the "Change of Control
Offer") at a purchase price (the "Change of Control Purchase Price") equal to
101.0% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the purchase date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date).
 
  Within 30 days following any Change of Control, and within one day following
the Cut-off Date, the Company shall (a) cause a notice of the Change of
Control Offer to be sent at least once to the Dow Jones News Service or
similar business news service in the United States and (b) send, by first-
class mail, with a copy to the
 
                                      76
<PAGE>
 
Trustee, to each holder of Notes, at such holder's address appearing in the
Security Register, a notice stating: (i) that a Change of Control Offer is
being made pursuant to the covenant entitled "Repurchase at the Option of
Holders Upon a Change of Control" and that all Notes timely tendered will be
accepted for payment; (ii) the Change of Control Purchase Price and the
purchase date, which shall be, subject to any contrary requirements of
applicable law, a business day no earlier than 30 days nor later than 60 days
from the date such notice is mailed; (iii) the circumstances and relevant
facts regarding the Change of Control (including information with respect to
pro forma historical income, cash flow and capitalization after giving effect
to the Change of Control); and (iv) the procedures that holders of Notes must
follow in order to tender their Notes (or portions thereof) for payment, and
the procedures that holders of Notes must follow in order to withdraw an
election to tender Notes (or portions thereof) for payment.
 
  The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to a Change of Control
Offer. To the extent that the provisions of any securities laws or regulations
conflict with the provisions of the covenant described hereunder, the Company
will comply with the applicable securities laws and regulations and will not
be deemed to have breached its obligations under the covenant described
hereunder by virtue of such compliance.
 
  The Change of Control repurchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to certain
covenants described below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of debt outstanding at such time
or otherwise affect the Company's capital structure or credit ratings.
 
  The definition of Change of Control includes a phrase relating to the sale,
transfer, assignment, lease, conveyance or other disposition of "all or
substantially all" the Company's assets. Although there is a developing body
of case law interpreting the phrase "substantially all", there is no precise
established definition of the phrase under applicable law. In the absence of a
definitive judicial determination of the definition of such phrase, it will be
necessary for a holder of Notes to seek to clarify such interpretation through
discussions with the Company or through litigation or other proceedings.
Accordingly, the ability of a holder of Notes to require the Company to
repurchase such Notes as a result of a sale, transfer, assignment, lease,
conveyance or other disposition of less than all the assets of the Company may
be uncertain.
 
  The New Credit Facility prohibits the Company from voluntarily purchasing
any Notes prior to their stated maturity, and also provides that the
occurrence of any of the events that would constitute a Change of Control
would constitute a change of control under the New Credit Facility, which
would result in all debt thereunder becoming due and payable. Other future
debt of the Company may contain prohibitions of any events which would
constitute a Change of Control or require such debt to be repurchased upon a
Change of Control. To the extent other debt of the Company is subject to
similar repurchase obligations in the event of a Change of Control and such
debt ranks senior in right of payment to the Notes, all available funds will
first be expended for the repurchase of such debt. Moreover, the exercise by
holders of Notes of their right to require the Company to repurchase such
Notes following a Change of Control could cause a default under existing or
future debt of the Company, even if the Change of Control itself does not, due
to the financial effect of such repurchase on the Company. Furthermore, the
Company's ability to pay cash to holders of Notes upon a repurchase following
a Change of Control may be limited by the Company's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases. The Company's failure to
purchase Notes in connection with a Change of Control would result in a
default under the Indenture which would, in turn, constitute a default under
existing (and may constitute a default under future) debt of the Company. If
such debt constitutes Designated Senior Debt, the subordination provisions in
the Indenture would likely restrict payment to holders of Notes. The
provisions under the Indenture relative to the Company's obligation to make an
offer to repurchase the Notes as a result of a Change of Control may be waived
or modified
 
                                      77
<PAGE>
 
(at any time prior to the occurrence of such Change of Control) with the
written consent of the holders of a majority in principal amount of each of
the Fixed Rate Notes or the Floating Rate Notes, as the case may be. See "--
Amendments and Waivers."
 
CERTAIN COVENANTS
 
  LIMITATION ON DEBT. The Company shall not, and shall not permit any
Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless,
after giving effect to the application of the proceeds thereof, no Default or
Event of Default would occur as a consequence of such Incurrence or be
continuing following such Incurrence and either (a) after giving effect to the
Incurrence of such Debt and the receipt and application of the proceeds
thereof, the Leverage Ratio of the Company and the Restricted Subsidiaries (on
a consolidated basis) would not exceed 7.0 to 1.0 or (b) such Debt is
Permitted Debt.
 
  The term "Permitted Debt" is defined to include the following:
 
    (a) Debt of the Company evidenced by the Offered Notes;
 
    (b) Debt under the Credit Facility, provided that the aggregate principal
  amount of all such Debt under the Credit Facility at any one time
  outstanding shall not exceed $315.0 million, which amount shall be
  permanently reduced by the amount of Net Available Cash used to Repay Debt
  under the Credit Facility, and not subsequently reinvested in Additional
  Assets or used to purchase Notes or Repay other Debt, pursuant to the
  covenant described under "--Limitation on Asset Sales";
 
    (c) Debt of the Company or a Restricted Subsidiary in respect of Capital
  Lease Obligations and Purchase Money Debt, provided that (i) the aggregate
  principal amount of such Debt does not exceed the Fair Market Value (on the
  date of the Incurrence thereof) of the Property acquired, constructed or
  leased and (ii) the aggregate principal amount of all Debt Incurred and
  then outstanding pursuant to this clause (c) (together with all Permitted
  Refinancing Debt Incurred in respect of Debt previously Incurred pursuant
  to this clause (c)) does not exceed $30.0 million;
 
    (d) Debt of the Company owing to and held by any Restricted Subsidiary
  and Debt of a Restricted Subsidiary owing to and held by the Company or any
  Restricted Subsidiary; provided, however, that any subsequent issue or
  transfer of Capital Stock or other event that results in any such
  Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
  subsequent transfer of any such Debt (except to the Company or a Restricted
  Subsidiary) shall be deemed, in each case, to constitute the Incurrence of
  such Debt by the issuer thereof;
 
    (e) Debt under Interest Rate Agreements entered into by the Company or a
  Restricted Subsidiary for the purpose of limiting interest rate risk in the
  ordinary course of the financial management of the Company or such
  Restricted Subsidiary and not for speculative purposes, provided that the
  obligations under such agreements are directly related to payment
  obligations on Debt otherwise permitted by the terms of this covenant;
 
    (f) Debt in connection with one or more standby letters of credit or
  performance bonds issued by the Company or a Restricted Subsidiary in the
  ordinary course of business or pursuant to self-insurance obligations and
  not in connection with the borrowing of money or the obtaining of advances
  or credit;
 
    (g) Debt outstanding on the Issue Date not otherwise described in clauses
  (a) through (f) above;
 
    (h) Debt in an aggregate principal amount outstanding at any one time not
  to exceed $10.0 million;
 
    (i) if (x) the acquisition of Chouteau is consummated, up to $7.0 million
  of Debt Incurred by the Company in connection with such consummation and/or
  (y) the acquisition of Utilities is consummated, up to $12.51 million of
  Debt of Utilities Incurred in connection with such consummation, less the
  aggregate amount of all repayments of principal made thereon; and
 
    (j) Permitted Refinancing Debt Incurred in respect of Debt Incurred
  pursuant to clause (a) of the first paragraph of this covenant and clauses
  (a), (c), (g) and (i) above.
 
  The definition of "Senior Debt" includes a provision that in certain
circumstances subordinates the Notes to the claims of lenders who extend
credit in reliance on the Company's calculation of debt capacity under this
 
                                      78
<PAGE>
 
covenant, even if such interpretation is incorrect or is not made in good
faith. If the claims of such other lenders in fact were Incurred by the
Company in violation of this covenant, the holders of the Notes could declare
an Event of Default and exercise their remedies against the Company under the
Indenture, but the Noteholders would not have any claims against such other
lenders (so long as such other lenders had themselves acted in good faith) and
the claims of the Noteholders would be subordinated to the prior payment in
full of such other lenders. See "--Certain Definitions--Senior Debt."
 
  Notwithstanding anything to the contrary contained in this covenant, (a) the
Company shall not Incur any Debt pursuant to this covenant if the proceeds
thereof are used, directly or indirectly, to Refinance (i) any Subordinated
Obligations unless such Debt shall be subordinated to the Notes to at least
the same extent as such Subordinated Obligations or (ii) any Senior
Subordinated Debt unless such Debt shall be Senior Subordinated Debt or shall
be subordinated to the Notes, and (b) the Company shall not permit any
Restricted Subsidiary to Incur any Debt pursuant to this covenant if the
proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations or Senior Subordinated Debt of the Company.
 
  For purposes of determining compliance with the foregoing covenant, (i) in
the event that an item of Debt (including Debt issued by the Company to the
lenders that are party to the Credit Facility) meets the criteria of more than
one of the types of Debt described above, the Company, in its sole discretion,
will classify such item of Debt and only be required to include the amount and
type of such Debt in one of the above clauses and (ii) an item of Debt
(including Debt issued by the Company to the lenders that are party to the
Credit Facility) may be divided and classified in more than one of the types
of Debt described above.
 
  LIMITATION ON RESTRICTED PAYMENTS. The Company shall not make, and shall not
permit any Restricted Subsidiary to make, directly or indirectly, any
Restricted Payment if at the time of, and after giving effect to, such
proposed Restricted Payment,
 
    (a) a Default or Event of Default shall have occurred and be continuing,
 
    (b) the Company could not Incur at least $1.00 of additional Debt
  pursuant to clause (a) of the first paragraph of the covenant described
  under "--Limitation on Debt" or
 
    (c) the aggregate amount of such Restricted Payment and all other
  Restricted Payments declared or made since the Issue Date (the amount of
  any Restricted Payment, if made other than in cash, to be based upon Fair
  Market Value) would exceed an amount equal to the sum of:
 
      (i) 50.0% of the aggregate amount of Consolidated Net Income accrued
    during the period (treated as one accounting period) from the beginning
    of the fiscal quarter during which the Issue Date occurs to the end of
    the most recent fiscal quarter ending at least 45 days prior to the
    date of such Restricted Payment (or if the aggregate amount of
    Consolidated Net Income for such period shall be a deficit, minus
    100.0% of such deficit),
 
      (ii) Capital Stock Sale Proceeds, excluding Capital Stock Sale
    Proceeds from the sale of additional Capital Stock to the Permitted
    Holders pursuant to contractual obligations in effect on the Issue
    Date,
 
      (iii) the sum of (A) the aggregate net cash proceeds received by the
    Company or any Restricted Subsidiary from the issuance or sale after
    the Issue Date of convertible or exchangeable Debt that has been
    converted into or exchanged for Capital Stock (other than Disqualified
    Stock) of the Company and (B) the aggregate amount by which Debt (other
    than Subordinated Obligations) of the Company or any Restricted
    Subsidiary is reduced on the Company's consolidated balance sheet on or
    after the Issue Date upon the conversion or exchange of any Debt issued
    or sold on or prior to the Issue Date that is convertible or
    exchangeable for Capital Stock (other than Disqualified Stock) of the
    Company (excluding, in the case of clause (A) or (B), (x) any such Debt
    issued or sold to the Company or a Subsidiary of the Company or an
    employee stock ownership plan or trust established by the Company or
    any such Subsidiary for the benefit of their employees and (y) the
    aggregate amount of any cash or other Property distributed by the
    Company or any Restricted Subsidiary upon any such conversion or
    exchange),
 
                                      79
<PAGE>
 
      (iv) an amount equal to the sum of (A) the net reduction in
    Investments in any Person other than the Company or a Restricted
    Subsidiary resulting from dividends, repayments of loans or advances or
    other transfers of Property, in each case to the Company or any
    Restricted Subsidiary from such Person, and (B) the portion
    (proportionate to the Company's equity interest in an Unrestricted
    Subsidiary) of the Fair Market Value of the net assets of an
    Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
    designated a Restricted Subsidiary; provided, however, that the
    foregoing sum shall not exceed, in the case of any Person, the amount
    of Investments previously made (and treated as a Restricted Payment) by
    the Company or any Restricted Subsidiary in such Person, and
 
      (v) $20.0 million.
 
  Notwithstanding the foregoing limitation, the Company may:
 
    (a) pay dividends on its Capital Stock within 60 days of the declaration
  thereof if, on said declaration date, such dividends could have been paid
  in compliance with the Indenture; provided, however, that at the time of
  such payment of such dividend, no other Default or Event of Default shall
  have occurred and be continuing (or result therefrom); provided further,
  however, that such dividend shall be included in the calculation of the
  amount of Restricted Payments;
 
    (b) purchase, repurchase, redeem, legally defease, acquire or retire for
  value Capital Stock of the Company or Subordinated Obligations in exchange
  for, or out of the proceeds of the substantially concurrent sale of,
  Capital Stock of the Company (other than Disqualified Stock and other than
  Capital Stock issued or sold to a Subsidiary of the Company or an employee
  stock ownership plan or trust established by the Company or any such
  Subsidiary for the benefit of their employees); provided, however, that (i)
  such purchase, repurchase, redemption, legal defeasance, acquisition or
  retirement shall be excluded in the calculation of the amount of Restricted
  Payments and (ii) the Capital Stock Sale Proceeds from such exchange or
  sale shall be excluded from the calculation pursuant to clause (c)(ii)
  above;
 
    (c) purchase, repurchase, redeem, legally defease, acquire or retire for
  value any Subordinated Obligations in exchange for, or out of the proceeds
  of the substantially concurrent sale of, Permitted Refinancing Debt;
  provided, however, that such purchase, repurchase, redemption, legal
  defeasance, acquisition or retirement shall be excluded in the calculation
  of the amount of Restricted Payments;
 
    (d) repurchase shares of, or options to purchase shares of, common stock
  of the Company or any of its Subsidiaries from current or former officers,
  directors or employees of the Company or any of its Subsidiaries (or
  permitted transferees of such current or former officers, directors or
  employees), pursuant to the terms of agreements (including employment
  agreements) or plans (or amendments thereto) approved by the Board of
  Directors under which such individuals purchase or sell, or are granted the
  option to purchase or sell, shares of such common stock; provided, however,
  that (i) the aggregate amount of such repurchases shall not exceed $1.0
  million in any fiscal year, (ii) such repurchases shall be excluded in the
  calculation of the amount of Restricted Payments and (iii) at the time of
  any such repurchase, no other Default or Event of Default shall have
  occurred and be continuing (or result therefrom);
 
    (e) purchase up to (i) 12,500 shares of ST Enterprises, Ltd. and (ii)
  7.69 shares of Sidney Telephone Company (in each case as adjusted for stock
  splits and other similar events), outstanding on the Issue Date; provided,
  however, that such purchases or redemptions shall not be made from
  Affiliates of the Company (other than Persons who are Affiliates solely by
  virtue of their ownership of such shares) and shall be included in the
  calculation of the amount of Restricted Payments; provided further,
  however, that at the time of any such purchase or redemption, no other
  Default or Event of Default shall have occurred and be continuing (or
  result therefrom);
 
    (f) pay the fees and expenses described in clause (e) in the second
  paragraph of the covenant described under "--Certain Covenants--Limitation
  on Transactions with Affiliates", provided, however, that any such fees or
  expenses paid in excess of $1.0 million per fiscal year shall be included
  in the calculation of the amount of Restricted Payments; and
 
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<PAGE>
 
    (g) following the first Public Equity Offering that results in a Public
  Market, pay dividends on the common stock of the Company of up to 6.0% per
  annum of the cash proceeds (net of underwriters' fees, discounts or
  commissions) of such first Public Equity Offering; provided, however, that
  (i) such dividends shall be (x) paid pro rata to the holders of all classes
  of common stock of the Company and (y) included in the calculation of the
  amount of Restricted Payments and (ii) at the time of payment of any such
  dividend, no other Default or Event of Default shall have occurred and be
  continuing (or result therefrom).
 
  LIMITATION ON LIENS. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist,
any Lien (other than Permitted Liens or Liens securing Senior Debt) upon any
of its Property (including Capital Stock of a Restricted Subsidiary), whether
owned at the Issue Date or thereafter acquired, or any interest therein or any
income or profits therefrom, unless (a) if such Lien secures Senior
Subordinated Debt, the Notes are secured on an equal and ratable basis with
such Debt and (b) if such Lien secures Subordinated Obligations, such Lien
shall be subordinated to a Lien securing the Notes in the same Property as
that securing such Subordinated Obligations to the same extent as such
Subordinated Obligations are subordinated to the Notes.
 
  LIMITATION ON ISSUANCE OR SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES.
The Company shall not (a) sell, pledge, hypothecate or otherwise dispose of
any shares of Capital Stock of a Restricted Subsidiary or (b) permit any
Restricted Subsidiary to, directly or indirectly, issue or sell or otherwise
dispose of any shares of its Capital Stock, other than (i) directors'
qualifying shares, (ii) to the Company or a Wholly Owned Subsidiary, or (iii)
if, immediately after giving effect to such disposition, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary; provided,
however, that, in the case of this clause (iii), such issuance, sale or
disposition is effected in compliance with the covenant described under "--
Limitation on Asset Sales".
 
  LIMITATION ON ASSET SALES. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale
unless (a) the Company or such Restricted Subsidiary receives consideration at
the time of such Asset Sale at least equal to the Fair Market Value of the
Property subject to such Asset Sale; (b) at least 75.0% of the consideration
paid to the Company or such Restricted Subsidiary in connection with such
Asset Sale is in the form of cash or cash equivalents or the assumption by the
purchaser of liabilities of the Company or any Restricted Subsidiary (other
than liabilities that are by their terms subordinated to the Notes) as a
result of which the Company and the Restricted Subsidiaries are no longer
obligated with respect to such liabilities; and (c) the Company delivers an
Officers' Certificate to the Trustee certifying that such Asset Sale complies
with the foregoing clauses (a) and (b).
 
  The Net Available Cash (or any portion thereof) from Asset Sales may be
applied by the Company or a Restricted Subsidiary, to the extent the Company
or such Restricted Subsidiary elects (or is required by the terms of any
Debt): (a) to Repay Senior Debt of the Company or Debt of any Restricted
Subsidiary (excluding any Debt owed to the Company or an Affiliate of the
Company); or (b) subject to the covenant described under "--Limitation on
Restricted Payments", to reinvest in Additional Assets (including by means of
an Investment in Additional Assets by a Restricted Subsidiary with Net
Available Cash received by the Company or another Restricted Subsidiary).
Pending such application, and subject in all respects to the procedures set
forth below, the Company may, to the extent such use would not constitute a
Repayment, use such Net Available Cash to temporarily reduce Debt.
 
  Any Net Available Cash from an Asset Sale not applied in accordance with the
preceding paragraph within 270 days from the date of the receipt of such Net
Available Cash or that is not (to the extent not used to temporarily reduce
Debt without reducing related loan commitments) segregated from the general
funds of the Company for investment in identified Additional Assets in respect
of a project that shall have been commenced, and for which binding contractual
commitments have been entered into, prior to the end of such 270-day period
and that shall not have been completed or abandoned shall constitute "Excess
Proceeds"; provided, however, that the amount of any Net Available Cash that
ceases to be so segregated as contemplated above and any Net Available Cash
that is segregated in respect of a project that is abandoned or completed
shall also constitute "Excess Proceeds" at the time any such Net Available
Cash ceases to be so segregated or at the time the relevant
 
                                      81
<PAGE>
 
project is so abandoned or completed, as applicable. When the aggregate amount
of Excess Proceeds exceeds $5.0 million (taking into account income earned on
such Excess Proceeds, if any), the Company will be required to make an offer
to purchase (the "Prepayment Offer") the Notes which offer shall be in the
amount of the Allocable Excess Proceeds, on a pro rata basis according to
principal amount, at a purchase price equal to 100.0% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the purchase date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date), in accordance
with the procedures (including prorating in the event of oversubscription) set
forth in the Indenture. To the extent that any portion of the amount of Net
Available Cash remains after compliance with the preceding sentence and
provided that all holders of Notes have been given the opportunity to tender
their Notes for purchase in accordance with the Indenture, the Company or such
Restricted Subsidiary may use such remaining amount for any purpose permitted
by the Indenture and the amount of Excess Proceeds will be reset to zero. The
term "Allocable Excess Proceeds" will mean the product of (a) the Excess
Proceeds and (b) a fraction, the numerator of which is the aggregate principal
amount of the Notes outstanding on the date of the Prepayment Offer and the
denominator of which is the sum of the aggregate principal amount of the Notes
outstanding on the date of the Prepayment Offer and the aggregate principal
amount of other Debt of the Company outstanding on the date of the Prepayment
Offer that is pari passu in right of payment with the Notes and subject to
terms and conditions in respect of Asset Sales similar in all material
respects to the covenant described hereunder and requiring the Company to make
an offer to purchase such Debt at substantially the same time as the
Prepayment Offer.
 
  Within five business days after the Company is obligated to make a
Prepayment Offer as described in the preceding paragraph, the Company shall
send a written notice, by first-class mail, to the holders of Notes,
accompanied by such information regarding the Company and its Subsidiaries as
the Company in good faith believes will enable such holders to make an
informed decision with respect to such Prepayment Offer. Such notice shall
state, among other things, the purchase price and the purchase date, which
shall be, subject to any contrary requirements of applicable law, a business
day no earlier than 30 days nor later than 60 days from the date such notice
is mailed.
 
  The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the covenant described hereunder, the
Company will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
 
  LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES.
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist any
consensual restriction on the right of any Restricted Subsidiary to (a) pay
dividends, in cash or otherwise, or make any other distributions on or in
respect of its Capital Stock, or pay any Debt or other obligation owed, to the
Company or any other Restricted Subsidiary, (b) make any loans or advances to
the Company or any other Restricted Subsidiary or (c) transfer any of its
Property to the Company or any other Restricted Subsidiary. The foregoing
limitations will not apply (i) with respect to clauses (a), (b) and (c), to
restrictions (A) arising under agreements that were in effect on the Issue
Date, (B) relating to Debt of a Restricted Subsidiary and existing at the time
it became a Restricted Subsidiary if such restriction was not created in
connection with or in anticipation of the transaction or series of
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company or another Restricted Subsidiary, or
(C) that result from the Refinancing of Debt Incurred pursuant to an agreement
referred to in clause (i)(A) or (B) above or in clause (ii)(A) or (B) below,
provided such restriction is no more restrictive than those under the
agreement evidencing the Debt so Refinanced, and (ii) with respect to clause
(c) only, to restrictions (A) relating to Debt that is permitted to be
Incurred and secured without also securing the Notes pursuant to the covenants
described under "--Limitation on Debt" and "--Limitation on Liens" that limit
the right of the debtor to dispose of the Property securing such Debt, (B)
encumbering Property at the time such Property was acquired by the Company
 
                                      82
<PAGE>
 
or any Restricted Subsidiary, so long as such restriction relates solely to
the Property so acquired and was not created in connection with or in
anticipation of such acquisition, (C) resulting from customary provisions
restricting subletting or assignment of leases or customary provisions in
other agreements that restrict assignment of such agreements or rights
thereunder or (D) customary restrictions contained in asset sale agreements
limiting the transfer of such Property pending the closing of such sale.
 
  LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall
not permit any Restricted Subsidiary to, directly or indirectly, conduct any
business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any service) with,
or for the benefit of, any Affiliate of the Company (an "Affiliate
Transaction"), unless (a) the terms of such Affiliate Transaction are (i) set
forth in writing, (ii) in the best interest of the Company or such Restricted
Subsidiary, as the case may be, and (iii) no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could be
obtained in a comparable arm's-length transaction with a Person that is not an
Affiliate of the Company, (b) if such Affiliate Transaction involves aggregate
payments or value in excess of $1.0 million, two Officers of the Company
approve such Affiliate Transaction, and in the good faith judgment of such
Officers, believe that such Affiliate Transaction complies with clauses (a)
(ii) and (iii) of this paragraph as evidenced by an Officers' Certificate
promptly delivered to the Trustee, (c) if such Affiliate Transaction involves
aggregate payments or value in excess of $5.0 million, the Board of Directors
(including a majority of the disinterested members of the Board of Directors)
approves such Affiliate Transaction, and in its good faith judgment, believes
that such Affiliate Transaction complies with clauses (a) (ii) and (iii) of
this paragraph as evidenced by a Board Resolution promptly delivered to the
Trustee and (d) if such Affiliate Transaction involves aggregate payments or
value in excess of $10.0 million, the Company obtains a written opinion from
an Independent Appraiser to the effect that the consideration to be paid or
received in connection with such Affiliate Transaction is fair, from a
financial point of view, to the Company or such Restricted Subsidiary, as the
case may be.
 
  Notwithstanding the foregoing limitation, the Company or any Restricted
Subsidiary may enter into or suffer to exist the following:
 
    (a) any transaction or series of transactions between the Company and one
  or more Restricted Subsidiaries or between two or more Restricted
  Subsidiaries, provided that no more than 5.0% of the total voting power of
  the Voting Stock (on a fully diluted basis) of any such Restricted
  Subsidiary is owned by an Affiliate of the Company (other than a Restricted
  Subsidiary);
 
    (b) any Restricted Payment permitted to be made pursuant to the covenant
  described under "--Limitation on Restricted Payments";
 
    (c) the payment of compensation (including amounts paid pursuant to
  employee benefit plans) for the personal services of officers, directors
  and employees of the Company or any of the Restricted Subsidiaries, so long
  as such payments are pursuant to a policy (i) established by the Board of
  Directors in good faith and (ii) evidenced by a resolution of the Board of
  Directors that establishes standards to ensure that the terms of such
  compensation and the services theretofore or thereafter to be performed for
  such compensation will be fair consideration therefor;
 
    (d) loans and advances to employees made in the ordinary course of
  business and consistent with the past practices of the Company or such
  Restricted Subsidiary, as the case may be, provided that such loans and
  advances do not exceed $1.0 million in the aggregate at any one time
  outstanding;
 
    (e) the payment, in compliance with clause (a) of the first paragraph of
  this covenant, of fees and expenses to the Equity Investors during any
  fiscal year not in excess of 1.0% of EBITDA for such year, provided that no
  Default or Event of Default exists at the time of such payment;
 
    (f) the payment of customary legal fees and expenses to Paul, Hastings,
  Janofsky & Walker LLP; or
 
    (g) any transaction or series of transactions, in the ordinary course of
  business for a Person engaged in the CLEC business, with a CLEC Subsidiary,
  provided that any such transaction is undertaken pursuant to
 
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<PAGE>
 
  a policy adopted by the Board of Directors, which policy shall be evidenced
  by a Board Resolution delivered to the Trustee, that establishes adequate
  procedures to insure that any such transaction is effected in accordance
  with clauses (a)(ii) and (a)(iii) of the first paragraph of this covenant.
 
  LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any Sale and
Leaseback Transaction with respect to any Property unless (a) the Company or
such Restricted Subsidiary would be entitled to (i) Incur Debt in an amount
equal to the Attributable Debt with respect to such Sale and Leaseback
Transaction pursuant to the covenant described under "--Limitation on Debt"
and (ii) create a Lien on such Property securing such Attributable Debt
without also securing the Notes pursuant to the covenant described under "--
Limitation on Liens" and (b) such Sale and Leaseback Transaction is effected
in compliance with the covenant described under "--Limitation on Asset Sales".
 
  LIMITATION ON LAYERED DEBT. The Company shall not Incur, directly or
indirectly, any Debt that is subordinate or junior in right of payment to any
Senior Debt unless such Debt is Senior Subordinated Debt or is expressly
subordinated in right of payment to Senior Subordinated Debt.
 
  DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES. The Board of
Directors may designate any Subsidiary of the Company to be an Unrestricted
Subsidiary if (a) the Subsidiary to be so designated does not own any Capital
Stock or Debt of, or own or hold any Lien on any Property of, the Company or
any other Restricted Subsidiary, (b) the Subsidiary to be so designated is not
obligated under any Debt, Lien or other obligation that, if in default, would
result (with the passage of time or notice or otherwise) in a default on any
Debt of the Company or of any Restricted Subsidiary and (c) either (i) the
Subsidiary to be so designated has total assets of $1,000 or less or (ii) such
designation is effective immediately upon such entity becoming a Subsidiary of
the Company. Unless so designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of the Company will be classified as a Restricted
Subsidiary; provided, however, that such Subsidiary shall not be designated a
Restricted Subsidiary and shall be automatically classified as an Unrestricted
Subsidiary if either of the requirements set forth in clauses (x) and (y) of
the immediately following paragraph will not be satisfied after giving pro
forma effect to such classification. Except as provided in the first sentence
of this paragraph, no Restricted Subsidiary may be redesignated as an
Unrestricted Subsidiary.
 
  The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation, (x) the Company could Incur at least $1.00 of additional Debt
pursuant to clause (a) of the first paragraph of the covenant described under
"--Limitation on Debt" and (y) no Default or Event of Default shall have
occurred and be continuing or would result therefrom.
 
  Any such designation or redesignation by the Board of Directors will be
evidenced to the Trustee by filing with the Trustee a Board Resolution giving
effect to such designation or redesignation and an Officers' Certificate (a)
certifying that such designation or redesignation complies with the foregoing
provisions and (b) giving the effective date of such designation or
redesignation, such filing with the Trustee to occur within 45 days after the
end of the fiscal quarter of the Company in which such designation or
redesignation is made (or, in the case of a designation or redesignation made
during the last fiscal quarter of the Company's fiscal year, within 90 days
after the end of such fiscal year).
 
  LIMITATION ON COMPANY'S BUSINESS. The Company shall not, and shall not
permit any Restricted Subsidiary, to, directly or indirectly, engage in any
business other than the Telecommunications Business.
 
MERGER, CONSOLIDATION AND SALE OF PROPERTY
 
  The Company shall not merge, consolidate or amalgamate with or into any
other Person (other than a merger of a Wholly Owned Subsidiary into the
Company) or sell, transfer, assign, lease, convey or otherwise dispose of all
or substantially all its Property in any one transaction or series of
transactions unless: (a) the Company shall be the surviving Person (the
"Surviving Person") or the Surviving Person (if other than the
 
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<PAGE>
 
Company) formed by such merger, consolidation or amalgamation or to which such
sale, transfer, assignment, lease, conveyance or disposition is made shall be
a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia; (b) the Surviving
Person (if other than the Company) expressly assumes, by supplemental
indenture in form satisfactory to the Trustee, executed and delivered to the
Trustee by such Surviving Person, the due and punctual payment of the
principal of, and premium, if any, and interest on, all the Notes, according
to their tenor, and the due and punctual performance and observance of all the
covenants and conditions of the Indenture to be performed by the Company; (c)
in the case of a sale, transfer, assignment, lease, conveyance or other
disposition of all or substantially all the Property of the Company, such
Property shall have been transferred as an entirety or virtually as an
entirety to one Person; (d) immediately before and after giving effect to such
transaction or series of transactions on a pro forma basis (and treating, for
purposes of this clause (d) and clauses (e) and (f) below, any Debt that
becomes, or is anticipated to become, an obligation of the Surviving Person or
any Restricted Subsidiary as a result of such transaction or series of
transactions as having been Incurred by the Surviving Person or such
Restricted Subsidiary at the time of such transaction or series of
transactions), no Default or Event of Default shall have occurred and be
continuing; (e) immediately after giving effect to such transaction or series
of transactions on a pro forma basis, the Company or the Surviving Person, as
the case may be, would be able to Incur at least $1.00 of additional Debt
under clause (a) of the first paragraph of the covenant described under "--
Certain Covenants--Limitation on Debt"; (f) immediately after giving effect to
such transaction or series of transactions on a pro forma basis, the Surviving
Person shall have a Consolidated Net Worth in an amount that is not less than
the Consolidated Net Worth of the Company immediately prior to such
transaction or series of transactions; and (g) the Company shall deliver, or
cause to be delivered, to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an Officers' Certificate and an Opinion of
Counsel, each stating that such transaction and the supplemental indenture, if
any, in respect thereto comply with this covenant and that all conditions
precedent herein provided for relating to such transaction have been
satisfied.
 
  The Surviving Person shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a sale, transfer, assignment, lease,
conveyance or other disposition shall not be released from its obligations
under the Indenture and the Notes (except the predecessor company shall be so
released in the case of the sale, transfer assignment, conveyance or other
disposition, but not the lease, of the assets as an entirety or virtually as
an entirety).
 
SEC REPORTS
 
  Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall
file with the Commission and provide the Trustee and holders of Notes with
such annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
U.S. corporation subject to such Sections, such information, documents and
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections; provided,
however, that the Company shall not be so obligated to file such information,
documents and reports with the Commission if the Commission does not permit
such filings.
 
EVENTS OF DEFAULT
 
  Events of Default in respect of the Notes as set forth in the Indenture
include: (a) failure to make the payment of any interest on the Notes when the
same becomes due and payable, and such failure continues for a period of 30
days; (b) failure to make the payment of any principal of, or premium, if any,
on, any of the Notes when the same becomes due and payable at its Stated
Maturity, upon acceleration, redemption, optional redemption, required
repurchase or otherwise; (c) failure to comply with the covenant described
under "--Merger, Consolidation and Sale of Property"; (d) failure to comply
with any other covenant or agreement in the Notes or in the Indenture (other
than a failure that is the subject of the foregoing clause (a), (b) or (c))
and such failure continues for 30 days after written notice is given to the
Company as provided below; (e) a default under
 
                                      85
<PAGE>
 
any Debt by the Company or any Restricted Subsidiary that results in
acceleration of the maturity of such Debt, or failure to pay any such Debt at
maturity, in an aggregate amount greater than $5.0 million or its foreign
currency equivalent at the time (the "cross acceleration provisions"); (f) any
judgment or judgments for the payment of money in an aggregate amount in
excess of $5.0 million (or its foreign currency equivalent at the time) shall
be rendered against the Company or any Restricted Subsidiary and shall not be
waived, satisfied or discharged for any period of 60 consecutive days during
which a stay of enforcement shall not be in effect (the "judgment default
provisions"); and (g) certain events involving bankruptcy, insolvency or
reorganization of the Company or any Significant Subsidiary (the "bankruptcy
provisions").
 
  A Default under clause (d) is not an Event of Default until the Trustee or
the holders of not less than 25.0% in aggregate principal amount of the Notes
then outstanding notify the Company of the Default and the Company does not
cure such Default within the time specified after receipt of such notice. Such
notice must specify the Default, demand that it be remedied and state that
such notice is a "Notice of Default."
 
  The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any event that with the giving of notice and the lapse of time would become an
Event of Default, its status and what action the Company is taking or proposes
to take with respect thereto.
 
  The Indenture provides that if an Event of Default with respect to the Notes
(other than an Event of Default resulting from certain events involving
bankruptcy, insolvency or reorganization with respect to the Company) shall
have occurred and be continuing, the Trustee or the registered holders of not
less than 25.0% in aggregate principal amount of the Notes then outstanding
may declare to be immediately due and payable the principal amount of all the
Notes then outstanding, plus accrued but unpaid interest to the date of
acceleration. In case an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization with respect to the Company shall
occur, such amount with respect to all the Notes shall be due and payable
immediately without any declaration or other act on the part of the Trustee or
the holders of the Notes. After any such acceleration, but before a judgment
or decree based on acceleration is obtained by the Trustee, the registered
holders of a majority in aggregate principal amount of the Notes then
outstanding may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the nonpayment of
accelerated principal, premium or interest, have been cured or waived as
provided in the Indenture.
 
  Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders of the
Notes, unless such holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the holders of a majority in aggregate principal amount of the Notes then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the
Notes.
 
  No holder of Notes will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or trustee, or
for any remedy thereunder, unless (a) such holder has previously given to the
Trustee written notice of a continuing Event of Default, (b) the registered
holders of at least 25.0% in aggregate principal amount of the Notes then
outstanding have made written request and offered reasonable indemnity to the
Trustee to institute such proceeding as trustee and (c) the Trustee shall not
have received from the registered holders of a majority in aggregate principal
amount of the Notes then outstanding a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of any
Note for enforcement of payment of the principal of, and premium, if any, or
interest on, such Note on or after the respective due dates expressed in such
Note.
 
AMENDMENTS AND WAIVERS
 
  Subject to certain exceptions, the Indenture may be amended with the consent
of the registered holders of a majority in aggregate principal amount of the
Notes then outstanding (including consents obtained in connection
 
                                      86
<PAGE>
 
with a tender offer or exchange offer for the Notes) and any past default or
compliance with any provisions may also be waived (except a default in the
payment of principal, premium or interest and certain covenants and provisions
of the Indenture that cannot be amended without the consent of each holder of
an outstanding Note) with the consent of the registered holders of at least a
majority in aggregate principal amount of the Notes then outstanding. However,
without the consent of each holder of an outstanding Note, no amendment may,
among other things, (a) reduce the amount of Notes whose holders must consent
to an amendment or waiver, (b) reduce the rate of or extend the time for
payment of interest on any Note, (c) reduce the principal of or extend the
Stated Maturity of any Note, (d) make any Note payable in money other than
that stated in the Note, (e) impair the right of any holder of the Notes to
receive payment of principal of and interest on such holder's Notes on or
after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's Notes, (f) release any security
interest that may have been granted in favor of the holders of the Notes, (g)
reduce the premium payable upon the redemption of any Note nor change the time
at which any Note may be redeemed, as described under "--Optional Redemption,"
(h) reduce the premium payable upon a Change of Control or, at any time after
a Change of Control has occurred, change the time at which the Change of
Control Offer relating thereto must be made or at which the Notes must be
repurchased pursuant to such Change of Control Offer, (i) at any time after
the Company is obligated to make a Prepayment Offer with the Excess Proceeds
from Asset Sales, change the time at which such Prepayment Offer must be made
or at which the Notes must be repurchased pursuant thereto or (j) make any
change to the subordination provisions of the Indenture that would adversely
affect the holders of the Notes.
 
  Without the consent of any holder of the Notes, the Company and the Trustee
may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add Guarantees with respect
to the Notes, to secure the Notes, to add to the covenants of the Company for
the benefit of the holders of the Notes or to surrender any right or power
conferred upon the Company, to make any change that does not adversely affect
the rights of any holder of the Notes, to make any change to the subordination
provisions of the Indenture that would limit or terminate the benefits
available to any holder of Senior Debt under such provisions or to comply with
any requirement of the Commission in connection with the qualification of the
Indenture under the Trust Indenture Act.
 
  No amendment may be made to the subordination provisions of the Indenture
that adversely affects the rights of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or their Representative)
consent to such change. The consent of the holders of the Notes is not
necessary under the Indenture to approve the particular form of any proposed
amendment. It is sufficient if such consent approves the substance of the
proposed amendment. After an amendment under the Indenture becomes effective,
the Company is required to mail to each registered holder of the Notes at such
holder's address appearing in the Security Register a notice briefly
describing such amendment. However, the failure to give such notice to all
holders of the Notes, or any defect therein, will not impair or affect the
validity of the amendment.
 
DEFEASANCE
 
  The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost
or stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the
covenants described under "--Repurchase at the Option of Holders Upon a Change
of Control" and "--Certain Covenants," the operation of the cross acceleration
provisions, the judgment default provisions and the bankruptcy provisions with
respect to Significant Subsidiaries, described under "--Events of Default"
above and the limitations contained in clauses (e) and (f) under the first
paragraph of "--Merger, Consolidation and
 
                                      87
<PAGE>
 
Sale of Property" above ("covenant defeasance"). The Company may exercise its
legal defeasance option notwithstanding its prior exercise of its covenant
defeasance option.
 
  If the Company exercises its legal defeasance option, payment of the Notes
may not be accelerated because of an Event of Default with respect thereto. If
the Company exercises its covenant defeasance option, payment of the Notes may
not be accelerated because of an Event of Default specified in clause (d)
(with respect to the covenants described under "--Certain Covenants"), (e),
(f) or (g) (with respect only to Significant Subsidiaries) under "--Events of
Default" above or because of the failure of the Company to comply with clauses
(e) and (f) under the first paragraph of "--Merger, Consolidation and Sale of
Property" above.
 
  The legal defeasance option or the covenant defeasance option may be
exercised only if: (a) the Company irrevocably deposits in trust with the
Trustee money or U.S. Government Obligations for the payment of principal of
and interest on the Notes to maturity or redemption, as the case may be; (b)
the Company delivers to the Trustee a certificate from a nationally recognized
firm of independent certified public accountants expressing their opinion that
the payments of principal and interest when due and without reinvestment on
the deposited U.S. Government Obligations plus any deposited money without
investment will provide cash at such times and in such amounts as will be
sufficient to pay principal and interest when due on all the Notes to maturity
or redemption, as the case may be; (c) 123 days pass after the deposit is made
and during the 123-day period no Default described in clause (g) under "--
Events of Default" occurs with respect to the Company or any other Person
making such deposit which is continuing at the end of the period; (d) no
Default or Event of Default has occurred and is continuing on the date of such
deposit and after giving effect thereto; (e) such deposit does not constitute
a default under any other agreement or instrument binding on the Company; (f)
the Company delivers to the Trustee an Opinion of Counsel to the effect that
the trust resulting from the deposit does not constitute, or is qualified as,
a regulated investment company under the Investment Company Act of 1940; (g)
in the case of the legal defeasance option, the Company delivers to the
Trustee an Opinion of Counsel stating that (i) the Company has received from
the Internal Revenue Service a ruling, or (ii) since the date of the Indenture
there has been a change in the applicable Federal income tax law, to the
effect, in either case, that, and based thereon such Opinion of Counsel shall
confirm that, the holders of the Notes will not recognize income, gain or loss
for Federal income tax purposes as a result of such defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and at
the same time as would have been the case if such defeasance had not occurred;
(h) in the case of the covenant defeasance option, the Company delivers to the
Trustee an Opinion of Counsel to the effect that the holders of the Notes will
not recognize income, gain or loss for Federal income tax purposes as a result
of such covenant defeasance and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such covenant defeasance had not occurred; and (i) the Company
delivers to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that all conditions precedent to the defeasance and discharge of
the Notes have been complied with as required by the Indenture.
 
GOVERNING LAW
 
  The Indenture and the Notes are governed by the internal laws of the State
of New York without reference to principles of conflicts of law.
 
THE TRUSTEE
 
  United States Trust Company of New York is the Trustee under the Indenture.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the
Trustee will exercise such of the rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
 
                                      88
<PAGE>
 
CERTAIN DEFINITIONS
 
  Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
 
  "Additional Assets" means (a) any Property (other than cash, cash
equivalents and securities) to be owned by the Company or any Restricted
Subsidiary and used in a Telecommunications Business; or (b) Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or another Restricted Subsidiary from any
Person other than an Affiliate of the Company; provided, however, that, in the
case of clause (b), such Restricted Subsidiary is primarily engaged in a
Telecommunications Business.
 
  "Affiliate" of any specified Person means (a) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (b) any other Person who is a director
or officer of (i) such specified Person, (ii) any Subsidiary of such specified
Person or (iii) any Person described in clause (a) above. For the purposes of
this definition, "control" when used with respect to any Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing. For purposes of the covenant described under "--
Certain Covenants--Limitation on Transactions with Affiliates," "--Limitation
on Asset Sales" and the definition of "Additional Assets" only, "Affiliate"
shall also mean any beneficial owner of shares representing 10.0% or more of
the total voting power of the Voting Stock (on a fully diluted basis) of the
Company or of rights or warrants to purchase such Voting Stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
 
  "Asset Sale" means any sale, lease, transfer, issuance or other disposition
(or series of related sales, leases, transfers, issuances or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means
of a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (a) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares) or
(b) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary
(other than, in the case of clauses (a) and (b) above, (i) any disposition by
a Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (ii) for purposes of the covenant
described under "--Certain Covenants--Limitation on Asset Sales" only, (x) any
disposition that constitutes a Permitted Investment or Restricted Payment
permitted by the covenant described under "--Certain Covenants--Limitation on
Restricted Payments" and (y) contemporaneous exchanges by the Company or any
Restricted Subsidiary of Telecommunications Assets for other
Telecommunications Assets in the ordinary course of business; provided that
the applicable Telecommunications Assets received by the Company or such
Restricted Subsidiary have at least substantially equal Fair Market Value to
the Company or such Restricted Subsidiary (as evidenced by a Resolution of the
Board of Directors of the Company) and (iii) any disposition effected in
compliance with the first paragraph of the covenant described under "--Merger,
Consolidation and Sale of Property").
 
  "Attributable Debt" in respect of a Sale and Leaseback Transaction means, at
any date of determination, (a) if such Sale and Leaseback Transaction is a
Capital Lease Obligation, the amount of Debt represented thereby according to
the definition of "Capital Lease Obligation" and (b) in all other instances,
the greater of (i) the Fair Market Value of the Property subject to such Sale
and Leaseback Transaction and (ii) the present value (discounted at the
interest rate borne by the Fixed Rate Notes, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale and Leaseback Transaction (including any period
for which such lease has been extended).
 
  "Average Life" means, as of any date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the
product of the numbers of years (rounded to the nearest one-
 
                                      89
<PAGE>
 
twelfth of one year) from the date of determination to the dates of each
successive scheduled principal payment of such Debt or redemption or similar
payment with respect to such Preferred Stock multiplied by the amount of such
payment by (b) the sum of all such payments.
 
  "Capital Lease Obligations" means any obligation under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance with GAAP; and
the Stated Maturity thereof shall be the date of the last payment of rent or
any other amount due under such lease prior to the first date upon which such
lease may be terminated by the lessee without payment of a penalty. For
purposes of "--Certain Covenants--Limitation on Liens," a Capital Lease
Obligation shall be deemed secured by a Lien on the Property being leased.
 
  "Capital Stock" means, with respect to any Person, any shares or other
equivalents (however designated) of any class of corporate stock or
partnership interests or any other participations, rights, warrants, options
or other interests in the nature of an equity interest in such Person,
including Preferred Stock, but excluding any debt security convertible or
exchangeable into such equity interest.
 
  "Capital Stock Sale Proceeds" means the aggregate cash proceeds received by
the Company from the issuance or sale (other than to a Subsidiary of the
Company or an employee stock ownership plan or trust established by the
Company or any such Subsidiary for the benefit of their employees) by the
Company of its Capital Stock (other than Disqualified Stock) after the Issue
Date, net of attorneys' fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant and other
fees actually incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
 
  "Change of Control" means the occurrence of any of the following events:
 
    (a) prior to the first Public Equity Offering that results in a Public
  Market, the Permitted Holders cease to be the "beneficial owners" (as
  defined in Rule 13d-3 under the Exchange Act, except that a Person will be
  deemed to have "beneficial ownership" of all shares that any such Person
  has the right to acquire, whether such right is exercisable immediately or
  only after the passage of time), directly or indirectly, of a majority of
  the total voting power of the Voting Stock of the Company, whether as a
  result of the issuance of securities of the Company, any merger,
  consolidation, liquidation or dissolution of the Company, any direct or
  indirect transfer of securities by the Permitted Holders or otherwise (for
  purposes of this clause (a), the Permitted Holders will be deemed to
  beneficially own any Voting Stock of a specified corporation held by a
  parent corporation so long as the Permitted Holders beneficially own,
  directly or indirectly, in the aggregate a majority of the total voting
  power of the Voting Stock of such parent corporation); or
 
    (b) on or after the first Public Equity Offering that results in a Public
  Market, if any "Person" or "group" (as such terms are used in Sections
  13(d) and 14(d) of the Exchange Act or any successor provisions to either
  of the foregoing), including any group acting for the purpose of acquiring,
  holding, voting or disposing of securities within the meaning of Rule 13d-
  5(b)(1) under the Exchange Act, other than any one or more of the Permitted
  Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
  Exchange Act, except that a Person will be deemed to have "beneficial
  ownership" of all shares that any such Person has the right to acquire,
  whether such right is exercisable immediately or only after the passage of
  time), directly or indirectly, of 35.0% or more of the total voting power
  of the Voting Stock of the Company; provided, however, that the Permitted
  Holders are the "beneficial owners" (as defined in Rule 13d-3 under the
  Exchange Act, except that a Person will be deemed to have "beneficial
  ownership" of all shares that any such Person has the right to acquire,
  whether such right is exercisable immediately or only after the passage of
  time), directly or indirectly, in the aggregate of a lesser percentage of
  the total voting power of the Voting Stock of the Company than such other
  Person or group (for purposes of this clause (b), such Person or group
  shall be deemed to beneficially own any Voting Stock of a corporation (the
  "specified corporation") held by any other corporation (the "parent
  corporation") so long as such Person or group beneficially owns, directly
  or indirectly, in the aggregate a majority of the total voting power of the
  Voting Stock of such parent corporation); or
 
                                      90
<PAGE>
 
    (c) the sale, transfer, assignment, lease, conveyance or other
  disposition, directly or indirectly, of all or substantially all the assets
  of the Company and the Restricted Subsidiaries, considered as a whole
  (other than a disposition of such assets as an entirety or virtually as an
  entirety to a Wholly Owned Subsidiary or one or more Permitted Holders)
  shall have occurred, or the Company merges, consolidates or amalgamates
  with or into any other Person (other than one or more Permitted Holders) or
  any other Person (other than one or more Permitted Holders) merges,
  consolidates or amalgamates with or into the Company, in any such event
  pursuant to a transaction in which the outstanding Voting Stock of the
  Company is reclassified into or exchanged for cash, securities or other
  Property, other than any such transaction where (i) the outstanding Voting
  Stock of the Company is reclassified into or exchanged for Voting Stock of
  the surviving corporation and (ii) the holders of the Voting Stock of the
  Company immediately prior to such transaction own, directly or indirectly,
  not less than a majority of the Voting Stock of the surviving corporation
  immediately after such transaction and in substantially the same
  proportions as before the transaction; or
 
    (d) during any period of two consecutive years, individuals who at the
  beginning of such period constituted the Board of Directors (together with
  any new directors whose election or appointment or whose nomination for
  election by the shareholders of the Company (i) was approved by a vote of a
  majority of the directors then still in office who were either directors at
  the beginning of such period or whose election or nomination for election
  was previously so approved or (ii) was pursuant to agreements among
  shareholders in effect on the Issue Date) cease for any reason to
  constitute a majority of the Board of Directors then in office; or
 
    (e) the shareholders of the Company shall have approved any plan of
  liquidation or dissolution of the Company.
 
  "CLEC Subsidiary" means (i) an Unrestricted Subsidiary engaged primarily in
providing telecommunications services as a competitive local exchange carrier
in areas within the United States where neither the Company nor any of its
other Subsidiaries provides such services as the incumbent local exchange
carrier and (ii) MJD TeleChoice Corp. to the extent it engages in no business
other than the business described in clause (i) and the ownership of Capital
Stock of Unrestricted Subsidiaries described in clause (i).
 
  "Code" means the Internal Revenue Code of 1986, as amended.
 
  "Commodity Price Protection Agreement" means, in respect of a Person, any
forward contract, commodity swap agreement, commodity option agreement or
other similar agreement or arrangement designed to protect such Person against
fluctuations in commodity prices.
 
  "Consolidated Current Liabilities" means, as of any date of determination,
the aggregate amount of liabilities of the Company and its consolidated
Restricted Subsidiaries which may properly be classified as current
liabilities (including taxes accrued as estimated), after eliminating (a) all
intercompany items between the Company and any Restricted Subsidiary or
between Restricted Subsidiaries and (b) all current maturities of long-term
Debt.
 
  "Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
Incurred by the Company or its Restricted Subsidiaries, without duplication,
(a) interest expense attributable to leases constituting part of a Sale and
Leaseback Transaction and to capital leases, (b) amortization of debt discount
and debt issuance cost, including commitment fees, (c) capitalized interest,
(d) non-cash interest expenses, (e) commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, (f) net costs associated with Hedging Obligations (including
amortization of fees), (g) Disqualified Stock Dividends, (h) Preferred Stock
Dividends, (i) interest Incurred in connection with Investments in
discontinued operations, (j) interest accruing on any Debt of any other Person
to the extent such Debt is Guaranteed by the Company or any Restricted
Subsidiary and (k) the lesser of (i) cash contributions to any employee stock
ownership plan or similar trust and (ii) the interest or fees paid by such
plan or trust to any Person (other than the Company) in connection with Debt
Incurred by such plan or trust.
 
 
                                      91
<PAGE>
 
  "Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income (a) any net income
(loss) of any Person (other than the Company) if such Person is not a
Restricted Subsidiary, except that (i) subject to the exclusion contained in
clause (d) below, there shall be included in such Consolidated Net Income up
to the aggregate amount of cash distributed by such Person during such period
to the Company or a Restricted Subsidiary as a dividend or other distribution,
whether or not reflected on the Company's income statement (subject, in the
case of a dividend or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (c) below and excluding any such cash
dividends or other distributions made by Financing Cooperatives that are
reinvested in such Financing Cooperatives) and (ii) the Company's equity in a
net loss of any such Person other than an Unrestricted Subsidiary for such
period shall be included in determining such Consolidated Net Income, (b) for
purposes of the covenant described under "--Certain Covenants--Limitation on
Restricted Payments" only, any net income (loss) of any Person acquired by the
Company or any of its consolidated Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (c) any net
income (but not loss) of any Restricted Subsidiary, if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the payment
of dividends or the making of distributions, directly or indirectly, to the
Company, except that, subject to the exclusion contained in clause (d) below,
the Company's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a dividend or other
distribution, plus the amount of income accrued during such period in excess
of such distributed cash to the extent such excess income could be distributed
on the date of determination (subject, in the case of a dividend or other
distribution to another Restricted Subsidiary, to the limitation contained in
this clause), (d) any gain (but not loss) realized upon the sale or other
disposition of any Property of the Company or any of its consolidated
Subsidiaries (including pursuant to any Sale and Leaseback Transaction) that
is not sold or otherwise disposed of in the ordinary course of business,
provided that, in the event of such a sale or other disposition of all or a
portion of the Capital Stock of a Financing Cooperative, any gain therefrom
shall be included in Consolidated Net Income in an amount not to exceed the
amount of dividends or other distributions from such Financing Cooperative
previously excluded from Consolidated Net Income pursuant to the parenthetical
in clause (a)(i) above, (e) any extraordinary gain or loss, (f) the cumulative
effect of a change in accounting principles and (g) any non-cash compensation
expense realized for grants of performance shares, stock options or other
stock awards to officers, directors and employees of the Company or any
Restricted Subsidiary. Notwithstanding the foregoing, for purposes of the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments" only, there shall be excluded from Consolidated Net Income any
dividends, repayments of loans or advances or other transfers of assets from
Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the
extent such dividends, repayments or transfers increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (c)(iv)
thereof.
 
  "Consolidated Net Tangible Assets" means, as of any date of determination,
the sum of the amounts that would appear on a consolidated balance sheet of
the Company and its consolidated Restricted Subsidiaries as the total assets
(less accumulated depreciation and amortization, allowances for doubtful
receivables, other applicable reserves and other properly deductible items) of
the Company and its Restricted Subsidiaries, after giving effect to purchase
accounting and after deducting therefrom Consolidated Current Liabilities and,
to the extent otherwise included, the amounts of (without duplication): (a)
the excess of cost over fair market value of assets or businesses acquired;
(b) any revaluation or other write-up in book value of assets subsequent to
the last day of the fiscal quarter of the Company immediately preceding the
Issue Date as a result of a change in the method of valuation in accordance
with GAAP; (c) unamortized debt discount and expenses and other unamortized
deferred charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items; (d) minority interests in consolidated Subsidiaries held by
Persons other than the Company or any Restricted Subsidiary; (e) treasury
stock; (f) cash or securities set aside and held in a sinking or other
analogous fund established for the purpose of redemption or other retirement
of Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities; and (g) Investments in and assets of
Unrestricted Subsidiaries.
 
                                      92
<PAGE>
 
  "Consolidated Net Worth" means the total of the amounts shown on the
consolidated balance sheet of the Company and its Restricted Subsidiaries as
of the end of the most recent fiscal quarter of the Company ending at least 45
days prior to the taking of any action for the purpose of which the
determination is being made, as (a) the par or stated value of all outstanding
Capital Stock of the Company plus (b) paid-in capital or capital surplus
relating to such Capital Stock plus (c) any retained earnings or earned
surplus less (i) any accumulated deficit and (ii) any amounts attributable to
Disqualified Stock.
 
  "Credit Facility" means, the credit agreement, dated as of March 30, 1998,
among the Company, the lenders party thereto in their capacities as lenders
thereunder, NationsBank of Texas, N.A., as syndication agent and Bankers Trust
Company, as administrative agent, together with the related documents thereto
(including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended, restated,
supplemented or otherwise modified from time to time, including any agreement
extending the maturity of, refinancing, replacing or otherwise restructuring
(including increasing the amount of available borrowings thereunder, provided
that such increase in borrowings is permitted by clause (b) of the second
paragraph of the covenant described under "--Certain Covenants--Limitation on
Debt," or adding Restricted Subsidiaries of the Company as additional
borrowers or guarantors thereunder) all or any portion of the debt under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
 
  "Currency Exchange Protection Agreement" means, in respect of a Person, any
foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
 
  "Debt" means, with respect to any Person on any date of determination
(without duplication), (a) the principal of and premium (if any) in respect of
(i) debt of such Person for money borrowed and (ii) debt evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable; (b) all Capital Lease Obligations of such
Person and all Attributable Debt in respect of Sale and Leaseback Transactions
entered into by such Person; (c) all obligations of such Person issued or
assumed as the deferred purchase price of Property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business); (d) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (a) through
(c) above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement following
payment on the letter of credit); (e) the amount of all obligations of such
Person with respect to the Repayment of any Disqualified Stock or, with
respect to any Subsidiary of such Person, any Preferred Stock (but excluding,
in each case, any accrued dividends); (f) all obligations of the type referred
to in clauses (a) through (e) of other Persons and all dividends of other
Persons for the payment of which, in either case, such Person is responsible
or liable, directly or indirectly, as obligor, guarantor or otherwise,
including by means of any Guarantee; (g) all obligations of the type referred
to in clauses (a) through (f) of other Persons secured by any Lien on any
Property of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of the
value of such Property or the amount of the obligation so secured; and (h) to
the extent not otherwise included in this definition, Hedging Obligations of
such Person. The amount of Debt of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date. The amount
of Debt represented by a Hedging Obligation shall be equal to (i) zero if such
Hedging Obligation has been Incurred pursuant to clause (e) of the second
paragraph of the covenant described under "--Certain Covenants--Limitation on
Debt" or (ii) the notional amount of such Hedging Obligation if not Incurred
pursuant to such clause.
 
  "Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
 
                                      93
<PAGE>
 
  "Designated Senior Debt" means (a) any Senior Debt that has, at the time of
determination, an aggregate principal amount outstanding of at least $25.0
million (including the amount of all undrawn commitments and matured and
contingent reimbursement obligations pursuant to letters of credit thereunder)
that is specifically designated in the instrument evidencing such Senior Debt
and is designated in a notice delivered by the Company to the holders or a
Representative of the holders of such Senior Debt and in an Officers'
Certificate delivered to the Trustee as "Designated Senior Debt" of the
Company for purposes of the Indenture and (b) the Credit Facility.
 
  "Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable, in either case at the option of
the holder thereof) or otherwise (a) matures or is mandatorily redeemable
pursuant to a sinking fund obligation or otherwise, (b) is or may become
redeemable or repurchaseable at the option of the holder thereof, in whole or
in part, or (c) is convertible or exchangeable at the option of the holder
thereof for Debt or Disqualified Stock, on or prior to, in the case of clause
(a), (b) or (c), the first anniversary of the Stated Maturity of the Notes.
 
  "Disqualified Stock Dividends" means all dividends with respect to
Disqualified Stock of the Company held by Persons other than a Wholly Owned
Subsidiary. The amount of any such dividend shall be equal to the quotient of
such dividend divided by the difference between one and the maximum statutory
federal income tax rate (expressed as a decimal number between 1 and 0) then
applicable to the Company.
 
  "EBITDA" means, for any period, an amount equal to, for the Company and its
consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income
for such period, plus the following to the extent reducing Consolidated Net
Income for such period: (i) the provision for taxes based on income or profits
or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii)
depreciation, (iv) amortization of intangibles and (v) any other non-cash
items (other than any such non-cash item to the extent that it represents an
accrual of or reserve for cash expenditures in any future period) minus (b)
all non-cash items increasing Consolidated Net Income for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization of, a Restricted Subsidiary
shall be added to Consolidated Net Income to compute EBITDA only to the extent
(and in the same proportion) that the net income of such Restricted Subsidiary
was included in calculating Consolidated Net Income and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
shareholders.
 
  "Equity Investors" means Carousel Capital Partners, L.P., Kelso Investment
Associates V., L.P. and Kelso Equity Partners V, L.P.
 
  "Equity Sale" means (i) a Public Equity Offering following which a Public
Market exists or (ii) a Strategic Equity Investment.
 
  "Event of Default" has the meaning set forth under "--Events of Default".
 
  "Exchange Act" means the Securities Exchange Act of 1934, as amended.
 
  "Fair Market Value" means, with respect to any Property, the price that
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value shall be
determined, except as otherwise provided, (a) if such Property has a Fair
Market Value equal to or less than $5.0 million, by any Officer of the Company
or (b) if such Property has a Fair Market Value in excess of $5.0 million, by
a majority of the Board of Directors and evidenced by a Board Resolution,
dated within 30 days of the relevant transaction, delivered to the Trustee.
 
  "Financing Cooperative" means CoBank ACB and Rural Telephone Finance
Cooperative.
 
                                      94
<PAGE>
 
  "GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date, including those set forth (a) in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants, (b) in the statements and pronouncements of the
Financial Accounting Standards Board, (c) in such other statements by such
other entity as approved by a significant segment of the accounting profession
and (d) in the rules and regulations of the Commission governing the inclusion
of financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the Commission.
 
  "Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Debt of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (b) entered into for the purpose of assuring in
any other manner the obligee against loss in respect thereof (in whole or in
part); provided, however, that the term "Guarantee" shall not include (i)
endorsements for collection or deposit in the ordinary course of business or
(ii) a contractual commitment by one Person to invest in another Person for so
long as such Investment is reasonably expected to constitute a Permitted
Investment under clause (c) of the definition of Permitted Investments. The
term "Guarantee" used as a verb has a corresponding meaning. The term
"Guarantor" shall mean any Person Guaranteeing any obligation.
 
  "Hedging Obligation" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, Currency Exchange Protection
Agreement, Commodity Price Protection Agreement or any other similar agreement
or arrangement.
 
  "Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by merger, conversion, exchange or otherwise),
extend, assume, Guarantee or become liable in respect of such Debt or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Debt or obligation on the balance sheet of such Person (and "Incurrence"
and "Incurred" shall have meanings correlative to the foregoing); provided,
however, that a change in GAAP that results in an obligation of such Person
that exists at such time, and is not theretofore classified as Debt, becoming
Debt shall not be deemed an Incurrence of such Debt; provided further,
however, that solely for purposes of determining compliance with "--Certain
Covenants--Limitation on Debt", amortization of debt discount shall not be
deemed to be the Incurrence of Debt, provided that in the case of Debt sold at
a discount, the amount of such Debt Incurred shall at all times be the
accreted value of such Debt.
 
  "Independent Appraiser" means an investment banking firm of national
standing or any third party appraiser of national standing, provided that such
firm or appraiser is not an Affiliate of the Company.
 
  "Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or
other similar agreement designed to protect against fluctuations in interest
rates.
 
  "Investment" by any Person means any direct or indirect loan (other than
advances to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of such Person), advance or other
extension of credit or capital contribution (by means of transfers of cash or
other Property to others or payments for Property or services for the account
or use of others, or otherwise) to, or Incurrence of a Guarantee of any
obligation of, or purchase or acquisition of Capital Stock, bonds, notes,
debentures or other securities or evidence of Debt issued by, any other
Person. For purposes of the covenants described under "--Certain Covenants--
Limitation on Restricted Payments" and "--Designation of Restricted and
Unrestricted Subsidiaries" and the definitions of "Restricted Payment," and
"Investment" shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the Fair Market Value of the net assets of any
Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary;
 
                                      95
<PAGE>
 
provided, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary of an amount (if
positive) equal to (a) the Company's "Investment" in such Subsidiary at the
time of such redesignation less (b) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the Fair Market Value of the
net assets of such Subsidiary at the time of such redesignation. In
determining the amount of any Investment made by transfer of any Property
other than cash, such Property shall be valued at its Fair Market Value at the
time of such Investment.
 
  "Issue Date" means the date on which the Offered Notes are initially issued.
 
  "Leverage Ratio" means the ratio of (a) the outstanding Debt of the Company
and the Restricted Subsidiaries on a consolidated basis to (b) the Pro Forma
EBITDA for the last four full fiscal quarters preceding the date on which such
calculation is made.
 
  "Lien" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien, charge, easement (other than any easement not
materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind
or nature whatsoever on or with respect to such Property (including any
Capital Lease Obligation, conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing or any
Sale and Leaseback Transaction).
 
  "Moody's" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
 
  "Net Available Cash" from any Asset Sale means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Debt or other obligations
relating to the Property that is the subject of such Asset Sale or received in
any other non-cash form), in each case net of (a) all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be accrued
as a liability under GAAP, as a consequence of such Asset Sale, (b) all
payments made on any Debt that is secured by any Property subject to such
Asset Sale, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such Property, or which must by its
terms, or in order to obtain a necessary consent to such Asset Sale, or by
applicable law, be repaid out of the proceeds from such Asset Sale, (c) all
distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Sale and
(d) the deduction of appropriate amounts provided by the seller as a reserve,
in accordance with GAAP, against any liabilities associated with the Property
disposed in such Asset Sale and retained by the Company or any Restricted
Subsidiary after such Asset Sale.
 
  "Officer" means the Chief Executive Officer, the President, the Chief
Financial Officer or any Executive Vice President of the Company.
 
  "Officers' Certificate" means a certificate signed by two Officers of the
Company, at least one of whom shall be the principal executive officer or
principal financial officer of the Company, and delivered to the Trustee.
 
  "Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
 
  "Permitted Holders" means Daniel G. Bergstein, JED Associates, Inc., Meyer
Haberman, Jack H. Thomas, Eugene B. Johnson, Walter E. Leach, Jr., John P.
Duda, Carousel Capital Partners, L.P., Kelso Investment Associates V, L.P. and
Kelso Equity Partners V, L.P. (or any successor entity of the Equity Investors
controlled by the current principals of the Equity Investors or any entity
controlled by, or under common control with, the Equity Investors) and their
respective estates, spouses, ancestors and lineal descendants, the legal
representatives of any of the foregoing and the trustees of any bona fide
trusts of which the foregoing are the sole beneficiaries
 
                                      96
<PAGE>
 
or the grantors, or any Person of which the foregoing "beneficially owns" (as
defined in Rule 13d-3 under the Exchange Act), individually or collectively
with any of the foregoing, at least a majority of the total voting power of
the Voting Stock of such Person.
 
  "Permitted Investment" means any Investment by the Company or a Restricted
Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the
making of such Investment, become a Restricted Subsidiary, provided that the
primary business of such Restricted Subsidiary is a Telecommunications
Business; (b) a CLEC Subsidiary in an aggregate amount, together with the
aggregate amount of all other such Investments made in CLEC Subsidiaries
pursuant to this clause (b), not to exceed $65.0 million; provided, however,
that (i) in the first year following the Issue Date, the aggregate amount of
such Investments made during such year shall not exceed $5.0 million and (ii)
in each of the second, third, fourth and fifth years following the Issue Date,
the aggregate amount of such Investments made during such year shall not
exceed $15.0 million (each such Investment a "Permitted CLEC Investment," and
each such amount set forth in clauses (i) and (ii) a "Permitted CLEC
Investment Amount"); provided further, however, that any excess Permitted CLEC
Investment Amount over the total Permitted CLEC Investments made in any given
year may be added to the Permitted CLEC Investment Amount for any subsequent
year; (c) any Person if as a result of such Investment such Person is merged
or consolidated with or into, or transfers or conveys all or substantially all
its Property to, the Company or a Restricted Subsidiary, provided that such
Person's primary business is a Telecommunications Business; (d) Temporary Cash
Investments; (e) receivables owing to the Company or a Restricted Subsidiary,
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or such Restricted Subsidiary deems reasonable under the
circumstances; (f) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(g) loans and advances to employees made in the ordinary course of business
consistent with past practices of the Company or a Restricted Subsidiary, as
the case may be, provided that such loans and advances do not exceed $1.0
million at any one time outstanding; (h) stock, obligations or other
securities received in settlement of debts created in the ordinary course of
business and owing to the Company or a Restricted Subsidiary or in
satisfaction of judgments; (i) Capital Stock of a Financing Cooperative made
through the reinvestment of dividends or other distributions received from
such Financing Cooperative; (j) any Person to the extent such Investment
represents the non-cash portion of the consideration received in connection
with an Asset Sale consummated in compliance with the covenant described under
"--Certain Covenants--Limitation on Asset Sales"; and (k) other Investments
made for Fair Market Value that do not exceed $5.0 million outstanding at any
one time in the aggregate.
 
    "Permitted Liens" means:
 
    (a) Liens to secure Debt permitted to be Incurred under clause (b) of the
  second paragraph of the covenant described under "--Certain Covenants--
  Limitation on Debt";
 
    (b) Liens to secure Debt permitted to be Incurred under clause (c) of the
  second paragraph of the covenant described under "--Certain Covenants--
  Limitation on Debt", provided that any such Lien may not extend to any
  Property of the Company or any Restricted Subsidiary, other than the
  Property acquired, constructed or leased with the proceeds of such Debt and
  any improvements or accessions to such Property;
 
    (c) Liens for taxes, assessments or governmental charges or levies on the
  Property of the Company or any Restricted Subsidiary if the same shall not
  at the time be delinquent or thereafter can be paid without penalty, or are
  being contested in good faith and by appropriate proceedings promptly
  instituted and diligently concluded, provided that any reserve or other
  appropriate provision that shall be required in conformity with GAAP shall
  have been made therefor;
 
    (d) Liens imposed by law, such as carriers', warehousemen's and
  mechanics' Liens and other similar Liens, on the Property of the Company or
  any Restricted Subsidiary arising in the ordinary course of business and
  securing payment of obligations that are not more than 60 days past due or
  are being contested in good faith and by appropriate proceedings;
 
                                      97
<PAGE>
 
    (e) Liens on the Property of the Company or any Restricted Subsidiary
  Incurred in the ordinary course of business to secure performance of
  obligations with respect to statutory or regulatory requirements,
  performance or return-of-money bonds, surety bonds or other obligations of
  a like nature and Incurred in a manner consistent with industry practice,
  in each case which are not Incurred in connection with the borrowing of
  money, the obtaining of advances or credit or the payment of the deferred
  purchase price of
   Property and which do not in the aggregate impair in any material respect
   the use of Property in the operation of the business of the Company and the
   Restricted Subsidiaries taken as a whole;
 
    (f) Liens on Property at the time the Company or any Restricted
  Subsidiary acquired such Property, including any acquisition by means of a
  merger or consolidation with or into the Company or any Restricted
  Subsidiary; provided, however, that any such Lien may not extend to any
  other Property of the Company or any Restricted Subsidiary; provided
  further, however, that such Liens shall not have been Incurred in
  anticipation of or in connection with the transaction or series of
  transactions pursuant to which such Property was acquired by the Company or
  any Restricted Subsidiary;
 
    (g) Liens on the Property of a Person at the time such Person becomes a
  Restricted Subsidiary; provided, however, that any such Lien may not extend
  to any other Property of the Company or any other Restricted Subsidiary
  that is not a direct Subsidiary of such Person; provided further, however,
  that any such Lien was not Incurred in anticipation of or in connection
  with the transaction or series of transactions pursuant to which such
  Person became a Restricted Subsidiary;
 
    (h) pledges or deposits by the Company or any Restricted Subsidiary under
  workmen's compensation laws, unemployment insurance laws or similar
  legislation, or good faith deposits in connection with bids, tenders,
  contracts (other than for the payment of Debt) or leases to which the
  Company or any Restricted Subsidiary is party, or deposits to secure public
  or statutory obligations of the Company, or deposits for the payment of
  rent, in each case Incurred in the ordinary course of business;
 
    (i) utility easements, building restrictions and such other encumbrances
  or charges against real Property as are of a nature generally existing with
  respect to properties of a similar character;
 
    (j) Liens existing on the Issue Date not otherwise described in clauses
  (a) through (i) above;
 
    (k) Liens on the Property of the Company or any Restricted Subsidiary to
  secure any Refinancing, in whole or in part, of any Debt secured by Liens
  referred to in clause (b), (f), (g) or (j) above; provided, however, that
  any such Lien shall be limited to all or part of the same Property that
  secured the original Lien (together with improvements and accessions to
  such Property) and the aggregate principal amount of Debt that is secured
  by such Lien shall not be increased to an amount greater than the sum of
  (i) the outstanding principal amount, or, if greater, the committed amount,
  of the Debt secured by Liens described under clause (b), (f), (g) or (j)
  above, as the case may be, at the time the original Lien became a Permitted
  Lien under the Indenture and (ii) an amount necessary to pay any fees and
  expenses, including premiums and defeasance costs, incurred by the Company
  or such Restricted Subsidiary in connection with such Refinancing; and
 
    (l) Liens not otherwise permitted by clauses (a) through (k) above
  encumbering assets having an aggregate Fair Market Value not in excess of
  5.0% of Consolidated Net Tangible Assets, as determined based on the
  consolidated balance sheet of the Company as of the end of the most recent
  fiscal quarter ending at least 45 days prior to the date any such Lien
  shall be Incurred.
 
  "Permitted Refinancing Debt" means any Debt that Refinances any other Debt,
including any successive Refinancings, so long as (a) such Debt is in an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) not in excess of the sum of (i) the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding of the Debt being Refinanced and (ii) an amount
necessary to pay any fees and expenses, including premiums and defeasance
costs, related to such Refinancing, (b) the Average Life of such Debt is equal
to or greater than the Average Life of the Debt being Refinanced, (c) the
Stated Maturity of such Debt is no earlier than the Stated Maturity of the
Debt being
 
                                      98
<PAGE>
 
Refinanced and (d) the new Debt shall not be senior in right of payment to the
Debt that is being Refinanced; provided, however, that Permitted Refinancing
Debt shall not include (x) Debt of a Subsidiary that Refinances Debt of the
Company or (y) Debt of the Company or a Restricted Subsidiary that Refinances
Debt of an Unrestricted Subsidiary.
 
  "Person" means any individual, corporation, company (including any limited
liability company), association, partnership, joint venture, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
 
  "Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to the payment
of dividends, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such Person, over shares of any
other class of Capital Stock issued by such Person.
 
  "Preferred Stock Dividends" means all dividends with respect to Preferred
Stock of Restricted Subsidiaries held by Persons other than the Company or a
Wholly Owned Subsidiary. The amount of any such dividend shall be equal to the
quotient of such dividend divided by the difference between one and the
maximum statutory federal income rate (expressed as a decimal number between 1
and 0) then applicable to the issuer of such Preferred Stock.
 
  "pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms hereof, a calculation performed in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act, as
interpreted in good faith by the Board of Directors after consultation with
the independent certified public accountants of the Company, or otherwise a
calculation made in good faith by the Board of Directors after consultation
with the independent certified public accountants of the Company, as the case
may be.
 
  "Pro Forma EBITDA" means, for any period, the EBITDA of the Company and its
consolidated Restricted Subsidiaries, after giving effect to the following: if
(a) since the beginning of such period, the Company or any Restricted
Subsidiary shall have made any Asset Sale, Investment (by merger or otherwise)
in any Restricted Subsidiary (or any Person that becomes a Restricted
Subsidiary) or an acquisition of Property, (b) the transaction giving rise to
the need to calculate Pro Forma EBITDA is such an Asset Sale, Investment or
acquisition or (c) since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made such an Asset Sale, Investment or acquisition, EBITDA for such
period shall be calculated after giving pro forma effect to such Asset Sale,
Investment or acquisition as if such Asset Sale, Investment or acquisition
occurred on the first day of such period.
 
  For purposes of this definition, notwithstanding the definition of "pro
forma," EBITDA shall be calculated on a pro forma basis after giving effect to
cost savings resulting from employee terminations, facilities consolidations
and closings, standardization of employee benefits and compensation practices,
consolidation of property, casualty and other insurance coverage and policies,
standardization of sales representation commissions and other contract rates,
and reductions in taxes other than income taxes (collectively, "Cost Savings
Measures"), which cost savings the Company reasonably believes in good faith
would have been achieved during the period for which such calculation is being
made as a result of acquisitions of Property (regardless of whether such Cost
Savings Measures could then be reflected in pro forma financial statements
under GAAP, Regulation S-X promulgated by the Commission or any other
regulation or policy of the Commission), provided that both (i) such cost
savings and Cost Savings Measures were identified and such cost savings were
quantified in an Officers' Certificate delivered to the Trustee at the time of
the consummation of an acquisition of Property and such Officers' Certificate
states that such officers believe in good faith that actions will be commenced
or initiated within 90 days of such acquisition of Property to effect such
Cost Savings Measures and (ii) with respect to each acquisition of Property
completed prior to the 90th day preceding such date of determination, actions
were commenced or initiated by the Company or any of its Restricted
Subsidiaries within 90 days of such
 
                                      99
<PAGE>
 
acquisition of Property to effect the Cost Savings Measures identified in such
Officers' Certificate (regardless, however, of whether the corresponding cost
savings have been achieved).
 
  "Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the Indenture,
the value of any Property shall be its Fair Market Value.
 
  "Public Equity Offering" means an underwritten public offering of common
stock of the Company pursuant to an effective registration statement under the
Securities Act.
 
  "Public Market" means any time after (a) a Public Equity Offering has been
consummated and (b) at least 15.0% of the total issued and outstanding common
stock of the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
 
  "Purchase Money Debt" means Debt (a) consisting of the deferred purchase
price of property, conditional sale obligations, obligations under any title
retention agreement, other purchase money obligations and obligations in
respect of industrial revenue bonds, in each case where the maturity of such
Debt does not exceed the anticipated useful life of the Property being
financed, and (b) Incurred to finance the acquisition, construction or lease
by the Company or a Restricted Subsidiary of such Property, including
additions and improvements thereto; provided, however, that such Debt is
Incurred within 180 days after the acquisition, construction or lease of such
Property by the Company or such Restricted Subsidiary.
 
  "Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, repurchase, redeem, defease or retire, or to issue
other Debt, in exchange or replacement for, such Debt. "Refinanced" and
"Refinancing" shall have correlative meanings.
 
  "Repay" means, in respect of any Debt, to repay, prepay, repurchase, redeem,
legally defease or otherwise retire such Debt. "Repayment" and "Repaid" shall
have correlative meanings. For purposes of the covenant described under "--
Certain Covenants--Limitation on Asset Sales" and clause (b) of the covenant
described under "--Certain Covenants--Limitation on Debt", Debt shall be
considered to have been Repaid only to the extent the related loan commitment,
if any, shall have been permanently reduced in connection therewith, without
the right on the part of the Company or any of its Subsidiaries, pursuant to
an agreement in effect at the time of such Repayment, to cause such commitment
to be reinstated or replaced with a substantially similar commitment.
 
  "Representative" means the trustee, agent or representative expressly
authorized to act in such capacity, if any, for an issue of Senior Debt.
 
  "Restricted Payment" means (a) any dividend or distribution (whether made in
cash, securities or other Property) declared or paid on or with respect to any
shares of Capital Stock of the Company or any Restricted Subsidiary (including
any payment in connection with any merger or consolidation with or into the
Company or any Restricted Subsidiary), except for any dividend or distribution
that is made solely to the Company or a Restricted Subsidiary (and, if such
Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other
shareholders of such Restricted Subsidiary on a pro rata basis or on a basis
that results in the receipt by the Company or a Restricted Subsidiary of
dividends or distributions of greater value than it would receive on a pro
rata basis) or any dividend or distribution payable solely in shares of
Capital Stock (other than Disqualified Stock) of the Company; (b) the
purchase, repurchase, redemption, acquisition or retirement for value of any
Capital Stock of the Company or any Affiliate of the Company (other than from
the Company or a Restricted Subsidiary) or any securities exchangeable for or
convertible into any such Capital Stock, including the exercise of any option
to exchange any Capital Stock (other than for or into Capital Stock of the
Company that is not Disqualified Stock); (c) the purchase, repurchase,
redemption, acquisition or retirement for value, prior to the date for any
scheduled maturity, sinking fund or amortization or other installment payment,
of any Subordinated Obligation (other than the purchase, repurchase or other
acquisition of any Subordinated Obligation purchased in
 
                                      100
<PAGE>
 
anticipation of satisfying a scheduled maturity, sinking fund or amortization
or other installment obligation, in each case due within one year of the date
of acquisition); (d) any Investment (other than Permitted Investments) in any
Person; or (e) the issuance, sale or other disposition of Capital Stock of any
Restricted Subsidiary to a Person other than the Company or another Restricted
Subsidiary if the result thereof is that such Restricted Subsidiary shall
cease to be a Restricted Subsidiary, in which event the amount of such
"Restricted Payment" shall be the Fair Market Value of the remaining interest,
if any, in such former Restricted Subsidiary held by the Company and the other
Restricted Subsidiaries.
 
  "Restricted Subsidiary" means (a) any Subsidiary of the Company unless such
Subsidiary shall have been designated an Unrestricted Subsidiary as permitted
or required pursuant to the covenant described under
"--Certain Covenants--Designation of Restricted and Unrestricted Subsidiaries"
and (b) an Unrestricted Subsidiary that is redesignated as a Restricted
Subsidiary as permitted pursuant to such covenant.
 
  "S&P" means Standard & Poor's Ratings Service or any successor to the rating
agency business thereof.
 
  "Sale and Leaseback Transaction" means any arrangement relating to Property
now owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such Property to another Person and the Company or a Restricted
Subsidiary, within two years of such transfer, leases it from such Person.
 
  "Securities Act" means the Securities Act of 1933.
 
  "Senior Debt" means (a) all obligations consisting of the principal,
premium, if any, and accrued and unpaid interest (including interest accruing
on or after the filing of any petition in bankruptcy or for reorganization
relating to the Company whether or not post-filing interest is allowed in such
proceeding) in respect of (i) Debt of the Company for borrowed money
(including all monetary obligations of the Company under the Credit Facility)
and (ii) Debt of the Company evidenced by notes, debentures, bonds or other
similar instruments permitted under the Indenture for the payment of which the
Company is responsible or liable; (b) all Capital Lease Obligations of the
Company and all Attributable Debt in respect of Sale and Leaseback
Transactions entered into by the Company; (c) all obligations of the Company
(i) for the reimbursement of any obligor on any letter of credit, bankers'
acceptance or similar credit transaction, (ii) under Hedging Obligations or
(iii) issued or assumed as the deferred purchase price of Property and all
conditional sale obligations of the Company and all obligations under any
title retention agreement permitted under the Indenture; and (d) all
obligations of other Persons of the type referred to in clauses (a), (b) and
(c) for the payment of which the Company is responsible or liable as
Guarantor; provided, however, that Senior Debt shall not include (A) Debt of
the Company that is by its terms expressly subordinate or pari passu in right
of payment to the Notes, including any Senior Subordinated Debt or any
Subordinated Obligations; (B) any Debt Incurred in violation of the provisions
of the Indenture (but, as to any such obligation, no such violation shall be
deemed to exist for purposes of this clause (B) if the holders of such
obligation or their Representative and the Trustee shall have received an
Officers' Certificate of the Company to the effect that the Incurrence of such
Debt does not (or, in the case of revolving credit indebtedness (including
revolving credit indebtedness under the Acquisition Facility), that the
Incurrence of the entire committed amount thereof at the date on which the
initial borrowing thereunder is made would not) violate such provisions of the
Indenture); (C) accounts payable or any other obligations of the Company to
trade creditors created or assumed by the Company in the ordinary course of
business in connection with the obtaining of materials or services (including
Guarantees thereof or instruments evidencing such liabilities); (D) any
liability for federal, state, local or other taxes owed or owing by the
Company; (E) any obligation of the Company to any Subsidiary; or (F) any
obligations with respect to any Capital Stock of the Company.
 
  "Senior Subordinated Debt" means the Notes and any other subordinated Debt
of the Company that specifically provides that such Debt is to rank pari passu
with the Notes and is not subordinated by its terms to any other subordinated
Debt or other obligation of the Company which is not Senior Debt.
 
  "Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-
X promulgated by the Commission.
 
                                      101
<PAGE>
 
  "Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
 
  "Strategic Equity Investment" means an equity investment made by a Strategic
Investor in the Company in an aggregate amount of at least $25.0 million and
that results in such Strategic Investor becoming the owner of at least 15.0%
of the total issued and outstanding common stock of the Company.
 
  "Strategic Investor" means a corporation, partnership or other entity
engaged in one or more Telecommunications Businesses that has, or 80.0% or
more of the Voting Stock of which is owned by a Person that has, an equity
market capitalization, at the time of its initial investment in the Company,
in excess of $2.0 billion.
 
  "Subordinated Obligation" means any Debt of the Company (whether outstanding
on the Issue Date or thereafter Incurred) that is subordinate or junior in
right of payment to the Notes pursuant to a written agreement to that effect
(which shall include the subordination section of any document governing such
Debt).
 
  "Subsidiary" means, in respect of any Person, any corporation, company
(including any limited liability company), association, partnership, joint
venture or other business entity of which a majority of the total voting power
of the Voting Stock is at the time owned or controlled, directly or
indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries
of such Person or (c) one or more Subsidiaries of such Person.
 
  "Telecommunications Assets" means any Property, including licenses and
applications, bids and agreements to acquire licenses, or other authority to
provide telecommunications services, previously granted, or
to be granted, by the Federal Communications Commission, used or intended for
use primarily in connection with a Telecommunications Business.
 
  "Telecommunications Business" means any business substantially all the
revenues of which are derived from (a) transmitting, or providing services
relating to the transmission of, voice, video or data through owned or leased
wireline or wireless facilities, (b) the sale or provision of phone cards,
"800" services, voice mail, switching, enhanced telecommunications services,
telephone directory or telephone number information services or
telecommunications network intelligence or (c) any business ancillary or
directly related to the businesses referred to in clause (a) or (b), provided
that the determination of what constitutes a Telecommunications Business shall
be made in good faith by the Board of Directors.
 
  "Temporary Cash Investments" means any of the following: (a) Investments in
U.S. Government Obligations maturing within one year of such Investment; (b)
Investments in time deposit accounts, certificates of deposit and money market
deposits maturing within 180 days of the date of acquisition thereof issued by
a bank or trust company organized under the laws of the United States of
America or any state thereof having capital, surplus and undivided profits
aggregating in excess of $500.0 million and whose long-term debt is rated "A-
3" or "A-" or higher according to Moody's or S&P (or such similar equivalent
rating by at least one "nationally recognized statistical rating organization"
(as defined in Rule 436 under the Securities Act)); (c) repurchase obligations
with a term of not more than 30 days for underlying securities of the types
described in clause (a) entered into with a bank meeting the qualifications
described in clause (b) above; (d) Investments in commercial paper, maturing
not more than 90 days after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America with a rating at the time as of which any
Investment therein is made of "P-1" (or higher) according to Moody's or "A-1"
(or higher) according to S&P (or such similar equivalent rating by at least
one "nationally recognized statistical rating organization" (as defined in
Rule 436 under the Securities Act)); and (e) direct obligations (or
certificates representing an ownership interest in such obligations) of any
state of the United States of America (including any agency or instrumentality
thereof) for the payment of which the full faith and credit of such state
 
                                      102
<PAGE>
 
is pledged and which are not callable or redeemable at the issuer's option,
provided that (i) the long-term debt of such state is rated "A-3" or "A-" or
higher according to Moody's or S&P (or such similar equivalent rating by at
least one "nationally recognized statistical rating organization" (as defined
in Rule 436 under the Securities Act)) and (ii) such obligations mature within
180 days of the date of acquisition thereof.
 
  "Unrestricted Subsidiary" means (a) MJD TeleChoice Corp.; (b) any Subsidiary
of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company that is
designated after the Issue Date as an Unrestricted Subsidiary as permitted or
required pursuant to the covenant described under "--Certain Covenants--
Designation of Restricted and Unrestricted Subsidiaries" and not thereafter
redesignated as a Restricted Subsidiary as permitted pursuant thereto.
 
  "U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable or redeemable at the issuer's option.
 
  "Voting Stock" of any Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding
and normally entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof.
 
  "Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all
the Voting Stock of which (except directors' qualifying shares) is at such
time owned, directly or indirectly, by the Company and its other Wholly Owned
Subsidiaries.
 
 
                                      103
<PAGE>
 
                    CERTAIN FEDERAL INCOME TAX CONSEQUENCES
 
  The following discussion summarizes the material United States federal
income tax consequences of the Exchange Offer to a holder of Old Notes that is
an individual citizen or resident of the United States or a United States
corporation that purchased the Old Notes pursuant to their original issue (a
"U.S. Holder"). It is based on the Internal Revenue Code of 1986, as amended
to the date hereof (the "Code") existing and proposed Treasury regulations,
and judicial and administrative determinations, all of which are subject to
change at any time, possibly on a retroactive basis. The following relates
only to the Old Notes, and the Exchange Notes received therefor, that are held
as "capital assets" within the meaning of Section 1221 of the Code by U.S.
Holders. It does not discuss state, local, or foreign tax consequences, nor
does it discuss tax consequences to subsequent purchasers (persons who did not
purchase the Old Notes pursuant to their original issue), or to categories of
holders that are subject to special rules, such as foreign persons, tax-exempt
organizations, insurance companies, banks, and dealers in stocks and
securities. Tax consequences may vary depending on the particular status of an
investor. No rulings will be sought from the Internal Revenue Service (the
"IRS") with respect to the federal income tax consequences of the Exchange
Offer.
 
  THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE OLD NOTES
FOR EXCHANGE NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR
CONCERNING THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS
TO ITS PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE OLD NOTES
FOR EXCHANGE NOTES.
 
THE EXCHANGE OFFER
 
  The Company believes that the exchange of Exchange Notes pursuant to the
Exchange Offer will be treated as a continuation of the corresponding Old
Notes because the terms of the Exchange Notes are not materially different
from the terms of the Old Notes, and accordingly (i) such exchange will not
constitute a taxable event to a U.S. Holder, (ii) no gain or loss will be
realized by a U.S. Holder upon receipt of an Exchange Note, (iii) the holding
period of the Exchange Note will include the holding period of the Old Note
exchanged therefor and (iv) the adjusted tax basis of the Exchange Note will
be the same as the adjusted tax basis of the Old Notes exchanged therefor
immediately before the exchange.
 
STATED INTEREST
 
  Stated interest of a Note will be taxable to a U.S. Holder as ordinary
interest income at the time that such interest accrues or is received, in
accordance with the U.S. Holder's regular method of accounting for federal
income tax purposes. The Notes are not considered to have been issued with
original issue discount for federal income tax purposes.
 
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
 
  A U.S. Holder's tax basis in a Note generally will be its cost. A U.S.
Holder generally will recognize gain or loss on the sale, exchange or
retirement of a Note in an amount equal to the difference between the amount
realized on the sale, exchange or retirement and the tax basis of the Note.
Gain or loss recognized on the sale, exchange or retirement of a Note
(excluding amount received in respect of accrued interest, which will be
taxable as ordinary interest income) generally will be capital gain or loss.
The maximum rate of tax on long term capital gains on most capital assets held
by an individual, trust or estate for more than 18 months is 20%, and for most
capital assets held for more than one year and up to 18 months is 28%.
 
BACKUP WITHHOLDING
 
  Under certain circumstances, a U.S. Holder of a Note may be subject to
"backup withholding" at a 31% rate with respect to payments of interest
thereon or the gross proceeds from the disposition thereof. This
 
                                      104
<PAGE>
 
withholding generally applies if the U.S. Holder fails to furnish his or her
social security number or other taxpayer identification number in the
specified manner and in certain other circumstances. Any amount withheld from
a payment to a U.S. Holder under the backup withholding rules is allowable as
a credit against such U.S. Holder's federal income tax liability provided that
the required information is furnished to the IRS. Corporations and certain
other entities described in the Code and Treasury regulations are exempt from
backup withholding if their exempt status is properly established.
 
                             PLAN OF DISTRIBUTION
 
  A broker-dealer that is the holder of Old Notes that were acquired for the
account of such broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from the Company or any
affiliate of the Company) may exchange such Old Notes for Exchange Notes
pursuant to the Exchange Offer; provided, that each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old notes were acquired by such broker-dealer as a result of market-
making or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after consummation of the Exchange Offer, it
will make this Prospectus, as it may be amended or supplemented from time to
time, available to any broker-dealer for use in connection with any such
resale. In addition, until      , 1998, all dealers effecting transactions in
the Exchange Notes may be required to deliver a prospectus.
 
  The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other holder of Exchange Notes. Exchange Notes received
by broker-dealers for their own account pursuant to the Exchange Offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer and any broker or dealer that participates in a distribution of such
Exchange Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
 
  For a period of 180 days after consummation of the Exchange Offer, the
Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer and to the Company's performance of,
or compliance with, the Registration Agreement (other than commissions or
concessions of any brokers or dealers) and will indemnify the holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
 
                                 LEGAL MATTERS
 
  Certain legal matters relating to the Exchange Notes offered hereby will be
passed upon on behalf of the Company by Paul, Hastings, Janofsky & Walker LLP,
New York, New York.
 
                                      105
<PAGE>
 
                                    EXPERTS
 
  The consolidated balance sheets of MJD Communications, Inc. and its
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1997 have been
audited by KPMG Peat Marwick LLP, independent auditors, as stated in their
report, and are incorporated herein in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
 
  The consolidated balance sheets of Taconic Telephone Corp. and its
subsidiaries as of December 31, 1996 and 1997 and the related consolidated
statements of operations, stockholder's equity, and cash flows for each of the
years in the three year period ended December 31, 1997 have been audited by
KPMG Peat Marwick LLP, independent auditors, as stated in their report, and
are incorporated herein, in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
 
  The consolidated balance sheets of Ellensburg Telephone Company and its
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997 have been audited by
Moss Adams LLP, independent auditors, as stated in their report, and are
incorporated herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
 
  The consolidated balance sheets of Utilities, Inc. and its subsidiaries as
of December 31, 1996 and 1997 and the related consolidated statements of
income and retained earnings, changes in stockholder's equity, and cash flows
for each of the years in the three year period ended December 31, 1997 have
been audited by Berry, Dunn, McNeil & Parker, independent auditors, as stated
in their report, and are incorporated herein, in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
 
  The consolidated balance sheets of Chautauqua & Erie Telephone Corporation
as of December 31, 1996, and the related consolidated statements of income and
retained earnings, and cash flows for the year then ended have been audited by
Ernst & Young LLP, independent auditors, as stated in their report, and are
incorporated herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
 
  The balance sheets of Big Sandy Telecommunications, Inc. as of December 31,
1995 and 1994 and the related statements of income, changes in stockholder's
equity, and cash flows for each of the years then ended have been audited by
Kiesling Associates, independent auditors, as stated in their report, and are
incorporated herein, in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
 
                                      106
<PAGE>
 
                                   GLOSSARY
 
  CABS--Carrier Access Billing System.
 
  CAP (competitive access provider)--A company that provides its customers
with an alternative to the local exchange company for local transport or
private line and special access telecommunications services.
 
  CATV--Cable Television.
 
  Central offices--The switching centers or central switching facilities of
the local exchange companies.
 
  Centrex--Business local service that gives the customer control of user
features.
 
  CLEC--Competitive Local Exchange Carrier.
 
  CSA--Carrier Serving Areas.
 
  DBS--Direct Broadcast Satellite.
 
  Dedicated--Telecommunications lines reserved for use by particular
customers.
 
  Dialing Parity--The ability of a competing local or toll service provider to
provide telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code, their
telecommunications to the service provider of the customer's designation and
the ability of customers to dial the same number of digits on a competitor's
network as on the LEC's network.
 
  Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits of 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously viable analog signal. The precise digital numbers minimize
distortion in the case of audio transmission.
 
  ILEC--Incumbent Local Exchange Carrier.
 
  Interconnection--Interconnection of facilities between or among local
exchange carriers, including potential physical colocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
 
  InterLATA--Telecommunications services originating in a LATA and terminating
outside of that LATA.
 
  IntraLATA--Telecommunications services originating and terminating within
the same LATA.
 
  ISDN--Integrated Services Digital Network--High speed high capacity voice
and data communications.
 
  ISP--Internet Service Provider.
 
  IXC--Inter-exchange (or long distance) carrier.
 
  LATA (local access and transport area)--A geographic area composed of
contiguous local exchanges, usually but not always, within a single state.
 
  Local exchange--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
 
  LEC (local exchange carrier)--A company providing local telephone services.
 
  Long distance carriers (interexchange carriers)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis.
A long distance carrier may offer services over its own or another carrier's
facilities.
 
                                      107
<PAGE>
 
  MACC--Mid America Computer Corporation.
 
  MSA--Metropolitan Statistical Area.
 
  NECA--National Exchange Carrier Association.
 
  NGDLC--Next Generation Digital Line Concentrators.
 
  NTCA--National Telephone Cooperative Association.
 
  OPASTCO--Organization for the Protection and Advancement of Small
Telecommunications Companies.
 
  pari passu--at an equal rate or level.
 
  PCS (personal communication service)--A telephone service with respect to
which a telephone number or numbers are assigned to a person rather than to a
fixed location thereby allowing that person to receive and make calls from any
location within the area serviced by the personal communication service.
 
  POP--The estimates of the 1995 population of a Metropolitan Statistics Area
for which the FCC licensed communications systems or a Rural Service Area for
which the FCC licensed communications systems, as derived from the 1995
population estimates prepared by Strategic Mapping, Inc.
 
  RBOC--Regional Bell Operating Company.
 
  RLEC--Rural Local Exchange Carrier.
 
  RSA--Rural Statistical Area.
 
  RFTC--Rural Telephone Finance Cooperative.
 
  SS7--Signal System 7--Digital signaling network for high speed processing of
toll calls.
 
  Switch--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
 
  Unbundled Access--Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment,
features, functions and capabilities, at any technically feasible point within
such network.
 
  USAC--Universal Service Administration Corporation--FCC appointed
administrator of universal service support funds.
 
  USSF--Universal Service Support Fund.
 
  USTA--United States Telephone Association.
 
                                      108
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES:
   Independent Auditors' Report...........................................  F-3
   Consolidated Balance Sheets as of December 31, 1996 and 1997...........  F-4
   Consolidated Statements of Operations for the Years ended December 31,
    1995, 1996 and 1997...................................................  F-5
   Consolidated Statements of Stockholders' Equity (Deficit) for the Years
    ended December 31, 1995, 1996 and 1997................................  F-6
   Consolidated Statements of Cash Flows for the Years ended December 31,
    1995, 1996 and 1997...................................................  F-7
   Notes to Consolidated Financial Statements.............................  F-8
   Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998
    (Unaudited)........................................................... F-23
   Consolidated Statements of Operations for the six months ended June 30,
    1997 and 1998 (Unaudited)............................................. F-24
   Consolidated Statements of Cash Flows for the six months ended June 30,
    1997 and 1998 (Unaudited)............................................. F-25
   Notes to Consolidated Financial Statements............................. F-26
 
TACONIC TELEPHONE CORP. AND SUBSIDIARIES:
 
   Independent Auditors' Report........................................... F-29
   Consolidated Balance Sheets as of December 31, 1996 and 1997........... F-30
   Consolidated Statements of Operations for the Years ended December 31,
    1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998
    (Unaudited)........................................................... F-31
   Consolidated Statements of Stockholders' Equity for the Years ended
    December 31, 1995, 1996 and 1997...................................... F-32
   Consolidated Statements of Cash Flows for the Years ended December 31,
    1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998
    (Unaudited) .......................................................... F-33
   Notes to Consolidated Financial Statements............................. F-34
 
ELLENSBURG TELEPHONE COMPANY:
 
   Independent Auditor's Report........................................... F-44
   Consolidated Balance Sheet as of December 31, 1996 and 1997 and March
    31, 1998 (Unaudited).................................................. F-45
   Consolidated Statement of Income for the Years ended December 31, 1995,
    1996 and 1997 and the three months ended March 31, 1997 and 1998
    (Unaudited)........................................................... F-46
   Consolidated Statement of Shareholders' Equity for the Years ended
    December 31, 1995, 1996 and 1997 and the three months ended March 31,
    1998 (Unaudited)...................................................... F-47
   Consolidated Statement of Cash Flows for the Years ended December 31,
    1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998
    (Unaudited)........................................................... F-48
   Notes to Consolidated Financial Statements............................. F-49
 
UTILITIES, INC. AND SUBSIDIARIES:
 
   Independent Auditors' Report........................................... F-54
   Consolidated Balance Sheets as of December 31, 1997 and 1996 and March
    31, 1998 (Unaudited) and June 30, 1998 (Unaudited).................... F-55
   Liabilities and Stockholders' Equity................................... F-56
   Consolidated Statements of Income for the Years Ended December 31,
    1997, 1996 and 1995 and Three-Month Periods ended March 31, 1998 and
    1997 (Unaudited) and Six-Month Periods ended June 30, 1998 and 1997
    (Unaudited)........................................................... F-57
</TABLE>
 
                                      F-1
<PAGE>
 
<TABLE>
<CAPTION>
  PAGE
  ----
<S>                                                                        <C>
   Consolidated Statements of Changes in Stockholders' Equity for the
    Years Ended December 31, 1997, 1996 and 1995 and Three-Month Period
    ended March 31, 1998 (Unaudited) and Six-Month Periods ended June 30,
    1998 and 1997 (Unaudited)............................................. F-58
   Consolidated Statements of Cash Flows for the Years Ended December 31,
    1997, 1996 and 1995 and Three-Month Periods ended March 31, 1998 and
    1997 (Unaudited) and Six Month Periods ended June 30, 1998 and 1997
    (Unaudited)........................................................... F-59
   Notes to Consolidated Financial Statements............................. F-60
 
CHAUTAUQUA & ERIE TELEPHONE CORPORATION:
 
   Report of Independent Auditors......................................... F-72
   Consolidated Balance Sheet as of December 31, 1996..................... F-73
   Consolidated Statement of Income and Retained Earnings for the Years
    ended December 31, 1996 and 1995...................................... F-74
   Consolidated Statement of Cash Flows for the Years ended December 31,
    1996 and 1995......................................................... F-75
   Notes to Consolidated Financial Statements............................. F-76
   Condensed Consolidated Statement of Income and Retained Earnings for
    the Six Months ended June 30, 1997 (Unaudited)........................ F-81
   Condensed Consolidated Statement of Cash Flows for the Six Months ended
    June 30, 1997 (Unaudited)............................................. F-82
   Notes to Condensed Consolidated Financial Statements................... F-83
 
BIG SANDY TELECOMMUNICATIONS, INC.:
 
   Independent Auditor's Report........................................... F-84
   Balance Sheets as of December 31, 1995 and 1994........................ F-85
   Statements of Income for the Years Ended December 31, 1995 and 1994.... F-87
   Statements of Changes In Stockholders' Equity for the Years Ended
    December 31, 1995 and 1994............................................ F-88
   Statements of Cash Flows for the Years Ended December 31, 1995 and
    1994.................................................................. F-89
   Notes to Financial Statements.......................................... F-90
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF MJD
 COMMUNICATIONS, INC. AND SUBSIDIARIES....................................  P-1
</TABLE>
 
                                      F-2
<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, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1997. 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall 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, 1996 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
 
                                                          KPMG Peat Marwick LLP
 
Lincoln, Nebraska
February 27, 1998, except the last two
 paragraphs of note 2 and note 16 which are
 as of April 2, 1998 and note 17 which is as
 of April 8, 1998
 
                                      F-3
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1997
 
<TABLE>   
<CAPTION>
                                                         1996         1997
                                                      -----------  -----------
<S>                                                   <C>          <C>
                       ASSETS
Current assets:
  Cash and cash equivalents.......................... $ 4,252,732    6,822,462
  Accounts receivable, net of allowance for doubtful
   accounts
   of $57,734 in 1996 and $49,204 in 1997............   4,889,608    8,312,778
  Prepaid and other assets...........................     429,831    1,248,627
  Income taxes recoverable...........................      27,047      757,001
                                                      -----------  -----------
    Total current assets.............................   9,599,218   17,140,868
                                                      -----------  -----------
Property, plant and equipment, net...................  41,614,696   61,206,890
                                                      -----------  -----------
Other assets:
  Investments........................................   8,388,677   11,423,521
  Goodwill, net of amortization......................  34,473,377   50,432,932
  Loan origination costs, net of amortization........   1,729,767    2,981,391
  Covenant not to compete, net of amortization.......     343,750      987,500
  Other..............................................     870,918      439,677
                                                      -----------  -----------
    Total other assets...............................  45,806,489   66,265,021
                                                      -----------  -----------
      Total assets................................... $97,020,403  144,612,779
                                                      ===========  ===========
        LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable................................... $ 2,389,472    4,999,714
  Current portion of long-term debt..................   3,349,437    5,409,333
  Demand notes payable...............................         --       879,000
  Current portion of capital lease obligations.......      77,039       41,173
  Current portion of early retirement benefits.......      22,809       14,283
  Current portion of covenant not to compete.........      75,000      256,250
  Accrued interest payable...........................   1,318,608    2,818,769
  Accrued property taxes.............................     799,214    1,170,969
  Other accrued liabilities..........................     961,847    1,443,677
  Deferred income taxes..............................      10,042          --
                                                      -----------  -----------
    Total current liabilities........................   9,003,468   17,033,168
                                                      -----------  -----------
Long-term liabilities:
  Long-term debt, net of current portion.............  70,608,553  126,502,779
  Put warrant obligation.............................   3,000,000    3,455,500
  Accrued interest payable...........................     748,924          --
  Long-term capital lease obligation, net of current
   portion...........................................      76,471      109,246
  Early retirement benefits payable, net of current
   portion...........................................      38,371       22,083
  Covenant not to compete, net of current portion....     281,250      756,250
  Deferred income taxes..............................   4,304,585    6,983,449
  Unamortized investment tax credits.................      69,471      198,817
                                                      -----------  -----------
    Total long-term liabilities......................  79,127,625  138,028,124
                                                      -----------  -----------
Minority interest....................................     341,952      360,101
                                                      -----------  -----------
Redeemable preferred stock...........................  10,689,417      130,164
                                                      -----------  -----------
Stockholders' deficit:
Common stock:
  Class A voting, par value $.01 per share,
   authorized 130,000 shares,
   issued and outstanding 38,370 and 88,060 shares in
   1996 and 1997, respectively.......................         384          881
  Class B non-voting, par value $.01 per share,
   authorized 125,000 shares,
   no shares issued and outstanding..................         --           --
  Additional paid-in capital.........................         --    16,910,450
  Retained deficit...................................  (2,142,443) (27,850,109)
                                                      -----------  -----------
    Total stockholders' deficit......................  (2,142,059) (10,938,778)
                                                      -----------  -----------
      Total liabilities and stockholders' deficit.... $97,020,403  144,612,779
                                                      ===========  ===========
</TABLE>    
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
 
<TABLE>   
<CAPTION>
                                               1995         1996        1997
                                            -----------  ----------  ----------
<S>                                         <C>          <C>         <C>
Operating revenues:
  Switched services.......................  $22,762,965  27,875,832  39,257,363
  Other...................................    1,986,030   2,382,550   3,714,955
                                            -----------  ----------  ----------
    Total operating revenues..............   24,748,995  30,258,382  42,972,318
                                            -----------  ----------  ----------
Operating expenses:
  Plant operations........................    3,746,124   4,181,469   6,856,901
  Corporate and customer service..........    6,432,591   7,576,699  11,580,804
  Depreciation and amortization...........    5,757,403   6,644,157   8,777,103
  Other...................................    1,406,845   1,657,772   3,318,258
                                            -----------  ----------  ----------
    Total operating expenses..............   17,342,963  20,060,097  30,533,066
                                            -----------  ----------  ----------
Income from operations....................    7,406,032  10,198,285  12,439,252
                                            -----------  ----------  ----------
Other income (expense):
  Net loss on sale of investments and
   other assets...........................      (29,457)     (2,933)    (19,229)
  Interest income.........................      224,980     180,015     212,035
  Dividend income.........................      663,575     666,760   1,182,124
  Interest expense........................   (7,267,372) (9,605,063) (9,293,104)
  Other nonoperating, net.................       33,088     (14,883)    139,972
                                            -----------  ----------  ----------
    Total other expense...................   (6,375,186) (8,776,104) (7,778,202)
                                            -----------  ----------  ----------
Earnings before income taxes and
 extraordinary item.......................    1,030,846   1,422,181   4,661,050
Income tax expense........................     (547,072) (1,461,583) (1,875,634)
                                            -----------  ----------  ----------
Earnings before extraordinary item........      483,774     (39,402)  2,785,416
Extraordinary item-loss on early
 retirement of debt, net of income tax
 benefit of $2,296,480....................          --          --   (3,611,624)
                                            -----------  ----------  ----------
Earnings (loss) before minority interest..      483,774     (39,402)   (826,208)
Minority interest in income of
 subsidiaries.............................       (5,730)    (32,698)    (61,635)
                                            -----------  ----------  ----------
Net earnings (loss).......................  $   478,044     (72,100)   (887,843)
                                            ===========  ==========  ==========
</TABLE>    
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
 
<TABLE>   
<CAPTION>
                                  CLASS                               TOTAL
                                    A    ADDITIONAL   RETAINED    STOCKHOLDERS'
                                  COMMON  PAID-IN     EARNINGS       EQUITY
                                  STOCK   CAPITAL     (DEFICIT)     (DEFICIT)
                                  ------ ----------  -----------  -------------
<S>                               <C>    <C>         <C>          <C>
Balance, December 31, 1994.......  $380     191,770     (524,727)     (332,577)
Net earnings.....................   --          --       478,044       478,044
Issuance of common stock.........     4      40,696          --         40,700
Accretion of preferred stock.....   --      (83,104)         --        (83,104)
                                   ----  ----------  -----------   -----------
Balance, December 31, 1995.......   384     149,362      (46,683)      103,063
Net earnings.....................   --          --       (72,100)      (72,100)
Accretion of preferred stock.....   --     (149,362)  (2,023,660)   (2,173,022)
                                   ----  ----------  -----------   -----------
Balance, December 31, 1996.......   384         --    (2,142,443)   (2,142,059)
Net loss.........................   --          --      (887,843)     (887,843)
Issuance of common stock.........   488  15,874,616          --     15,875,104
Conversion of preferred stock....     9     112,334          --        112,343
Capital contribution.............   --      923,500          --        923,500
Repurchase of preferred stock....   --          --   (24,540,429)  (24,540,429)
Preferred stock dividends paid...   --          --      (279,394)     (279,394)
                                   ----  ----------  -----------   -----------
Balance, December 31, 1997.......  $881  16,910,450  (27,850,109)  (10,938,778)
                                   ====  ==========  ===========   ===========
</TABLE>    
 
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-6
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
 
<TABLE>   
<CAPTION>
                                             1995         1996         1997
                                          -----------  -----------  -----------
<S>                                       <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).....................  $   478,044      (72,100)    (887,843)
                                          -----------  -----------  -----------
Adjustments to reconcile net earnings
 (loss) to net cash provided by
 operating activities:
  Depreciation and amortization.........    6,002,980    6,914,258    9,093,037
  Provision for uncollectible revenue...      165,167        4,812          --
  Deferred income taxes.................      707,667      428,970      207,397
  Direct financing lease................      (36,403)         --           --
  Deferred patronage dividends..........     (329,350)    (303,501)    (585,237)
  Minority interest in income of
   subsidiaries.........................        5,730       32,698       61,635
  Increase (decrease) in put warrant
   obligation...........................       88,650    2,071,500     (294,500)
  Net loss on sale of investments and
   other assets.........................       29,457        2,993       16,715
  Loss on early retirement of debt......          --           --     1,864,428
  Amortization of investment tax
   credits..............................      (18,299)     (16,135)     (30,879)
  Changes in assets and liabilities
   arising from operations, net of
   acquisitions:
    Accounts receivable.................      525,388     (464,560)  (1,563,230)
    Prepaid and other assets............      (11,150)     (18,703)    (105,885)
    Accounts payable....................     (571,531)     773,023    1,663,873
    Accrued interest payable............       72,560      105,463      720,369
    Accrued liabilities.................       82,464      337,602      636,228
    Income taxes recoverable............   (1,151,962)     (24,373)    (956,119)
                                          -----------  -----------  -----------
      Total adjustments.................    5,561,368    9,844,047   10,727,832
                                          -----------  -----------  -----------
      Net cash provided by operating
       activities.......................    6,039,412    9,771,947    9,839,989
                                          -----------  -----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of telephone properties,
 net....................................     (110,234) (11,261,934) (30,845,006)
Acquisition of property, plant and
 equipment..............................   (4,438,891)  (8,438,739)  (8,239,237)
Proceeds from sale of property, plant
 and equipment..........................       55,990       70,180      120,660
Salvage proceeds less cost of removal...          --           --       (22,673)
Distributions from investments..........          --         8,513       62,770
Payment on covenant not to compete......          --       (18,750)     (93,750)
Acquisition of investments..............      (23,718)    (148,804)    (240,522)
Proceeds from sale of investments.......          --           --       402,706
Payments received on direct financing
 leases.................................       35,546          --       248,829
Increase in other assets................          --           --      (360,737)
                                          -----------  -----------  -----------
      Net cash used in investing
       activities.......................   (4,481,307) (19,789,534) (38,966,960)
                                          -----------  -----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
 debt...................................          --    12,823,684   71,134,318
Repayment of long-term debt.............   (2,868,211)  (3,672,890) (22,104,295)
Net proceeds from issuance of preferred
 stock..................................          --     1,815,558          --
Repurchase of preferred stock and
 warrants...............................          --           --   (31,487,339)
Dividends paid to preferred
 stockholders...........................          --           --      (279,394)
Net proceeds from the issuance of common
 stock..................................       40,700          --    15,875,104
Loan origination costs..................          --      (326,072)  (1,949,205)
Payment of early retirement benefits....      (23,468)     (20,646)     (24,814)
Dividends paid to minority
 stockholders...........................       (6,000)      (4,020)      (3,736)
Release of restricted funds.............          --           --       560,654
Repayment of capital lease obligation...      (45,650)     (16,933)     (24,592)
                                          -----------  -----------  -----------
      Net cash provided by (used in)
       financing activities.............   (2,902,629)  10,598,681   31,696,701
                                          -----------  -----------  -----------
Net increase (decrease) in cash and cash
 equivalents............................   (1,344,524)     581,094    2,569,730
Cash and cash equivalents, beginning of
 year...................................    5,016,162    3,671,638    4,252,732
                                          -----------  -----------  -----------
Cash and cash equivalents, end of year..  $ 3,671,638    4,252,732    6,822,462
                                          ===========  ===========  ===========
</TABLE>    
          See accompanying notes to consolidated financial statements.
 
                                      F-7
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1995, 1996 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) 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, cable
services, equipment sales, and installation and repair services. MJD Capital
Corp. leases equipment to other subsidiaries of MJD.
 
  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.; S T Paging, Inc.; and S T Long Distance, Inc. (S T Long
Distance) Venture's wholly-owned subsidiaries include Sidney Telephone Company
(Sidney), and C-R Communications, Inc. (C-R). Services' wholly-owned
subsidiaries include Bluestem Telephone Company (Bluestem); Big Sandy Telecom,
Inc. (Big Sandy); Columbine Telecom Company (Columbine); and Odin Telephone
Exchange, Inc. (Odin). Holdings' wholly-owned subsidiaries include Kadoka
Telephone Co. (Kadoka) and Chautauqua & Erie Telephone Corporation (C&E).
 
 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 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 No. 71, Accounting
for the Effects of Certain Types of Regulation (SFAS No. 71). 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. 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 from telephone services are recognized 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.
 
 
                                      F-8
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  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's
(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.
 
 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.
 
 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. The Company
utilizes cash management accounts that invest excess funds in interest-bearing
securities.
 
 Investments
 
  Investments consist of stock in CoBank, ACB (CoBank), Rural Telephone Bank,
the Rural Telephone Finance Cooperative (RTFC), Southern Illinois Cellular,
Inc. and other minority equity investments in nonregulated entities and are
stated at cost. To determine if an impairment of an investment exists, the
Company monitors and evaluates the financial performance of the businesses in
which it invests and compares the carrying value of the investee to the fair
values of similar investments, and in certain instances, 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
1995, 1996 and 1997.
 
  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 source earnings and notices of allocations of source earnings to
the Company. Deferred and uncollected patronage dividends are included as part
of the basis of the investment until collected. The Rural Telephone Bank
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.
 
 
                                      F-9
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Depreciation is determined using the straight-line method for financial
reporting purposes. Depreciation expense was $5,020,699, $5,787,499 and
$7,465,891 for the years ended December 31, 1995, 1996 and 1997, respectively.
 
 Loan Origination Costs
 
  Loan origination costs are being amortized using the straight-line method
which approximates the effective interest rate method over the life of the
loans ranging from ten to fifteen years. Accumulated amortization of loan
origination costs was $478,785 and $664,753 at December 31, 1996 and 1997,
respectively.
 
 Covenants not to Compete
 
  The covenants not to compete are being amortized over their contracted life
of five years. Accumulated amortization of covenants not to compete was
$31,250 and $137,500 at December 31, 1996 and 1997, respectively.
 
 Impairment of Long-Lived Assets and Excess Cost on Net Assets Acquired
(Goodwill)
 
  In 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The carrying value of long-lived assets, including
allocated goodwill, is reviewed for impairment at least annually, or whenever
events or changes in circumstances indicate that such carrying value may not
be recoverable, by assessing the recoverability of such carrying value through
estimated undiscounted future net cash flows expected to be generated by the
assets or the acquired business. 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 exceed 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. The adoption of SFAS No. 121 did not affect the Company's
consolidated financial position or results of operations.
 
  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 a 40-year period. Accumulated amortization of goodwill was $2,361,677 and
$3,555,340 at December 31, 1996 and 1997, respectively.
 
 Income Taxes
 
  The Company files a consolidated income tax return with its subsidiaries.
Current income tax expense is allocated to MJD and its subsidiaries based upon
their relative income or loss. The current income tax expense or benefit is
received from or paid to the respective subsidiaries. Deferred income taxes
are calculated on a separate company basis.
 
  Investment tax credits were deferred and are taken into income over the
estimated useful lives of the assets that gave rise to the credits.
 
 Stock-based Compensation
 
  During 1996 the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. As allowed by SFAS No. 123, the Company accounts for employee
stock compensation plans in accordance with Accounting Principles Board No.
25, Accounting for Stock Issued to Employees, whereby no compensation expense
is recognized in the consolidated financial statements.
 
                                     F-10
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Use of Estimates
 
  Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
 
(2) ACQUISITIONS
 
  Certain subsidiaries of MJD acquired telephone properties through four
separate acquisitions in 1996 and four acquisitions in 1997. There were no
acquisitions in 1995.
 
  On January 19, 1996, Ventures acquired 100% of the outstanding common stock
of Sidney for $2,959,490. On June 3, 1996, Big Sandy acquired certain
telephone exchanges of Big Sandy Telecommunications, Inc. through the purchase
of certain assets for $3,114,055. On August 1, 1996, Bluestem acquired certain
telephone exchanges of United Telephone Company through the purchase of
certain assets for $3,885,348. On August 1, 1996, Services acquired 85% of the
outstanding common stock of Odin through the purchase of 100% of the
outstanding common stock of Penta-Gen, which owned Odin, for $5,038,596.
Penta-Gen was subsequently merged into Services.
 
  On January 1, 1997, Holdings acquired 100% of the outstanding common stock
of Kadoka for $2,949,404. On April 18, 1997, Services acquired certain
telephone exchanges of Columbine Telephone Company, Inc. through the purchase
of certain assets for $4,642,672. On July 31, 1997, Holdings acquired 100% of
the outstanding common stock of C&E including its wholly-owned subsidiaries
for $22,000,000. On October 15, 1997, Ventures acquired 100% of the
outstanding common stock of C-R for $3,994,664.
 
  Acquisition costs were $411,428 and $625,777 in 1996 and 1997, respectively.
The acquisitions have been accounted for using the purchase method and,
accordingly, the results of their operations have been included in the
Company's consolidated financial statements from the date of acquisition. The
excess of the purchase price and acquisition costs over the fair value of the
net identifiable assets acquired was $6,650,987 and $17,337,532 and has been
recognized as goodwill in 1996 and 1997, respectively. Goodwill is being
amortized using the straight-line method over forty years.
 
  The allocation of the total net purchase price for the 1996 and 1997
acquisitions follows:
 
<TABLE>
<CAPTION>
                                                        1996         1997
                                                     -----------  -----------
   <S>                                               <C>          <C>
   Current assets................................... $ 1,606,576    5,947,244
   Property, plant and equipment....................   5,055,069   18,905,919
   Excess cost over fair value of net assets
    acquired........................................   6,650,987   17,337,532
   Other assets.....................................   4,270,998    3,569,292
   Current liabilities..............................  (2,149,748)  (1,093,159)
   Noncurrent liabilities...........................     (24,965) (10,454,311)
                                                     -----------  -----------
     Total net purchase price....................... $15,408,917   34,212,517
                                                     ===========  ===========
</TABLE>
 
  The Company has entered into two contracts and two letters of intent to
acquire four separate telephone properties as follows: Taconic Telephone
Corp.; Ellensburg Telephone Company; Chouteau Telephone Company; and
Utilities, Inc. except its subsidiaries, Seacoast Cellular and Western Maine
Cellular. On March 30, 1998 the acquisition of Taconic was consummated for a
purchase price of $67.5 million. The remaining acquisitions are anticipated to
be consummated during 1998 for a total purchase price of approximately $163.5
million. These contemplated acquisitions will be accounted for using the
purchase method. The excess of purchase price and acquisition costs over the
fair value of the net identifiable assets acquired for all four acquisitions
is estimated to be approximately $161.2 million. The Company plans to finance
these acquisitions primarily with long-term debt.
 
 
                                     F-11
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following unaudited pro forma information presents the combined results
of operations of the Company as though the acquisitions in 1996 and 1997 and
those acquisitions contemplated in 1998 occurred on January 1, 1996 and 1997,
respectively. These results include certain adjustments, including
amortization of goodwill, increased interest expense on debt related to the
acquisitions and related income tax effects. The pro forma financial
information does not necessarily reflect the results of operations if the
acquisitions had been in effect at the beginning of each period or which may
be attained in the future.
 
<TABLE>
<CAPTION>
                                           PRO FORMA YEARS ENDED DECEMBER 31
                                           ----------------------------------
                                                 1996              1997
                                           ----------------  ----------------
                                                      (UNAUDITED)
   <S>                                     <C>               <C>
   Revenues............................... $     97,653,533       104,606,454
   Earnings (loss) before extraordinary
    item .................................       (7,601,154)       (5,923,193)
   Net loss...............................      (10,338,442)      (12,275,052)
</TABLE>
 
(3) PROPERTY, PLANT AND EQUIPMENT
 
  A summary of property, plant and equipment as of December 31, 1996 and 1997
follows:
 
<TABLE>
<CAPTION>
                                       ESTIMATED
                                    LIFE (IN YEARS)     1996         1997
                                    --------------- ------------  -----------
   <S>                              <C>             <C>           <C>
   Land............................         --      $    523,694      878,752
   Buildings.......................          30        5,808,308    8,648,890
   Telephone equipment.............     10 - 25       82,166,545  112,356,634
   Cable equipment.................      3 - 15          208,367      397,965
   Furniture and equipment.........      5 - 10        1,633,250    3,196,328
   Vehicles and equipment..........      3 -  5        3,161,187    4,769,253
   Computer software...............           5          174,656      246,288
                                                    ------------  -----------
     Total property, plant and
      equipment....................                   93,676,007  130,494,110
   Accumulated depreciation........                  (52,061,311) (69,287,220)
                                                    ------------  -----------
     Net property, plant and
      equipment....................                 $ 41,614,696   61,206,890
                                                    ============  ===========
</TABLE>
 
(4) INVESTMENTS
 
  The investments are stated at cost and consist of the following at December
31, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                            1996       1997
                                                         ---------- ----------
   <S>                                                   <C>        <C>
   Southern Illinois Cellular, Inc. stock............... $4,551,800  4,551,800
   Rural Telephone Bank stock...........................  2,348,104  2,364,698
   CoBank stock and unpaid deferred CoBank patronage....  1,108,541  1,689,416
   RTFC secured certificates and unpaid deferred RTFC
    patronage...........................................    127,422    373,248
   Other minority equity investments....................    252,810  2,444,359
                                                         ---------- ----------
     Total investments.................................. $8,388,677 11,423,521
                                                         ========== ==========
</TABLE>
 
 
                                     F-12
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(5)LONG-TERM DEBT
 
  Long-term debt consists of the following at December 31, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                          1996         1997
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Senior notes payable to CoBank:
     Fixed rates ranging from 7.29% to 9.32%, due
      1998 to 2004...................................  $59,102,344   99,058,093
     Variable rates ranging from 7.50% to 7.75% at
      December 31, 1997, due 2002 to 2012............          --    21,872,315
   Senior notes payable to RTFC:
     Fixed rates ranging from 8.8% to 9.2%, due
      2011...........................................    1,451,344    1,399,216
     Variable rates ranging from 6.45% to 6.65% at
      December 31, 1997, due 2011 to 2012............      984,840    5,686,309
   Subordinated promissory notes payable, 8%, unless
    deferred, in which case interest shall accrue at
    10%, due 2000....................................          --     3,500,000
   Subordinated notes payable, 18%, net of discount
    of $716,171, paid in 1997........................   10,845,962          --
   Other debt, 5.75% to 9.5%, due 1998 to 2002.......    1,573,500      396,179
                                                       -----------  -----------
       Total outstanding long-term debt..............   73,957,990  131,912,112
   Less current portion..............................   (3,349,437)  (5,409,333)
                                                       -----------  -----------
       Total long-term debt, net of current portion..  $70,608,553  126,502,779
                                                       ===========  ===========
</TABLE>
 
  The approximate aggregate maturities of long-term debt for each of the five
years subsequent to December 31, 1997 are: 1998--$5,409,000; 1999--$7,170,000;
2000--$12,395,000; 2001--$9,641,000; 2002--$10,356,000; and thereafter
$86,941,000.
 
  Certain debt agreements contain various restrictive covenants which, among
others, require that the Company maintain certain financial ratios. The
Company received waivers related to noncompliance with certain covenants of
the CoBank debt agreements. Those covenants requiring waivers from CoBank
included restrictions on the Company and its subsidiaries on limits on capital
expenditures, the maintenance of certain financial ratios related to leverage
and liquidity, payments of dividends and other intercompany transfers of cash.
The Company also received a waiver from RTFC relating to noncompliance with a
restrictive covenant on the payment of dividends in 1997. As a result of
receiving the waivers, it is management's opinion that the Company has
complied with all such covenants or will be able to continue to meet the
covenant requirements following the balance sheet date.
 
  The Company also has $879,000 unsecured demand notes payable to various
individuals and entities with interest payable at 5.75%.
 
  The Company has available four lines of credit, with a total maximum limit
of $2,750,000, expiring 1998 to 2002.
 
  Substantially all assets of the Company are collateralized to secure the
long-term debt and lines of credit.
 
  As described in note 16, the Company refinanced its long-term debt on March
30, 1998.
 
(6)EMPLOYEE BENEFIT PLAN
 
  The Company participates in a voluntary 401(k) savings plan (the Plan) of
STE that covers all eligible employees. Each plan year, the Company
contributes to the Plan an amount of matching contributions determined by the
Company at its discretion. For the plan years ended December 31, 1996 and
1997, the Company matched 100% of each employee's contribution up to 3% of
compensation and 50% of additional contributions up to 6%. The Plan also
allows for a profit sharing contribution that is made based upon management
discretion. Total Company contributions to the Plan were $267,799, $324,873,
and $422,069, for the years ended December 31, 1995, 1996, and 1997,
respectively.
 
 
                                     F-13
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
  C&E also sponsors a defined contribution 401(k) retirement savings plan for
union employees. C&E matches contributions to this plan based upon a
percentage of pay of all qualified personnel. Contributions to the plan were
$12,543 in 1997.
 
(7)INCOME TAXES
 
  Income tax expense consists of the following components:
 
<TABLE>
<CAPTION>
                                                1995       1996       1997
                                              ---------  ---------  ---------
   <S>                                        <C>        <C>        <C>
   Current:
     Federal................................. $ (98,033)   913,116  1,425,059
     State...................................   (44,263)   135,632    274,057
                                              ---------  ---------  ---------
       Total current income tax expense
        (benefit)............................  (142,296) 1,048,748  1,699,116
                                              ---------  ---------  ---------
   Investment tax credits....................   (18,299)   (16,135)   (30,879)
                                              ---------  ---------  ---------
   Deferred:
     Federal.................................   560,823    338,243    130,190
     State...................................   146,844     90,727     77,207
                                              ---------  ---------  ---------
       Total deferred income tax expense.....   707,667    428,970    207,397
                                              ---------  ---------  ---------
       Total income tax expense.............. $ 547,072  1,461,583  1,875,634
                                              =========  =========  =========
</TABLE>
 
  Total income tax expense in 1995, 1996, and 1997 was greater than that
computed by applying U. S. Federal income tax rates to earnings before income
taxes. The reasons for the differences are as follows:
 
<TABLE>   
<CAPTION>
                                                  1995      1996       1997
                                                --------  ---------  ---------
   <S>                                          <C>       <C>        <C>
   Computed "expected" tax expense............  $350,488    483,542  1,584,757
   State income tax, net of federal income tax
    benefit...................................    67,703    148,738    231,834
   Amortization of investment tax credits.....   (18,299)   (16,135)   (30,879)
   Goodwill amortization......................   105,311    103,707    185,690
   Change in fair value of put warrant
    obligation................................    30,140    704,310   (100,130)
   Other......................................    11,729     37,421      4,362
                                                --------  ---------  ---------
     Total income tax expense.................  $547,072  1,461,583  1,875,634
                                                ========  =========  =========
</TABLE>    
 
 
                                     F-14
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1997 are presented on below:
 
<TABLE>
<CAPTION>
                                                             1996      1997
                                                          ---------- ---------
   <S>                                                    <C>        <C>
   Deferred tax assets:
     State tax carryforward.............................. $      --    123,126
     Employee benefits...................................     23,768    14,281
     Allowance for doubtful accounts.....................      5,507       --
     Alternative minimum tax credits.....................    292,691   720,667
     Warrants issued in connection with early retirement
      of debt............................................        --    291,525
                                                          ---------- ---------
       Total gross deferred tax assets...................    321,966 1,149,599
   Less, valuation allowance.............................        --        --
                                                          ---------- ---------
   Net deferred tax assets...............................    321,966 1,149,599
                                                          ---------- ---------
   Deferred tax liabilities:
     Property, plant and equipment, principally due to
      depreciation differences...........................  1,924,895 4,288,167
     Goodwill, due to amortization differences...........    768,199 1,172,089
     Basis in investments................................  1,943,499 2,672,792
                                                          ---------- ---------
       Total gross deferred tax liabilities..............  4,636,593 8,133,048
                                                          ---------- ---------
   Net deferred tax liabilities.......................... $4,314,627 6,983,449
                                                          ========== =========
</TABLE>
 
  As a result of the nature and amount of the temporary differences which give
rise to the gross deferred tax liabilities and the Company's expected taxable
income in future years, no valuation allowance for deferred tax assets as of
December 31, 1996 and 1997 was necessary. The alternative minimum tax credits
carryforward indefinitely and can be used in a year when regular tax exceeds
alternative minimum tax.
 
(8)WARRANTS
 
  The subordinated notes included detachable warrants to purchase 10,000
shares of STE's common stock at the stated par value of $.01 per share. In
conjunction with the retirement of the subordinated notes in 1997, STE issued
additional warrants to purchase 2,857 shares of STE's common stock. This
noncash transaction was recognized as part of the loss on the early retirement
of debt described in note 9. The warrants are currently exercisable, have no
expiration date and contain certain put and call provisions. The warrants may
not be put back to STE prior to July 31, 1999. STE may call the warrants
beginning after July 31, 1999. The agreement stipulates that the put/call
price of the warrants shall be equal to STE's net equity, as defined in the
agreement, multiplied by the ratio of exercisable warrants to the number of
shares of common stock outstanding on a fully-diluted basis on the date of the
put or call.
   
  The Company recorded the obligation for the warrants based on the fair value
of STE's common stock as determined by management, at the issuance date of the
warrants. At each balance sheet date,the warrants are valued utilizing cash
flow models that management also uses in valuing potential acquisitions. Those
models estimate fair value using earnings before interest, taxes, depreciation
and amortization (EBITDA) and multiples of EBITDA for recent acquisitions of
similar companies. The increase or decrease in fair value of the obligation
for the warrants is recognized in earnings as interest expense. At December
31, 1996 and 1997, the estimated fair value of the obligation for the
warrants, as determined by management, was $3,000,000 and $3,455,500,
respectively.     
 
 
                                     F-15
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  In addition, on January 19, 1996, the Company issued warrants to purchase
7.69 shares representing 7.14% of Sidney's common stock in connection with the
acquisition of Sydney. The Company estimated the fair value of the warrants at
the date of issuance utilizing cash flow models that management also uses in
valuing potential acquisitions. Those models estimate fair value using EBITDA
and multiples of EBITDA for recent acquisitions of similar companies. The fair
value of the warrants of $89,000 were included in the initial allocation of
purchase price, with the related value of the warrants issued to minority
shareholders included in the obligation for minority interests. The warrants
carry an exercise price of $.01 per share and have no expiration date. The
warrants are not exercisable until the RTFC loans are repaid or in the event
of a sale, merger, consolidation, or other transaction involving Sidney
pursuant to which such loans are to be repaid, refinanced, or substantially
all of the equity interests in Sidney are transferred. There are no put/call
provisions associated with these warrants.
 
(9)STOCKHOLDERS' EQUITY AND RECAPITALIZATION
 
  Effective July 31, 1997, a recapitalization of the Company was completed.
The Company issued 44,234 shares of its Class A Common Stock to unrelated
third parties and members of management for proceeds of approximately $15.1
million (net of offering expenses of $925,602). These proceeds, together with
additional borrowings of $39.2 million from CoBank and the issuance of
subordinated promissory notes in the amount of $3.5 million, were utilized to
repurchase and retire the remaining Series A Preferred Stock, all shares of
Series C Preferred Stock not owned by members of management and all the
warrants and contingent warrants (the Warrants) to purchase the Company's
Class A Common Stock not owned by members of management for approximately
$35.0 million. The difference between the carrying value of the Series A and
Series C Preferred Stock and the Warrants and the price at which the stock was
repurchased and retired ($24.5 million) was charged to retained earnings as it
represents a return to the preferred shareholders. In conjunction with the
recapitalization, STE also retired the subordinated notes payable of
$11,562,133. As a result of retiring the subordinated debt of STE, the Company
recognized an extraordinary loss of approximately $3.6 million (net of taxes
of $2.3 million), consisting of prepayment penalties of approximately $4.0
million, the write-off of existing deferred financing costs of approximately
$1.1 million and the issuance of additional put warrants valued at $750,000.
The additional put warrants were issued to the holders of the STE warrants and
debt in consideration of their consent to retire the STE debt. (See also note
8.)
 
  In connection with the recapitalization, the Company amended its certificate
of incorporation so that Series A (11% cumulative, redeemable, convertible and
nonvoting) Preferred Stock and Series B (11% cumulative, redeemable,
convertible and nonvoting) Preferred Stock are no longer authorized. At
December 31, 1997, the Company is authorized to issue up to 290,000 shares of
Series C (14% cumulative, redeemable and nonvoting) preferred stock.
 
  During 1997, a shareholder of MJD contributed the net assets of Holdings
totaling $150,000 in consideration for 145 shares of Class A Common Stock.
Also in 1997, existing subordinated notes payable to stockholders of the
Company in the amount of $923,500 were contributed as additional capital.
 
  In October 1997, there were an additional 4,379 shares of Class A Common
Stock issued for proceeds of $1,500,000.
 
  The Company has a stock option plan that covers officers, directors and
employees of the Company. The Company may issue qualified or nonqualified
stock options to purchase up to 5,684 shares of the Company's Class A Common
Stock to employees that will vest equally over five years from the date of
employment of the recipient and are exercisable from five to ten years. In
1995, the Company granted options to purchase 4,264 shares at $50 per share.
There were no options granted in 1996 or 1997. Since the Company applies APB
Opinion No. 25 in accounting for its plan, no compensation cost has been
recognized for its stock options in the financial statements. Had the Company
recorded compensation cost based on the fair value at the grant date for its
stock options following SFAS No. 123, the Company's net income for 1995, 1996
and 1997 would not have been
 
                                     F-16
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
significantly reduced. The per share weighted average fair value of stock
options granted during 1995 was $13 on the date of grant using the Black
Scholes option-pricing model with the following assumptions: expected dividend
yield of 0.0%, risk-free interest rate of 6.41% and expected term of 5 years.
Because the Company was non-public on the date of grant, no assumption as to
the volatility of the stock price was made.
 
 
  Stock option activity for 1995, 1996 and 1997, under the plan, is summarized
as follows:
 
<TABLE>
<CAPTION>
                                                          1995    1996    1997
                                                         ------- ------- -------
   <S>                                                   <C>     <C>     <C>
   Outstanding at January 1.............................     --  4,264.0 4,264.0
     Granted............................................ 4,264.0     --      --
     Exercised..........................................     --      --      --
     Canceled...........................................     --      --      --
                                                         ------- ------- -------
   Outstanding at December 31........................... 4,264.0 4,264.0 4,264.0
                                                         ------- ------- -------
   Exercisable at December 31........................... 1,350.2 2,203.0 3,055.8
                                                         ======= ======= =======
</TABLE>
 
(10)REDEEMABLE PREFERRED STOCK
 
  The following is a summary of the Company's preferred stock:
 
<TABLE>
<CAPTION>
                         SERIES A PREFERRED    SERIES B PREFERRED     SERIES C PREFERRED
                         --------------------  --------------------  ---------------------
                         SHARES     AMOUNT     SHARES     AMOUNT      SHARES     AMOUNT
                         -------  -----------  -------  -----------  --------  -----------
<S>                      <C>      <C>          <C>      <C>          <C>       <C>
Balance at December 31,
 1994...................  15,000  $ 1,418,086   55,000  $ 5,199,647       --   $       --
Conversion of preferred
 stock..................  54,100    5,114,562  (54,100)  (5,114,562)      --           --
Accretion of preferred
 stock..................     --        82,036      --         1,068       --           --
                         -------  -----------  -------  -----------  --------  -----------
Balance at December 31,
 1995...................  69,100  $ 6,614,684      900  $    86,153       --   $       --
Conversion of preferred
 stock..................     900       86,153     (900)     (86,153)      --           --
Issuance of preferred
 stock to an unrelated
 third party and members
 of management..........     --           --       --           --    183,060    1,815,558
Accretion of preferred
 stock..................     --     2,036,976      --           --        --       136,046
                         -------  -----------  -------  -----------  --------  -----------
Balance at December 31,
 1996...................  70,000  $ 8,737,813      --   $       --    183,060  $ 1,951,604
Conversion of preferred
 stock..................    (900)    (112,343)     --           --        --           --
Repurchase of preferred
 stock.................. (69,100)  (8,625,470)     --           --   (170,044)  (1,821,440)
                         -------  -----------  -------  -----------  --------  -----------
Balance at December 31,
 1997...................     --   $       --       --   $       --     13,016  $   130,164
                         =======  ===========  =======  ===========  ========  ===========
</TABLE>
 
  The Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock not owned by management were purchased and retired in
connection with the 1997 recapitalization. (See also Note 9.)
 
  At the option of the shareholders, the Series A Preferred Stock may be
converted into Series B Preferred Stock and the Series B Preferred Stock may
be converted into Series A Preferred Stock on a one-for-one basis. In
addition, the shareholders of the Series A and Series B Preferred Stock may
convert all or any portion of the stock into Series A Common Stock of the
Company on a one-for-one basis. During 1997, certain Series A Preferred Stock
shareholders converted 900 shares of their Series A Preferred Stock into 900
shares of Class A Common Stock.
 
                                     F-17
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Series A, Series B and Series C Preferred Stock contain certain put and
call provisions. At the option of the shareholders, the Series A, Series B and
Series C Preferred Stock may be put back to the Company beginning June 30,
1999, unless certain events occur, including an event of default under the MJD
Preferred Stock security agreement or liquidation of the Company at which time
the Series A, Series B and Series C Preferred Stock may be put back to the
Company immediately. In addition, the Company has the right to call the Series
A and the Series B Preferred Stock after June 30, 2000 and the Series C
Preferred Stock at any time. The call/put price for the Series A and Series B
Preferred Stock shall be the greater of $100 per share, the Company's net
worth per share or the fair value as determined by an independent appraiser.
The call/put price for the Series C Preferred Stock is $10 per share plus
accrued unpaid dividends, whether or not declared to the date of such payment.
 
  The Series C Preferred Stock carries cumulative dividends that accrue
quarterly at a rate of 14% per year on the issuance price and all accumulated
and unpaid dividends. The accumulated dividends are payable upon declaration
by the Board of Directors. The amount of unpaid cumulative dividends at
December 31, 1997 was $7,593.
 
  On June 7 and July 31, 1996, the Company collectively issued 183,060 shares
of its Series C Preferred Stock for proceeds of $1,830,600 or $10 per share.
The Company incurred issuance costs in the amount of $15,042 which are
reflected as a reduction in the proceeds received. As part of the
recapitalization in 1997 discussed in note 9, 170,044 shares of the stock were
repurchased.
 
  The Series C Preferred Stock contains certain put and call provisions. At
the option of the shareholders, the Series C Preferred Stock may be put back
to the Company beginning June 30, 1999, unless certain events occur, including
an event of default under the preferred stock security agreement or
liquidation of the Company at which time the Series C Preferred Stock may be
put back immediately. In addition, the Company has the right to call the
Series C Preferred Stock at any time. The put/call price is $10 per share plus
accrued unpaid dividends, whether or not declared to the date of such payment.
 
  In the event of liquidation, dissolution or winding up of the Company, the
Series C Preferred shareholders will be entitled to the $10 per share plus
accrued unpaid dividends, whether or not declared to the date of such payment.
 
  In conjunction with the issuance of the Series C Preferred Stock in 1996,
the Company issued warrants to purchase 1,168.99 shares of the Company's Class
A Common Stock. In association with the recapitalization, the Company
repurchased warrants to purchase 1,086.05 shares and contingent warrants to
purchase 648 shares. There are no contingent warrants outstanding at December
31, 1997. The remaining warrants for 82.94 shares are currently exercisable,
carry an exercise price of $.01 per share and expire July 31, 2016. There are
no put/call provisions associated with these warrants.
 
  On an annual basis, management values the preferred stock based on cash flow
models as described in Note 8. The increase in value is recognized as an
increase to the carrying amount of the preferred stock and charged to retained
earnings and additional paid-in capital using the straight-line method over
the remaining period until the stockholders are allowed under the agreement to
call/put the preferred stock as mentioned above. At December 31, 1997, the
accretion of the Series C Preferred Stock was not significant.
 
  As described in note 16, the Company repurchased the remaining outstanding
shares of Series C Preferred Stock on March 30, 1998.
 
                                     F-18
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(11)RELATED PARTY TRANSACTIONS
 
  During 1997, the Company entered into an agreement with MJD Partners, L.P.
(Partners), a major shareholder of the Company. Under the terms of the
agreement, Partners provided senior management and acquisition services to the
Company. Partners was paid $1,020,000 under this agreement and this expense
was classified with corporate and customer service expense in 1997. This
agreement was terminated in 1998.
 
  In connection with the recapitalization, described in note 9, the Company
entered into financial advisory agreements, dated July 31, 1997, with certain
equity investors, pursuant to which the equity investors provide certain
consulting and advisory services, related, but not limited to equity
financings and strategic planning. Pursuant to these agreements, the Company
pays annual advisory fees in an aggregate amount of $100,000 to the equity
investors payable on a quarterly basis until December 31, 2007. During 1997,
the Company paid $45,833 in such fees to the equity investors and this expense
was classified with corporate and customers service expense in 1997. The
agreements also provide that the Company will reimburse the equity investors
for travel relating to the Company's Board of Directors meetings. In the event
of additional equity investments in the Company by the equity investors, the
parties have agreed to negotiate in good faith to increase the advisory fee.
 
  The Company also has entered into a consulting agreement dated as of July
31, 1997 with an entity controlled by a certain shareholder pursuant to which
the shareholder has agreed to provide general consulting and advice to the
Company as reasonably requested from time to time. Pursuant to the terms of
the agreement, the consulting company is paid an annual fee of $120,000 in
monthly installments plus all of the shareholder's out-of-pocket business
expenses up to $30,000. The term of the agreement is one year, subject to
automatic renewal for successive periods of one year each thereafter.
 
  In 1995 a law firm, in which a partner of such law firm is also a partner in
Partners, was paid $208,199 for general counsel services which have been
classified with corporate and customer service expense. In 1996, this same law
firm was paid $321,251, of which $138,368 was for general counsel services,
which have been classified with corporate and customer service expense, and
$182,883 for acquisition related services, which have been capitalized as
direct costs of acquisitions of subsidiaries. In 1997, this same law firm was
paid $1,070,132 for general counsel services ($38,872) which are classified
with corporate and customer service expense, services related to financings
($819,361) which have been recorded as debt issue costs and equity issue costs
and new acquisitions ($211,899) which have been capitalized as direct costs of
acquisitions of subsidiaries.
 
(12)SUPPLEMENTAL CASH FLOW INFORMATION
 
  For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $6,868,074 $7,204,795 and $8,301,646, respectively.
 
  For the years ended December 31, 1995, 1996, and 1997, the Company paid
income taxes of $1,288,000, $1,084,766, and $529,352, respectively. The
Company received income tax refunds totaling $223,367 during 1997.
 
  In conjunction with the recapitalization, the Company issued subordinated
promissory notes for $3.5 million for the repurchase of the Series A and
Series C Preferred Stock.
 
                                     F-19
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(13)QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
<TABLE>
<CAPTION>
                            FIRST     SECOND     THIRD       FOURTH
                           QUARTER    QUARTER   QUARTER     QUARTER     TOTAL
                          ---------- --------- ----------  ---------- ----------
<S>                       <C>        <C>       <C>         <C>        <C>
1996
Revenue.................  $6,560,744 7,880,509  7,335,857   8,481,272 30,258,382
Income from operations..   2,254,129 3,331,595  2,038,769   2,573,792 10,198,285
Net earnings............     291,730   939,934    164,975     602,761  1,999,400
1997
Revenue.................  $8,766,654 9,120,775 11,303,202  13,781,687 42,972,318
Income from operations..   2,789,744 2,998,629  3,901,546   2,749,333 12,439,252
Earnings before
 extraordinary item and
 minority interest......  $  615,925   461,415    762,484     651,092  2,490,916
Net earnings (loss).....     593,471   461,415 (2,851,789)    614,560 (1,182,343)
</TABLE>
 
  During the third quarter 1997, the Company recognized a loss on early
retirement of debt of $5,908,104. The loss had the effect of reducing net
earnings by $3,611,624.
 
(14)DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Demand
Notes Payable
 
  The carrying amount approximates fair value because of the short maturity of
these instruments.
 
 Investments
 
  Investments do not have a readily determinable fair value (not publicly
traded). The investments are stated at cost which management believes is not
impaired. On an annual basis, management determines a fair value of its
investments based on the financial performance of the investee, the fair value
of similar investments and in certain instances, based on traditional
valuation models used by industry analysts. At December 31, 1997, the Company
had investments with a carrying value of $11,423,521 and estimated fair value
of $14,160,747.
 
 Long-Term Debt
 
  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,
1997, the Company had long-term debt with a carrying value of $131,912,112 and
estimated fair value of $137,500,000.
 
 Limitations
 
  Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
 
(15)MAJOR CUSTOMER
 
  Compensation for interstate access services is based on reimbursement of
costs and an allowed rate of return. This compensation is received from the
National Exchange Carrier Association in the form of monthly
 
                                     F-20
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
settlements. Such compensation amounted to 31.8%, 30.8% and 30.0% of revenues
in 1995, 1996 and 1997, respectively. The Company also derives significant
revenues from Nynex, principally from network access and billing and
collecting service. Such compensation amounted to 27.5%, 20.1% and 16.3% of
revenues in 1995, 1996 and 1997, respectively.
 
(16)SUBSEQUENT EVENTS
 
  On March 30, 1998, the Company closed a $315 million senior secured credit
facility (the "New Credit Facility") which committed $75 million of term debt
(tranche C) amortized over nine years, $155 million of term debt (tranche B)
amortized over eight years and an $85 million reducing revolving credit
facility with a term of 6.5 years. Borrowings under the facility bear interest
at a rate based, at the option of the Company, on the participating banks'
prime rate or Euro dollar rate, plus an incremental rate of 3.0%, 2.75% and
2.5% for the Euro dollar margin and 2.0%, 1.75% and 1.50% for the prime rate
margins for the tranche C, tranche B and revolver facility, respectively. The
New Credit Facility is secured by a perfected first priority pledge of the
stock of certain subsidiaries of the Company as well as the promissory notes
evidencing intercompany advances. The New Credit Facility is also guaranteed
by four of the Company's intermediary holding companies, subject to
contractual or regulatory restrictions. The Company pays fees of one half of
1% per annum on the aggregate unused portion of the revolver and tranche B
commitment, in addition to an annual administrative agent's fee. Pursuant to
the New Credit Facility, the Company is required to enter into interest
hedging agreements that result in the fixing of the interest rate on no less
than 50% of the principal amount of total outstanding debt, including any
senior subordinated debt.
 
  Total proceeds received from the New Credit Facility in the amount of
$195,000,000 were utilized to repay all of the outstanding long-term debt from
CoBank and RTFC, certain other long-term debt, repurchase the Series C
Preferred Stock, pay related transaction expenses and finance certain business
acquisitions. On March 30, 1998, the Company recognized an extraordinary loss
of approximately $4.3 million ($2.5 million net of income taxes) resulting
from a prepayment penalty of approximately $1.4 million and the write-off of
unamortized loan origination costs of [approximately $2.9 million] related to
the refinanced debt.
 
  The Company's ability to make additional borrowings under the New Credit
Facility is subject to compliance with certain financial ratios and other
conditions set forth in the New Credit Facility. These conditions limit the
ability of the Company and certain of its subsidiaries to, among other things,
incur additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with another company or change the business
conducted.
 
  Borrowings under the New Credit Facility to finance the acquisition of
Ellensburg (see note 2) will be conditioned upon the Company's receipt of
$15.0 million in common equity by certain existing shareholders.
 
(17) 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.
 
  On April 6, 1998, Latin World Communications, Inc., ("LWC") and Debra A.
Boudrot, LWC's principal (collectively, "Plaintiffs") sued B. Stephen May
("May"), who is a former officer of S T Long Distance (a subsidiary of STE),
Siesta Telecom, Inc. ("Siesta"), which is a company controlled by May, and S T
Long Distance in the Circuit Court for the Twelfth Judicial Circuit, Sarasota
County, Florida. From March 1997 through early 1998, S T Long Distance
provided long distance services to Plaintiffs in connection with Plaintiffs'
prepaid telephone card distribution business. Plaintiffs have alleged, among
other things, that May, Siesta and
 
                                     F-21
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
S T Long Distance have engaged in fraud, misappropriation of trade secrets,
unfair competition, deceptive trade practices and trade slander; and that May,
Siesta and S T Long Distance have breached various contractual obligations to
the Plaintiffs and received certain overpayments from the Plaintiffs.
Plaintiffs seek approximately $1 million in damages relating to such alleged
overpayments, and unspecified monetary damages and injunctive relief relating
to certain other matters. The Company intends to vigorously contest all of the
Plaintiffs' allegations, and believes that it has no liability to the
Plaintiffs. While the outcome of such litigation cannot be predicted, the
Company does not believe that such litigation, even if determined adversely to
the Company, would have a material adverse effect on its financial condition
or results of operations.
 
                                     F-22
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                   AS OF DECEMBER 31, 1997 AND JUNE 30, 1998
 
<TABLE>   
<CAPTION>
                                                     DECEMBER 31,   JUNE 30,
                                                         1997         1998
                                                     ------------  -----------
<S>                                                  <C>           <C>
                       ASSETS                                      (UNAUDITED)
Current assets:
  Cash and cash equivalents......................... $  6,822,462   14,045,260
  Accounts receivable...............................    8,312,778   23,204,075
  Prepaid and other assets..........................    1,248,627    3,914,452
  Income taxes recoverable..........................      757,001    3,242,328
                                                     ------------  -----------
    Total current assets............................   17,140,868   44,406,115
                                                     ------------  -----------
Property, plant and equipment, net..................   61,206,890  122,590,187
                                                     ------------  -----------
Other assets:
  Investments.......................................   11,423,521   17,227,421
  Goodwill, net of amortization.....................   50,432,932  168,618,491
  Loan origination costs, net of amortization.......    2,981,391   15,651,360
  Covenant not to compete, net of amortization......      987,500      875,000
  Other.............................................      439,677    1,345,502
                                                     ------------  -----------
    Total other assets..............................   66,265,021  203,717,774
                                                     ------------  -----------
      Total assets.................................. $144,612,779  370,714,076
                                                     ============  ===========
    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable.................................. $  4,999,714    8,413,431
  Current portion of long-term debt.................    5,409,333    1,996,639
  Demand notes payable..............................      879,000      814,500
  Current portion of capital lease obligations......       41,173       52,182
  Current portion of early retirement benefits......       14,283       14,283
  Current portion of covenant not to compete........      256,250      256,250
  Accrued interest payable..........................    2,818,769    9,659,477
  Accrued property taxes............................    1,170,969    1,295,861
  Other accrued liabilities.........................    1,443,677    3,137,306
                                                     ------------  -----------
    Total current liabilities.......................   17,033,168   25,639,929
                                                     ------------  -----------
Long-term liabilities:
  Long-term debt, net of current portion............  126,502,779  100,390,421
  Subordinated debt.................................          --   200,000,000
  Put warrant obligation............................    3,455,500    3,625,688
  Long-term capital lease obligation, net of current
   portion..........................................      109,246      132,511
  Early retirement benefits payable, net of current
   portion..........................................       22,083       14,465
  Covenant not to compete, net of current portion...      756,250      612,500
  Deferred income taxes.............................    6,983,449   16,808,984
  Unamortized investment tax credits................      198,817      618,887
  Other liabilities.................................          --     3,690,644
                                                     ------------  -----------
    Total long-term liabilities.....................  138,028,124  325,894,100
                                                     ------------  -----------
Minority interest...................................      360,101      396,624
                                                     ------------  -----------
Redeemable preferred stock..........................      130,164          --
                                                     ------------  -----------
Stockholders' equity (deficit):
  Common stock......................................          881        1,811
  Additional paid-in capital........................   16,910,450   48,747,262
  Retained deficit..................................  (27,850,109) (30,202,170)
  Accumulated other comprehensive income............          --       236,520
                                                     ------------  -----------
    Total stockholders' equity (deficit)............  (10,938,778)  18,783,423
                                                     ------------  -----------
      Total liabilities and stockholders' equity
       (deficit).................................... $144,612,779  370,714,076
                                                     ============  ===========
</TABLE>    
 
          See accompanying notes to consolidated financial statements.
 
                                      F-23
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                                          1997         1998
                                                       -----------  ----------
<S>                                                    <C>          <C>
Operating revenues:
  Switched services................................... $16,541,598  29,485,512
  Other...............................................   1,345,831   5,776,332
                                                       -----------  ----------
    Total operating revenues..........................  17,887,429  35,261,844
                                                       -----------  ----------
Operating expenses:
  Plant operations....................................   2,277,101   5,731,047
  Corporate and customer service......................   4,532,472   8,762,269
  Depreciation and amortization.......................   4,009,838   7,299,909
  Other...............................................   1,279,630   3,926,595
                                                       -----------  ----------
    Total operating expenses..........................  12,099,041  25,719,820
                                                       -----------  ----------
Income from operations................................   5,788,388   9,542,024
                                                       -----------  ----------
Other income (expense):
  Net gain on sale of investments and other assets....         --      389,693
  Interest income.....................................     102,910     126,471
  Dividend income.....................................         --       44,895
  Interest expense....................................  (3,998,383) (9,706,729)
  Other nonoperating, net.............................      23,542     198,203
                                                       -----------  ----------
    Total other expense...............................  (3,871,931) (8,947,467)
                                                       -----------  ----------
Earnings before income taxes and extraordinary item...   1,916,457     594,557
Income tax expense....................................    (839,102)   (389,152)
                                                       -----------  ----------
Earnings before extraordinary item....................   1,077,355     205,405
Extraordinary item, net of tax........................         --   (2,520,943)
                                                       -----------  ----------
Earnings (loss) before minority interest..............   1,077,355  (2,315,538)
Minority interest in income of subsidiaries...........     (22,464)    (36,523)
                                                       -----------  ----------
Net earnings (loss)................................... $ 1,054,891  (2,352,061)
                                                       ===========  ==========
</TABLE>    
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-24
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
          FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                                        1997         1998
                                                     ----------  ------------
<S>                                                  <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................. $1,054,891    (2,352,061)
                                                     ----------  ------------
Adjustments to reconcile net earnings (loss) to net
 cash provided by (used in) operating activities:
  Depreciation and amortization.....................  4,073,040     7,635,118
  Deferred income taxes.............................    239,116      (303,700)
  Deferred patronage dividends......................     (6,076)      (34,817)
  Minority interest in income of subsidiaries.......     22,455        36,523
  Increase in put warrant obligation................        --        170,188
  Income from equity investments....................        --       (131,694)
  Unrealized loss on marketable securities..........        --       (104,292)
  Net loss on sale of investments and other assets..     (9,750)     (217,053)
  Loss on early retirement of debt..................        --      2,896,599
  Amortization of investment tax credits............     (7,403)      (47,741)
  Changes in assets and liabilities arising from op-
   erations, net of acquisitions:
    Accounts receivable.............................  1,309,736    (4,090,464)
    Prepaid and other assets........................   (552,963)     (260,020)
    Accounts payable................................ (1,922,607)   (1,186,658)
    Accrued interest payable........................   (392,686)    6,818,662
    Accrued liabilities.............................   (175,451)      (64,282)
    Income taxes recoverable........................    621,167    (1,439,495)
                                                     ----------  ------------
      Total adjustments.............................  3,198,578     9,676,874
                                                     ----------  ------------
      Net cash provided by (used in) operating ac-
       tivities.....................................  4,253,469     7,324,813
                                                     ----------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment........ (2,922,425)   (3,331,570)
Proceeds from sale of property, plant and equip-
 ment...............................................     38,297        36,114
Salvage proceeds less cost of removal...............     26,078        10,799
Distributions from investments......................     11,035        56,170
Payment on covenant not to compete..................    (56,250)     (143,750)
Acquisition of investments..........................        --           (856)
Payments received on direct financing leases........     45,421           --
Proceeds from sale of investments...................        --        720,000
Acquisition costs...................................        --       (408,959)
Organizational costs................................        --       (107,284)
Decrease in other assets............................    339,048        51,544
Increase in other liabilities.......................        --         60,331
Acquisitions of telephone properties................ (4,635,919) (171,264,840)
                                                     ----------  ------------
      Net cash used in investing activities......... (7,154,715) (174,322,301)
                                                     ----------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............  5,725,000   451,000,000
Repayment of long-term debt......................... (1,639,431) (292,591,022)
Repurchase of preferred stock and warrants..........        --       (130,166)
Net proceeds from the issuance of common stock......        --     31,837,741
Loan origination costs..............................   (267,524)  (15,870,983)
Payment of early retirement benefits................    (11,110)       (7,619)
Repayment of capital lease obligation...............    (11,356)      (17,665)
                                                     ----------  ------------
      Net cash provided by (used in) financing ac-
       tivities.....................................  3,795,579   174,220,286
                                                     ----------  ------------
Net increase in cash and cash equivalents...........    894,333     7,222,798
Cash and cash equivalents, beginning of period .....  4,252,732     6,822,462
                                                     ----------  ------------
Cash and cash equivalents, end of period............ $5,147,065    14,045,260
                                                     ==========  ============
</TABLE>    
 
          See accompanying notes to consolidated financial statements.
 
                                      F-25
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            JUNE 30, 1997 AND 1998
 
(1) BASIS OF FINANCIAL REPORTING
 
  Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission; however, the Company believes the
disclosures which are made are adequate to make the information presented not
misleading.
 
  The consolidated balance sheet of MJD Communications, Inc. and Subsidiaries
(the "Company") at December 31, 1997 was derived from the Company's audited
balance sheet as of that date. The unaudited financial information for the six
months ended June 30, 1997 and 1998 has not been audited by independent public
accountants; however in the opinion of management, such financial information
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of financial position, results of
operations, and cash flows for the six-month periods have been included
therein in accordance with generally accepted accounting principles. The
results of operations for the interim periods are not necessarily indicative
of the results of operations which might be expected for the entire year. The
consolidated financial statements should be read in conjunction with the
Company's 1997 annual financial statements contained herein.
 
(2) CREDIT FACILITY
 
  On March 30, 1998, the Company closed a $315 million senior secured credit
facility (the "New Credit Facility") which committed $75 million of term debt
(tranche C) amortized over nine years, $155 million of term debt (tranche B)
amortized over eight years and an $85 million reducing revolving credit
facility with a term of 6.5 years. Borrowings under the facility bear interest
at a rate based, at the option of the Company, on the participating banks'
prime rate or Euro dollar rate, plus an incremental rate of 3.0%, 2.75% and
2.5% for the Euro dollar margin and 2.0%, 1.75% and 1.50% for the prime rate
margins for the tranche C, tranche B and revolver facility, respectively. The
New Credit Facility is secured by a perfected first priority pledge of the
stock of all the subsidiaries of the Company as well as the promissory notes
evidencing intercompany advances. The New Credit Facility is also guaranteed
by the Company's four intermediary holding companies, subject to contractual
or regulatory restrictions. The Company pays fees of one half of one percent
per annum on the aggregate unused portion of the revolver and tranche B
commitment, in addition to an annual agent's fee. Pursuant to the New Credit
Facility, the Company is required to enter into interest hedging agreements
that result in the fixing of the interest rate on no less than 50% of the
principal amount of total outstanding debt, including any subordinated debt.
 
  Total proceeds received from the New Credit Facility in the amount of
$195,000,000 were utilized to repay all of the outstanding long-term debt from
CoBank and RTFC, pay related transaction expenses and finance certain business
acquisitions. On March 30, 1998, the Company recognized an extraordinary loss
of approximately $4.3 million ($2.5 million net of income taxes) resulting
from a prepayment penalty of approximately $1.4 million and the write-off of
unamortized loan origination costs of approximately $2.9 million related to
the refinanced debt.
 
  The Company's ability to make additional borrowings under the New Credit
Facility is subject to compliance with certain financial ratios and other
conditions set forth in the New Credit Facility. These conditions limit the
ability of the Company and certain of its subsidiaries to, among other things,
incur additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with another company or change the business
conducted.
 
                                     F-26
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(3) ACQUISITIONS
 
 
  On March 30, 1998, the Company acquired 100% of the outstanding common stock
of Taconic Telephone Corp. and subsidiaries for a purchase price of
approximately $67.5 million. Acquisition costs were approximately $440,000. On
April 30, 1998, the Company acquired 100% of the outstanding common stock of
Ellensburg Telephone Company for a purchase price of approximately $91.0
million. Acquisition costs were approximately $254,000. On June 1, 1998, the
Company acquired 100% of the outstanding common stock of Chouteau Telephone
Company for a purchase price of $18.6 million. Acquisitions costs were
approximately $120,000.
 
  These acquisitions have been accounted for as purchases and accordingly, the
acquired assets and liabilities have been recorded at their estimated fair
values at the dates of acquisition, and the results of operations have been
included in the accompanying consolidated financial statements since the dates
of acquisition. Goodwill recognized on these acquisitions was approximately
$119.4 million and will be amortized over an estimated useful life of 40
years.
 
  In the first quarter of 1998, the Company entered into a letter of intent to
purchase Utilities, Inc. (excluding its subsidiaries, Seacoast Cellular and
Western Maine Cellular). The acquisition is anticipated to be consummated
during the third or fourth quarter of 1998. The contemplated acquisition will
be accounted for using the purchase method. The Company plans to finance this
acquisition primarily with long-term debt.
 
  The following unaudited pro forma information presents the combined results
of operations of the Company as though the acquisitions in 1997 and 1998,
including the contemplated acquisition, occurred on January 1, 1997. These
results include certain adjustments, including amortization of goodwill,
increased interest expense on debt related to the acquisitions and related
income tax effects. The pro forma financial information does not necessarily
reflect the results of operations if the acquisitions had been in effect at
the beginning of each period which may be attained in the future.
 
<TABLE>
<CAPTION>
                                             PRO FORMA SIX MONTHS ENDED JUNE 30,
                                             -----------------------------------
                                                   1997              1998
                                             ----------------- -----------------
                                                         (UNAUDITED)
<S>                                          <C>               <C>
Revenues....................................       $50,260,447        56,033,490
Net loss....................................       (3,763,868)       (3,831,178)
</TABLE>
 
(4) ISSUANCE OF LONG-TERM NOTES
 
  On May 5, 1998, the Company issued $125.0 million of 9 1/2% senior
subordinated notes due 2008 (the "Fixed Rate Notes"), and $75.0 million of
floating rate callable securities due 2008 (the "Floating Rate Notes," and
collectively with the Fixed Rate Notes, the "Notes"). Proceeds were used to
reduce existing bank indebtedness under the New Credit Facility. 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 (including
trade payables and accrued liabilities) of the Company's subsidiaries.
Interest in the Notes is payable semi-annually. Interest on the Fixed Rate
Notes is fixed at 9 1/2% and interest on the Floating Rate Notes is equal to a
rate per annum at LIBOR plus 418.75 basis points (10% at May 5, 1998).
 
(5) ACCOUNTING PRONOUNCEMENT
 
  Statement of Financial Accounting Standard (SFAS) No. 130, Reporting
Comprehensive Income establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The standard also requires disclosure of the total of
comprehensive income in interim financial statements. The Company's
comprehensive income was $1.1 million and $(2.5)million for the six months
ended June 30, 1997 and 1998, respectively. The difference between the
Company's reported net
 
                                     F-27
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
income and comprehensive income for the six months ended June 30, 1998 is due
to an unrealized gain on marketable securities procured in connection with the
Chouteau and Taconic acquisitions. The change in the unrealized gain since the
dates of acquisition has been recorded as other comprehensive income. The
accumulated other comprehensive income included in the Company's Consolidated
Balance Sheet at June 30, 1998 is due to the unrealized gain on marketable
securities.
 
(6) SUBSEQUENT EVENTS
 
  On July 1, 1998 the Company issued notice of its intent to exercise its call
right with respect to certain warrants held by other parties. These warrants
are included in the Company's minority interest at a value of approximately
$2.8 million June 30, 1998 and will be accreted to the determined purchase
price. The Company intends to close the purchase of the warrants on July 1,
1999 for a purchase price which is currently being negotiated.
 
                                     F-28
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
Board of Directors
Taconic Telephone Corp.
 
  We have audited the consolidated balance sheets of Taconic Telephone Corp.
and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall 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 consolidated financial position
of Taconic Telephone Corp. and subsidiaries at December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
 
                                          KPMG Peat Marwick LLP
 
March 6, 1998
Albany, New York
 
                                     F-29
<PAGE>
 
                    TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                            1996          1997
                                                        ------------  ------------
<S>                                                     <C>           <C>
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $  1,204,578     3,073,458
  Accounts receivable, net of allowance of $119,553 and
   $225,800 in 1996 and 1997, respectively.............    4,052,061     3,651,252
  Inventories..........................................    1,097,107       863,414
  Deferred income taxes (note 5).......................       44,644        92,036
  Other current assets.................................      339,702       430,636
                                                        ------------  ------------
    Total current assets...............................    6,738,092     8,110,796
Property, plant and equipment (note 2):
  Telephone:
    In service.........................................   43,538,277    45,495,739
    Under construction and other.......................    1,275,671     1,819,966
                                                        ------------  ------------
                                                          44,813,948    47,315,705
Less accumulated depreciation..........................  (18,318,296)  (20,756,761)
                                                        ------------  ------------
                                                          26,495,652    26,558,944
Subsidiary:
  Net of accumulated depreciation of $2,606,882 and
   $3,025,429 in 1996 and 1997, respectively...........    2,370,740     2,252,162
  Other assets (note 4)................................    2,706,464     3,276,261
                                                        ------------  ------------
                                                        $ 38,310,948    40,198,163
                                                        ============  ============
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................... $    558,370       993,189
  Accrued payroll and related items....................      204,857       221,304
  Other accrued expenses...............................    2,156,553     2,087,070
  Current maturities of long-term debt (note 3)........      642,254       668,278
                                                        ------------  ------------
    Total current liabilities..........................    3,562,034     3,969,841
Long-term debt, less current maturities (note 3).......    9,271,428     8,605,381
Deferred income taxes (note 5).........................    4,675,841     4,380,934
Other long-term liabilities (note 7)...................      461,581     1,287,390
                                                        ------------  ------------
    Total liabilities..................................   17,970,884    18,243,546
                                                        ------------  ------------
Stockholders' equity:
  Common stock, no par value; 80,000 shares authorized;
   62,588 shares issued; 60,219 shares outstanding in
   1996 and 1997.......................................      677,719       677,719
  Retained earnings....................................   20,124,170    21,697,303
  Accumulated other comprehensive income...............      150,396       191,816
                                                        ------------  ------------
                                                          20,952,285    22,566,838
  Less cost of treasury stock, (2,369 shares in 1996
   and 1997)...........................................     (612,221)     (612,221)
                                                        ------------  ------------
    Total stockholders' equity.........................   20,340,064    21,954,617
                                                        ------------  ------------
                                                        $ 38,310,948    40,198,163
                                                        ============  ============
</TABLE>
          See accompanying notes to consolidated financial statements.
 
                                      F-30
<PAGE>
 
                    TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
                 THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                     DECEMBER 31                      MARCH 31
                          -----------------------------------  -----------------------
                             1995         1996        1997        1997        1998
                          -----------  ----------  ----------  ----------- -----------
                                                               (UNAUDITED) (UNAUDITED)
<S>                       <C>          <C>         <C>         <C>         <C>
Telephone operating
 revenues:
  Local network
   services.............  $ 5,235,962   5,912,306   5,850,960   1,445,926   1,423,477
  Long distance and
   access services......    8,618,850   8,246,383   9,155,034   2,114,692   2,503,927
  Directory advertising,
   billing and other
   services.............    2,725,430   2,670,607   2,595,355     864,018     712,205
                          -----------  ----------  ----------   ---------   ---------
    Total telephone
     operating
     revenues...........   16,580,242  16,829,296  17,601,349   4,424,636   4,639,609
CATV and systems
 operations.............    2,326,816   2,446,677   2,795,713     673,911     725,110
                          -----------  ----------  ----------   ---------   ---------
    Total operating
     revenues...........   18,907,058  19,275,973  20,397,062   5,098,547   5,364,719
Telephone operating
 expenses:
  Plant specific........    2,329,605   2,593,113   2,678,778     538,335     545,433
  Plant non-specific....    1,274,544   1,263,568   1,327,241     281,764     342,379
  Customer operations...    2,325,571   2,562,919   2,655,925     628,301     633,993
  Corporate operations..    3,039,519   3,261,519   3,436,270     833,841   1,230,212
  Depreciation and
   amortization.........    2,704,164   2,818,757   2,912,796     718,848     748,323
  Other taxes...........      906,586   1,099,188   1,080,140     311,530     232,947
                          -----------  ----------  ----------   ---------   ---------
    Total telephone
     operating
     expenses...........   12,579,989  13,599,064  14,091,150   3,312,619   3,733,287
CATV and systems
 operations.............    2,104,323   2,242,855   2,530,484     625,159     690,784
                          -----------  ----------  ----------   ---------   ---------
    Total operating
     expenses...........   14,684,312  15,841,919  16,621,634   3,937,778   4,424,071
                          -----------  ----------  ----------   ---------   ---------
Income from operations..    4,222,746   3,434,054   3,775,428   1,160,769     940,648
Other income (expense):
  Equity in earnings of
   partnerships.........       74,000     595,000     565,000      55,628      65,447
  Other income..........       48,068      99,983      91,645      79,111    (360,891)
  Interest expense......   (1,034,609)   (950,302)   (891,437)   (225,074)   (209,067)
                          -----------  ----------  ----------   ---------   ---------
                             (912,541)   (255,319)   (234,792)    (90,335)   (504,511)
                          -----------  ----------  ----------   ---------   ---------
Earnings before income
 taxes..................    3,310,205   3,178,735   3,540,636   1,070,434     436,137
Income tax expense (note
 5).....................    1,087,412     874,949   1,281,007     314,921     141,602
                          -----------  ----------  ----------   ---------   ---------
Net earnings............  $ 2,222,793   2,303,786   2,259,629     755,513     294,535
                          ===========  ==========  ==========   =========   =========
Basic earnings per share
 of common stock........  $     36.48       38.15       37.52        9.22        4.89
                          ===========  ==========  ==========   =========   =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-31
<PAGE>
 
                    TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                                     ACCUMULATED
                                                                                        OTHER         TOTAL
                          COMPREHENSIVE       COMMON   RETAINED   PAID IN TREASURY  COMPREHENSIVE STOCKHOLDERS'
                             INCOME           STOCK    EARNINGS   CAPITAL  STOCK       INCOME        EQUITY
                          -------------      -------- ----------  ------- --------  ------------- -------------
<S>                       <C>           <C>  <C>      <C>         <C>     <C>       <C>           <C>
Balance at December 31,
 1994...................   $      --         $677,719 16,979,189      --  (389,582)    132,275     17,399,601
Net earnings............    2,222,793             --   2,222,793      --       --          --       2,222,793
Dividends...............          --              --    (694,704)     --       --          --        (694,704)
Change in unrealized
 gain on securities, net
 of tax.................      183,808             --         --       --       --      183,808        183,808
                           ----------   ---  -------- ----------  ------- --------    --------     ----------
Balance at December 31,
 1995...................    2,406,601         677,719 18,507,278      --  (389,582)    316,083     19,111,498
Net earnings............    2,303,786             --   2,303,786      --       --          --       2,303,786
Purchase of common
 shares.................          --              --         --       --  (222,639)        --        (222,639)
Dividends...............          --              --    (686,894)     --       --          --        (686,894)
Change in unrealized
 gain on securities, net
 of tax.................     (165,687)            --         --       --       --     (165,687)      (165,687)
                           ----------   ---  -------- ----------  ------- --------    --------     ----------
Balance at December 31,
 1996...................    4,544,700         677,719 20,124,170      --  (612,221)    150,396     20,340,064
Net earnings............    2,259,629             --   2,259,629      --       --          --       2,259,629
Dividends...............          --              --    (686,496)     --       --          --        (686,496)
Change in unrealized
 gain on securities, net
 of tax.................       41,420             --         --       --       --       41,420         41,420
                           ----------   ---  -------- ----------  ------- --------    --------     ----------
Balance at December 31,
 1997...................   $6,845,749        $677,719 21,697,303      --  (612,221)    191,816     21,954,617
                           ==========   ===  ======== ==========  ======= ========    ========     ==========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-32
<PAGE>
 
                    TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
                 THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                    DECEMBER 31                      MARCH 31
                         -----------------------------------  -----------------------
                            1995         1996        1997        1997        1998
                         -----------  ----------  ----------  ----------- -----------
                                                              (UNAUDITED) (UNAUDITED)
<S>                      <C>          <C>         <C>         <C>         <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES:
Net income.............  $ 2,222,793   2,303,786   2,259,629     555,513     294,536
Adjustments to
 reconcile net income
 to net cash provided
 by operating
 activities:
  Depreciation and
   amortization........    3,078,954   3,288,659   3,401,706     831,666     874,918
  Deferred income tax
   benefit.............     (212,521)   (324,320)   (363,639)    (67,336)   (161,391)
  Amortization of
   discount on long-
   term debt...........        2,211       2,209       2,231         553         553
  Gain on sale of
   equipment...........          --         (413)     (2,620)       (966)     (1,281)
  Undistributed income
   from investments....     (287,930)   (166,433)   (112,641)     71,908     107,912
  Decrease (increase)
   in accounts
   receivable, net.....      396,183    (735,295)    400,809    (205,572)     57,668
  Decrease (increase)
   in inventories......      (86,820)    (74,872)    233,693    (140,766)    (35,220)
  (Increase) decrease
   in other current
   assets..............       48,162     139,711     (90,934)    (24,181)     55,743
  Increase (decrease)
   in accounts payable
   and accrued
   expenses............      233,175    (358,667)    381,783     294,235    (157,713)
  Increase in other
   liabilities.........      (83,755)    110,066     825,809     162,276      50,907
                         -----------  ----------  ----------   ---------  ----------
      Net cash provided
       by operating
       activities......    5,310,452   4,184,431   6,935,826   1,477,330   1,086,632
CASH FLOWS FROM
 INVESTING ACTIVITIES:
Expenditures for
 property and
 equipment.............   (1,782,958) (2,778,977) (3,407,297)   (351,229)   (284,105)
Net salvage on
 retirements...........       10,446       2,877         571       4,430       2,235
Expenditures for
 subsidiary property
 and equipment.........     (462,158)   (337,070)   (337,071)     (7,462)    (34,731)
Proceeds from sale of
 equipment.............          --        9,142       5,601       3,666          91
Purchase of
 nonmarketable equity
 securities............          --       (4,000)        --          --          --
Proceeds from
 collection of loan
 receivable............          --       61,932         --          --          --
Purchase of other
 capitalized assets....     (144,901)        --          --          --          --
                         -----------  ----------  ----------   ---------  ----------
      Net cash used in
       investing
       activities......   (2,379,571) (3,046,096) (3,738,196)   (350,595)   (316,510)
CASH FLOWS FROM
 FINANCING ACTIVITIES:
Proceeds from short-
 term borrowings.......      130,000         --          --          --          --
Repayment of short-term
 borrowings............     (600,000)   (130,000)        --          --          --
Repayment of long-term
 borrowings............     (559,560)   (676,328)   (642,254)   (160,513) (2,315,894)
Dividends paid.........     (694,704)   (686,894)   (686,496)   (168,613)   (168,613)
Purchase of treasury
 stock.................          --     (222,639)        --          --          --
Additional paid in
 capital...............          --          --          --          --    2,193,837
                         -----------  ----------  ----------   ---------  ----------
      Net cash used in
       financing
       activities......   (1,724,264) (1,715,861) (1,328,750)   (329,126)   (290,670)
                         -----------  ----------  ----------   ---------  ----------
Increase (decrease) in
 cash and cash
 equivalents...........    1,206,617    (577,526)  1,868,880     797,609     479,452
Cash and cash
 equivalents at
 beginning of year.....      575,487   1,782,104   1,204,578   1,204,578   3,073,458
                         -----------  ----------  ----------   ---------  ----------
Cash and cash
 equivalents at end of
 year..................  $ 1,782,104   1,204,578   3,073,458   2,002,187   3,552,910
                         ===========  ==========  ==========   =========  ==========
SUPPLEMENTAL CASH FLOW
 INFORMATION:
Cash paid for
 interest..............  $ 1,038,466   1,104,521     891,437     225,074     209,067
                         ===========  ==========  ==========   =========  ==========
Cash paid for income
 taxes.................  $   985,000   1,265,000   1,627,623         --          --
                         ===========  ==========  ==========   =========  ==========
Supplemental schedule
 of non-cash investing
 activities:
Capital lease
 obligation on
 equipment.............  $       --      143,852         --          --          --
                         ===========  ==========  ==========   =========  ==========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-33
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         DECEMBER 31, 1995, 1996 AND 1997 AND MARCH 31, 1997 AND 1998
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
 
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a) Organization
 
  The consolidated financial statements include the accounts of Taconic
Telephone Corp. (the "Company") and its wholly owned subsidiaries
(collectively the "subsidiaries") Taconic Technology Corp. ("TECH"), Taconic
Cellular Corp. ("TCC"), Taconet Corp. ("TNC"), Taconet Wireless Corp. ("TWC")
and Taconic TelCom Corp ("TTC"). All significant inter-company transactions
and balances have been eliminated in consolidation.
 
  The Company provides local exchange telecommunications services to
residential and commercial customers. TECH provides telecommunications
products to residential and commercial customers, operates a cable television
system and provides paging and Internet services. TCC has an ownership
interest in several cellular telephone general partnerships. TNC was formed to
hold interests in partnerships and corporations involved in signaling systems
and related data base services. TWC was formed to hold interests in
partnerships and corporations involved in the provision, marketing and
operations of personal communication services. TTC resells long distance
services to residential and commercial customers. TTC commenced operations in
1997. The companies operate in New York State, primarily in Columbia,
Rensselaer and Dutchess Counties.
 
  The Company's telephone operation follows the accounting for regulated
enterprises prescribed by Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). 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 71 requires the
Company's telephone operation to depreciate telephone plant over useful lives
as approved by regulators which could be longer than the useful lives that
would otherwise be determined by management. SFAS 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
operation periodically reviews the applicability of SFAS 71 based on the
developments in their current regulatory and competitive environment. SFAS 71
may, at some future date, be deemed inapplicable due to changes in the
regulatory and competitive environments and/or a decision by the Company to
accelerate deployment of new technology. If the Company were to discontinue
the application of SFAS 71 for its regulated operation, the Company would be
required to write off its regulatory assets and regulatory liabilities
associated with such operation and would be required to adjust the carrying
amount of any other assets, including property, plant and equipment, that
would be deemed not recoverable. The Company believes its regulated operations
continue to meet the criteria for SFAS 71 and that the carrying value of its
regulated property, plant and equipment is recoverable in accordance with
established rate-making practices.
 
 
  The Company maintains its accounts in accordance with the Uniform System of
Accounts prescribed for telephone companies by the New York State Public
Service Commission (the PSC).
 
 (b) Inventories
 
  Inventories are carried at the lower of average cost or market and consist
primarily of materials and supplies.
 
 (c) Property, Plant and Equipment
 
  Property, plant and equipment is stated at cost. Expenditures for
maintenance and repairs are expensed as incurred. Depreciation is provided for
using annual rates which are sufficient to amortize the cost of depreciable
assets over their estimated useful lives which range from four to fifty years.
 
                                     F-34
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The cost of depreciable property retired is removed from telephone plant
accounts and charged to accumulated depreciation, which is credited with the
salvage less removal cost. Under this method, no profit or loss is calculated
on ordinary retirements of depreciable telephone property.
 
 (d) Subsidiary Property and Equipment
 
  Subsidiary property and equipment are stated at cost. Major expenditures for
property and those which substantially increase useful lives are capitalized.
Maintenance and repairs are expensed as incurred. Any gain or loss on disposal
is recognized in operations.
 
  The subsidiaries provide for depreciation of property and equipment using
annual rates which are sufficient to amortize the cost of depreciable assets
over their estimated useful lives which range from five to twenty years
utilizing the straight-line method.
 
 (e) Allowance for Funds Used During Construction
 
  Regulatory bodies allow the Company to capitalize an allowance for funds
used during construction ("AFUDC"). AFUDC represents the borrowing costs and a
return on common equity of funds used to finance construction of regulated
assets. AFUDC is capitalized as a component of additions to property, plant
and equipment and is credited to income. AFUDC does not represent current cash
earnings; however, under established regulatory rate-making practices, after
the related plant is placed in service, the Company is permitted to include in
the rates charged for utility services a fair return on and depreciation of
such AFUDC included in plant in service. The allowance rates for funds
capitalized during the construction of certain plant assets were 9.49%, 9.40%
and 9.34%, and totaled $13,280, $28,510 and $23,435 for March 31, 1998,
December 31, 1997 and December 31, 1996, respectively.
 
 (f) Investments
 
  The Company records investments in marketable debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". Statement
115 requires investments in marketable equity securities to be reported at
fair value, with net unrealized gains reported, net of income taxes, as a
separate component of stockholders' equity.
 
  The Company accounts for its investments in nonmarketable equity securities
and partnerships in the following manner:
 
  .  investments in excess of 50% in investee equity are consolidated.
 
  .  investments of 20-50% in investee equity are accounted for under the
     equity method. That is, the Company adjusts its investments for its
     proportion of the income earned and distributions made by the investee.
 
  .  investments under 20% are accounted for at the lower of cost or market
     unless the Company is able to exercise significant influence over
     operating and financial policies of the investee.
 
 (g) Revenues and Accounts Receivable
 
  Local service charges are recognized when earned regardless of the period in
which they are billed. Long distance revenues are derived from
interstate/intralata long-distance calls that originate or terminate in the
Company's Hancock, Massachusetts exchange. Network access service revenues are
earned from interexchange carriers by providing access to the Company's local
exchange network. The Company also generates revenue through billing
subscriber line charges to their end user customers. Interstate carrier common
line revenues are
 
                                     F-35
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
recognized under pooling arrangements with other telephone companies and are
allocated among the companies based on respective costs and investments to
provide these services. Revenues recognized through the various pooling
processes are initially based on estimates. Adjustments are recorded in
subsequent years as participating companies finalize their respective costs
and investments. The Company has settled all toll and access charge revenue
agreements through 1996.
 
  Accounts receivable consists primarily of amounts due from residential,
commercial and interexchange carrier customers for telecommunications
services. The Company performs ongoing credit evaluations of its customers.
The Company maintains an allowance for doubtful accounts to cover potential
credit losses.
 
 (h) Income Taxes
 
  The Company accounts for income taxes using the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary 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 rate is recognized in income in
the period that includes the enactment date.
 
  The Company files consolidated Federal tax returns with its subsidiaries.
Investment tax credits are deferred and amortized over the estimated useful
life of the equipment which gave rise to the credit.
 
 (i) Cash Equivalents
 
  For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents.
 
 (j) Regulatory Matters
 
  On May 30, 1995, the Company filed a petition with the PSC for approval of a
proposed Quality Assurance Plan (the Plan), which was approved August 21,
1996. This incentive plan eliminated rate of return regulation for the
Company's New York State operations as of September 1, 1996. The five-year
plan freezes basic local rates with limited exceptions. Non-basic rates will
not increase in excess of 40% over this same time period. Additionally, the
Company has offered its local exchange service for resale to competitors at a
discounted rate.
 
  The Company is the first small telephone company in the country to
successfully negotiate an incentive regulation plan.
 
  Regarding federal issues, the Telecommunications Act of 1996 ("Act") was
passed early in 1996. This legislation encourages competition, anticipates
lower rates for consumers, and assures rural customers they will have the same
services as their urban counterparts. The Company continues to monitor recent
court decisions and the activity of the Federal Communications Commission as
it issues orders which attempt to interpret and implement the Act.
 
 (k) Reclassifications
 
  Certain items in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
 
 (l) Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
 
                                     F-36
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 (m) Impairment of Long-Lived Assets
 
  In 1996 the Company adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The carrying value of long-lived assets is reviewed for
impairment at least annually, or whenever events or changes in circumstances
indicate that such carrying value may not be recoverable, by assessing the
recoverability of such carrying value through estimated undiscounted future
net cash flows expected to be generated by the assets. 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 exceed 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. The adoption of SFAS No. 121 did not
affect the Company's consolidated financial position or results of operations.
 
 (n) Basic Earnings Per Share
 
  Basic earnings per share of common stock was computed by dividing net
earnings by the weighted average number of common shares outstanding during
the respective periods. The weighted average number of common shares
outstanding was 60,939, 60,393 and 60,219 during 1995, 1996 and 1997,
respectively.
 
 (o) Comprehensive Income
 
  On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." The statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income includes the
reported net income of a company adjusted for items that are currently
accounted for as direct entries to equity, such as the mark-to-market
adjustment on securities available for sale, foreign currency items and
minimum pension liability adjustments. In the case of the Company,
comprehensive income represents net income plus other comprehensive income,
which consists of the net change in unrealized gains and losses on securities
available for sale for the period. Accumulated other comprehensive income
represents the net unrealized gain on securities available-for-sale as of the
balance sheet dates. All periods for which the Company has presented financial
information contain the prescribed disclosures.
 
(2)PROPERTY, PLANT, AND EQUIPMENT
 
  Property, plant, and equipment in service at December 31, 1996 and December
31, 1997 is summarized as follows:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31, DECEMBER 31,
                                                           1996         1997
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Land............................................... $    100,442     100,442
   Customer premises wiring...........................      427,210     427,210
   Other work equipment...............................      563,445     561,383
   Motor vehicles.....................................      720,357     716,834
   Furniture and office equipment.....................    1,088,148   1,120,792
   Buildings..........................................    3,091,851   3,157,272
   Central office equipment...........................   14,348,632  15,040,958
   Poles, cables and wire.............................   22,475,840  23,593,356
   Other..............................................      722,352     777,492
                                                       ------------  ----------
     Total telephone plant in service................. $ 43,538,277  45,495,739
                                                       ============  ==========
</TABLE>
 
                                     F-37
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company provides for depreciation on a straight-line basis at annual
rates which will amortize the depreciable property over its estimated useful
life. Such provision as a percentage of the average balance of telephone plant
in service was 6.48 percent at December 31, 1996, December 31, 1997 and March
31, 1998. Individual annual depreciable rates are as follows:
 
<TABLE>
   <S>                                                               <C>
   Motor vehicles................................................... 9.50-15.00%
   Other work equipment.............................................       5.67%
   Buildings........................................................       2.66%
   Furniture and office equipment................................... 5.00-20.00%
   Central office equipment......................................... 6.67-10.35%
   Customer premises wiring.........................................       5.91%
   Poles, cables, and wire.......................................... 2.00-11.33%
</TABLE>
 
 
(3)LONG-TERM DEBT
 
  Long-term debt at December 31, 1996 and 1997 consists of the following:
 
<TABLE>
<CAPTION>
                                                     DECEMBER 31, DECEMBER 31,
                                                         1996         1997
                                                     ------------ ------------
<S>                                                  <C>          <C>
First mortgage notes payable to the Rural Utilities
 Service at 8.72%, due in quarterly installments of
 $158,802 including interest, through December 31,
 2009...............................................  $4,914,431   4,700,767
First mortgage note payable to the Rural Utilities
 Service at 10.782%, due in quarterly installments
 of $70,658 including interest, through December 31,
 2016...............................................   2,309,321   2,274,222
First mortgage note payable at prime, (8.50% and
 8.25% at December 31, 1997 and 1996, respectively)
 due in quarterly installments of $51,667 plus
 interest, through December 31, 2004................   1,653,333   1,446,667
Capital lease at 8.15% due in monthly installments
 of $3,498 including interest, through March 31,
 2000...............................................     119,505      86,034
Note payable at prime plus 1/2% (9.00% and 8.75% at
 December 31, 1997 and 1996, respectively) due in
 monthly installments of $10,833 plus interest,
 through February 1, 1999, at which time remaining
 principal of $563,334 is due in full, secured by
 interest in TECH accounts receivable, inventory,
 and a second lien on property and equipment........     823,333     693,334
Note payable at prime plus 1/2% (9.00% and 8.75% at
 December 31, 1997 and 1996, respectively) due in
 monthly installments of $1,944 plus interest,
 through March 1, 2002, secured by TECH property and
 equipment..........................................     122,501      99,167
                                                      ----------   ---------
Total long-term debt................................   9,942,424   9,300,191
Less discount on long-term debt.....................     (28,742)    (26,532)
Less current maturities.............................    (642,254)   (668,278)
                                                      ----------   ---------
  Long-term debt, net of current maturities.........  $9,271,428   8,605,381
                                                      ==========   =========
</TABLE>
 
  Certain of the obligations contain covenants which restrict the amount of
dividends that may be paid without approval and limit other obligations,
guarantees, and require maintenance of certain operating ratios. A subsidiary
of the Company, TECH, was in violation of three covenants related to notes
payable as of December 31, 1997, with respect to working capital, current
ratio and capital expenditure levels. Appropriate waivers were obtained in all
cases.
 
                                     F-38
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The estimated minimum future principal payments at December 31, 1997 are
scheduled as follows:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1997
                                                               -----------------
<S>                                                            <C>
1998..........................................................    $  668,278
1999..........................................................     1,130,031
2000..........................................................       565,428
2001..........................................................       585,429
2002..........................................................       601,144
Thereafter....................................................     5,749,881
                                                                  ----------
                                                                  $9,300,191
                                                                  ==========
</TABLE>
 
  As of December 31, 1996 and 1997, the Company had available unsecured lines
of credit totaling $8,500,000, with interest based on referenced rates at the
times of borrowing.
 
(4)OTHER ASSETS
 
  Other assets at December 31, 1996 and 1997 consist of the following:
 
<TABLE>
<CAPTION>
                                                     DECEMBER 31, DECEMBER 31,
                                                         1996         1997
                                                     ------------ ------------
   <S>                                               <C>          <C>
   Investments in partnerships......................  $1,065,269   1,177,910
   Investments in marketable equity securities,
    available for sale..............................     738,284     801,044
   Deferred pension expense due to regulatory
    requirements (note 7)...........................     625,991   1,037,246
   Other............................................     276,920     260,061
                                                      ----------   ---------
                                                      $2,706,464   3,276,261
                                                      ==========   =========
</TABLE>
 
(5)INCOME TAXES
 
  The Company accounts for income taxes using the asset and liability method
required by Financial Accounting Standards Board Statement No. 109 "Accounting
for Income Taxes". Generally accepted accounting principles for regulated
enterprises adopting Statement 109 required the recognition of deferred tax
assets and liabilities. The net effect of deferred regulatory assets and
liabilities of approximately $275,000 was recorded as an increase to deferred
income tax liabilities as of January 1, 1993, and is being amortized over a
fifteen-year period.
 
  The balance of deferred regulatory assets and liabilities was $220,000 and
$238,333 at December 31, 1997 and 1996, respectively.
 
  The components of income tax expense (benefit) are as follows:
 
<TABLE>
<CAPTION>
                             DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
                                 1995         1996         1997       1997      1998
                             ------------ ------------ ------------ --------- ---------
   <S>                       <C>          <C>          <C>          <C>       <C>
   Income taxes charged to
    the statements of
    operations
   Federal:
     Current...............   $1,299,933   1,199,269    1,644,646    382,207   302,993
     Deferred..............     (212,521)   (324,320)    (363,639)   (67,386) (161,391)
                              ----------   ---------    ---------    -------  --------
     Income taxes charged
      to the statements of
      operations...........    1,087,412     874,949    1,281,007    314,821   141,602
   Income taxes charged
    (credited) to
    stockholders' equity
     Deferred..............       94,692     (85,360)      21,340     44,010    91,353
                              ----------   ---------    ---------    -------  --------
       Total income taxes..   $1,182,104     789,589    1,302,347    358,931   232,955
                              ==========   =========    =========    =======  ========
</TABLE>
 
 
                                     F-39
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1997 are presented below.
 
<TABLE>
<CAPTION>
                                                         1996         1997
                                                      -----------  -----------
   <S>                                                <C>          <C>
   Deferred tax assets:
     Accounts receivable due to allowance for
      doubtful accounts.............................  $    42,274  $    86,501
     Investments in partnerships....................      190,951      298,853
     Warranty reserve...............................        2,370        3,168
     Current deferred revenue.......................          --         2,367
     Deferred revenue due to regulatory require-
      ments.........................................       80,487       62,601
     Deferred pension expense.......................          --        68,746
     Deferred expense due to environmental
      remediation...................................          --        48,745
                                                      -----------  -----------
       Total gross deferred tax assets..............      316,082      570,981
     Less valuation allowance.......................          --           --
                                                      -----------  -----------
       Net deferred tax assets......................      316,082      570,981
                                                      -----------  -----------
   Deferred tax liabilities:
     Plant and equipment, principally due to differ-
      ences in depreciation.........................   (4,424,130)  (4,313,310)
     Unamortized investment tax credits.............     (340,642)    (275,528)
     Deferred pension expense due to regulatory
      requirements..................................      (55,899)     (13,838)
     Investment differences due to market adjust-
      ments.........................................     (116,836)    (248,183)
     Unamortized discount on debt...................       (9,772)      (9,020)
                                                      -----------  -----------
       Total gross deferred tax liabilities.........   (4,947,279)  (4,859,879)
                                                      -----------  -----------
       Net deferred tax liability...................  $(4,631,197) $(4,288,898)
                                                      ===========  ===========
</TABLE>
 
  In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences.
 
(6)LEASES
 
  The Company leases equipment under operating leases, for which the future
non-cancelable minimum lease payments as of December 31, 1997 are as follows:
 
<TABLE>
<CAPTION>
   YEAR ENDING DECEMBER 31
   -----------------------
   <S>                                                                  <C>
      1998............................................................. $234,627
      1999.............................................................  206,003
      2000.............................................................  134,188
      2001.............................................................    7,486
                                                                        --------
                                                                        $582,304
                                                                        ========
</TABLE>
 
 
                                     F-40
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Total rental expense for all operating leases was $228,908, $334,647 and
$303,017 for 1995, 1996 and 1997, and $66,847 and $60,986 for the three months
ended March 31, 1997 and March 31, 1998, respectively.
 
 
(7)RETIREMENT PLANS
 
  The Company has a qualified defined benefit pension plan covering
substantially all of its full-time employees. The Company's funding policy is
to contribute annually an amount within the range established by the Employee
Retirement Income Security Act (ERISA) of 1974. Contributions to the plan are
intended to provide not only for benefits attributed to service to date but
also for those expected to be earned in the future. Effective January 1, 1996,
the plan was frozen with respect to the employees of TECH.
 
  The defined benefit plan was amended in 1997 to cease benefit accruals for
all participants in preparation to terminate and liquidate the plan in 1998.
The amendment also increased benefits to the level of the fair value of plan
assets at December 31, 1997 or $5,452,047. In accordance with regulatory
policy, a curtailment gain of $1,010,268 was deferred as of December 31, 1997
and is included in other long-term liabilities on the accompanying
consolidated balance sheet.
 
  Net periodic pension cost for 1995, 1996 and 1997 included the following
components:
 
<TABLE>
<CAPTION>
                                                  1995       1996      1997
                                                ---------  --------  --------
   <S>                                          <C>        <C>       <C>
   Service cost-benefits earned during the
    period..................................... $ 284,812   404,989   435,351
   Interest cost on projected benefit
    obligations................................   349,426   434,571   476,026
   Actual return on plan assets................  (197,636) (678,898) (529,998)
   Net amortization and deferral...............  (150,102)  488,347   167,308
                                                ---------  --------  --------
   Net periodic pension cost...................   286,500   649,009   548,687
   Increase (decrease) due to pension expense
    computed under regulatory requirements.....    14,660   (34,839) (548,687)
   Amortization of deferred pension asset......       --     68,716   137,432
                                                ---------  --------  --------
   Pension cost expensed due to regulatory
    requirements............................... $ 301,160   682,886   137,432
                                                =========  ========  ========
</TABLE>
 
  The following table sets forth the funded status of the plan and amounts
recognized in the Company's balance sheets at December 31, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                            1996       1997
                                                         ----------  ---------
   <S>                                                   <C>         <C>
   Projected benefit obligation:
     Vested employees................................... $3,971,160  5,452,047
     Non-vested employees...............................    253,167        --
                                                         ----------  ---------
       Accumulated benefit obligation...................  4,224,327  5,452,047
   Effect of projected future compensation levels.......  2,667,089        --
                                                         ----------  ---------
       Total projected benefit obligation...............  6,891,416  5,452,047
   Plan assets at fair value (primarily corporate
    securities and government bonds)....................  5,434,130  5,452,047
                                                         ----------  ---------
   Projected benefit obligation in excess of plan
    assets.............................................. (1,457,286)       --
   Unrecognized net obligation..........................     38,828        --
   Unrecognized prior service cost......................    (57,287)       --
   Unrecognized net (gain) loss.........................  1,014,164        --
                                                         ----------  ---------
   Accrued pension obligation........................... $ (461,581)       --
                                                         ==========  =========
</TABLE>
 
 
                                     F-41
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The assumptions used in determining the funded status information and
pension expense under Financial Accounting Standards Board Statement No. 87
(SFAS No. 87) for 1995, 1996 and 1997 were:
 
<TABLE>
<CAPTION>
                                                               1995  1996  1997
                                                               ----- ----- -----
   <S>                                                         <C>   <C>   <C>
   Discount rate.............................................. 7.15% 7.15% 7.00%
   Expected long-term rate of return on assets................ 9.50% 8.15% 7.50%
   Rate of increase in compensation levels.................... 5.00% 5.00% 5.00%
</TABLE>
 
  In accordance with the provisions of Financial Accounting Standards Board
Statement No. 71, a deferred asset of $625,991 $1,037,246 and at December 31,
1996 and 1997, respectively, has been established to provide for any variation
between pension expense computed under SFAS No. 87 and pension expense
computed for regulatory purposes.
 
  The Company has a defined contribution retirement plan, pursuant to Section
401(k) of the Internal Revenue Code, covering substantially all of its full-
time employees. The plan provides that participants may contribute a
percentage of compensation, but not in excess of the maximum allowed under the
Code. Prior to 1996, the plan made no provision for employer contributions.
Effective January 1, 1996, full-time employees of Taconic Technology having at
least one year of service were eligible to receive employer contributions
under the plan of 5% of gross wages and matching up to 3% of employee
contributions. Effective January 1, 1997, full-time employees of Taconic
Telephone having at least one year of service were eligible for the same level
of employer contributions as Taconic Technology employees. The Company's
expense was $10,546 for 1996 and $344,616 for 1997 and $85,097 and $18,295 for
the three months ended March 31, 1997 and March 31, 1998, respectively. .
 
(8)SALE OF COMPANY
 
  During 1997, the Company's board of directors approved a definitive
agreement to sell 100% of the Company's common stock to MJD Ventures, Inc. of
Charlotte, N.C. The transaction received PSC approval in February, 1998 and is
expected to be consummated no later than the second quarter of 1998.
 
(9)ENVIRONMENTAL REMEDIATION
 
  During 1997, the Company engaged an environmental consultant to undertake an
environmental site assessment of all property owned by the Company. As a
result, the Company opted to remove all in-ground fuel tanks and replace most
with above ground storage tanks. In those locations where testing detected the
existence of soil contamination, remediation was either undertaken or planned.
Utilizing projected costs derived from the remediation plan, the Company was
able to develop estimates of cash payments for the remediation costs which are
considered fixed and reliably determinable. The aggregate cost related to
remediation, principally the removal and treatment of contaminated soil is
estimated to be $103,000. Other costs, including site assessments, testing and
tank removal and replacement are estimated to be $168,000. Approximately
$128,000 has been incurred as of December 31, 1997. The remaining estimated
costs have been recorded in current liabilities on the accompanying
consolidated balance sheet.
 
(10)DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued
Expenses: the carrying amount approximates fair value because of the short
maturity of these instruments
 
  Investments: the investments are stated at fair value
 
  Long-Term Debt: the carrying value of the Company's long-term debt
approximates fair value.
 
 
                                     F-42
<PAGE>
 
                   TACONIC TELEPHONE CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
(11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
<TABLE>
<CAPTION>
                            FIRST      SECOND     THIRD      FOURTH
    1996                   QUARTER    QUARTER    QUARTER    QUARTER      TOTAL
    ----                  ---------- ---------- ---------- ---------- -----------
<S>                       <C>        <C>        <C>        <C>        <C>
Revenue.................  $4,706,451 $4,869,411 $4,975,221 $4,724,890 $19,275,973
Income from operations..   1,020,069  1,048,612    923,243    442,130   3,434,054
Net earnings............     665,202    689,007    649,973    299,604   2,303,786
<CAPTION>
                            FIRST      SECOND     THIRD      FOURTH
    1997                   QUARTER    QUARTER    QUARTER    QUARTER      TOTAL
    ----                  ---------- ---------- ---------- ---------- -----------
<S>                       <C>        <C>        <C>        <C>        <C>
Revenue.................  $4,898,547 $5,031,223 $5,274,498 $5,192,794 $20,397,062
Income from operations..     960,769    964,894  1,129,248    700,517   3,775,428
Net earnings............     555,513    560,451    702,345    441,328   2,259,629
</TABLE>
 
(12) MAJOR CUSTOMERS
 
  The Company derives significant revenues from AT&T and NYNEX principally
from network access and billing and collection services. Such revenues
amounted to 19.9%, 18.3% and 16.6% for AT&T and 11.4%, 8.1%, and 8.5% for
NYNEX of total operating revenues for the years ended December 31, 1995, 1996
and 1997, respectively and 17.7% and 13.0% for AT&T and 8.7% and 7.4% for
NYNEX for the three months ended March 31, 1997 and 1998, respectively.
 
                                     F-43
<PAGE>
 
                         INDEPENDENT AUDITOR'S REPORT
 
To the Board of Directors and Shareholders
Ellensburg Telephone Company
 
  We have audited the accompanying consolidated balance sheet of Ellensburg
Telephone Company and subsidiary as of December 31, 1996 and 1997 and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall 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 Ellensburg
Telephone Company and subsidiary as of December 31, 1996 and 1997 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
 
              Moss Adams LLP
 
Seattle, Washington
February 11, 1998
 
                                     F-44
<PAGE>
 
                          ELLENSBURG TELEPHONE COMPANY
 
                           CONSOLIDATED BALANCE SHEET
                 DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998
 
<TABLE>
<CAPTION>
                                               DECEMBER 31
                                        --------------------------   MARCH 31,
                                            1996          1997          1998
                                        ------------  ------------  ------------
                                                                    (UNAUDITED)
 <S>                                    <C>           <C>           <C>
                ASSETS
 Current assets
   Cash...............................  $    793,800  $    575,500  $    377,828
   Short-term marketable securities...     4,549,500     4,893,600     6,441,152
   Receivables less allowance for
    uncollectibles:
    1996--$198,000; 1997--$209,500....       930,400     1,015,100     1,499,729
   Materials and supplies (first-in,
    first-out cost basis).............       264,100       220,000       243,598
   Prepaid expenses...................       170,200       198,200        68,313
   Income tax prepaid and deferred....       234,200        72,600       184,700
                                        ------------  ------------  ------------
     Total current assets.............     6,942,200     6,975,000     8,815,320
                                        ------------  ------------  ------------
 Other investments and assets.........     3,263,700     4,508,600     4,312,075
                                        ------------  ------------  ------------
 Property, plant and equipment, at
  cost................................    55,312,800    57,692,000    58,175,974
   Less accumulated depreciation......   (25,207,200)  (27,557,800)  (28,104,516)
                                        ------------  ------------  ------------
                                          30,105,600    30,134,200    30,071,458
                                        ------------  ------------  ------------
                                        $ 40,311,500  $ 41,617,800  $ 43,198,853
                                        ============  ============  ============
 LIABILITIES AND SHAREHOLDERS' EQUITY
 Current liabilities
   Current portion of long-term debt..  $    133,300  $        --   $        --
   Accounts payable...................     1,272,400       439,900     1,000,135
   Accrued liabilities................       865,500       791,700     1,377,204
                                        ------------  ------------  ------------
     Total current liabilities........     2,271,200     1,231,600     2,377,339
                                        ------------  ------------  ------------
 Deferred federal income tax..........     4,239,500     4,224,300     4,201,973
                                        ------------  ------------  ------------
 Employee benefit plans...............     1,429,000     1,748,300     1,827,797
                                        ------------  ------------  ------------
 Regulatory liability.................       482,900       429,600       429,600
                                        ------------  ------------  ------------
 Shareholders' equity
   Common stock, $10 par; authorized
    1,000,000 shares..................     6,851,600     6,851,600     6,851,600
   Additional paid-in capital.........    11,476,700    11,476,700    11,476,700
   Retained earnings..................    13,560,600    15,655,700    16,033,844
                                        ------------  ------------  ------------
                                          31,888,900    33,984,000    34,362,144
                                        ------------  ------------  ------------
                                        $ 40,311,500  $ 41,617,800  $ 43,198,853
                                        ============  ============  ============
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-45
<PAGE>
 
                          ELLENSBURG TELEPHONE COMPANY
 
                        CONSOLIDATED STATEMENT OF INCOME
                YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
                 THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                     DECEMBER 31                       MARCH 31
                         -------------------------------------  ------------------------
                            1995         1996         1997         1997         1998
                         -----------  -----------  -----------  -----------  -----------
                                                                (UNAUDITED)  (UNAUDITED)
<S>                      <C>          <C>          <C>          <C>          <C>
Operating revenues
  Local telephone
   services............. $ 3,386,000  $ 3,656,000  $ 3,894,700  $  942,783   $1,025,374
  Network access........   8,320,600    9,040,800    9,301,400   2,544,922    2,104,583
  Long distance
   services.............     138,000      108,500      104,700      26,778       21,251
  Miscellaneous
   revenues.............   1,386,100    1,269,100    1,397,200     339,979      354,482
  Uncollectible
   revenues.............     (45,800)     (15,500)     (39,300)    (13,875)       2,573
                         -----------  -----------  -----------  ----------   ----------
                          13,184,900   14,058,900   14,658,700   3,840,587    3,508,263
                         -----------  -----------  -----------  ----------   ----------
Operating expenses
  Plant operations......   1,957,300    2,310,700    2,298,500     605,994      528,670
  Depreciation and
   amortization.........   3,112,000    3,324,800    3,601,100     944,154      843,853
  Network operations....     350,400      297,000      340,100      73,088      114,187
  Marketing and customer
   services.............   1,439,800    1,571,900    1,610,800     443,877      414,444
  General and
   administrative.......   1,238,800    1,202,200    1,441,400     351,168      444,063
  Operating taxes.......     506,400      408,800      484,300     118,851      122,140
                         -----------  -----------  -----------  ----------   ----------
                           8,604,700    9,115,400    9,776,200   2,537,132    2,467,357
                         -----------  -----------  -----------  ----------   ----------
    Operating income....   4,580,200    4,943,500    4,882,500   1,303,455    1,040,906
                         -----------  -----------  -----------  ----------   ----------
Other income (expenses)
  Interest income.......     239,900      235,700      242,800      56,250       72,882
  Interest expense......      (1,000)        (100)        (100)        --           --
  Other income..........     317,800      515,000      811,600     192,847      155,332
                         -----------  -----------  -----------  ----------   ----------
                             556,700      750,600    1,054,300     249,097      228,214
                         -----------  -----------  -----------  ----------   ----------
    Income before income
     tax provision......   5,136,900    5,694,100    5,936,800   1,552,552    1,269,120
Income tax provision....   1,523,100    1,760,000    1,923,200     501,960      411,365
                         -----------  -----------  -----------  ----------   ----------
Net income.............. $ 3,613,800  $ 3,934,100  $ 4,013,600  $1,050,592   $  857,755
                         ===========  ===========  ===========  ==========   ==========
Earnings per share...... $      5.27  $      5.74  $      5.86  $     1.53   $     1.25
                         ===========  ===========  ===========  ==========   ==========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-46
<PAGE>
 
                          ELLENSBURG TELEPHONE COMPANY
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
                     THE THREE MONTHS ENDED MARCH 31, 1998
 
<TABLE>
<CAPTION>
                                               PAR
                                  NUMBER     VALUE OF  ADDITIONAL
                                 OF SHARES    COMMON     PAID-IN    RETAINED
                                OUTSTANDING   STOCK      CAPITAL    EARNINGS
                                ----------- ---------- ----------- -----------
<S>                             <C>         <C>        <C>         <C>
Balance, December 31, 1994.....   685,158   $6,851,600 $11,476,700 $ 9,644,000
  Cash dividends paid, $2.60
   per share...................       --           --          --   (1,781,400)
  Net income for the year......       --           --          --    3,613,800
                                  -------   ---------- ----------- -----------
Balance, December 31, 1995.....   685,158    6,851,600  11,476,700  11,476,400
  Cash dividends paid, $2.70
   per share...................       --           --          --   (1,849,900)
  Net income for the year......       --           --          --    3,934,100
                                  -------   ---------- ----------- -----------
Balance, December 31, 1996.....   685,158    6,851,600  11,476,700  13,560,600
  Cash dividends paid, $2.80
   per share...................       --           --          --   (1,918,500)
  Net income for the year......       --           --          --    4,013,600
                                  -------   ---------- ----------- -----------
Balance, December 31, 1997.....   685,158    6,851,600  11,476,700  15,655,700
  Cash dividends paid, $.70 per
   share.......................       --           --          --     (479,611)
  Net income for the three
   months......................       --           --          --      857,755
                                  -------   ---------- ----------- -----------
Balance, March 31, 1998........   685,158   $6,851,600 $11,476,700 $16,033,844
                                  =======   ========== =========== ===========
</TABLE>
 
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-47
<PAGE>
 
                          ELLENSBURG TELEPHONE COMPANY
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
                 THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                      DECEMBER 31                         MARCH 31
                         ----------------------------------------  ------------------------
                             1995          1996          1997         1997         1998
                         ------------  ------------  ------------  -----------  -----------
                                                                   (UNAUDITED)  (UNAUDITED)
<S>                      <C>           <C>           <C>           <C>          <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES
Net income.............  $  3,613,800  $  3,934,100  $  4,013,600  $ 1,050,592  $   857,755
Adjustments to
 reconcile net income
 to cash flows from
 operating activities
  Depreciation and
   amortization........     3,250,900     3,472,400     3,732,300      977,831      860,902
  Deferred income tax
   and investment
   credit..............        98,300       (61,600)      (15,200)     (15,146)     (22,327)
  Joint venture and
   affiliate income....      (250,000)     (310,900)     (736,000)      (9,837)    (131,755)
  Employee benefit
   plans...............       178,100       322,400       319,300       82,405       79,497
  Regulatory
   liability...........      (174,300)     (117,900)      (53,300)         --           --
  Changes in assets and
   liabilities
    Receivables........      (339,100)      113,800       (84,700)    (552,678)    (484,629)
    Materials and
     supplies..........       (32,100)      (52,800)       44,100          --       (23,598)
    Prepaid expenses...       (32,200)      (25,800)      (28,000)     114,818      129,887
    Income tax prepaid
     and deferred......      (151,000)     (210,400)      161,600      234,200       72,600
    Accounts payable
     and accrued
     liabilities.......       132,100       598,300      (906,300)    (259,057)     961,034
                         ------------  ------------  ------------  -----------  -----------
      Cash flows from
       operating
       activities......     6,294,500     7,661,600     6,447,400    1,623,128    2,299,366
                         ------------  ------------  ------------  -----------  -----------
CASH FLOWS FROM
 INVESTING ACTIVITIES
Additions to property,
 plant and equipment,
 net...................    (3,355,900)   (5,103,500)   (3,760,900)  (1,174,804)    (541,643)
Decrease (increase) in
 investments and other
 assets................    (1,458,000)    1,112,500      (508,900)    (630,000)      71,760
Proceeds from sales of
 marketable
 securities............    16,579,600    13,527,200    19,114,000    5,651,118    3,525,853
Purchases of marketable
 securities............   (15,840,400)  (15,469,600)  (19,458,100)  (5,733,777)  (5,073,397)
                         ------------  ------------  ------------  -----------  -----------
      Cash flows from
       investing
       activities......    (4,074,700)   (5,933,400)   (4,613,900)  (1,887,463)  (2,017,427)
                         ------------  ------------  ------------  -----------  -----------
CASH FLOWS FROM
 FINANCING ACTIVITIES
Payments of long-term
 debt..................      (133,300)     (133,300)     (133,300)         --           --
Cash dividends paid....    (1,781,400)   (1,849,900)   (1,918,500)    (479,611)    (479,611)
                         ------------  ------------  ------------  -----------  -----------
      Cash flows from
       financing
       activities......    (1,914,700)   (1,983,200)   (2,051,800)    (479,611)    (479,611)
                         ------------  ------------  ------------  -----------  -----------
CHANGE IN CASH.........       305,100      (255,000)     (218,300)    (743,946)    (197,672)
CASH
Beginning of year......       743,700     1,048,800       793,800      793,800      575,500
                         ------------  ------------  ------------  -----------  -----------
End of year............  $  1,048,800  $    793,800  $    575,500  $    49,854  $   377,828
                         ============  ============  ============  ===========  ===========
SUPPLEMENTAL
 INFORMATION
Cash paid during the
 year for:
  Income tax...........  $  1,750,100  $  2,150,000  $  1,830,000  $       --   $    60,000
                         ============  ============  ============  ===========  ===========
  Interest.............  $      1,000  $        100  $        100  $       --   $       --
                         ============  ============  ============  ===========  ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-48
<PAGE>
 
                         ELLENSBURG TELEPHONE COMPANY
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
         DECEMBER 31, 1995, 1996 AND 1997 AND MARCH 31, 1997 AND 1998
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
 
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  The Company's principal business is operation of a telephone company serving
Ellensburg and Selah, Washington and surrounding areas. The Company also
provides wireless communication services directly and with other joint venture
partners.
 
  USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and a wholly-owned subsidiary. The Company's
investments in affiliated ventures (not majority owned) engaged in paging,
cellular and other services are reported on the equity method. Income from
these ventures amounted to $250,000, $310,900, $736,000 and $140,000 for the
years ended December 31, 1995, 1996, 1997 and for the three months ended March
31, 1998, respectively. Investments in ventures where the ownership percentage
is less than 20% are carried at cost. All significant intercompany accounts
and transactions have been eliminated.
 
  PROPERTY, PLANT AND EQUIPMENT--The cost of property, plant and equipment is
depreciated on the straight-line composite method based upon the estimated
useful lives of the related assets. Provisions for depreciation were 6.4%,
6.4%, 6.5% and 6.5% of average depreciable assets in service for 1995, 1996,
1997 and for the three months ended March 31, 1998, respectively.
 
  INCOME TAX--Deferred income taxes are computed using the liability method.
Under the liability method, taxes are recorded based on the future tax effects
of the difference between the tax and financial reporting bases of the
Company's assets and liabilities. In estimating future tax consequences, all
expected future events are considered, except for potential income tax law or
rate changes. Deferred income tax expense is measured by the change in the net
deferred income tax asset or liability during the year. For regulated
companies, the deferred regulatory liabilities are recognized at the revenue
requirement level.
 
  Investment tax credits are deferred and amortized to income over the
estimated useful lives of the related plant additions. The net deferrals
accumulate to $252,700, $183,400, $122,900 and $111,600 at December 31, 1995,
1996, 1997 and March 31, 1998, respectively.
 
  NETWORK ACCESS REVENUES--Certain network access revenues are recorded on an
estimated basis each month. These revenues are subject to later settlement
with an exchange carrier association based on studies of actual costs. The
1995, 1996 and 1997 revenues were increased by $113,200, $308,200 and
$145,900, respectively, representing prior years' amounts refunded by the
exchange carrier association. Certain network access revenue for 1995, 1996
and 1997 is subject to final settlement. There were no increases or decreases
for the first three months of 1998.
 
  INVESTMENTS--Short-term marketable securities are carried at cost, adjusted
for amortization of premium and accretion of discounts, which are recognized
as adjustments to income. Such cost approximates market. These securities
consist of U.S. Treasury Bills and, generally, have a maturity of less than
twelve months from date of purchase. Under the provisions of Statement of
Financial Accounting Standards No. 115, Investments in Debt and Equity
Securities, these investments are classified as held-to-maturity.
 
                                     F-49
<PAGE>
 
                         ELLENSBURG TELEPHONE COMPANY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  CALCULATION OF EARNINGS AND DIVIDENDS PER SHARE--Earnings per share are
computed based on the average number of shares outstanding. These calculations
are in conformity with recently issued Statement of Financial Accounting
Standards No. 128. Dividends per share are computed based on the number of
shares outstanding on the date the dividend is paid.
 
  RECLASSIFICATIONS--Certain reclassifications of 1995 and 1996 balances have
been made to conform to the 1997 presentation. The reclassifications have no
effect on net income for 1995 and 1996.
 
  FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS--Financial instruments
which potentially subject the Company to concentrations of credit risk consist
of cash, short-term marketable securities and receivables. The Company
maintains bank accounts with major financial institutions and balances from
time to time exceed insured limits. Investments are in securities issued by
the U.S. Government and its agencies. Receivables are due from a large number
of customers in the Company's service area, and also include settlements from
other carriers and exchange associations. The Company believes these policies
do not result in significant risks.
 
  FUTURE ACCOUNTING CHANGES--Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" will be effective for the Company in
1998. This standard requires that certain items recognized under accounting
principles as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
 
  Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" will be effective for the
Company in 1998. This standard revises employers' disclosures about pension
and other post-retirement benefit plans. It does not change the measurement or
recognition of those plans.
 
  Other recent pronouncements do not affect the Company.
 
NOTE 2--LINES OF CREDIT
 
  The Company has a revolving credit facility with a bank with maximum
borrowings of $3,000,000, bearing interest at the bank's reference lending
rate plus .25%. The line is unsecured and matures October 1, 1998. The Company
also has a revolving credit facility with a finance cooperative with maximum
borrowings of $6,000,000, bearing interest at the prime rate plus 1.50%. The
line is unsecured, and available through March 10, 2001. The Company has an
understanding with the lenders that the total outstanding balances will not
exceed $6,000,000. There were no balances outstanding on either credit line at
December 31, 1996, 1997, or March 31, 1998.
 
NOTE 3--INCOME TAX
 
  The income tax provision is composed of the following:
 
<TABLE>
<CAPTION>
                                      DECEMBER 31                     MARCH 31
                            ----------------------------------  -----------------------
                               1995        1996        1997       1997      1998
                            ----------  ----------  ----------  --------  --------
   <S>                      <C>         <C>         <C>         <C>       <C>       <C>
   Current................. $1,599,100  $2,122,500  $2,000,700  $521,327  $426,365
   Deferred................      1,200    (293,200)    (17,000)   (4,250)   (3,672)
   Investment credits
    amortized..............    (77,200)    (69,300)    (60,500)  (15,117)  (11,328)
                            ----------  ----------  ----------  --------  --------
                            $1,523,100  $1,760,000  $1,923,200  $501,960  $411,365
                            ==========  ==========  ==========  ========  ========
</TABLE>
 
                                     F-50
<PAGE>
 
                         ELLENSBURG TELEPHONE COMPANY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The difference between the total expected income tax provision at the
federal statutory rate of 34% and the actual provision is accounted for as
follows:
 
<TABLE>
<CAPTION>
                                       DECEMBER 31                     MARCH 31
                             ----------------------------------  -----------------------
                                1995        1996        1997       1997      1998
                             ----------  ----------  ----------  --------  --------
   <S>                       <C>         <C>         <C>         <C>       <C>       <C>
    Computed expected tax
     expense...............  $1,746,600  $1,936,000  $2,018,500  $527,875  $431,541
    Investment tax credit
     amortization..........     (77,200)    (69,300)    (60,500)  (15,117)  (11,328)
    Rate differential on
     temporary differences
     that are reversing....     (53,000)    (53,000)    (53,000)  (13,248)  (13,248)
    Other, net.............     (93,300)    (53,700)     18,200     2,450     4,400
                             ----------  ----------  ----------  --------  --------
      Income tax
       provision...........  $1,523,100  $1,760,000  $1,923,200  $501,960  $411,365
                             ==========  ==========  ==========  ========  ========
</TABLE>
 
  The components of the deferred income tax assets and liabilities are as
follows:
 
<TABLE>
<CAPTION>
                                               DECEMBER 31
                                         ------------------------   MARCH 31
                                            1996         1997         1998
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
  Deferred tax assets
    Pension costs and benefit plans..... $   485,900  $   594,600  $   621,650
    Other investments...................       4,300        4,300        4,300
    Allowance for doubtful accounts.....      67,000       71,300       64,000
    Accrued vacation....................     116,000      120,700      120,700
                                         -----------  -----------  -----------
      Total deferred income tax assets..     673,200      790,900      810,650
                                         -----------  -----------  -----------
  Deferred tax liabilities
    Depreciation and asset basis
     differences........................  (4,729,700)  (4,823,200)  (4,827,923)
                                         -----------  -----------  -----------
      Net deferred income taxes......... $(4,056,500) $(4,032,300) $(4,017,273)
                                         ===========  ===========  ===========
</TABLE>
 
  Net deferred income tax balances at December 31 are classified as follows:
 
<TABLE>
<CAPTION>
                                                DECEMBER 31
                                          ------------------------    MARCH 31
                                             1996         1997          1998
                                          -----------  -----------  ------------
<S>                                       <C>          <C>          <C>
  Deferred tax asset--current............ $   183,000  $   192,000  $    184,700
  Deferred tax liabilities--long-term....  (4,239,500)  (4,224,300)  (4,201,973)
                                          -----------  -----------  ------------
                                          $(4,056,500) $(4,032,300) $(4,017,273)
                                          ===========  ===========  ============
</TABLE>
 
  As a result of implementing the liability method of accounting for income
taxes, the Company recorded a regulatory liability, which represents the
reduction of deferred taxes resulting from the decrease in the statutory
federal income tax rate to 34%. This reduction of accumulated deferred income
taxes is being amortized over the regulatory lives of the related depreciable
assets concurrent with their inclusion in the ratemaking base.
 
                                     F-51
<PAGE>
 
                         ELLENSBURG TELEPHONE COMPANY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 4--ACCRUED LIABILITIES
 
  Accrued liabilities at December 31, 1996 and 1997 include the following
components:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31
                                                    -----------------  MARCH 31
                                                      1996     1997      1998
                                                    -------- -------- ----------
<S>                                                 <C>      <C>      <C>
  Vacation pay..................................... $342,600 $354,900 $  354,900
  Property taxes...................................  350,100  371,100    464,886
  Income tax payable...............................      --       --     485,796
  Other............................................  172,800   65,700     71,622
                                                    -------- -------- ----------
                                                    $865,500 $791,700 $1,377,204
                                                    ======== ======== ==========
</TABLE>
 
NOTE 5--EMPLOYEE BENEFIT PLANS
 
  The Company has a defined benefit pension plan which covers substantially
all employees. This plan provides pension benefits based upon participants'
compensation levels and length of service. The Company's funding policy is to
contribute amounts deductible for federal income tax purposes. The Company
contributed $99,000 in 1995, $83,200 in 1996, $88,100 in 1997 and $0 in the
three months ended March 31, 1997 and 1998, respectively. Pension cost
amounted to $279,700, $339,600 and $321,400 for 1995, 1996 and 1997,
respectively.
 
  Pension cost for the years ended December 31, 1995, 1996 and 1997 includes
the following components:
 
<TABLE>
<CAPTION>
                                                  1995       1996       1997
                                                ---------  ---------  ---------
<S>                                             <C>        <C>        <C>
  Service cost................................. $ 191,300  $ 228,500  $ 224,300
  Interest cost................................   420,900    485,500    511,700
  Return on assets.............................  (585,100)  (555,400)  (819,800)
  Amortization of transition adjustment........   252,600    181,000    405,200
                                                ---------  ---------  ---------
  Net pension cost............................. $ 279,700  $ 339,600  $ 321,400
                                                =========  =========  =========
</TABLE>
 
  The following table sets forth the plan's funded status and amounts
recognized in the accompanying balance sheet at December 31, 1996 and 1997.
 
<TABLE>
<CAPTION>
                                                             1996       1997
                                                          ---------- ----------
<S>                                                       <C>        <C>
  Actuarial present value of benefit obligations
    Vested benefit obligation............................ $5,314,000 $5,809,800
                                                          ========== ==========
    Accumulated benefit obligation....................... $5,326,100 $5,909,000
                                                          ========== ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                         1996         1997
                                                      -----------  -----------
<S>                                                   <C>          <C>
  Projected benefit obligation....................... $(7,575,600) $(8,009,400)
  Fair value of plan assets..........................   6,011,700    6,774,800
                                                      -----------  -----------
  Projected benefit obligation in excess of (less
   than) plan assets.................................  (1,563,900)  (1,234,600)
  Unrecognized amounts of net assets, liabilities and
   gains.............................................     386,900     (175,700)
                                                      -----------  -----------
  Pension plan obligation............................ $(1,177,000) $(1,410,300)
                                                      ===========  ===========
</TABLE>
 
                                     F-52
<PAGE>
 
                         ELLENSBURG TELEPHONE COMPANY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The actuarial present value of the projected benefit obligation at December
31, 1996 and 1997, respectively, was determined using a weighted average
discount rate of 7.0%, and a rate of increase in future compensation levels of
5.5%. The expected long-term rate of return on assets was 8%.
 
  The Company applies Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Post-retirement Benefits Other than Pensions ("FAS
106"), which requires the cost of nonpension, post-retirement benefits granted
to employees to be accrued and recognized as expense over the period in which
the employee provides services and becomes eligible to receive benefits. The
accumulated post-retirement benefits granted to employees as of January 1,
1993 amounted to approximately $677,000, which is being amortized over a 20
year period. The Company recognized net periodic post-retirement benefit costs
approximating $78,900, $72,500, $93,400, $17,000 and $21,000 in 1995, 1996,
1997 and for the three months ended March 31, 1997 and 1998, respectively. The
recorded obligation for this plan is $252,000, $338,000 and $359,000 at
December 31, 1996, 1997 and March 31, 1998, respectively. The accumulated
post-retirement benefits and net periodic post-retirement benefit costs are
based upon an assumed medical inflation rate of 7.0%, which is subject to
change. An increase in the assumed medical inflation rate of 1.0% would
effectively increase the accumulated post-retirement benefits obligation by
13% and the net periodic benefit expense by 15%.
 
  Substantially all employees are eligible to participate in a thrift plan
which allows each employee to contribute up to 6% of individual earnings to
the plan. Company contributions to the plan are at least one half of the
employee contributions and amounted to $74,800 in 1995, $66,300 in 1996,
$82,400 in 1997 and $21,100 and $22,900 for the three months ended March 31,
1997 and 1998, respectively. It is the current policy of the plan trustees to
invest contributions in common stock of the Company, when available, and U.S.
government securities.
 
NOTE 6--PROPOSED MERGER
 
  The Company has entered into an Agreement and Plan of Merger dated December
31, 1997 (the "Merger Agreement"), which is subject to approval by the
shareholders at a special meeting to be held on February 24, 1998. Under terms
of the Merger Agreement, and as more fully explained in the Proxy Statement,
the Company's shareholders will receive cash for their shares of common stock.
 
                                     F-53
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Directors and Stockholders
Utilities, Inc. and Subsidiaries
 
  We have audited the accompanying consolidated balance sheets of Utilities,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income and retained earnings, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. 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 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 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 consolidated financial position
of Utilities, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
results of their consolidated operations and their consolidated cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
 
                                          Berry, Dunn, McNeil & Parker
 
Portland, Maine
February 12, 1998 (except for Notes 3, 13, and 14, which are dated May 17,
1998, July 31, 1998, and March 27, 1998, respectively)
 
 
                                     F-54
<PAGE>
 
                        UTILITIES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
           DECEMBER 31, 1997 AND 1996 AND MARCH 31 AND JUNE 30, 1998
 
<TABLE>
<CAPTION>
                                      DECEMBER 31,
                                 -----------------------  MARCH 31,   JUNE 30,
                                    1997        1996        1998        1998
                                 ----------- ----------- ----------- -----------
                                                         (UNAUDITED) (UNAUDITED)
<S>                              <C>         <C>         <C>         <C>
            ASSETS
Current assets
  Cash and cash equivalents....  $ 6,999,028 $ 4,297,997 $ 4,830,278 $ 3,863,729
  Accounts receivable, net of
   allowance for doubtful
   accounts of $42,664 in 1997,
   $45,829 in 1996, $14,986 at
   March 31, 1998, and $17,631
   at June 30, 1998............    2,818,058   2,580,390   3,081,515   3,435,891
  Due from affiliates..........       13,396       6,886         --       48,189
  Recoverable income taxes.....          --          --      169,621      62,630
  Materials and supplies.......      153,547     116,334     138,596     257,772
  Prepaid expenses.............       12,725      48,150      13,507     349,452
                                 ----------- ----------- ----------- -----------
    Total current assets.......    9,996,754   7,049,757   8,233,517   8,017,663
                                 ----------- ----------- ----------- -----------
Property, plant, and equipment,
 at cost
  Telecommunications plant in
   service
    General support assets.....    6,200,971   6,156,449   6,189,111   6,188,856
    Central office equipment...   17,977,267  15,999,835  17,598,995  17,616,588
    Information
     origination/termination
     equipment.................      162,417     283,704     162,417     162,417
    Cable and wire facilities..   20,599,704  19,636,679  20,590,636  20,645,266
    Cellular communications
     plant.....................    1,203,173   1,192,851   1,203,173   1,196,861
                                 ----------- ----------- ----------- -----------
                                  46,143,532  43,269,518  45,744,332  45,809,988
    Less accumulated
     depreciation..............   24,041,978  21,233,463  24,527,391  25,393,763
                                 ----------- ----------- ----------- -----------
                                  22,101,554  22,036,055  21,216,941  20,416,225
Telecommunications plant under
 construction..................      647,549     567,755   1,032,974   1,911,402
                                 ----------- ----------- ----------- -----------
    Net property, plant, and
     equipment.................   22,749,103  22,603,810  22,249,915  22,327,627
                                 ----------- ----------- ----------- -----------
Other assets
  Cellular license, net........    1,730,786   1,824,338   1,707,398   1,684,010
  Investment in and advances to
   Portland Cellular
   Partnership.................      777,784     785,778     789,340     848,245
  Investment in nontraded
   stocks......................    1,871,091   1,913,859   1,871,091   1,826,767
  Deferred charges, net........    1,220,984     700,510   1,359,050   1,605,525
  Goodwill, net................    8,150,527   8,420,707   8,085,006   8,020,497
                                 ----------- ----------- ----------- -----------
    Total other assets.........   13,751,172  13,645,192  13,811,885  13,985,044
                                 ----------- ----------- ----------- -----------
                                 $46,497,029 $43,298,759 $44,295,317 $44,330,334
                                 =========== =========== =========== ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-55
<PAGE>
 
                        UTILITIES, INC. AND SUBSIDIARIES
 
                    CONSOLIDATED BALANCE SHEETS--(CONTINUED)
 
           DECEMBER 31, 1997 AND 1996 AND MARCH 31 AND JUNE 30, 1998
 
<TABLE>
<CAPTION>
                                 DECEMBER 31,
                            ------------------------   MARCH 31,    JUNE 30,
                               1997         1996         1998         1998
                            -----------  -----------  -----------  -----------
                                                      (UNAUDITED)  (UNAUDITED)
<S>                         <C>          <C>          <C>          <C>
      LIABILITIES AND
    STOCKHOLDERS' EQUITY
Current liabilities
  Current portion of long-
   term debt............... $ 1,889,584  $ 1,878,639  $ 1,960,439  $ 1,960,439
  Dividends payable........   1,082,522       82,524       82,522       82,522
  Accounts payable.........   1,213,178    1,942,039    1,467,861    1,937,726
  Due to affiliates........         --           --        11,693          --
  Income taxes payable.....   1,201,889      162,202          --           --
  Accrued expenses.........     535,094      294,220      675,523      410,640
  Accrued wages............     291,586      338,187      304,077      322,455
  Accrued interest.........     235,869      261,517      229,672      224,858
  Customer deposits........      50,333       48,590       36,459       58,533
                            -----------  -----------  -----------  -----------
    Total current
     liabilities...........   6,500,055    5,007,918    4,768,246    4,997,173
                            -----------  -----------  -----------  -----------
Deferred credits
  Income taxes.............   3,395,612    2,388,995    3,453,190    3,447,819
  Unamortized investment
   tax credits.............     143,497      191,324      131,540      119,583
  Other deferred credits...     259,112      298,086      268,855      278,598
                            -----------  -----------  -----------  -----------
    Total deferred
     credits...............   3,798,221    2,878,405    3,853,585    3,846,000
                            -----------  -----------  -----------  -----------
Long-term debt, excluding
 current portion...........  24,022,957   25,885,685   23,484,054   22,969,336
Other liabilities..........     773,243      596,379      776,961      810,090
                            -----------  -----------  -----------  -----------
    Total liabilities......  35,094,476   34,368,387   32,882,846   32,622,599
                            -----------  -----------  -----------  -----------
Minority interest..........      37,500       42,000       37,500       33,000
                            -----------  -----------  -----------  -----------
Stockholders' equity
  Common stock, no par
   value; authorized 50,000
   shares, issued 31,136
   shares, outstanding
   30,792 shares...........     815,205      815,205      815,205      815,205
  Retained earnings........  10,622,318    8,145,637   10,632,236   10,932,000
                            -----------  -----------  -----------  -----------
                             11,437,523    8,960,842   11,447,441   11,747,205
  Less common stock in
   treasury, 344 shares, at
   cost....................     (72,470)     (72,470)     (72,470)     (72,470)
                            -----------  -----------  -----------  -----------
    Total stockholders'
     equity................  11,365,053    8,888,372   11,374,971   11,674,735
                            -----------  -----------  -----------  -----------
                            $46,497,029  $43,298,759  $44,295,317  $44,330,334
                            ===========  ===========  ===========  ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-56
<PAGE>
 
                        UTILITIES, INC. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
               YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 AND
             THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 AND
                 SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                     DECEMBER 31,                       MARCH 31,                 JUNE 30,
                          -------------------------------------  ------------------------  ------------------------
                             1997         1996         1995         1998         1997         1998         1997
                          -----------  -----------  -----------  -----------  -----------  -----------  -----------
                                                                 (UNAUDITED)  (UNAUDITED)  (UNAUDITED)  (UNAUDITED)
<S>                       <C>          <C>          <C>          <C>          <C>          <C>          <C>
Operating revenues
 Basic local network
  services..............  $ 3,264,356  $ 3,049,929  $ 3,057,114  $  771,891   $  765,596   $1,620,146   $1,587,107
 Network access
  services..............    6,015,791    5,718,810    5,873,537   1,603,207    1,294,771    3,148,370    2,523,705
 Long-distance network
  services..............    5,557,779    5,476,960    5,329,295   1,406,256    1,332,532    2,830,550    2,807,127
 Miscellaneous..........      322,933      257,210      255,384      78,514       75,648      163,689      143,672
 Service revenues.......    1,198,392    1,777,538    1,369,284     269,334      357,455      624,713      629,566
 Cellular communications
  revenues..............    1,645,974    1,421,054    1,209,728     366,891      364,731      762,645      747,043
 Less uncollectible
  revenues..............     (174,359)    (145,279)    (141,599)    (48,549)     (42,562)     (82,862)     (79,464)
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
 Total operating
  revenue...............   17,830,866   17,556,222   16,952,743   4,447,544    4,148,171    9,067,251    8,358,756
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
Operating expenses
 Plant specific
  operations............    2,394,140    2,327,448    2,712,240     964,986      609,518    1,638,744    1,188,150
 Plant nonspecific
  operations............    2,255,028    1,963,413      929,670     624,998      605,588    1,198,044    1,226,847
 Depreciation and
  amortization..........    3,515,918    3,376,023    3,112,306     924,259      874,155    1,851,943    1,746,816
 Customer operations....    1,410,351    1,162,523    1,430,682     503,328      335,904    1,030,994      898,556
 Corporate operations...    2,272,279    2,275,615    2,684,846     428,514      573,747      844,795    1,109,748
 Cellular operations....    1,331,868    1,268,310    1,147,582     226,905      288,340      372,270      346,235
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
 Total operating
  expenses..............   13,179,584   12,373,332   12,017,326   3,672,990    3,287,252    6,936,790    6,516,352
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
Operating taxes
 Federal and state
  income taxes..........    1,357,276    1,475,894    1,178,488     146,941      131,768      524,259      356,958
 Other operating taxes..      653,907      647,566      656,085     174,420      146,239      377,428      332,852
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
 Total operating taxes..    2,011,183    2,123,460    1,834,573     321,361      278,007      901,687      689,810
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
 Net operating income...    2,640,099    3,059,430    3,100,844     453,193      582,912    1,228,774    1,152,594
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
Other income (expense)
 Interest and
  dividends.............      215,578      189,475      125,828      75,646       51,842      133,215      103,399
 Loss from Portland
  Cellular Partnership..     (282,994)    (284,932)    (338,871)    (28,444)     (79,891)     (89,539)    (190,567)
 Legal settlement.......    4,500,000          --           --          --           --           --           --
 Gain on sale of
  subsidiary............          --       367,516          --          --           --           --           --
 Goodwill amortization..     (270,180)    (269,820)    (275,285)    (65,521)     (67,545)    (130,030)    (135,090)
 Other, net.............      299,047      519,442      384,953      74,447       62,601      117,595      163,792
 Income taxes...........   (1,103,800)     542,242      723,657      98,539       95,200      247,076      248,236
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
 Net other income
  (expense).............    3,357,651    1,063,923      620,282     154,667       62,207      278,317      189,770
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
 Income before interest
  expense...............    5,997,750    4,123,353    3,721,126     607,860      645,119    1,507,091    1,342,364
 Income before interest
  expense (brought
  forward)..............    5,997,750    4,123,353    3,721,126     607,860      645,119    1,507,091    1,342,364
Interest expense........    2,187,849    2,647,443    2,937,493     514,670      584,181    1,030,863    1,127,440
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
 Net income before
  minority interest.....    3,809,901    1,475,910      783,633      93,190       60,938      476,228      214,924
Minority interest.......        3,130        3,450        3,810         750          840        1,500        1,680
                          -----------  -----------  -----------  ----------   ----------   ----------   ----------
 Net income.............  $ 3,806,771  $ 1,472,460  $   779,823  $   92,440   $   60,098   $  474,728   $  213,244
                          ===========  ===========  ===========  ==========   ==========   ==========   ==========
Earnings per common
 share..................  $    123.63  $     47.82  $     25.17  $     3.00   $     1.95   $    15.42   $     6.93
                          ===========  ===========  ===========  ==========   ==========   ==========   ==========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-57
<PAGE>
 
                        UTILITIES, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
               YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 AND
                  THREE-MONTH PERIOD ENDED MARCH 31, 1998 AND
                      SIX-MONTH PERIOD ENDED JUNE 30, 1998
 
<TABLE>
<CAPTION>
                                   COMMON   RETAINED    TREASURY
                                   STOCK    EARNINGS      STOCK       TOTAL
                                  -------- -----------  ---------  -----------
<S>                               <C>      <C>          <C>        <C>
Balances, December 31, 1994...... $815,205 $ 6,515,352  $  (9,737) $ 7,320,820
  Net income.....................      --      779,823        --       779,823
  Dividends declared, $9.84 per
   share.........................      --     (303,917)       --      (303,917)
  Purchase of stock for the
   treasury, 457 shares..........      --                (107,778)    (107,778)
  Sale of treasury stock, 191
   shares........................      --          --      45,045       45,045
                                  -------- -----------  ---------  -----------
Balances, December 31, 1995......  815,205   6,991,258    (72,470)   7,733,993
  Net income.....................      --    1,472,460        --     1,472,460
  Dividends declared, $10.33 per
   share.........................      --     (318,081)       --      (318,081)
                                  -------- -----------  ---------  -----------
Balances, December 31, 1996......  815,205   8,145,637    (72,470)   8,888,372
  Net income.....................      --    3,806,771        --     3,806,771
  Dividends declared, $43.20 per
   share.........................      --   (1,330,090)       --    (1,330,090)
                                  -------- -----------  ---------  -----------
Balances, December 31, 1997......  815,205  10,622,318    (72,470)  11,365,053
  Net income (unaudited).........      --       92,440        --        92,440
  Dividends declared, $2.68 Per
   share (unaudited).............      --      (82,522)       --       (82,522)
                                  -------- -----------  ---------  -----------
Balances, March 31, 1998......... $815,205 $10,632,236  $ (72,470) $11,374,971
                                  -------- -----------  ---------  -----------
  Net income (unaudited).........              382,287                 382,287
  Dividends declared, $2.68 per
   share (unaudited).............              (82,523)                (82,523)
                                  -------- -----------  ---------  -----------
Balances, June 30, 1998.......... $815,205 $10,932,000  $ (72,470) $11,674,735
                                  ======== ===========  =========  ===========
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-58
<PAGE>
 
                        UTILITIES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
               YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 AND
             THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 AND
                 SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                    DECEMBER 31,                       MARCH 31,                 JUNE 30,
                         -------------------------------------  ------------------------  ------------------------
                            1997         1996         1995         1998         1997         1998         1997
                         -----------  -----------  -----------  -----------  -----------  -----------  -----------
                                                                (UNAUDITED)  (UNAUDITED)  (UNAUDITED)  (UNAUDITED)
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>
Cash flows from
 operating activities
 Net income............  $ 3,806,771  $ 1,472,460  $   779,823  $    92,440  $   60,098   $   474,727  $   213,244
 Adjustments to
  reconcile net income
  to net cash provided
  (used) by operating
  activities
 Patronage dividends...          --           --       (39,069)         --          --            --           --
 Depreciation and
  amortization.........    3,795,180    3,645,843    3,387,591      989,780     941,700     1,981,973    1,881,906
 Deferred income
  taxes................      976,209      282,655      298,108       47,837      17,000       108,541       34,000
 Amortization of
  deferred investment
  tax credits..........      (45,823)     (45,823)     (47,827)     (11,957)    (11,456)      (23,914)     (22,912)
 Loss from Portland
  Cellular
  Partnership..........      282,994      284,932      338,871       28,444      79,891        89,539      190,567
 Legal settlement......   (4,500,000)         --           --           --          --            --           --
 Gain on sale of
  subsidiary...........          --      (367,516)         --           --          --            --           --
 Decrease (increase) in
 Accounts receivable...     (237,668)     381,814     (449,206)    (263,457)    (11,529)     (617,833)    (210,201)
 Recoverable income
  taxes................          --        31,583      (31,583)    (169,621)        --        (62,630)    (120,076)
 Due from affiliates...       (6,510)      (6,886)     144,178       13,396       6,886       (34,793)       6,886
 Materials and
  supplies.............      (37,213)     (48,379)      47,928       14,951     (56,283)     (104,225)    (149,846)
 Prepaid expenses......       35,425      (29,553)      (9,531)        (782)        --       (336,727)    (356,010)
 Increase (decrease) in
 Accounts payable......     (728,861)     781,663      290,110      254,683    (210,872)      724,548     (379,952)
 Income taxes payable..    1,039,687      162,202     (280,867)  (1,201,889)    (73,333)   (1,201,889)    (163,982)
 Due to affiliates.....          --       (85,840)      31,295       11,693         --            --        59,515
 Accrued expenses and
  other liabilities....      291,012      130,222      111,647      150,441     153,305      (104,596)      32,849
 Customer deposits.....        1,743          174       22,857      (13,874)        --          8,200       22,104
                         -----------  -----------  -----------  -----------  ----------   -----------  -----------
  Net cash provided
   (used) by operating
   activities..........    4,672,946    6,589,551    4,594,325      (57,915)    895,407       900,921    1,038,092
                         -----------  -----------  -----------  -----------  ----------   -----------  -----------
Cash flows from
 investing activities
 Plant additions.......   (3,552,217)  (2,802,602)  (2,741,179)    (384,883)   (714,945)   (1,350,091)  (1,807,603)
 Proceeds from sale of
  subsidiary...........          --       969,225          --           --          --            --           --
 Proceeds from legal
  settlement...........    4,500,000          --           --           --          --            --           --
 Plant removal costs...      (39,601)     (13,500)      (7,206)         --          --            --           --
 Salvage...............       57,518       16,811       30,485          --          --            --           --
 Contributions to
  plant................       19,841        4,410        1,236          --          --            --           --
 Distributions from
  (contributions to)
  Portland Cellular
  Partnership..........     (275,000)    (100,000)     350,000      (40,000)    (50,000)     (160,000)    (150,000)
 Payment of deferred
  charges..............     (538,849)     (11,615)     (34,756)    (135,382)        --       (373,817)      42,769
                         -----------  -----------  -----------  -----------  ----------   -----------  -----------
  Net cash provided
   (used) by investing
   activities..........      171,692   (1,937,271)  (2,401,420)    (560,265)   (764,945)   (1,883,908)  (1,914,834)
                         -----------  -----------  -----------  -----------  ----------   -----------  -----------
Cash flows from
 financing activities
 Retirement of
  preferred stock of
  subsidiary...........       (4,500)      (4,500)      (4,500)         --          --         (4,500)      (4,500)
 Payment of long-term
  debt.................   (1,809,015)  (2,452,487)  (1,270,141)    (468,048)   (431,321)     (982,766)    (929,045)
 Receipt (payment) on
  line of credit.......          --           --      (250,000)         --          --            --       200,000
 Dividends paid........     (330,092)    (314,077)    (300,868)  (1,082,522)    (83,363)   (1,165,046)    (166,726)
 Purchase of treasury
  stock................          --           --      (107,778)         --          --            --           --
 Sale of treasury
  stock................          --           --        45,045          --          --            --           --
                         -----------  -----------  -----------  -----------  ----------   -----------  -----------
  Net cash used by
   financing
   activities..........   (2,143,607)  (2,771,064)  (1,888,242)  (1,550,570)   (514,684)   (2,152,312)    (900,271)
                         -----------  -----------  -----------  -----------  ----------   -----------  -----------
  Net increase
   (decrease) in cash
   and cash
   equivalents.........    2,701,031    1,881,216      304,663   (2,168,750)   (384,222)   (3,135,299)  (1,777,013)
Cash and cash
 equivalents, beginning
 of period.............    4,297,997    2,416,781    2,112,118    6,999,028   4,297,997     6,999,028    4,297,997
                         -----------  -----------  -----------  -----------  ----------   -----------  -----------
Cash and cash
 equivalents, end of
 period................  $ 6,999,028  $ 4,297,997  $ 2,416,781  $ 4,830,278  $3,913,775   $ 3,863,729  $ 2,520,984
                         ===========  ===========  ===========  ===========  ==========   ===========  ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-59
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
        DECEMBER 31, 1997, 1996, 1995, MARCH 31, 1998 AND JUNE 30, 1998
               (INFORMATION AS OF AND FOR THE THREE-MONTHS ENDED
    MARCH 31, 1998 AND 1997 AND SIX-MONTHS ENDED JUNE 30, 1998 AND 1997 IS
                                  UNAUDITED)
 
NATURE OF OPERATIONS
 
  Utilities, Inc. (the Company) and its subsidiaries derive operating revenues
primarily from providing regulated telephone, cellular communication and data
processing services to customers in Maine and to other domestic
telecommunication providers. The Company extends credit at standard terms,
after appropriate review, to customers.
 
  The Company's telephone and cellular operations are subject to various
degrees of regulation by the Federal Communications Commission (FCC) and the
Maine Public Utilities Commission (MPUC). On February 8, 1996, the
"Telecommunications Act of 1996" (the Act) was signed into law. The Act seeks
to stimulate competition in the provision of telecommunications services. The
FCC and MPUC are charged with implementing its provisions. The effect of the
Act on the Company cannot be determined at this time.
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Basis of Reporting
 
  The consolidated financial statements include the accounts of the Company
and its subsidiaries: Standish Telephone Company, Maine Telephone Company,
China Telephone Company, Seacoast Cellular, Inc., and Western Maine Cellular,
Inc. All significant intercompany accounts and transactions have been
eliminated in consolidation.
 
 Regulatory Accounting
 
  The Telephone Companies follow the accounting prescribed by the Uniform
System of Accounts of the Federal Communications Commission (FCC) and the
Maine Public Utilities Commission (MPUC) and 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. The Company annually
reviews the continued applicability of SFAS No. 71 based on the current
regulatory and competitive environment.
 
 Cash and Cash Equivalents
 
  All liquid investments with an original maturity of three months or less are
considered to be cash equivalents. The Company maintains its cash in bank
deposit accounts, which at times may exceed federally insured limits, or in
government securities. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risk on cash and
cash equivalents.
 
 Depreciation
 
  Depreciation is computed on average plant investment by primary plant
accounts using the straight-line method over the assets' useful lives.
Depreciation expense was $3,369,166, $3,199,371 and $2,922,521 for the
 
                                     F-60
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
years ended December 31, 1997, 1996, and 1995, respectively, $884,071 and
$829,992 for the three-month periods ended March 31, 1998 and 1997,
respectively, and $1,771,567 and $1,666,440 for the six-month periods ended
June 30, 1998 and 1997, respectively.
 
 Capitalization Policy
 
  Additions to property, plant, and equipment, telecommunications plant in
service and replacements of retirement units of property are capitalized at
original cost, which includes labor, material and overhead.
 
 Cellular License
 
  The Western Maine Cellular, Inc. license is being amortized by the straight-
line method over twenty-five years. Amortization expense related to the
license was $93,552 for each of the years ended December 31, 1997, 1996, and
1995, and $23,388 for the three-month periods ended March 31, 1998 and 1997,
and $47,550 for the six-month periods ended June 30, 1998 and 1997.
 
 Deferred Charges
 
  Deferred charges include start-up, organization and deferred financing costs
being amortized by the straight-line method over ten years, deferred pension
costs of the regulated telephone companies, and billing system software
development costs. The billing system software costs approximated $539,000 as
of December 31, 1997, and when placed in service, will be amortized using the
straight-line method over the useful life of the billing software.
Amortization expense on deferred charges was $62,282, $83,100 and $96,233 for
the years ended December 31, 1997, 1996, and 1995. Amortization expense was
$16,800 and $20,775 for the three-month periods ended March 31, 1998 and 1997;
and $33,600 and $41,550 for the sixth-month periods ended June 30, 1998 and
1997.
 
 Impairment of Long-Lived Assets and Excess Cost on Net Assets Acquired
(Goodwill)
 
  Goodwill arose from the purchase of the Maine Telephone Company from GTE of
Maine in 1994. It is being amortized on the straight-line method over thirty-
five years. By agreement with the MPUC, the goodwill and related amortization
are excluded from regulated operations for rate making purposes.
 
  In 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The carrying value of long-lived assets, including
allocated goodwill, is reviewed for impairment at least annually, or whenever
events or changes in circumstances indicate that such carrying value may not
be recoverable, by assessing the recoverability of such carrying value through
estimated undiscounted future net cash flows expected to be generated by the
assets or the acquired business. 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 exceed 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. The adoption of SFAS No. 121 did not affect the Company's
consolidated financial position or results of operations.
 
 Investments
 
  Investments in the Rural Telephone Finance Cooperative (RTFC) Subordinated
Capital Certificates (SCCs) and the Rural Telephone Bank (RTB) Class B stock
were purchased as a requisite to obtaining financing and are carried at cost.
RTB Class C stock acquired by Maine Telephone Company pursuant to its
acquisition of
 
                                     F-61
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
telecommunications property is carried at cost. The Seacoast Cellular, Inc.
investment in Portland Cellular Partnership (PCP) is accounted for by the
equity method.
 
 Materials and Supplies
 
  Materials and supplies are valued at the lower of first-in, first-out (FIFO)
average cost or market.
 
 Income Taxes
 
  Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for tax purposes.
 
  Investment tax credits deferred for financial reporting purposes are being
amortized over the lives of the properties that gave rise to the credits.
 
 Pension Plan
 
  The Company has a noncontributory pension plan covering substantially all
employees, and an unqualified supplemental plan for certain officers. Benefits
are based on years of service and levels of compensation. The Company funds
pension costs accrued.
 
  As mandated by the MPUC, the telephone companies recognize periodic pension
expense as the amounts to be funded are accrued. Pension costs calculated
under SFAS No. 87 are carried as deferred charges until such time as they are
funded.
 
 Revenue Recognition
 
  Operating revenues are recognized when services are provided to customers.
Interstate network access services revenues are recorded based on estimates of
the Telephone Companies' telephone plant investment, operating expenses, and
allowable rates of return on investment allocable to those services.
Nationwide pooling of the revenues is administered by the National Exchange
Carrier Association (NECA), of which the Telephone Companies are members. NECA
files interstate access charge tariff schedules with the FCC and accumulates
and distributes pooled revenues derived from interstate network access
services to its members. The Telephone Companies record the effect of NECA
settlements, including retroactive adjustments, upon notification of such
settlements from NECA.
 
  The Telephone Companies' intrastate network access and long-distance
services revenues are based on agreements with Bell Atlantic, the
interconnecting carrier.
 
  In 1998, Bell Atlantic plans to cancel the long-distance network revenue
settlement agreement referred to above. The cancellation will be effective no
later than May 31, 1998, and possibly earlier at the Company's discretion.
After cancellation, the Company will bill Bell Atlantic and other intrastate
long-distance carriers for access to its customers. The Company intends to
file access rates, based on revenue generated from existing settlements for
similar services and usage, with the MPUC.
 
  During 1997, the Maine legislature enacted a law requiring that, by May 30,
1999, charges for intrastate access service be less than or equal to those
charged for interstate access services. The MPUC has amended its access charge
rules to ensure compliance with the law. The access filing referred to above
will be the first step in the compliance phase for the Company. This phase is
expected to last through much of 1998 and possibly into 1999. The impact of
this process, if any, on the future earnings of the Company is not known at
this time.
 
                                     F-62
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Earnings Per Share
 
  Earnings per share data are based on the weighted average number of common
shares outstanding during each year. There were no potentially dilative
securities in any of the years presented.
 
 Reclassification
 
  Based on updated property records, approximately $385,000 of goodwill was
reclassified to telecommunications plant in service during 1997. The impact on
earnings was not significant. The December 31, 1996, balances have been
reclassified to conform to the December 31, 1997, presentation.
 
 Effect of New Financial Accounting Standards
 
  During 1997, the Financial Accounting Standards Board issued two Statements
of Financial Accounting Standards ("SFAS") which apply to the Company: SFAS
No. 128, Earnings Per Share, and SFAS No. 129, Disclosure About Capital
Structure. These statements do not change the measurement or recognition
methods used in financial statements but, rather, deal with disclosure and
presentation requirements.
 
2. SALE OF SUBSIDIARY
 
  On January 19, 1996, the Company sold all the common stock of its
subsidiary, Sidney Telephone Company, in a cash transaction. The Company
recognized a pretax gain on the sale of $367,516. The results of Sidney
Telephone Company's operations during the nineteen days it was owned by the
Company in 1996 were not significant and were included in the gain.
 
3. INVESTMENT IN AND ADVANCES TO PORTLAND CELLULAR PARTNERSHIP
 
  The Company's wholly-owned subsidiary, Seacoast Cellular, Inc. ("Seacoast"),
is a one-third general partner in Portland Cellular Partnership. The
investment is accounted for by the equity method and represents Seacoast's
only activity.
 
  The Partnership was originally granted a license to provide service in the
Portland New England County Metropolitan Area (NECMA). That grant was
subsequently challenged by losing applicants and was ultimately rescinded and
awarded to Northeast Cellular Telephone Company (Northeast). On November 28,
1994, Northeast commenced operations and the Partnership ceased providing
service in the Portland NECMA while continuing to pursue its legal rights in
an attempt to regain the license.
 
  On November 18, 1996, the FCC rescinded Northeast's Portland license,
reinstated the Partnership's license, and granted Northeast interim authority
to operate until ten days after the Partnership notifies Northeast that it is
ready to recommence operations. Subsequently, Northeast filed, with the United
States Court of Appeals, an emergency motion for stay of the FCC decision
pending appeal. The motion was granted on March 10, 1997. The Court heard
arguments on the appeal on September 30, 1997, and on January 16, 1998,
affirmed the FCC decision. Northeast filed a motion for rehearing on March 2,
1998. The Court denied Northeast's motion for rehearing on March 19, 1998. On
April 17, 1998, the Court granted Northeast a stay of the effectiveness of its
affirmation of the FCC decision. This has the effect of leaving Northeast the
operator until the Supreme Court rules on its petition for certiorari which
was filed on May 17, 1998. The Supreme Court will likely decide whether to
hear the case in October 1998.
 
  The Partnership intends to resume operations in Portland as soon as legally
and operationally practicable and has obtained a bank commitment for financing
in an amount that management believes is adequate to effect the transition.
 
                                     F-63
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
4. LEGAL SETTLEMENT
 
  During 1997, Seacoast Cellular, Inc. received $4,500,000 from a party
against whom it had commenced a civil action, in settlement of that action.
The legal settlement is essentially compensation for lost investment value of
the Company's interest in Portland Cellular Partnership resulting from the
license dispute described in Note 3. Accordingly, the proceeds are shown in
cash from investing activities on the 1997 statement of cash flows. Management
believes this presentation most clearly reflects the economic substance of the
event.
 
5. INVESTMENTS IN NONTRADED STOCKS
 
  Investments in nontraded stocks consist of the following:
 
<TABLE>
<CAPTION>
                                      DECEMBER 31,      (UNAUDITED) (UNAUDITED)
                                  ---------------------  MARCH 31,   JUNE 30,
                                     1997       1996       1998        1998
                                  ---------- ---------- ----------- -----------
<S>                               <C>        <C>        <C>         <C>
Rural Telephone Finance
 Cooperative (RTFC) Subordinated
 Capital Certificates and
 Patronage Capital Certificates,
 carried at original cost, held
 as a requisite to obtaining RTFC
 financing....................... $  728,384 $  771,152 $  728,384  $  684,060
Rural Telephone Bank (RTB) Class
 B stock, carried at original
 cost, held as a requisite to
 obtaining RTB financing.........    399,050    399,050    399,050     399,250
RTB Class C stock, carried at
 cost............................    701,600    701,600    701,600     701,600
Other, at cost...................     42,057     42,057     42,057      42,057
                                  ---------- ---------- ----------  ----------
                                  $1,871,091 $1,913,859 $1,871,091  $1,826,967
                                  ========== ========== ==========  ==========
</TABLE>
 
6. LONG-TERM DEBT
 
  Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                      DECEMBER 31,      (UNAUDITED) (UNAUDITED)
                                  ---------------------  MARCH 31,   JUNE 30,
                                     1997       1996       1998        1998
                                  ---------- ---------- ----------- -----------
<S>                               <C>        <C>        <C>         <C>
UTILITIES, INC.
Mortgage payable to bank, due in
 monthly installments, including
 interest at 9%, of $5,029,
 through 2003; collateralized by
 real estate....................  $  254,588 $  292,673 $  245,372  $  235,787
Note payable to bank, unsecured,
 due in monthly installments of
 $6,917, plus interest, at the
 bank's prime rate (8.5% at
 December 31, 1997, March 31,
 and June 30, 1998), through
 July 1999......................     124,500    214,416    103,750      83,000
Note payable to bank, due in
 installments of $32,389, plus
 interest at the LIBOR rate, for
 the LIBOR interest period
 selected from time-to-time by
 the Company, plus 2% (8% at
 December 31, 1997, 7.68% at
 March 31, 1998 and 7.65% at
 June 30, 1998), through January
 2002, with a final payment of
 the balance due in February
 2002; collateralized by all
 assets of Utilities, Inc.,
 excluding certain real estate
 and Investments in
 subsidiaries...................   3,562,778  3,960,000  3,465,611   3,368,444
</TABLE>
 
                                     F-64
<PAGE>
 
                        UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                               DECEMBER 31,
                          -----------------------  MARCH 31,   JUNE 30,
                             1997        1996        1998        1998
                          ----------- ----------- ----------- -----------
<S>                       <C>         <C>         <C>         <C>
STANDISH TELEPHONE
 COMPANY
10.50% notes payable to
 the Rural Telephone
 Bank, due in monthly
 installments of
 $10,616, including
 interest, through 2009;
 collateralized by all
 corporate assets except
 vehicles...............  $   816,415 $   855,833 $   805,610 $   794,761
10.50% notes payable to
 the Rural Telephone
 Bank, due in monthly
 installments of
 $28,823, including
 interest, through 2019;
 collateralized by all
 corporate assets except
 vehicles...............    2,957,378   2,990,861   2,947,396   2,939,004
MAINE TELEPHONE COMPANY
The following consists
 of notes payable to the
 RTFC, collateralized by
 a blanket mortgage on
 all property, except
 vehicles, of Maine
 Telephone Company:
Variable rate note pay-
 able due in quarterly
 installments, including
 interest at the RTFC
 short-term rate (6.65%
 at December 31, 1997,
 March 31, and June 30,
 1998), through October
 2008...................    2,638,422   2,813,362   2,595,422   2,543,007
9.2% note payable due in
 quarterly installments,
 including interest,
 through October 2008...    5,280,481   5,630,604   5,194,419   5,089,518
Note payable, due in
 quarterly installments,
 including interest
 (fixed through October
 2001 at 8.8%, then
 variable), through Oc-
 tober 2008.............    5,280,481   5,630,604   5,194,419   5,089,518
CHINA TELEPHONE COMPANY
6.50% notes payable to
 the Rural Telephone
 Bank, due in quarterly
 installments of
 $46,169, including in-
 terest, through 2013;
 collateralized by all
 corporate assets, ex-
 cept vehicles..........    1,801,953   1,871,236   1,784,100   1,766,493
WESTERN MAINE CELLULAR,
 INC.
Note payable to bank,
 due in monthly
 installments of
 $29,050, plus interest
 at the LIBOR rate, for
 the LIBOR interest
 period selected from
 time-to-time by the
 Company, plus 2% (8% at
 December 31, 1997,
 7.68% at March 31, 1998
 and 7.65% at June 30,
 1998), through January
 2002, with a final
 payment of the balance
 due in February 2002.
 The note is made
 jointly and severally
 by Utilities, Inc. and
 Western Maine Cellular,
 Inc., and is
 collateralized by all
 assets of Western Maine
 Cellular, Inc. ........    3,195,545   3,504,735   3,108,394   3,021,243
                          ----------- ----------- ----------- -----------
                           25,912,541  27,764,324  25,444,493  24,930,775
  Less current portion..    1,889,584   1,878,639   1,960,439   1,960,439
                          ----------- ----------- ----------- -----------
  Long-term debt,
   excluding current
   portion..............  $24,022,957 $25,885,685 $23,484,054 $22,970,336
                          =========== =========== =========== ===========
</TABLE>
 
                                      F-65
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Maturities on long-term debt for the next five years are estimated to be as
follows:
 
<TABLE>
      <S>                                                             <C>
      1998........................................................... $1,960,439
      1999...........................................................  1,920,900
      2000...........................................................  1,941,200
      2001...........................................................  2,014,900
      2002...........................................................  5,168,745
</TABLE>
 
  As of June 30 and March 31, 1998, and December 31, 1997 and 1996, $1,072,050
of additional Rural Telephone Bank (RTB) funds were available to China
Telephone Company under an RTB note approved in December 1991.
 
  The notes due to the RTB contain restrictions on additional borrowings and
on the payment of dividends on common stock. Retained earnings of the
telephone subsidiaries available for the payment of dividends to the Company
at June 30 and March 31, 1998, December 31, 1997 and 1996, approximated
$1,520,000, $1,676,000, $1,632,000 and $1,322,000, respectively.
 
  All, or portions, of the RTFC variable rate notes may be converted to a
fixed rate at any time as long as the RTFC continues to offer a fixed rate at
such time for similar loans.
 
  The loan agreements with RTFC contain restrictions on additional borrowings
and limit payment of dividends on common stock. Under the terms of the
agreement, Maine Telephone Company may not pay dividends if its equity drops
below 20% of its total assets and as long as that equity ratio is less than
40%, it may not pay dividends for any purpose other than retiring debt
incurred by Utilities, Inc., in connection with the investment in the
subsidiary. Maine Telephone Company's separately stated equity of $5,408,857
and $5,219,154 amounted to approximately 26% of total assets at March 30 and
June 30, 1998, respectively. At December 31, 1997, Maine Telephone Company's
separately stated equity of $5,399,789 amounted to approximately 26% of total
assets.
 
  As a requisite to obtaining the RTFC financing, Maine Telephone Company
purchased Subordinated Capital Certificates (SCCs), which represent
investments in the lender that will be amortized against the loan principal as
the debt is repaid.
 
  Cash paid for interest was $2,247,496, $2,633,266 and $3,093,192 in 1997,
1996, and 1995, respectively; and $546,989 and $651,825 for the three-month
periods ended March 31, 1998 and 1997, respectively. Cash paid for interest
was $1,082,829 and $1,129,060 for the six-month periods ended June 30, 1998
and 1997, respectively.
 
  During 1997, the Company refinanced $7,372,716 of notes payable to the bank
in a noncash transaction.
 
7. LINES OF CREDIT
 
  Utilities, Inc., and Standish Telephone Company maintain separate $500,000
unsecured lines of credit which bear interest at the prime rate. As of June 30
and March 31, 1998, December 31, 1997 and 1996, no advances were outstanding.
 
                                     F-66
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
8. INCOME TAXES
 
  The components of income tax expense are:
 
<TABLE>
<CAPTION>
                                                                    (UNAUDITED)          (UNAUDITED)
                                       DECEMBER 31,                  MARCH 31,            JUNE 30,
                             ----------------------------------  ------------------  --------------------
                                1997        1996        1995       1998      1997      1998       1997
                             ----------  ----------  ----------  --------  --------  ---------  ---------
   <S>                       <C>         <C>         <C>         <C>       <C>       <C>        <C>
   Current:
    Federal................  $1,152,585  $  555,304  $  158,387  $ 10,522  $ 24,079  $ 147,556  $  75,777
    State..................     378,105     141,516      46,163     2,000     6,945     45,000     21,857
                             ----------  ----------  ----------  --------  --------  ---------  ---------
    Total current income
     tax expense...........   1,530,690     696,820     204,550    12,522    31,024    192,556     97,634
                             ----------  ----------  ----------  --------  --------  ---------  ---------
   Amortization of
    investment tax
    credits................     (45,823)    (45,823)    (47,827)  (11,957)  (11,456)   (23,914)   (22,912)
                             ----------  ----------  ----------  --------  --------  ---------  ---------
   Deferred:
    Federal................     806,169     210,458     239,877    36,506    13,000     86,880     26,000
    State..................     170,040      72,197      58,231    11,331     4,000     21,661      8,000
                             ----------  ----------  ----------  --------  --------  ---------  ---------
    Total deferred income
     tax expense...........     976,209     282,655     298,108    47,837    17,000    108,541     34,000
                             ----------  ----------  ----------  --------  --------  ---------  ---------
    Total income tax
     expense...............  $2,461,076  $  933,652  $  454,831  $ 48,402  $ 36,568  $ 277,183  $ 108,722
                             ==========  ==========  ==========  ========  ========  =========  =========
 
  Income tax expense is allocated as follows:
 
<CAPTION>
                                                                    (UNAUDITED)          (UNAUDITED)
                                       DECEMBER 31,                  MARCH 31,            JUNE 30,
                             ----------------------------------  ------------------  --------------------
                                1997        1996        1995       1998      1997      1998       1997
                             ----------  ----------  ----------  --------  --------  ---------  ---------
   <S>                       <C>         <C>         <C>         <C>       <C>       <C>        <C>
   Operating income........  $1,357,276  $1,475,894  $1,178,488  $146,941  $131,768  $ 524,259  $ 356,958
   Other income and expense
    items..................   1,103,800    (542,242)   (723,657)  (98,539)  (95,200)  (247,076)  (248,236)
                             ----------  ----------  ----------  --------  --------  ---------  ---------
                             $2,461,076  $  933,652  $  454,831  $ 48,402  $ 36,568  $ 277,183  $ 108,722
                             ==========  ==========  ==========  ========  ========  =========  =========
 
  Total income tax expense in 1997, 1996, and 1995 was greater than that
computed by applying U.S. Federal income tax rates to earnings before income
taxes. The reasons for the differences are as follows:
 
<CAPTION>
                                                                    (UNAUDITED)          (UNAUDITED)
                                       DECEMBER 31,                  MARCH 31,            JUNE 30,
                             ----------------------------------  ------------------  --------------------
                                1997        1996        1995       1998      1997      1998       1997
                             ----------  ----------  ----------  --------  --------  ---------  ---------
   <S>                       <C>         <C>         <C>         <C>       <C>       <C>        <C>
   Computed "expected" tax
    expense................  $2,131,068  $  818,078  $  419,782  $ 47,886  $ 32,866  $ 255,649  $ 109,468
   State income tax, net of
    federal income tax
    benefit................     361,776     141,051      68,900     8,798     7,224     43,996     19,706
   Amortization of
    investment tax
    credits................     (45,823)    (45,823)    (47,827)  (11,957)  (11,456)   (23,914)   (22,912)
   Other...................      14,055      20,346      13,976     3,675     7,934      1,452      2,460
                             ----------  ----------  ----------  --------  --------  ---------  ---------
    Total income tax
     expense...............  $2,461,076  $  933,652  $  454,831  $ 48,402  $ 36,568  $ 277,183  $ 108,722
                             ==========  ==========  ==========  ========  ========  =========  =========
</TABLE>
 
 
                                     F-67
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The components of the deferred tax liability (asset) at December 31 are as
follows:
 
<TABLE>
<CAPTION>
                                                       (UNAUDITED)  (UNAUDITED)
                                   DECEMBER 31,         MARCH 31,    JUNE 30,
                               ----------------------  -----------  -----------
                                  1997        1996        1998         1998
                               ----------  ----------  -----------  -----------
   <S>                         <C>         <C>         <C>          <C>
   Tax effect of temporary
    differences related to:
     Depreciation............  $3,306,956  $2,978,681  $3,358,330   $3,060,845
     Regulatory assets and
      liabilities--deferred
      taxes..................      (9,064)    (42,661)     (9,396)      (9,396)
     Regulatory liability--
      deferred toll revenue..     (42,635)    (42,635)    (42,635)     (42,635)
     Unamortized investment
      tax credits............     (79,517)    (76,313)    (71,582)     (71,582)
     Goodwill amortization...     317,988     323,335     354,800      391,612
     Other...................     (98,116)   (246,164)    (93,782)     (91,213)
   Alternative minimum tax
    credit carryforward......         --     (505,248)    (42,545)         --
                               ----------  ----------  ----------   ----------
                               $3,395,612  $2,388,995  $3,453,190   $3,237,631
                               ==========  ==========  ==========   ==========
</TABLE>
 
  Cash paid for income taxes was $491,000, $540,000, and $517,000 in 1997,
1996, and 1995, respectively. Cash paid for income taxes for the three-month
periods ended March 31 was $1,439,500 and $130,000 for 1998 and 1997,
respectively. Cash paid for income taxes for the six-month periods ended June
30, 1998 and 1997 was $1,600,636 and $316,000, respectively.
 
9. PENSION PLAN
 
  The Companies have defined benefit pension plans covering substantially all
employees. Benefits are based on years of service and levels of compensation.
The Companies' funding policies are to contribute annually the amount deducted
for tax purposes. Also included below is an unqualified supplemental pension
plan for certain officers which will be funded as benefits are paid.
 
  The net pension cost was comprised of the following components:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                               -------------------------------
                                                 1997       1996       1995
                                               ---------  ---------  ---------
   <S>                                         <C>        <C>        <C>
   Service cost..............................  $ 190,163  $ 158,660  $ 131,482
   Interest on projected benefit obligation..    178,251    160,982    148,766
   Expected return on plan assets............   (166,297)  (145,506)  (118,596)
   Amortization of unrecognized net obliga-
    tion at January 1, 1989..................      4,091      4,091      4,091
   Amortization of unrecognized net
    obligation on supplemental pension at
    January 1, 1992..........................      9,011     10,137     11,819
   Amortization of unrecognized net gain.....    (11,225)    (8,064)    (2,597)
                                               ---------  ---------  ---------
                                               $ 203,994  $ 180,300  $ 174,965
                                               =========  =========  =========
</TABLE>
 
 
                                     F-68
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following reconciles the Plan's funded status to amounts recognized in
the Company's financial statements as of December 31:
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                     ------------------------
                                                        1997         1996
                                                     -----------  -----------
   <S>                                               <C>          <C>
   Actuarial present value of projected benefit
    obligation
     Vested......................................... $(1,605,469) $(1,305,607)
     Nonvested......................................     (87,000)    (286,567)
                                                     -----------  -----------
       Accumulated benefit obligation...............  (1,692,469)  (1,592,174)
   Additional amounts related to projected salary
    increases.......................................    (613,589)    (485,107)
                                                     -----------  -----------
       Projected benefit obligation.................  (2,306,058)  (2,077,281)
   Plan assets at fair value, Group Annuity Con-
    tracts and bank deposits at interest............   2,139,343    1,785,124
                                                     -----------  -----------
       Unfunded excess projected obligation over
        plan assets................................. $  (166,715) $  (292,157)
                                                     ===========  ===========
</TABLE>
 
  The unfunded excess consists of:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                          --------------------
                                                            1997       1996
                                                          ---------  ---------
   <S>                                                    <C>        <C>
   Unrecognized net gains from assumption changes and
    favorable actuarial experience....................... $ 494,906  $ 400,882
   Unrecognized net obligation at January 1, 1989, being
    amortized over 20 years..............................   (16,436)   (20,527)
   Unrecognized net obligation on supplemental pension
    plan at January 1, 1992, being recognized over four
    years................................................   (72,086)   (81,097)
   Accrued pension cost included in recorded
    liabilities..........................................  (573,099)  (591,415)
                                                          ---------  ---------
                                                          $(166,715) $(292,157)
                                                          =========  =========
</TABLE>
 
  The rate of increase in future compensation levels used in determining the
actuarial value of projected benefit obligation was 6% for 1997, 1996, and
1995. The weighted-average discount rate and the expected long-term rate of
return on assets was 8% for 1997, 1996, and 1995.
 
  Actuarial information was not available for disclosure as of and for the
periods ended June 30 and March 31, 1998 and 1997.
 
10. MINORITY INTEREST
 
  Minority interest at June 30 and March 31, 1998, December 31, 1997, and
December 31, 1996, consisted of 1,500, 1,500 and 1,680, respectively, shares
of $25 par value 8% cumulative preferred stock issued by Standish Telephone
Company (Standish). Standish has agreed to redeem 180 shares of this stock
annually at par. In addition to the annual redemption requirement, the stock
may be called at $26.25 per share. Minority interest in the consolidated
statements of income and retained earnings represents preferred dividends.
 
11. RELATED PARTY TRANSACTIONS
 
  The Company is affiliated, through common ownership, with Telephone Service
Company, which provides plant construction and maintenance services to the
Telephone Companies under contracts subject to regulation by the MPUC. Charges
from Telephone Service Company for construction and maintenance in 1997, 1996
and
 
                                     F-69
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
1995, approximated $640,000, $439,000, and $529,000, respectively. These
charges were $209,300 and $110,330 for the three-month periods ended March 31,
1998 and 1997, respectively. These charges totaled $430,983 and $259,419 for
the six-month periods ended June 30, 1998 and 1997.
 
  The Company provides data processing services to Portland Cellular
Partnership (PCP). Total billings for 1997, 1996, and 1995 approximated
$171,000, $135,000, and $122,000, respectively. Total billings for the three-
month periods ended March 31, 1998 and 1997, were $47,900 and $41,400, and
$97,310 and $68,891 for the six-month periods ended June 30, 1998 and 1997,
respectively.
 
  Western Maine Cellular, Inc. has network usage, revenue sharing, trademark
and service agreements with PCP. Amounts incurred relative to the agreements
approximated $143,000, $149,000, and $121,000 in 1997, 1996, and 1995,
respectively, and $32,600 and $36,163 for the three-month periods ended March
31, 1998 and 1997, respectively. The totals for the six-month periods ended
June 30, 1998 and 1997, were $66,664 and $69,656. Amounts received for network
usage provided to PCP approximated $98,000, $102,000, and $90,000 in 1997,
1996, and 1995, respectively, and $18,300 and $22,200 for the three-month
periods ended March 31, 1998 and 1997, respectively. For the six-month periods
ended June 30, 1998 and 1997, these amounts totaled $41,890 and $47,189,
respectively.
 
12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 Cash and Cash Equivalents, Accounts Receivable and Accounts Payable
 
  The carrying amount approximates fair value because of the short maturity of
these instruments.
 
 Investments
 
  Investments do not have a readily determinable fair value (not publicly
traded). With the exception of the Investment in Portland Cellular
Partnership, which is accounted for using the equity method, the investments
are stated at cost which management believes is not impaired. An estimate of
the fair value could not be reasonably made without incurring excessive costs.
 
 Long-Term Debt
 
  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 June 30,
1998, the Company had long-term debt with a carrying value of $24,929,775 and
estimated fair value of $26,778,040. At March 31, 1998, the Company had long-
term debt with a carrying value of $25,444,493 and estimated fair value of
$26,751,000. At December 31, 1997, the Company had long-term debt with a
carrying value of $25,912,541 and estimated fair value of $27,270,000.
 
 Limitations
 
  Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
 
13. SUBSEQUENT EVENT--AGREEMENT TO SELL SUBSIDIARY
 
  On February 19, 1998, the Company signed a stock purchase agreement to sell
100% of the common stock of Western Maine Cellular, Inc. for approximately
$7.5 million. The transaction was completed on July 31, 1998.
 
 
                                     F-70
<PAGE>
 
                       UTILITIES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
  Condensed financial data of Western Maine Cellular, Inc. included in the
basic financial statements are as follows:
 
<TABLE>
<CAPTION>
                                  DECEMBER 31,        (UNAUDITED)  (UNAUDITED)
                             -----------------------   MARCH 31,    JUNE 30,
                                1997        1996         1998         1998
                             ----------  -----------  -----------  -----------
   <S>                       <C>         <C>          <C>          <C>
   BALANCE SHEETS
   Current assets........... $  262,027  $   262,646  $   215,727  $  279,025
   Net property, plant, and
    equipment...............    630,679      728,176      610,379     589,745
   Cellular license.........  1,730,786    1,824,338    1,707,398   1,684,010
   Other assets.............     28,690       25,320       28,303      27,916
                             ----------  -----------  -----------  ----------
                             $2,652,182  $ 2,840,480  $ 2,561,807  $2,580,696
                             ==========  ===========  ===========  ==========
   Current liabilities...... $  599,701  $   578,425  $   702,300  $  543,770
   Long-term debt...........  2,846,945    3,156,735    2,759,794   2,672,643
   Deferred income taxes....    133,000      367,495      133,000     133,000
   Stockholders' deficit....   (927,464)  (1,262,175)  (1,033,287)   (768,717)
                             ----------  -----------  -----------  ----------
                             $2,652,182  $ 2,840,480  $ 2,561,807  $2,580,696
                             ==========  ===========  ===========  ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                   (UNAUDITED)          (UNAUDITED)
                                      DECEMBER 31,                  MARCH 31,            JUNE 30,
                            ----------------------------------  ------------------  --------------------
                               1997        1996        1995       1998      1997      1998       1997
                            ----------  ----------  ----------  --------  --------  ---------  ---------
   <S>                      <C>         <C>         <C>         <C>       <C>       <C>        <C>
   STATEMENTS OF INCOME
   Operating revenues...... $1,615,534  $1,407,088  $1,206,516  $365,448  $361,278  $ 756,463  $ 740,504
   Operating expenses......  1,592,076   1,540,458   1,400,270   440,959   358,983    811,543    737,175
                            ----------  ----------  ----------  --------  --------  ---------  ---------
    Net operating income
     (loss)................     23,458    (133,370)   (193,754)  (75,511)    2,295    (55,080)     3,328
   Interest expense........   (280,055)   (405,557)   (454,749)  (63,363)  (76,392)  (125,930)  (147,209)
   Income tax benefit......     99,000     215,876     258,457    55,467    29,547     72,346     57,467
                            ----------  ----------  ----------  --------  --------  ---------  ---------
    Net loss............... $ (157,597) $ (323,051) $ (390,046) $(83,407) $(44,550) $(108,664) $ (86,414)
                            ==========  ==========  ==========  ========  ========  =========  =========
</TABLE>
 
14. SUBSEQUENT EVENT--MERGER
 
  On March 27, 1998, the Company entered into an agreement to merge with a
subsidiary of MJD Communications, Inc. (MJD). The agreement contemplates that
the pre-merger stockholders' shares will be redeemed for cash, leaving MJD as
the sole remaining stockholder. The post-merger entity will consist of the
existing operation of Utilities, Inc., Standish Telephone Company, Maine
Telephone Company, and China Telephone Company. The transaction is expected to
close in the third or fourth quarter of 1998.
 
                                     F-71
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
Chautauqua & Erie Telephone Corporation
 
  We have audited the accompanying consolidated balance sheet of Chautauqua &
Erie Telephone Corporation as of December 31, 1996, and the related
consolidated statements of income and retained earnings, and cash flows for
the years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Chautauqua & Erie Telephone Corporation as of December 31, 1996, and the
consolidated results of its operations and its cash flows for the years ended
December 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
 
Ernst & Young LLP
 
Buffalo, New York
February 24, 1997
 
 
                                     F-72
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
                           CONSOLIDATED BALANCE SHEET
                               DECEMBER 31, 1996
 
<TABLE>
<S>                                                                 <C>
                              ASSETS
Current assets:
  Cash............................................................. $ 4,094,370
  Due from customers and agents....................................     466,227
  Other accounts receivable........................................     803,655
  Materials and supplies...........................................     480,362
  Prepaid expenses.................................................     154,080
                                                                    -----------
    Total current assets...........................................   5,998,694
Noncurrent assets:
  Net cash value of life insurance.................................     183,878
  Other assets, net of accumulated amortization....................     714,919
                                                                    -----------
    Total noncurrent assets........................................     898,797
Telephone plant, at cost:
  Telephone plant in service.......................................  21,654,432
  Telephone plant under construction...............................      31,251
                                                                    -----------
                                                                     21,685,683
  Less accumulated depreciation....................................   8,018,651
                                                                    -----------
Net telephone plant................................................  13,667,032
                                                                    -----------
    Total assets................................................... $20,564,523
                                                                    ===========
               LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current maturities on long-term debt............................. $   870,000
  Notes payable....................................................   2,319,000
  Accounts payable.................................................     400,503
  Accrued taxes, interest and dividends............................   2,048,147
  Other current liabilities........................................     484,540
                                                                    -----------
    Total current liabilities......................................   6,122,190
Long-term debt, less current maturities............................   1,012,294
Deferred federal income taxes......................................   2,493,610
Pension obligation.................................................      17,564
                                                                    -----------
    Total liabilities..............................................   9,645,658
Shareholders' equity:
  Common stock, no par value; 100,000 shares authorized; 79,498
   shares issued and outstanding...................................     775,320
  Retained earnings................................................  10,143,545
                                                                    -----------
    Total shareholders' equity.....................................  10,918,865
                                                                    -----------
    Total liabilities and shareholders' equity..................... $20,564,523
                                                                    ===========
</TABLE>
 
                            See accompanying notes.
 
                                      F-73
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
             CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
                     YEAR ENDED DECEMBER 31, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                 1996         1995
                              -----------  -----------
<S>                           <C>          <C>
Operating revenues:
  Local service.............  $ 1,892,626  $ 1,729,458
  Network access service....    3,777,331    3,843,309
  Long distance network
   service..................       73,965       91,858
  Miscellaneous.............    1,002,697    1,016,265
                              -----------  -----------
                                6,746,619    6,680,890
  Other.....................      (17,190)       6,541
                              -----------  -----------
    Total operating reve-
     nues...................    6,729,429    6,687,431
Operating expenses:
  Plant specific............    1,474,595    1,171,283
  Plant nonspecific.........    1,322,827    1,425,352
  Customer operations.......      605,798      696,700
  Corporate operations......    1,269,154    1,373,167
  Operating taxes...........      431,227      662,655
                              -----------  -----------
    Total operating ex-
     penses.................    5,103,601    5,329,157
                              -----------  -----------
    Operating income........    1,625,828    1,358,274
Other income (expense):
  Interest..................     (345,669)    (419,791)
  Gain on sale of investment
   in cellular partnership..    4,658,700          --
  Other, net................      (72,259)    (136,635)
                              -----------  -----------
    Total other income (ex-
     pense).................    4,240,772     (556,426)
                              -----------  -----------
Income before income taxes..    5,866,600      801,848
Federal income taxes:
  Current...................    1,953,570      221,063
  Deferred..................      276,046       20,454
                              -----------  -----------
                                2,229,616      241,517
                              -----------  -----------
Net income..................    3,636,984      560,331
Retained earnings--January
 1..........................    7,047,147    7,027,495
                              -----------  -----------
                               10,684,131    7,587,826
Dividends paid:
  Common, $6.80 per share...      540,586      540,679
                              -----------  -----------
Retained earnings--December
 31.........................  $10,143,545   $7,047,147
                              ===========  ===========
</TABLE>
 
                            See accompanying notes.
 
                                      F-74
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                     YEAR ENDED DECEMBER 31, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                          1996        1995
                                                       ----------  -----------
<S>                                                    <C>         <C>
OPERATING ACTIVITIES:
Net income............................................ $3,636,984  $   560,331
Adjustments to reconcile net income to net cash
 provided by operating activities:
  Depreciation--telephone plant.......................  1,032,829    1,124,126
  Amortization........................................     49,609       32,598
  Gain on sale of cellular partnership................ (4,658,306)         --
  Provision for deferred income taxes.................    220,894       24,700
  (Decrease) increase in pension obligation...........   (124,035)      47,517
  Changes in operating assets and liabilities, net of
   effects from purchase of Chautauqua Cable, Inc.:
    (Increase) decrease in due from customers and
     agents...........................................    (22,287)      25,215
    Increase in other accounts receivable.............    (36,738)     (73,855)
    Decrease (increase) in materials and supplies.....    124,702     (125,190)
    Decrease in prepaid expenses......................      6,147        1,465
    Decrease (increase) in other assets...............     17,685     (175,113)
    (Decrease) increase in accounts payable...........   (538,320)      69,165
    Increase in accrued taxes, interest and dividends
     and other current liabilities....................  1,798,423      240,819
                                                       ----------  -----------
      Net cash provided by operating activities.......  1,507,587    1,751,778
INVESTING ACTIVITIES:
  Premium payments for officer's life insurance.......     (7,206)      (1,042)
  Capital expenditures--telephone plant...............   (955,656)  (1,003,636)
  Salvage proceeds in excess (less than) of cost of
   removal--telephone plant...........................      7,025       61,962
  Payment for purchase of Chautauqua Cable, Inc., net
   of cash acquired...................................        --      (699,004)
  Proceeds from sale of cellular partnership..........  4,988,700          --
                                                       ----------  -----------
      Net cash provided by investing activities.......  4,032,863   (1,641,720)
FINANCING ACTIVITIES:
  Principal payments on notes payable and long-term
   debt............................................... (1,241,243)    (823,500)
  Proceeds from the issuance of Notes Payable.........        --       891,324
  Redemption of common stock..........................        --        (5,000)
  Dividends paid......................................   (540,586)    (540,679)
                                                       ----------  -----------
Net cash used in financing activities................. (1,781,829)    (477,855)
                                                       ----------  -----------
Net increase (decrease) in cash.......................  3,758,621     (367,797)
Cash at beginning of year.............................    335,749      703,546
                                                       ----------  -----------
Cash at end of year................................... $4,094,370  $   335,749
                                                       ==========  ===========
</TABLE>
 
                            See accompanying notes.
 
                                      F-75
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1996 AND 1995
 
1.ACCOUNTING POLICIES
 
  The Company maintains its accounts in accordance with the Uniform System of
Accounts prescribed for telephone companies by the New York State Public
Service Commission (PSC), which is in accordance with generally accepted
accounting principles. A summary of significant accounting policies is as
follows:
 
 Consolidation
 
  The financial statements include the accounts of Chautauqua & Erie Telephone
Corporation and its wholly-owned, deregulated subsidiaries, Chautauqua & Erie
Communications, Inc., C & E Communications, Ltd., Western New York Cellular,
Inc. and Chautauqua & Erie Network, Inc.
 
  Chautauqua & Erie Communications, Inc., C & E Communications, Ltd., and
Chautauqua Cable, Inc. are active operating companies, while the remaining two
represent investments.
 
  All material intercompany accounts have been eliminated in the financial
statements. Certain costs and expenses of Chautauqua & Erie Communications,
Inc. provided by Chautauqua & Erie Telephone Corporation have not been
eliminated in order to more accurately reflect the operations of the telephone
company and this subsidiary. These costs are for expenses that would have been
paid to an outside supplier if not to Chautauqua & Erie Telephone Corporation.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
 Revenue Recognition
 
  Revenues are recognized upon the placing of calls by customers or rendering,
by the company, of other related services.
 
 Toll Settlements
 
  Toll revenues are often pooled by telephone companies on a national and a
state-wide basis and are apportioned back to the companies based upon cost to
provide services. This process is known as "toll settlements."
 
  The computations are very complex and on a routine basis, these toll
settlements are adjusted for previous quarters and years. When calculations
are changed the companies are notified of a retroactive toll settlement (plus
or minus) which applies to previously reported periods. Retroactive toll
settlements may have a material effect on current net income.
 
  It is industry practice to record retroactive toll settlements in the year
determined. There are no known material unrecorded retroactive settlements as
of the balance sheet date. The amount of retroactive toll settlements
recognized in 1996 was not material.
 
 Other Assets
 
  Other assets include $577,656 of franchise licenses and goodwill associated
with the purchase of Chautauqua Cable, Inc., which is being amortized over 15
years. Accumulated amortization was $63,731 at December 31, 1996.
 
 Telephone Plant
 
  Telephone plant is stated at original cost. The Company has consistently
followed the practice of capitalizing certain costs related to construction,
including payroll and payroll related costs.
 
                                     F-76
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Depreciation is provided on the straight-line basis over the estimated
useful lives of the assets.
 
  Upon retirement, the cost of the asset retired is charged against
accumulated depreciation together with the costs of removal, net of salvage.
 
 Materials and Supplies
 
  New materials, reusable materials and deregulated station equipment and
other electronic equipment are carried at cost or market, if lower, utilizing
the first-in, first-out method.
 
 Federal Income Taxes
 
  Deferred federal income taxes are provided for temporary differences in the
basis of assets and liabilities for financial and income tax accounting
purposes, principally with respect to telephone plant.
 
  The Internal Revenue Service does not recognize expensing of the inside
wiring component of station connections as required by the New York State
Public Service Commission. Therefore, the inside wiring component of station
connections is capitalized for Federal income tax purposes resulting in
greater income for tax purposes than that used for accounting purposes. The
tax benefit created by this timing difference has been normalized.
 
  In accordance with PSC requirements, the Company has identified a portion of
its deferred tax liability as being associated with investment tax credits
realized in prior years which are fully normalized and amortized to income
over the average service life of the related telephone plant and other
equipment.
 
 Risks and Uncertainties
 
  The Company provides services to residential and commercial customers
generally located within Chautauqua County, New York. The deregulation of the
telecommunications industry allows for the possible entry of other local and
long distance carriers into the Chautauqua County market.
 
  The Company requires deposits for certain equipment leased to customers.
Collateral is generally not required in connection with ongoing services
provided.
 
2.LONG-TERM DEBT
 
  Long-term debt at December 31, 1996 consists of two separate mortgage bonds.
One of the bonds is due February 1, 1997 and accrues interest at 8 1/8%. The
balance outstanding at December 31, 1996 for this bond, before unamortized
discount, was $840,000 . The second bond is due November 1, 2001 and accrues
interest at 9 1/8%. The balance outstanding at December 31, 1996 for this
bond, before unamortized discount, was $1,050,000.
 
  The bonds are collateralized by all of the telephone plant and equipment.
These bonds are covered by indenture agreements which require, under certain
conditions, annual sinking fund payments.
 
  Aggregate maturities of sinking fund requirements for the five years
following December 31, 1996 are as follows:
 
<TABLE>
   <S>                                                                  <C>
   1997................................................................ $870,000
   1998................................................................   30,000
   1999................................................................   30,000
   2000................................................................   30,000
   2001................................................................  930,000
</TABLE>
 
 
                                     F-77
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
3.NOTES PAYABLE
 
  Notes payable consists of:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1996
                                                              -----------------
   <S>                                                        <C>
   Outstanding amounts under a $3,000,000 available
    unsecured line of credit at approximately prime.........     $1,150,000
   Unsecured demand notes payable to various individuals and
    entities with interest payable at 5.75%.................      1,169,000
   Unsecured time notes--repaid in 1996.....................            --
                                                                 ----------
                                                                 $2,319,000
                                                                 ==========
</TABLE>
 
4.RETIREMENT PLANS
 
  The Company sponsors two defined benefit pension plans covering
substantially all employees. These plans are individually maintained for union
and management employees, both of which are funded by trusteed funds and are
noncontributory. The Company's policy is to fund pension costs annually based
on current actuarial determinations.
 
  Pension benefits are based on years of service and compensation.
 
  Net periodic pension cost for the union plan includes the following
components:
 
<TABLE>
<CAPTION>
                                                             1996       1995
                                                           ---------  ---------
<S>                                                        <C>        <C>
Service cost-benefits earned during the period...........  $  25,693  $  18,054
Interest cost on projected benefit obligation............     27,692     34,655
Actual return on plan assets.............................    (73,169)  (148,852)
Net amortization and deferral............................     19,879    116,149
                                                           ---------  ---------
Net periodic pension cost................................  $      95  $  20,006
                                                           =========  =========
 
Actuarial assumptions used in the calculation for the union plan were as
follows:
 
Discount rates...........................................        7.5%       7.5%
Rates of increase in compensation levels.................        4.0%       4.0%
Expected long-term rate of return on assets..............        8.0%       8.0%
 
  The following table sets forth the union plan's funded status at December
31, 1996:
 
Actuarial present value of benefit obligations:
  Vested.................................................  $ 279,228  $ 193,555
  Nonvested..............................................      7,315        860
                                                           ---------  ---------
    Total accumulated benefit obligations................  $ 286,543  $ 194,415
                                                           =========  =========
Projected benefit obligation.............................  $(422,618) $(416,324)
Plan assets at fair value................................    540,831    461,452
                                                           ---------  ---------
Excess of plan assets over projected benefit obligation..    118,213     45,128
Unrecognized transition asset............................    (38,100)   (42,863)
Unrecognized net gain from past experience different from
 that assumed and effects of changes in assumptions......   (128,218)   (56,485)
Amount deferred as regulatory asset......................     30,541     34,901
                                                           ---------  ---------
Accrued pension cost.....................................  $ (17,564) $ (19,319)
                                                           =========  =========
</TABLE>
 
 
                                     F-78
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  On December 31, 1996, the Company froze the benefits accrued under its
pension plan for management employees. The Company expects to distribute lump
sum payments to all participants as actuarially determined in the fourth
quarter of 1997. The Company has calculated its accrued pension liability at
December 31, 1996 in accordance with all the requirements of the Pension
Benefit Guaranty Corporation, the Internal Revenue Service, and the U.S.
Department of Labor. As such, the Company has recorded an accrual of
approximately $300,000 to account for the unfunded benefit obligation at
December 31, 1996 which is included in other current liabilities. The unfunded
benefit obligation is the difference between the expected settlement
obligation of approximately $1,850,000 and the fair value of plan assets at
December 31, 1996 of approximately $1,500,000. A contribution of $300,000 was
made to the plan by the Company in January of 1997. As a result of these
transactions, the Company recorded a net periodic pension cost for the
management plan of approximately $130,000 for 1996.
 
  Net periodic pension cost for the management plan consisted of the following
components for 1995:
 
<TABLE>
<S>                                                               <C>
Service cost-benefits earned during the period................... $    92,421
Interest cost on projected benefit obligation....................      95,430
Actual return on plan assets.....................................    (373,896)
Net amortization and deferral....................................     292,950
                                                                  -----------
Net periodic pension cost........................................ $   106,905
                                                                  ===========
 
  Actuarial assumptions used in the calculation for the management plan for
1995 were as follows:
 
Discount rates...................................................         7.5%
Rates of increase in compensation levels.........................         4.0%
Expected long-term rate of return on assets......................         8.0%
 
  The following table sets forth the management plan's funded status at
December 31, 1995:
 
Actuarial present value of benefit obligations:
  Vested......................................................... $   736,457
  Nonvested......................................................      20,053
                                                                  -----------
    Total accumulated benefit obligations........................ $   756,510
                                                                  ===========
Projected benefit obligation..................................... $(1,248,142)
Plan assets at fair value........................................   1,217,876
                                                                  -----------
Projected benefit obligation in excess of plan assets............     (30,266)
Unrecognized transition asset....................................    (225,605)
Unrecognized net gain from past experience different from that
 assumed and effects of changes in assumptions...................     (87,325)
Amount deferred as regulatory asset..............................     220,916
                                                                  -----------
Accrued pension cost............................................. $  (122,280)
                                                                  ===========
</TABLE>
 
  Assets of the plans are stated at fair value and consist primarily of listed
stocks and corporate debt.
 
  The Company sponsors a defined contribution 401(k) retirement savings plan
for non union employees. Contributions to the plan are based upon a percentage
of salaries of all qualified personnel. Additional contributions may be made
at the discretion of management. Contributions to this plan amounted to
$32,334 in 1996 and $129,811 in 1995.
 
 
                                     F-79
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
  The Company also sponsors a defined contribution 401(k) retirement savings
plan for union employees. The Company matches contributions to this plan based
upon a percentage of pay of all qualified personnel. Contributions to this
plan amounted to $9,311 in 1996 and $8,284 in 1995.
 
5.SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
  Cash paid during the year for:
 
<TABLE>
<CAPTION>
                                                                 1996     1995
                                                               -------- --------
<S>                                                            <C>      <C>
Interest...................................................... $350,267 $418,197
Income taxes..................................................  280,000  220,976
</TABLE>
 
6.SALE OF PARTNERSHIP INTEREST
 
  The Company sold its 11.25% ownership interest in a cellular communications
partnership, during 1996. The Company's carrying value for the ownership
interest was approximately $330,000 and the sale price was $4,988,700. The
gain on the sale, net of tax of $1,736,000, is included in income from
deregulated subsidiaries in the income statement.
 
7.COMMITMENTS
 
  During 1996, the Company entered into an agreement to sell all of its
outstanding stock to MJD Holding Corp., pending approval from the PSC and the
Federal Communications Commission (FCC).
 
                                     F-80
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
        CONDENSED CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
                   SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                     JUNE 30,
                                                                       1997
                                                                    -----------
<S>                                                                 <C>
Operating revenues:
  Local service.................................................... $   967,481
  Network access service...........................................   1,914,905
  Long distance network service....................................      38,135
  Miscellaneous....................................................     545,386
                                                                    -----------
                                                                      3,465,907
  Other............................................................      (3,000)
                                                                    -----------
    Total operating revenues.......................................   3,462,907
Operating expenses:
  Plant specific...................................................     677,771
  Plant nonspecific................................................     675,200
  Customer operations..............................................     321,376
  Corporate operations.............................................     590,775
  Operating taxes..................................................     253,058
                                                                    -----------
    Total operating expenses.......................................   2,518,180
                                                                    -----------
    Operating income...............................................     944,727
Other income (expense):
  Interest.........................................................    (171,780)
  Gain on sale of investment in cellular partnership...............         --
  Other, net.......................................................       3,973
                                                                    -----------
    Total other income (expense)...................................    (167,807)
                                                                    -----------
Income before income taxes.........................................     776,920
Federal income taxes:
  Current..........................................................     214,710
  Deferred.........................................................      60,000
                                                                    -----------
                                                                        274,710
                                                                    -----------
Net income.........................................................     502,210
Retained earnings--January 1.......................................  10,143,545
                                                                    -----------
                                                                     10,645,755
Dividends paid:
  Common, $6.80 per share..........................................         --
                                                                    -----------
Retained earnings June 30.......................................... $10,645,755
                                                                    ===========
</TABLE>
 
     See accompanying note to condensed consolidated financial statements.
 
                                      F-81
<PAGE>
 
                    CHAUTAUQUA & ERIE TELEPHONE CORPORATION
 
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                   SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                    JUNE 30,
                                                                      1997
                                                                   -----------
<S>                                                                <C>
OPERATING ACTIVITIES:
Net income........................................................ $   502,210
Adjustments to reconcile net income to net cash provided by
 operating activities:
  Depreciation--telephone plant...................................     534,626
  Amortization....................................................       2,521
  Gain on sale of cellular partnership............................         --
  Other non cash expenses.........................................      12,679
  Changes in operating assets and liabilities, net of effects from
   purchase of Chautauqua Cable, Inc.:
    Increase in due from customers and agents.....................      61,825
    Increase in other accounts receivable.........................      97,982
    Decrease in materials and supplies............................      13,543
    Decrease in prepaid expenses..................................      87,316
    Decrease in other assets......................................         --
    Decrease in accounts payable..................................    (262,032)
    Increase (Decrease) in accrued taxes, interest and dividends
     and other current liabilities................................  (1,947,813)
                                                                   -----------
      Net cash provided by operating activities...................    (897,143)
INVESTING ACTIVITIES:
  Premium payments for officer's life insurance...................      (3,866)
  Capital expenditures--telephone plant...........................    (383,486)
  Salvage proceeds in excess (less than) of cost of removal--
   telephone plant................................................     (50,205)
  Proceeds from sale of cellular partnership......................         --
                                                                   -----------
      Net cash provided by investing activities...................    (437,557)
FINANCING ACTIVITIES:
  Principal payments on notes payable and long-term debt..........    (810,000)
  Proceeds from the issuance of Notes Payable.....................     976,500
  Dividends paid..................................................    (274,268)
                                                                   -----------
Net cash used in financing activities.............................    (107,768)
                                                                   -----------
Net increase (decrease) in cash...................................  (1,442,468)
Cash at beginning of year.........................................   4,094,370
                                                                   -----------
Cash at end of year............................................... $ 2,651,902
                                                                   ===========
</TABLE>
 
 
     See accompanying note to condensed consolidated financial statements.
 
                                      F-82
<PAGE>
 
(1)BASIS OF FINANCIAL REPORTING
 
  Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission; however, the Company believes the
disclosures which are made are adequate to make the information presented not
misleading.
 
  The unaudited financial information for the six months ended June 30, 1997
has not been audited by independent public accountants; however, in the
opinion of management, such financial information includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of results of operations and cash flows for the six month period
have been included therein in accordance with generally accepted accounting
principles. The results of operations for the interim period are not
necessarily indicative of the results of operations which might be expected
for the entire year. The condensed consolidated financial statements should be
read in conjunction with the Company's 1996 annual financial statements
contained herein.
 
                                     F-83
<PAGE>
 
                         INDEPENDENT AUDITOR'S REPORT
 
The Board of Directors
Big Sandy Telecommunications, Inc.
Simla, Colorado
 
  We have audited the accompanying balance sheets of Big Sandy
Telecommunications, Inc. (a Colorado Corporation) as of December 31, 1995 and
1994, and the related statements of income, changes in stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Big Sandy
Telecommunications, Inc. as of December 31, 1995 and 1994, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
 
  As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for investments in 1994.
 
                                          Kiesling Associates
 
Colorado Springs, Colorado
February 6, 1996
 
                                     F-84
<PAGE>
 
                       BIG SANDY TELECOMMUNICATIONS, INC.
 
                                 BALANCE SHEETS
                           DECEMBER 31, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                            1995        1994
                                                         ----------- ----------
<S>                                                      <C>         <C>
                         ASSETS
CURRENT ASSETS
  Cash and cash equivalents............................. $ 1,858,423 $  686,684
  Temporary investments.................................      81,256     81,256
  Accounts receivable--
    Due from customers..................................      19,387     16,374
    Interexchange carriers..............................      59,148     68,215
    Other...............................................         661     28,902
  Materials and supplies, at average cost...............      25,503     31,849
  Prepayments--
    Income Taxes........................................         --      26,481
    Other...............................................      34,422     30,432
  Deferred income taxes.................................       9,090     11,438
                                                         ----------- ----------
                                                           2,087,890    981,631
                                                         ----------- ----------
NONCURRENT ASSETS
  Investments--
    Marketable equity securities........................   7,302,239  5,505,808
    Other...............................................      37,478     37,478
  Cash value of life insurance..........................     128,194    101,472
                                                         ----------- ----------
                                                           7,467,911  5,644,758
                                                         ----------- ----------
PROPERTY AND EQUIPMENT
  Telecommunications plant in service...................   2,953,752  2,949,651
  Other property........................................     229,156    228,917
                                                         ----------- ----------
                                                           3,182,908  3,178,568
                                                         ----------- ----------
  Less accumulated depreciation.........................   2,016,173  1,893,578
                                                         ----------- ----------
                                                           1,166,735  1,284,990
                                                         ----------- ----------
TOTAL ASSETS............................................ $10,722,536 $7,911,379
                                                         =========== ==========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements
 
                                      F-85
<PAGE>
 
                       BIG SANDY TELECOMMUNICATIONS, INC.
 
                          BALANCE SHEETS--(CONTINUED)
                           DECEMBER 31, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                            1995        1994
                                                         ----------- ----------
<S>                                                      <C>         <C>
          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable--
    Interexchange carriers.............................. $     1,289 $   39,002
    Other...............................................      38,061     18,903
  Customer deposits.....................................       9,127      7,058
  Current portion of long-term debt.....................     189,600    178,700
  Current portion of deferred compensation liability....      46,098     42,701
  Accrued taxes--
    Income taxes........................................     346,138        --
    Other...............................................      27,297     29,357
  Other accrued liabilities.............................      43,144     49,093
                                                         ----------- ----------
                                                             700,754    364,814
                                                         ----------- ----------
LONG-TERM DEBT, less current portion....................   2,417,581  2,607,177
                                                         ----------- ----------
DEFERRED CREDITS
  Deferred income taxes.................................   2,807,232  2,121,822
  Deferred investment tax credit, net...................      38,824     50,040
  Deferred compensation liability, less current
   portion..............................................      22,617     68,715
  Deferred regulatory liability.........................      26,687     35,372
                                                         ----------- ----------
                                                           2,895,360  2,275,949
                                                         ----------- ----------
STOCKHOLDERS' EQUITY
  Common stock, no par value, 50,000 shares authorized;
   21,250 shares issued and outstanding.................      12,166     12,166
  Unrealized holding gains and losses on certain
   investments..........................................   2,197,504    631,075
  Retained earnings.....................................   2,499,171  2,020,198
                                                         ----------- ----------
                                                           4,708,841  2,663,439
                                                         ----------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY................ $10,722,536 $7,911,379
                                                         =========== ==========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements
 
                                      F-86
<PAGE>
 
                       BIG SANDY TELECOMMUNICATIONS, INC.
 
                              STATEMENTS OF INCOME
                     YEARS ENDED DECEMBER 31, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                               1995      1994
                                                             --------  --------
<S>                                                          <C>       <C>
OPERATING REVENUES
  Local network services.................................... $188,586  $183,053
  Network access services...................................  550,829   524,573
  Miscellaneous.............................................  162,198   148,622
                                                             --------  --------
                                                              901,613   856,248
                                                             --------  --------
OPERATING EXPENSES
  Plant specific operations.................................  173,882   138,608
  Plant nonspecific operations..............................    7,872     7,999
  Depreciation and amortization.............................  175,951   161,418
  Customer operations.......................................  107,194    94,466
  Corporate operations......................................  263,161   252,507
  General taxes.............................................   29,550    29,123
                                                             --------  --------
                                                              757,610   684,121
                                                             --------  --------
NET OPERATING INCOME........................................  144,003   172,127
                                                             --------  --------
OTHER INCOME
  Interest and dividend income..............................  367,439   353,986
  Gain--sale of investments.................................  446,957    27,511
  Other, net................................................  (45,428)  (64,076)
  Interest expense.......................................... (129,159) (142,263)
                                                             --------  --------
                                                              639,809   175,158
                                                             --------  --------
INCOME BEFORE INCOME TAX EXPENSE............................  783,812   347,285
                                                             --------  --------
INCOME TAX EXPENSE..........................................  204,114    41,096
                                                             --------  --------
NET INCOME.................................................. $579,698  $306,189
                                                             ========  ========
Earnings per share.......................................... $  27.27  $  14.41
                                                             ========  ========
</TABLE>
 
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-87
<PAGE>
 
                       BIG SANDY TELECOMMUNICATIONS, INC.
 
                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                        UNREALIZED
                                                        INVESTMENT
                                                COMMON  GAINS AND   RETAINED
                                                 STOCK    LOSSES    EARNINGS
                                                ------- ---------- ----------
<S>                                             <C>     <C>        <C>
Balance, December 31, 1993..................... $12,166 $      --  $1,920,009
Net income for the year........................     --         --     306,189
Cash Dividends ($9.69/share)...................     --         --    (206,000)
Change in unrealized gains and losses, net of
 income taxes of $375,425......................     --     631,075        --
                                                ------- ---------- ----------
Balance, December 31, 1994.....................  12,166    631,075  2,020,198
Net income for the year........................     --         --     579,698
Cash Dividends ($4.74/share)...................     --         --    (100,725)
Change in unrealized gains and losses, net of
 income taxes of $931,862......................     --   1,566,429        --
                                                ------- ---------- ----------
Balance, December 31, 1995..................... $12,166 $2,197,504 $2,499,171
                                                ======= ========== ==========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements
 
                                      F-88
<PAGE>
 
                       BIG SANDY TELECOMMUNICATIONS, INC.
 
                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                           1995        1994
                                                        ----------  ----------
<S>                                                     <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................  $  579,698  $  306,189
Adjustments to reconcile net income to net cash
 provided by operating
 activities--
  Gain on sale of investments.........................    (446,957)    (27,511)
  Depreciation........................................     173,048     158,514
  Amortization--
    Intangible property...............................       2,872       2,872
    Acquisition adjustment............................          31          31
  Increase in cash value of life insurance............     (26,721)     (7,863)
  Deferred income tax expense (benefit)...............    (252,789)     16,973
  Deferred investment tax credits, net................     (11,216)    (13,084)
  Change in assets and liabilities (Increase) decrease
   in:
      Accounts receivable.............................       6,302     (18,766)
      Material and supplies...........................       1,629        (758)
      Inventories.....................................       4,716      (1,206)
      Prepayments.....................................      22,491     (50,544)
    Increase (decrease) in:
      Accounts payable................................     (16,486)     (5,569)
      Accrued taxes...................................     344,078     (70,670)
      Other accrued liabilities.......................      (5,948)    (20,778)
                                                        ----------  ----------
        Net cash provided by operating activities.....     374,748     267,830
                                                        ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to property and equipment.................     (57,695)   (223,552)
  Purchase of investments.............................         --       (7,710)
  Sale of investments.................................   1,176,808         --
  Salvage from property retired.......................         --        8,250
                                                        ----------  ----------
        Net cash provided by (used in) investing
         activities...................................   1,119,113    (223,012)
                                                        ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Repayment of long-term debt.........................    (178,696)   (168,539)
  Dividends paid......................................    (100,725)   (206,000)
  Reduction of deferred compensation liability........     (42,701)    (39,423)
                                                        ----------  ----------
        Net cash used in financing activities.........    (322,122)   (413,962)
                                                        ----------  ----------
Net Increase (Decrease) in Cash and Cash Equivalents..   1,171,739    (369,144)
Cash and Cash Equivalents at Beginning of Year........     686,684   1,055,828
                                                        ----------  ----------
Cash and Cash Equivalents at End of Year..............  $1,858,423  $  686,684
                                                        ==========  ==========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-89
<PAGE>
 
                      BIG SANDY TELECOMMUNICATIONS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
                          DECEMBER 31, 1995 AND 1994
 
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 A. Nature of Operations
 
  The Company's principal business is providing telecommunications exchange
and local access services in a service area located primarily in eastern
Colorado. The Company also operates a small cable television system in the
same area.
 
 B. System of Accounts
 
  The accounting policies of Big Sandy Telecommunications, Inc. conform to
generally accepted accounting principles. Telephone operations reflect
practices appropriate to the telephone industry. The accounting records of the
Company are maintained in accordance with the Uniform System of Accounts for
Class A and B Telephone Companies prescribed by the Federal Communications
Commission and the Colorado Public Utilities Commission.
 
 C. Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 D. Property and Equipment
 
  Telephone plant is capitalized at original cost, including the capitalized
cost of salaries and wages, materials, certain payroll taxes and employee
benefits. Beginning in September, 1995, regulators modified accounting
principles for the allowance for funds used during construction (AFUDC) to
conform with Statement of Financial Accounting Standards No. 34
"Capitalization of Interest Cost". The impact of this change was not material.
No AFUDC was taken in 1995 or 1994.
 
  Renewals and betterments of units of property are charged to telephone plant
in service. When telephone plant is retired, its cost is removed from the
asset account and charged against accumulated depreciation, together with
removal cost less any salvage realized. No gains or losses are recognized in
connection with routine retirements of depreciable telephone property. Repairs
and renewals of minor items of property are included in plant specific
operations expense.
 
 E. Depreciation
 
  The Company provides for depreciation for financial reporting purposes on
the straight-line method by the application of rates, based on the estimated
service lives of the various classes of depreciable property, as approved by
the Colorado Public Utilities Commission.
 
  Depreciation on depreciable property resulted in composite rates of 5.51%
and 5.17% for 1995 and 1994, respectively.
 
 F. Income Taxes
 
  Income taxes are accounted for using a liability method and provide for the
tax effects of transactions reported in the financial statements including
both taxes currently due and deferred. Deferred income taxes reflect
 
                                     F-90
<PAGE>
 
                      BIG SANDY TELECOMMUNICATIONS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, using current enacted tax rates. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
 
  Investment tax credits (ITC), which were deferred prior to the Tax Reform
Act of 1986, are being amortized over the regulatory life of the plant which
produced the ITC.
 
 G. Revenue Recognition
 
  Local network, network access, and miscellaneous revenues are recognized
when earned regardless of the period in which they are billed.
 
  Revenues relating to the provision of access services to customers are
derived, in part, from tariffed access charges to toll service providers
(interexchange carriers), and in part from sharing in interstate pools.
Interstate revenues are determined in accordance with cost separation
procedures.
 
  The Company is compensated for intrastate access under access charge
procedures based on expense and plant investment levels as determined by the
Company and approved by the Colorado Public Utilities Commission.
 
  Reported interstate revenues and certain intrastate revenues are estimates
subject to subsequent adjustments resulting from changes in expense and plant
investment levels and the rate of return experience of the various pools.
 
 H. Cash Equivalents
 
  All highly liquid investments with a maturity of three months or less from
date of purchase are considered cash equivalents.
 
 I. Pension Expenses
 
  The Company's policy is to fund pension costs accrued.
 
 J. Investments
 
  Effective January 1, 1994, the Company implemented Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities." SFAS 115 requires certain investments to be
categorized as either trading, available-for-sale, or held-to-maturity. Debt
and marketable equity securities bought and held principally for selling in
the near future are classified as trading securities and carried at fair
value. Unrealized holding gains and losses on trading securities are reported
in earnings. Debt and marketable equity securities classified as available-
for-sale are carried at fair value with unrealized holding gains and losses
recorded as a separate component of stockholders' equity. Debt securities the
Company has both the positive intent and ability to hold to maturity are
classified as held-to-maturity and are carried at amortized cost. The Company
uses FIFO method of computing realized gains and losses. In accordance with
SFAS 115, prior period financial statements have not been restated. The
cumulative effect of adopting this standard was an increase in stockholders'
equity at January 1, 1994, of $1,634,994 (net of $972,652 in deferred income
taxes) to reflect the net unrealized holding gains and losses on securities
classified as available-for-sale.
 
                                     F-91
<PAGE>
 
                      BIG SANDY TELECOMMUNICATIONS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Non-marketable equity investments, over which the Company has significant
influence or a 20% ownership, are reflected on the equity method. Other non-
marketable equity investments are stated at cost.
 
2.PROPERTY AND EQUIPMENT
 
  Property and equipment at December 31, 1995 and 1994 includes the following:
 
<TABLE>
<CAPTION>
                                                             1995       1994
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   Telephone plant in service--
     Land................................................ $   26,419 $   26,419
     Buildings...........................................    200,685    199,306
     Switching equipment.................................    954,140    983,702
     Outside plant.......................................  1,440,835  1,407,461
     Furniture and office equipment......................     70,007     71,977
     Vehicles and work equipment.........................    247,516    246,102
     Other plant and equipment...........................     14,150     14,684
                                                          ---------- ----------
                                                           2,953,752  2,949,651
                                                          ---------- ----------
   Other property--
     CATV plant in service...............................    229,010    228,741
     CATV plant adjustment...............................        146        176
                                                          ---------- ----------
                                                             229,156    228,917
                                                          ---------- ----------
       Total property and equipment...................... $3,182,908 $3,178,568
                                                          ========== ==========
</TABLE>
 
3.LONG-TERM DEBT
 
  Long-term debt at December 31, 1995 and 1994 consists of:
 
<TABLE>
<CAPTION>
                                                             1995       1994
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   2% RUS mortgage notes................................. $1,526,183 $1,588,675
   8% note payable--H. Raymond Hope......................  1,080,998  1,197,202
                                                          ---------- ----------
                                                           2,607,181  2,785,877
   Less current maturity.................................    189,600    178,700
                                                          ---------- ----------
                                                          $2,417,581 $2,607,177
                                                          ========== ==========
</TABLE>
 
  The annual requirements for principal payments on long-term debt for the
next five years are as follows:
 
<TABLE>
           <S>                                       <C>
           1996..................................... $189,600
           1997.....................................  201,300
           1998.....................................  213,900
           1999.....................................  227,500
           2000.....................................  242,200
</TABLE>
 
  In January, 1996, the Company repaid in full its RUS mortgage notes.
 
  Substantially all property and equipment of the telephone company is pledged
as security for the long-term debt under a loan agreement with the Rural
Utilities Service (RUS). These mortgage notes are to be repaid in equal
quarterly installments covering principal and interest beginning three years
after date of issue and expiring by 2010.
 
                                     F-92
<PAGE>
 
                      BIG SANDY TELECOMMUNICATIONS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  In connection with the redemption of all of his stock, the Company issued to
H. Raymond Hope an unsecured promissory note of $1,427,135, dated August 25,
1992, with interest at 8%. The note is payable in 120 monthly installments of
$17,315, including principal and interest, beginning October 1, 1992. The note
is due and payable in full if certain events should occur in the future.
 
  Cash paid for interest during the years ended December 31, 1995 and 1994
totaled $129,739 and $143,801, respectively.
 
  The mortgage to the United States of America, underlying the RUS notes,
contains certain restrictions on the declaration or payment of cash dividends,
redemption of capital stock, or investment in affiliated companies. As of
December 31, 1995, the maximum amount which could be distributed in accordance
with these restrictions was approximately $1,305,600, except as might be
specifically authorized in writing in advance by the RUS.
 
4.INCOME TAXES
 
  Income taxes reflected in the Statements of Operations consist of the
following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -------------------
                                                              1995       1994
                                                            ---------  --------
   <S>                                                      <C>        <C>
   Income Taxes
     Federal income taxes--
       Current tax expense................................. $ 406,075  $ 36,677
       Deferred tax expense (benefit)......................  (218,057)   13,999
       Amortization of investment tax credits..............    (6,236)  (12,441)
     State income taxes--
       Current tax expense.................................    62,044       530
       Deferred tax expense (benefit)......................   (34,732)    2,974
       Investment tax credits (net)........................    (4,980)     (643)
                                                            ---------  --------
                                                            ---------  --------
   Total income tax expense................................ $ 204,114  $ 41,096
                                                            =========  ========
</TABLE>
 
  Cash paid for income taxes and estimated income taxes for 1995 and 1994,
totaled $95,500 and $56,000, respectively.
 
  The following is a reconciliation of the statutory federal income tax rate
of 34% to the Company's effective tax rate:
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                                  --------------------------
                                                     1995           1994
                                                  -----------   ------------
   <S>                                            <C>           <C>
   Statutory federal income tax rate.............        34.0 %         34.0 %
   State income taxes, net of federal benefit....         2.3            1.7
   Amortization of investment tax credits........        (1.5)          (5.4)
   Benefit of graduated rates....................         -0-          (13.6)
   Dividends received deduction and other
    permanent differences........................        (8.1)         (16.4)
   Other differences.............................        (0.7)           0.9
                                                  -----------   ------------
   Effective income tax rate.....................        26.0 %          1.2 %
                                                  ===========   ============
</TABLE>
 
                                     F-93
<PAGE>
 
                      BIG SANDY TELECOMMUNICATIONS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Deferred Federal and state tax liabilities and assets at December 31, 1995
and 1994 comprise the following:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                        ----------------------
                                                           1995        1994
                                                        ----------  ----------
   <S>                                                  <C>         <C>
   Deferred tax asset:
     Regulatory liabilities and unamortized ITC........ $  (24,436) $  (28,613)
     Accrued liabilities...............................    (34,721)    (48,763)
                                                        ----------  ----------
       Deferred tax assets.............................    (59,157)    (77,376)
                                                        ----------  ----------
   Deferred tax liability:
     Investments.......................................  2,715,290   2,043,661
     Property, plant and equipment.....................    139,606     141,486
     Other.............................................      2,403       2,613
                                                        ----------  ----------
       Deferred tax liabilities........................  2,857,299   2,187,760
                                                        ----------  ----------
   Net deferred tax liability.......................... $2,798,142  $2,110,384
                                                        ==========  ==========
   Current portion..................................... $   (9,090) $  (11,438)
   Noncurrent portion..................................  2,807,232   2,121,822
                                                        ----------  ----------
                                                        $2,798,142  $2,110,384
                                                        ==========  ==========
</TABLE>
 
  Deferred Credits includes a regulatory liability at December 31, 1995 and
1994 of $26,687 and $35,372, respectively. A substantial portion of the
regulatory liability represents an amount associated with unamortized
investment tax credits. This amount will be amortized in the same manner as
the underlying investment tax credits. The regulatory liability also includes
an amount representing excess deferred taxes on depreciable assets, resulting
primarily from reductions in the statutory Federal income tax rate. This
amount is being amortized over the lives of the related depreciable assets in
accordance with the average rate assumption method as required by income tax
regulations.
 
                                     F-94
<PAGE>
 
                      BIG SANDY TELECOMMUNICATIONS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
5.INVESTMENTS
 
  Investments at December 31, 1995 and 1994 include:
 
  The amortized costs and fair value of available-for-sale securities are:
 
<TABLE>
<CAPTION>
                                                GROSS      GROSS
                                   AMORTIZED  UNREALIZED UNREALIZED    FAIR
                                     COSTS      GAINS      LOSSES     VALUE
                                   ---------- ---------- ---------- ----------
   <S>                             <C>        <C>        <C>        <C>
   DECEMBER 31, 1995
   Available-for-Sale:
     Equity securities............ $3,797,448 $3,504,791    $-0-    $7,302,239
                                   ---------- ----------    ----    ----------
   Amount included in:
     Noncurrent investments.......                                  $7,302,239
                                                                    ==========
   Held-to-maturity:
     Debt securities.............. $   20,000 $   19,500    $-0-    $   39,500
                                   ========== ==========    ====    ==========
   Amount included in:
     Noncurrent investments....... $   20,000
                                   ==========
   DECEMBER 31, 1994
   Available-for-Sale:
     Equity securities............ $4,499,308 $1,006,500    $-0-    $5,505,808
                                   ========== ==========    ====    ==========
   Amount included in:
     Noncurrent investments.......                                  $5,505,808
                                                                    ==========
   Held-to-maturity:
     Debt securities.............. $   20,000 $   18,800    $-0-    $   38,800
                                   ========== ==========    ====    ==========
   Amount included in:
     Noncurrent investments....... $   20,000
                                   ==========
</TABLE>
 
  Proceeds from sales of available-for-sale securities totaled $1,148,816 and
$27,992 in 1995 and 1994, respectively. The gross realized gains on sales of
available-for-sale securities totaled $446,957 and $27,511, in 1995 and 1994,
respectively. There were no realized losses in 1995 or 1994. The net
adjustment to unrealized holding gains (losses) on available-for-sale
securities included as a separate component of stockholders' equity before tax
totaled $2,498,291 in 1995, and $(1,003,919) in 1994.
 
  Investments include the following at December 31, 1995 and 1994:
 
<TABLE>
<CAPTION>
                                                             1995       1994
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   Cash surrender value--officers' life insurance........ $  128,194 $  101,472
   Stock--Smokey Hill Cellular, Inc......................      6,282      6,282
   Stock--Rural Telephone Bank...........................      5,000      5,000
   Stock--U.S. Intelco Networks, Inc.....................      6,196      6,196
   Stock--U.S. West, Inc. ...............................  5,505,808  5,505,808
   Stock--U.S. West Media Group..........................  1,796,431        --
   U.S. Savings Bonds....................................     20,000     20,000
                                                          ---------- ----------
                                                          $7,467,911 $5,644,758
                                                          ========== ==========
</TABLE>
 
 
                                     F-95
<PAGE>
 
                      BIG SANDY TELECOMMUNICATIONS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
6.CELLULAR ACTIVITIES
 
  The Company has a 29.78% interest in a company involved in cellular
activities in Colorado. The total investment is $6,282.
 
  In late 1995, the Company entered into an agreement to sell its interest in
this company. The proceeds of the sale are expected to be approximately
$283,700.
 
7.RETIREMENT PLAN
 
  The Company has a non-contributory defined benefit plan covering most
employees. The multi-employer retirement program is with the National
Telephone Cooperative Association (NTCA) and has been approved by the Internal
Revenue Service. Pension cost, expensed and capitalized, for 1995 and 1994 was
$29,183 and $27,820, respectively. The Company makes annual contributions to
the plan equal to amounts accrued for pension expense.
 
8.FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  SFAS 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of the following information about the fair value of certain
financial instruments for which it is practicable to estimate that value. For
purposes of the following disclosure, the fair value of a financial instrument
is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation.
 
  The amounts disclosed represent management's best estimate of fair value. In
accordance with SFAS 107, the Company has excluded certain financial
instruments and all other nonfinancial instruments from its disclosure.
Accordingly, the aggregate fair value amounts presented are not intended to,
and do not, represent the underlying fair value of the Company.
 
  The methods and assumptions used to estimate fair value are as follows:
 
CASH AND SHORT-TERM INVESTMENTS
 
  The carrying amount approximates fair value because of the short maturity of
those instruments.
 
LONG-TERM INVESTMENTS
 
  The fair value of some investments are estimated based on quoted market
prices for those or similar investments, and other information available to
management.
 
  For investments totaling $11,196, there are no quoted market prices. Due to
the excessive costs that would be incurred, management does not believe it is
practicable to provide a current estimate of fair value.
 
LONG-TERM DEBT
 
  The fair value of the Company's long-term debt was estimated based on the
current rates available to the Company for debt with similar remaining
maturities.
 
  The carrying amount and estimated fair value of the Company's financial
instruments are as follows:
 
<TABLE>
<CAPTION>
                                                                  1995
                                                          ---------------------
                                                           CARRYING     FAIR
                                                            AMOUNT     VALUE
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   Cash and temporary investments........................ $1,939,678 $1,939,678
   Long-term investments for which it is:
     Practicable to estimate fair value..................  7,328,521  7,625,439
     Not practicable.....................................     11,196
   Long-term debt........................................  2,417,581  2,081,000
</TABLE>
 
 
                                     F-96
<PAGE>
 
                      BIG SANDY TELECOMMUNICATIONS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
9.DEFERRED COMPENSATION AGREEMENT
 
  The Company entered into a deferred compensation agreement, dated July 1,
1992, with a retired officer and former shareholder. The agreement provides
for 60 monthly payments of $4,166.67, totaling $250,000, beginning July 1,
1992. The Company's annual obligation for reduction of the liability of
$68,715 at December 31, 1995, for the next two years is as follows:
 
<TABLE>
           <S>                                        <C>
           1996...................................... $46,098
           1997......................................  22,617
</TABLE>
 
10.CONCENTRATIONS OF CREDIT RISK
 
  The Company grants credit to local service customers, all of whom are
located in the franchised service area, and telecommunications intrastate and
interstate long distance carriers. The Company may be subject to competition
for telecommunications services, including telecommunications exchange
services, in the franchised area.
 
  Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents and temporary
cash investments. The Company limits the amount of credit exposure in any one
financial institution by placing its temporary cash investments in several
financial institutions.
 
  Of the Company's cash and cash equivalents, $37,204 and $17,828 at December
31, 1995 and 1994, respectively, are maintained in financial institutions in
excess of amounts insured by an agency of the Federal Government.
 
11.CONTINGENCIES
 
  In January, 1996, the Company entered into an Asset Purchase Agreement
providing for the sale of all of its assets and rights used in the operations
of its telecommunications and cable television business activities. The sale
is subject to certain regulatory agency approvals, and is expected to be
consummated by mid-1996. If consummated, the sale would result in a
substantial gain to the Company.
 
                                     F-97
<PAGE>
 
                       BIG SANDY TELECOMMUNICATIONS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
 
12.SEGMENT INFORMATION
 
  The Company currently operates within industry segments related to
telecommunications and cable television services. Financial information by
industry segments for the years ending December 31, 1995 and 1994 is summarized
as follows:
 
<TABLE>
<CAPTION>
                                                            1995        1994
                                                         ----------- ----------
   <S>                                                   <C>         <C>
   Operating Revenues
     Telecommunications operations...................... $   797,019 $  756,538
     Cable television operations........................     104,594     99,710
                                                         ----------- ----------
                                                         $   901,613 $  856,248
                                                         =========== ==========
   Operating Income
     Telecommunications operations...................... $   138,287 $  161,945
     Cable television operations........................       5,716     10,182
                                                         ----------- ----------
                                                         $   144,033 $  172,127
                                                         =========== ==========
   Identifiable Assets
     Telecommunications operations...................... $10,656,219 $7,836,106
     Cable television operations........................      66,317     75,273
                                                         ----------- ----------
                                                         $10,722,536 $7,911,379
                                                         =========== ==========
   Depreciation and Amortization
     Telecommunications operations...................... $   163,736 $  148,669
     Cable television operations........................      12,215     12,749
                                                         ----------- ----------
                                                         $   175,951 $  161,418
                                                         =========== ==========
   Capital Expenditures
     Telecommunications operations...................... $    55,978 $  220,707
     Cable television operations........................       1,717      2,845
                                                         ----------- ----------
                                                         $    57,695 $  223,552
                                                         =========== ==========
</TABLE>
 
                                      F-98
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                  PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
                             BASIS OF PRESENTATION
 
  The following unaudited pro forma consolidated statement of operations for
the year ended December 31, 1997 is based on historical results of MJD
Communications, Inc. and subsidiaries (the "Company"); the acquisition of
Taconic Telephone Corp. ("Taconic") on March 30, 1998; the acquisition of
Ellensburg Telephone Company ("Ellensburg") on April 30, 1998; the acquisition
of Chouteau Telephone Company ("Chouteau") on June 1, 1998; and the probable
acquisition of Utilities, Inc. and its subsidiaries except for Seacoast
Cellular and Western Maine Cellular ("Utilities"). The pro forma consolidated
statement of operations also gives affect to the results of Kadoka Telephone
Company, Columbine Telephone Company, Chautauqua & Erie Telephone Corporation,
and C-R Communications, Inc. (the "1997 Acquisitions") for preacquisition
operations from January 1, 1997 to the date of the respective acquisition. The
1997 Acquisitions, Taconic acquisition, Ellensburg acquisition and Chouteau
acquisition (the "Completed Acquisitions") and the Utilities acquisition (the
"Pending Acquisition") are accounted for under the purchase method of
accounting.
 
  Pro forma adjustments, and the assumptions on which they are based are
described in the accompanying notes to the pro forma consolidated financial
statements. The accompanying pro forma consolidated statement of operations
for the year ended December 31, 1997 contain those pro forma adjustments
necessary to reflect the Completed Acquisitions and the Pending Acquisition as
if the purchase of the respective company was consummated on January 1, 1997
and to reflect the use of proceeds from the New Credit Facility and the sale
of notes related to the Offering as if it was consummated on January 1, 1997.
 
  The following unaudited pro forma consolidated balance sheet and
consolidated statement of operations as of and for the six months ended June
30, 1998 are based on historical results of the Company; the acquisition of
Taconic on March 30, 1998; the acquisition of Ellensburg on April 30, 1998;
the acquisition of Chouteau on June 1, 1998; and the probable acquisition of
Utilities. The acquisitions are accounted for under the purchase method of
accounting.
 
  Pro forma adjustments, and the assumptions on which they are based are
described in the accompanying notes to the pro forma consolidated financial
statements. The accompanying pro forma consolidated balance sheet as of June
30, 1998 contains those pro forma adjustments necessary to reflect the
purchase of Utilities as if it was consummated on that date. The accompanying
pro forma consolidated statement of operations for the six months ended June
30, 1998 contain those pro forma adjustments necessary to reflect Taconic,
Ellensburg, Chouteau and Utilities Inc. as if the purchase of the respective
company was consummated on January 1, 1997 and to reflect the use of proceeds
from the New Credit Facility and the sale of notes related to the Offering as
if it was consummated on January 1, 1997.
 
  The pro forma consolidated financial statements may not be indicative of the
actual financial position or results of operations as of the date and for the
periods presented, respectively, nor are the results indicative of the
Company's future results of operations.
 
                                      P-1
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
                 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1997
                                  (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                                         COMPLETED ACQUISITIONS
                                                                                                             PRO FORMA FOR
                                                                                                               COMPLETED
                           MJD                                                                               ACQUISITIONS,
                   COMMUNICATIONS INC.      1997                                           PRO FORMA      NEW CREDIT FACILITY
                       HISTORICAL      ACQUISITIONS(1)  TACONIC    ELLENSBURG  CHOUTEAU   ADJUSTMENTS       AND OFFERING(2)
                   ------------------- --------------- ----------  ----------  ---------  -----------     -------------------
<S>                <C>                 <C>             <C>         <C>         <C>        <C>             <C>
Operating
 revenues:
 Switched
  services.......      $39,257,363        5,004,866    15,005,994  13,300,800  4,182,391          --           76,751,414
 Other...........        3,714,955        1,027,604     5,391,068   1,357,900    148,181          --           11,639,708
                       -----------        ---------    ----------  ----------  ---------  -----------         -----------
Total operating
 revenues........       42,972,318        6,032,470    20,397,062  14,658,700  4,330,572          --           88,391,122
                       -----------        ---------    ----------  ----------  ---------  -----------         -----------
Operating
 expenses:
 Plant
  operations.....        6,856,901        1,196,507     4,006,019   2,638,600    893,926          --           15,591,953
 Corporate and
  customer
  services.......       11,580,804        1,972,690     6,092,195   3,052,200  1,984,740   (1,322,053)(a)      23,360,576
 Depreciation and
  amortization...        8,777,103          968,371     3,401,706   3,601,100    584,731    3,043,961 (b)      20,376,972
 Other...........        3,318,258          866,000     3,121,714     484,300    122,501          --            7,912,773
                       -----------        ---------    ----------  ----------  ---------  -----------         -----------
Total operating
 expenses........       30,533,066        5,003,568    16,621,634   9,776,200  3,585,898    1,721,908          67,242,274
                       -----------        ---------    ----------  ----------  ---------  -----------         -----------
Income from
 operations......       12,439,252        1,028,902     3,775,428   4,882,500    744,674   (1,721,908)         21,148,848
                       -----------        ---------    ----------  ----------  ---------  -----------         -----------
Other income
 (expense):
 Net gain (loss)
  on sale of
  investments and
  other assets...          (19,229)          10,349           --          --         --           --               (8,880)
 Interest
  income.........          212,035          139,775           --      242,800        --           --              594,610
 Dividend
  income.........        1,182,124              --            --          --         --           --            1,182,124
 Interest
  expense........       (9,293,104)        (372,625)     (891,437)       (100)  (219,319)  11,071,085 (c)     (29,704,427)
                                                                                          (28,269,892)(c)
                                                                                           (1,729,035)(d)
 Other
  nonoperating,
  net............          139,972         (361,557)      656,645     811,600    145,466          --            1,392,126
                       -----------        ---------    ----------  ----------  ---------  -----------         -----------
Total other
 income
 (expense).......       (7,778,202)        (584,058)     (234,792)  1,054,300    (73,853) (18,927,842)        (26,544,447)
                       -----------        ---------    ----------  ----------  ---------  -----------         -----------
Earnings (loss)
 before income
 taxes and
 extraordinary
 item............        4,661,050          444,844     3,540,636   5,936,800    670,821  (20,649,750)         (5,395,599)
Income tax
 (expense)
 benefit.........       (1,875,634)        (172,911)   (1,281,007) (1,923,200)  (148,069)   6,314,903 (e)         914,082
                       -----------        ---------    ----------  ----------  ---------  -----------         -----------
Earnings (loss)
 before
 extraordinary
 item............      $ 2,785,416          271,933     2,259,629   4,013,600    522,752  (14,334,847)         (4,481,517)
                       ===========        =========    ==========  ==========  =========  ===========         ===========
</TABLE>    
 
                                      P-2
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
                 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1997
                                  (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                                                                                            PRO FORMA FOR
                                                           UTILITIES                                          COMPLETED
                       PRO FORMA FOR     -----------------------------------------------                    ACQUISITIONS,
                         COMPLETED                                      AS ADJUSTED FOR                  NEW CREDIT FACILITY
                       ACQUISITIONS,                 SEACOAST CELLULAR SEACOAST CELLULAR                    OFFERING AND
                    NEW CREDIT FACILITY,             AND WESTERN MAINE AND WESTERN MAINE  PRO FORMA            PENDING
                      AND OFFERING(2)    HISTORICAL      CELLULAR         CELLULAR(3)    ADJUSTMENTS       ACQUISITION(4)
                    -------------------- ----------  ----------------- ----------------- -----------     -------------------
<S>                 <C>                  <C>         <C>               <C>               <C>             <C>
Operating
 revenues:
 Switched
  services........      $ 76,751,414     14,837,926            --         14,837,926            --            91,589,340
 Other............        11,639,708      2,992,940      1,615,534         1,377,406            --            13,017,114
                        ------------     ----------     ----------        ----------     ----------          -----------
Total operating
 revenues.........        88,391,122     17,830,866      1,615,534        16,215,332            --           104,606,454
                        ------------     ----------     ----------        ----------     ----------          -----------
Operating
 expenses:
 Plant
  operations......        15,591,953      4,649,168            --          4,649,168            --            20,241,121
 Corporate and
  customer
  service.........        23,360,576      4,197,665        825,296         3,372,369       (693,313)(f)       26,039,632
 Depreciation and
  amortization....        20,376,972      3,515,918        210,001         3,305,917        986,637 (g)       25,119,526
                                                                                            450,000 (h)
 Other............         7,912,773      1,470,740        879,040           591,700            --             8,504,473
                        ------------     ----------     ----------        ----------     ----------          -----------
Total operating
 expenses.........        67,242,274     13,833,491      1,914,337        11,919,154        743,324           79,904,752
                        ------------     ----------     ----------        ----------     ----------          -----------
Income from
 operations.......        21,148,848      3,997,375       (298,803)        4,296,178       (743,324)          24,701,702
                        ------------     ----------     ----------        ----------     ----------          -----------
Other income
 (expense):
 Net gain (loss)
  on sale of
  investments and
  other assets....            (8,880)      (282,994)      (282,994)              --             --                (8,880)
 Interest income..           594,610            --             --                --             --               594,610
 Dividend income..         1,182,124        215,578         16,350           199,228            --             1,381,352
 Interest
  expense.........       (29,704,427)    (2,187,849)      (280,055)       (1,907,794)     1,907,794 (i)      (35,646,252)
                                                                                         (5,941,825)(i)
 Other
  nonoperating,
  net.............         1,392,126      4,528,867      4,500,000            28,867            --             1,420,993
                        ------------     ----------     ----------        ----------     ----------          -----------
Total other income
 (expense)........       (26,544,447)     2,273,602      3,953,301        (1,679,699)    (4,034,031)         (32,258,177)
                        ------------     ----------     ----------        ----------     ----------          -----------
Earnings (loss)
 before income
 taxes and
 extraordinary
 item.............        (5,395,599)     6,270,977      3,654,498         2,616,479     (4,777,355)          (7,556,475)
Income tax
 (expense)
 benefit..........           914,082     (2,461,076)    (1,484,000)         (977,076)     1,433,502 (e)        1,370,508
                        ------------     ----------     ----------        ----------     ----------          -----------
Earnings (loss)
 before
 extraordinary
 item.............      $ (4,481,517)     3,809,901      2,170,498         1,639,403     (3,343,853)          (6,185,967)
                        ============     ==========     ==========        ==========     ==========          ===========
</TABLE>    
 
                                      P-3
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1997
                                  (UNAUDITED)
 
  The unaudited pro forma consolidated statement of operations reflects
various stages of pro forma information as follows:
 
FOR PURPOSES OF THE PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS:
 
    (1) The "1997 Acquisitions" column reflects the results of the 1997
  Acquisitions from January 1, 1997 to the acquisition date of the respective
  company. Results of operations from the date of acquisition to December 31,
  1997 for the 1997 Acquisitions are included in the historical results of
  the Company.
 
    (2) The "Pro Forma for Completed Acquisitions, New Credit Facility and
  Offering" column reflects the historical results of operations of the
  Company for the year ended December 31, 1997, with pro forma adjustments as
  if the purchase of the 1997 Acquisitions, Taconic, Ellensburg and Chouteau,
  the refinancing of debt utilizing the New Credit Facility and sale of notes
  from the Offering were consummated on January 1, 1997.
 
    (3) The "As Adjusted for Seacoast Cellular and Western Maine Cellular"
  column reflects the financial operations of Utilities without Seacoast
  Cellular and Western Maine Cellular as these subsidiaries will not be
  included in the purchase of Utilities.
 
    (4) The "Pro Forma for Completed Acquisitions, New Credit Facility,
  Offering and Pending Acquisition" column reflects the results of operations
  of the "Pro Forma for Completed Acquisitions, New Credit Facility and
  Offering" column for the year ended December 31, 1997 with further pro
  forma adjustments as if the purchase of Utilities was consummated on
  January 1, 1997.
 
THE PRO FORMA ADJUSTMENTS ARE AS FOLLOWS:
     
    (a) Reflects the elimination of corporate expenses of $1,322,053 of
  Taconic, Ellensburg and Chouteau related to specifically identified
  duplicative employees' salaries and related benefits. The adjustment
  relates to owners/senior executives who will not be retained following
  consummation of the business combinations. The adjustment is directly
  attributed to the transactions and is expected to have a continuing impact
  on the results of operations.     
 
    (b) Reflects the amortization of goodwill created from the acquisitions
  of Taconic, Ellensburg and Chouteau over the estimated useful life of 40
  years.
 
    (c) Reflects the interest expense on the New Credit Facility, the
  Offering and existing acquisition debt calculated as follows:
 
<TABLE>
<CAPTION>
                                                OUTSTANDING           ANNUAL
                   DEBT COMPONENT                 BALANCE    RATE    INTEREST
                   --------------               ------------ -----  -----------
     <S>                                        <C>          <C>    <C>
     9 1/2% Senior Subordinated Notes.......... $125,000,000  9.50% $11,875,000
     Floating Rate Callable Securities.........   50,000,000 10.00%   5,000,000
     Floating Rate Callable Securities.........   25,000,000  9.95%   2,488,125
     New Credit Facility Tranche B.............   13,263,000  8.41%   1,114,928
     New Credit Facility Tranche B.............    1,500,000  8.47%     127,050
     New Credit Facility Tranche C.............   51,500,000  8.66%   4,457,995
     New Credit Facility Tranche C.............   23,500,000  8.72%   2,049,200
     Chouteau Seller Financed Debt.............    7,000,000  7.00%     490,000
     Taconic Rural Utilities Service Debt......    4,700,770  8.72%     409,907
     Taconic Rural Utilities Service Debt......    2,274,230 10.78%     245,207
     Existing C-R Debt.........................      156,000  8.00%      12,480
                                                ------------        -----------
       Annual expense.......................... $303,894,000        $28,269,892
                                                ============        ===========
</TABLE>
 
                                      P-4
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
       NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
    To calculate the interest expense on the variable rate debt, interest
  rates in effect at June 30, 1998 were utilized. The impact of a 1/8%
  variance on the above variable rate debt would result in an approximate
  $90,000 difference in interest expense. The Company entered into interest
  rate swap agreements on certain variable portions of the Floating Rate
  Callable Securities and Tranche B and Tranche C of the New Credit Facility.
  The swap agreements are for terms of 2 to 3 years and exchange the stated
  variable rate for a fixed rate. By exchanging the variable rates for fixed
  rates, the Company limits its exposure to interest rate risk.
 
    Also reflects the elimination of historical interest expense due to the
  retirement of substantially all of the existing debt obligations.
 
    (d) Reflects the amortization of loan origination costs over the term of
  the New Credit Facility ($9,140,895 over 8-9 years) and Offering
  ($6,925,000 over 10 years).
 
    (e) Reflects the adjustment of the provision for the income tax benefit
  to an effective rate of 38.87% before the amortization of goodwill created
  from the acquisitions which is not deductible for income tax purposes.
     
    (f) Reflects the elimination of corporate expenses related to
  specifically identified duplicative employees' salaries and related
  benefits of $642,313 and specifically identified cost savings of $51,000
  for the elimination of directors fees at Utilities. The adjustment relates
  to owners/senior executives who will not be retained following consummation
  of the business combinations. Also, due to the fact that the Company has
  not historically paid fees to directors of its subsidiaries and does not
  intend to do so in the future, the adjustment eliminates historical
  expenses related to directors fees for Utilities. The adjustment is
  directly attributed to the transactions and is expected to have a
  continuing impact on the results of operations.     
 
    (g) Reflects the amortization of goodwill created from the acquisition of
  Utilities over the estimated useful life of 40 years.
 
    (h) Reflects the amortization of the non-compete agreement over the
  estimated useful life of 5 years.
 
    (i) Reflects the interest expense on the additional New Credit Facility
  debt utilized to purchase Utilities and existing acquisition debt
  calculated as follows:
 
<TABLE>
<CAPTION>
                                                    OUTSTANDING         ANNUAL
                     DEBT COMPONENT                   BALANCE   RATE   INTEREST
                     --------------                 ----------- ----  ----------
     <S>                                            <C>         <C>   <C>
     New Credit Facility Tranche B................. $57,995,000 8.41% $4,875,234
     Utilities RTFC Debt...........................   2,500,800 6.65%    166,303
     Utilities Bank Debt...........................   5,001,600 9.20%    460,147
     Utilities Bank Debt...........................   5,001,600 8.80%    440,141
                                                    -----------       ----------
       Annual expense.............................. $70,499,000       $5,941,825
                                                    ===========       ==========
</TABLE>
 
    Also reflects the elimination of historical interest expense of
  $1,907,794 due to the retirement of Utilities debt assumed from the
  purchase.
 
                                      P-5
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
       NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
   
OTHER EFFECTS FROM ACQUISITIONS     
   
  Concurrent with the closings of the acquisitions of Taconic, Ellensburg and
Chouteau, certain employees of the acquired companies, whose positions and
responsibilities were either redundant with those of existing employees of the
Company or were replaceable with lower cost, outsourced functions, were
terminated. The effects of the reductions in work force for the completed
acquisitions did not have a significant effect on the quality of customer
service or upon the level of revenues generated by these acquired businesses.
The Company has similar plans for reductions in work force related to the
pending acquisition of Utilities.     
   
  The historical payroll and benefit expenses of those employees are included
in the accompanying pro forma statement of operations for the year ended
December 31, 1997. If such reductions in work force had occurred on January 1,
1997, the effects of eliminating such historical expenses on pro forma net
earnings (loss) before income taxes would have been as follows:     
 
<TABLE>   
<CAPTION>
                                                            PRO FORMA FOR
                                        PRO FORMA FOR         COMPLETED
                                          COMPLETED          ACQUISITION,
                                        ACQUISITION,     NEW CREDIT FACILITY,
                                     NEW CREDIT FACILITY     OFFERING AND
                                        AND OFFERING     PENDING ACQUISITION
                                     ------------------- --------------------
   <S>                               <C>                 <C>
   Costs of duplicative employees
    and functions, net of
    incremental costs of outsourcing
    certain functions--
     Duplicative supervisory
      employees.....................      $324,072             $416,936
     Duplicative staff-level
      employees.....................       143,616              154,325
     Outsourced functions, net......       174,999                  --
</TABLE>    
   
  If these employees had been eliminated effective January 1, 1997, the
Company believes that the synergies of the acquisitions would have allowed the
Company to avoid the historical employee payroll and benefit costs of $642,687
for completed acquisitions and $571,261 for the pending acquisition, with no
significant effect on the revenues obtained from these acquired companies.
    
                                      P-6
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                      PRO FORMA CONSOLIDATED BALANCE SHEET
 
                                 JUNE 30, 1998
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                           UTILITIES
                                             --------------------------------------
                                                                       AS ADJUSTED
                                                          SEACOAST    FOR SEACOAST
                                 MJD                    CELLULAR AND  CELLULAR AND                    PRO FORMA
                         COMMUNICATIONS INC.            WESTERN MAINE WESTERN MAINE  PRO FORMA       FOR PENDING
                             HISTORICAL      HISTORICAL   CELLULAR     CELLULAR(1)  ADJUSTMENTS     ACQUISITION(2)
                         ------------------- ---------- ------------- ------------- -----------     --------------
<S>                      <C>                 <C>        <C>           <C>           <C>             <C>
         ASSETS
Current assets:
 Cash and cash              $ 14,045,260      3,863,729      43,001     3,820,728    57,995,000 (a)   15,456,456
  equivalents...........                                                            (51,000,000)(b)
                                                                                     (9,404,532)(c)
 Temporary investments..             --             --          --            --            --               --
 Accounts receivable,
  net of allowance for
  doubtful accounts.....      23,204,075      3,435,891     186,426     3,249,465           --        26,453,540
 Prepaid and other
  assets................       3,914,452        655,413      32,327       623,086           --         4,537,538
 Deferred income taxes..             --             --          --            --            --               --
 Income tax
  recoverable...........       3,242,328            --          --            --            --         3,242,328
                            ------------     ----------   ---------    ----------   -----------      -----------
Total current assets....      44,406,115      7,955,033     261,754     7,693,279    (2,409,532)      49,689,862
                            ------------     ----------   ---------    ----------   -----------      -----------
Property, plant and
 equipment, net.........     122,590,187     22,327,627     589,745    21,737,882           --       144,328,069
                            ------------     ----------   ---------    ----------   -----------      -----------
Other assets
 Investments............      17,227,421      4,359,022   2,498,509     1,860,513           --        19,087,934
 Goodwill, net of
  amortization..........     168,618,491      8,020,497         --      8,020,497    39,325,265 (b)  215,964,253
 Loan origination costs,
  net of amortization...      15,651,360            --          --            --            --        15,651,360
 Covenant not to
  compete, net of
  amortization..........         875,000            --          --            --      2,250,000 (b)    3,125,000
 Other..................       1,345,502      1,605,525      30,788     1,574,737           --         2,920,239
                            ------------     ----------   ---------    ----------   -----------      -----------
Total other assets......     203,717,774     13,985,044   2,529,297    11,455,747    41,575,265      256,748,786
                            ------------     ----------   ---------    ----------   -----------      -----------
Total assets............    $370,714,076     44,267,704   3,380,796    40,886,908    39,165,733      450,766,717
                            ============     ==========   =========    ==========   ===========      ===========
</TABLE>
 
                                      P-7
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                      PRO FORMA CONSOLIDATED BALANCE SHEET
 
                                 JUNE 30, 1998
                                  (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                                           UTILITIES
                                             ---------------------------------------
                                                                        AS ADJUSTED
                                                           SEACOAST    FOR SEACOAST
                                 MJD                     CELLULAR AND  CELLULAR AND                    PRO FORMA
                         COMMUNICATIONS INC.             WESTERN MAINE WESTERN MAINE  PRO FORMA       FOR PENDING
                             HISTORICAL      HISTORICAL    CELLULAR     CELLULAR(1)  ADJUSTMENTS     ACQUISITION(2)
                         ------------------- ----------  ------------- ------------- -----------     --------------
<S>                      <C>                 <C>         <C>           <C>           <C>             <C>
LIABILITIES AND 
 STOCKHOLDERS'
 EQUITY (DEFICIT)
Current liabilities:
 Accounts payable.......    $  8,413,431      1,937,726      108,339     1,829,387           --        10,242,818
 Current portion of
  long-term debt........       1,996,639      1,960,439      348,600     1,611,839       959,595 (a)    4,568,073
 Demand notes payable...         814,500            --           --            --            --           814,500
 Current portion of
  capital lease
  obligations...........          52,182            --           --            --            --            52,182
 Current portion of
  early retirement
  benefits..............          14,283            --           --            --            --            14,283
 Current portion of
  covenant not to
  compete...............         256,250            --           --            --        500,000 (b)      756,250
 Accrued interest
  payable...............       9,659,477            --           --            --            --         9,659,477
 Other accrued
  liabilities...........       4,433,167      1,016,486       65,214       951,272           --         5,384,439
 Income taxes payable...             --         147,558          --        147,558           --           147,558
 Dividends payable......             --          82,522          --         82,522           --            82,522
                            ------------     ----------    ---------    ----------   -----------      -----------
Total current
 liabilities............      25,639,929      5,144,731      522,153     4,622,578     1,459,595       31,722,102
                            ------------     ----------    ---------    ----------   -----------      -----------
Long-term liabilities
 Long-term debt, net of
  current portion.......     300,390,421     22,969,336    2,672,643    20,296,693    57,035,405 (a)  368,317,987
                                                                                      (9,404,532)(c)
 Put warrant                                                                                 --
  obligation............       3,625,688            --           --            --                       3,625,688
 Long-term capital lease
  obligation, net of
  current portion.......         132,511            --           --            --            --           132,511
 Early retirement
  benefits payable, net
  of current portion....          14,465            --           --            --            --            14,465
 Covenant not to
  compete, net of
  current portion.......         612,500            --           --            --      1,750,000 (b)    2,362,500
 Deferred income taxes..      16,808,984      3,237,631      186,000     3,051,631           --        19,860,615
 Unamortized investment
  tax credits...........         618,887        119,583          --        119,583           --           738,470
 Other..................       3,690,644      1,088,688          --      1,088,688           --         4,779,332
                            ------------     ----------    ---------    ----------   -----------      -----------
Total long-term
 liabilities............     325,894,100     27,415,238    2,858,643    24,556,595    49,380,873      399,831,568
                            ------------     ----------    ---------    ----------   -----------      -----------
Minority interest.......         396,624         33,000          --         33,000           --           429,624
                            ------------     ----------    ---------    ----------   -----------      -----------
Redeemable preferred
 stock..................             --             --           --            --            --               --
                            ------------     ----------    ---------    ----------   -----------      -----------
Common stock subject to
 put option.............             --             --           --            --      3,000,000 (j)    3,000,000
                            ------------     ----------    ---------    ----------   -----------      -----------
Stockholders' equity
 (deficit):
 Common stock...........           1,811        815,205          --        815,205      (815,205)           1,811
 Preferred stock........             --             --           --            --                             --
 Treasury stock.........             --         (72,470)         --        (72,470)       72,470              --
 Additional paid-in
  capital...............      48,747,262            --                         --      3,000,000 (j)   45,747,262
 Retained earnings
  (deficit).............     (30,202,170)    10,932,000          --     10,932,000   (10,932,000)     (30,202,170)
 Unrealized gain on
  marketable
  securities............         236,520            --           --            --            --           236,520
                            ------------     ----------    ---------    ----------   -----------      -----------
Total stockholders'
 equity (deficit).......      18,783,423     11,674,735          --     11,674,735   (11,674,735)      15,783,423
                            ------------     ----------    ---------    ----------   -----------      -----------
Total liabilities and
 stockholders' equity
 (deficit)..............    $370,714,076     44,267,704    3,380,796    40,886,908    39,165,733      450,766,717
                            ------------     ----------    ---------    ----------   -----------      -----------
</TABLE>    
 
                                      P-8
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                         SIX MONTHS ENDED JUNE 30, 1998
                                  (UNAUDITED)
<TABLE>   
<CAPTION>
                                                                        UTILITIES
                                                       --------------------------------------------
                                                                                   AS ADJUSTED FOR
                                                                      SEACOAST        SEACOAST
                           MJD                                      CELLULAR AND    CELLULAR AND
                   COMMUNICATIONS INC.    COMPLETED                   WESTERN          WESTERN       PRO FORMA
                       HISTORICAL      ACQUISITIONS(3) HISTORICAL  MAINE CELLULAR MAINE CELLULAR(4) ADJUSTMENTS
                   ------------------- --------------- ----------  -------------- ----------------- -----------
<S>                <C>                 <C>             <C>         <C>            <C>               <C>
Operating
 revenues:
 Switched
  services.......      $29,485,512       10,395,612     7,599,066          --         7,599,066             --
 Other...........        5,776,332        2,065,246     1,468,185      756,463          711,722             --
                       -----------       ----------    ----------     --------        ---------     -----------
Total operating
 revenues........       35,261,844       12,460,858     9,067,251      756,463        8,310,788             --
                       -----------       ----------    ----------     --------        ---------     -----------
Operating
 expenses:
 Plant
  operations.....        5,731,047        3,114,938     2,836,788          --         2,836,788             --
 Corporate and
  customer
  service........        8,762,269        3,513,191     1,875,789      343,641        1,532,148        (847,241)(d)
 Depreciation and
  amortization...        7,299,909        2,100,311     1,851,943       94,152        1,757,791       1,423,411 (e)
                                                                                                        225,000 (f)
 Other...........        3,926,595        2,317,437       749,699      408,209          341,490             --
                       -----------       ----------    ----------     --------        ---------     -----------
Total operating
 expenses........       25,719,820       11,045,877     7,314,219      846,002        6,468,217         801,170
                       -----------       ----------    ----------     --------        ---------     -----------
Income from
 operations......        9,542,024        1,414,981     1,753,032      (89,539)       1,842,571        (801,170)
                       -----------       ----------    ----------     --------        ---------     -----------
Other income
 (expense):
 Net gain (loss)
  on sale of
  investments and
  other assets...          389,693           39,877       (89,539)     (89,539)             --              --
 Interest
  income.........          126,471           13,854           --           --               --              --
 Dividend
  income.........           44,895            2,368       133,215          --           133,215             --
 Interest
  expense........       (9,706,729)        (278,237)   (1,030,863)    (125,930)        (904,933)     10,719,711 (g)
                                                                                                    (17,038,131)(g)
                                                                                                       (835,479)(h)
 Other
  nonoperating,
  net............          198,203         (845,570)      (12,435)         --           (12,435)            --
                       -----------       ----------    ----------     --------        ---------     -----------
Total other
 income
 (expense).......       (8,947,467)      (1,067,708)     (999,622)    (215,469)        (784,153)     (7,153,899)
                       -----------       ----------    ----------     --------        ---------     -----------
Earnings (loss)
 before income
 taxes...........          594,557          347,273       753,410     (305,008)       1,058,418      (7,955,069)
Income tax
 (expense)
 benefit.........         (389,152)        (361,188)     (277,183)     123,062         (400,245)      2,911,944
                       -----------       ----------    ----------     --------        ---------     -----------
Earnings (loss)
 before minority
 interest........          205,405          (13,915)      476,227     (181,946)         658,173      (5,043,125)
Minority interest
 in income of
 subsidiaries....          (36,523)             --         (1,500)         --            (1,500)            --
                       -----------       ----------    ----------     --------        ---------     -----------
Net earnings
 (loss)..........      $   168,882          (13,915)      474,727     (181,946)         656,673      (5,043,125)
                       ===========       ==========    ==========     ========        =========     ===========
<CAPTION>
                      PRO FORMA FOR
                        COMPLETED
                      ACQUISITIONS,
                   NEW CREDIT FACILITY,
                       OFFERING AND
                       UTILITIES(5)
                   --------------------
<S>                <C>
Operating
 revenues:
 Switched
  services.......       47,480,190
 Other...........        8,553,300
                   --------------------
Total operating
 revenues........       56,033,490
                   --------------------
Operating
 expenses:
 Plant
  operations.....       11,682,773
 Corporate and
  customer
  service........       12,960,367
 Depreciation and
  amortization...       12,806,422
 Other...........        6,585,522
                   --------------------
Total operating
 expenses........       44,035,084
                   --------------------
Income from
 operations......       11,998,406
                   --------------------
Other income
 (expense):
 Net gain (loss)
  on sale of
  investments and
  other assets...          429,570
 Interest
  income.........          140,325
 Dividend
  income.........          180,478
 Interest
  expense........      (18,043,798)
 Other
  nonoperating,
  net............         (659,802)
                   --------------------
Total other
 income
 (expense).......      (17,953,227)
                   --------------------
Earnings (loss)
 before income
 taxes...........       (5,954,821)
Income tax
 (expense)
 benefit.........        1,761,359
                   --------------------
Earnings (loss)
 before minority
 interest........       (4,193,462)
Minority interest
 in income of
 subsidiaries....          (38,023)
                   --------------------
Net earnings
 (loss)..........       (4,231,485)
                   ====================
</TABLE>    
 
                                      P-9
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
              NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
                                 JUNE 30, 1998
                                  (UNAUDITED)
  The unaudited pro forma consolidated balance sheet and statement of
operations reflect various stages of pro forma information as follows:
 
FOR PURPOSES OF THE PRO FORMA CONSOLIDATED BALANCE SHEET:
 
  (1) The "As Adjusted for Seacoast Cellular and Western Maine Cellular" column
reflects the balance sheet of Utilities without Seacoast Cellular and Western
Maine Cellular as these subsidiaries will not be included in the purchase of
Utilities.
   
  (2)  The "Pro Forma for Pending Acquisition" column reflects the historical
financial position of the Company at June 30, 1998, with pro forma adjustments
as if the purchase of Utilities was consummated on June 30, 1998. The "Pro
Forma for Pending Acquisition" column also reflects the reclassification of
equity for common shares which are anticipated to be subject to a put option
following execution of a share purchase agreement by the Company.     
 
FOR PURPOSES OF THE PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS:
 
  (3) The "Completed Acquisitions" column reflects the results of the Completed
Acquisitions from January 1, 1998 to the acquisition date of the respective
company. Results of operations from the date of acquisition to June 30, 1998
for the Completed Acquisitions are included in the historical results of the
Company.
 
  (4) The "As Adjusted for Seacoast Cellular and Western Maine Cellular" column
reflects the financial operations of Utilities without Seacoast Cellular and
Western Maine Cellular as these subsidiaries will not be included in the
purchase of Utilities.
 
  (5) The "Pro Forma for Completed Acquisitions, New Credit Facility, Offering
and Pending Acquisition" column reflects the historical results of operations
of the Company for the six months ended June 30, 1998, with pro forma
adjustments as if the purchase of the Completed Acquisitions, the refinancing
of debt utilizing the New Credit Facility and the sale of notes from the
Offering were consummated on January 1, 1997.
 
THE PRO FORMA ADJUSTMENTS ARE AS FOLLOWS:
 
  (a) Reflects the proceeds of $57,995,000 received from the New Credit
Facility in connection with the acquisition of Utilities. Proceeds used in
connection with the purchase of Utilities which is anticipated to occur in the
fourth quarter of 1998.
 
  (b) Reflects the acquisition of Utilities as follows and the elimination of
$11,674,735 historical equity.
 
<TABLE>
   <S>                                                              <C>
   Purchase Price:
     Cash.......................................................... $50,000,000
     Covenant not to compete.......................................   2,250,000
                                                                    -----------
       Total consideration.........................................  52,250,000
     Acquisition costs.............................................   1,000,000
     Covenant not to compete.......................................  (2,250,000)
     Fair value of net assets acquired............................. (11,674,735)
                                                                    -----------
     Excess of cost over fair value................................ $39,325,265
                                                                    ===========
</TABLE>
 
                                      P-10
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
       NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                                 JUNE 30, 1998
                                  (UNAUDITED)
 
  The covenant not to compete is recorded as an asset at fair value and is
being amortized over the term of the agreement (5 years).
 
  (c) Reflects the payment of $9,404,532 of various existing components of
Utilities debt. It is anticipated these debt payments will occur in
conjunction with the purchase of Utilities in the third or fourth quarter of
1998.
   
  (d) Reflects the elimination of corporate expenses related to specifically
identified duplicative employees' salaries and related benefits of $821,741 as
a result of the acquisitions of Taconic, Ellensburg, Chouteau and Utilities
and $25,500 for the elimination of directors fees at Utilities. The adjustment
relates to owners/senior executives who will not be retained following
consummation of the business combinations. Also, due to the fact that the
Company has not historically paid fees to directors of its subsidiaries and
does not intend to do so in the future, the adjustment eliminates historical
expenses related to directors fees for Utilities. The adjustment is directly
attributed to the transactions and is expected to have a continuing impact on
the results of operations.     
 
  (e) Reflects the amortization of goodwill created from the acquisition of
Taconic, Ellensburg, Chouteau and Utilities.
 
  (f) Reflects the amortization of the non-compete agreement over the
estimated useful life of 5 years.
 
  (g) Reflects the interest expense on the New Credit Facility, the Offering
and existing acquisition debt calculated as follows:
 
<TABLE>
<CAPTION>
                                                 OUTSTANDING           ANNUAL
                 DEBT COMPONENT                    BALANCE     RATE   INTEREST
- ------------------------------------------------ ------------ ------ -----------
<S>                                              <C>          <C>    <C>
9 1/2% Senior Subordinated Notes................ $125,000,000  9.50% $11,875,000
Floating Rate Callable Securities...............   50,000,000 10.00%   5,000,000
Floating Rate Callable Securities...............   25,000,000  9.95%   2,488,125
New Credit Facility Tranche B...................   70,460,000  8.41%   5,923,079
New Credit Facility Tranche B...................    1,500,000  8.47%     127,050
New Credit Facility Tranche C...................   50,826,060  8.66%   4,399,656
New Credit Facility Tranche C...................   23,500,000  8.72%   2,049,200
Chouteau Seller Financed Debt...................    7,282,000  7.00%     509,740
Taconic Rural Utilities Service Debt............    4,487,129  8.72%     391,278
Taconic Rural Utilities Service Debt............    2,170,871 10.78%     234,063
Utilities RTFC Debt.............................    2,500,800  6.65%     166,303
Utilities Bank Debt.............................    5,001,600  9.20%     460,147
Utilities Bank Debt.............................    5,001,600  8.80%     440,141
Existing C-R Debt...............................      156,000  8.00%      12,480
                                                 ------------        -----------
 Annual expense................................. $372,886,060        $34,076,262
                                                 ============        ===========
 Semi-annual expense............................                     $17,038,131
                                                                     ===========
</TABLE>
 
  To calculate the interest expense on the variable rate debt, interest rates
in effect at June 30, 1998 were utilized. The impact of a 1/8% percent
variance on the above variable rate would result in an approximate $45,000
difference in interest expense. The Company entered into interest rate swap
agreements on certain variable portions of the Floating Rate Callable
Securities and Tranche B and Tranche C of the New Credit Facility. The swap
agreements are for terms of 2 to 3 years and exchange the stated variable rate
for a fixed rate. By exchanging the variable rates for fixed rates, the
Company limits their exposure to interest rate risk.
 
                                     P-11
<PAGE>
 
                   MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
 
       NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
                                 JUNE 30, 1998
                                  (UNAUDITED)
 
  Also reflects the elimination of historical interest expense due to the
retirement of substantially all of the existing debt obligations.
 
  (h) Reflects the amortization of respective loan origination costs over the
term of the New Credit Facility ($9,140,895 over 8-9 years) and the Offering
($6,925,000 over 10 years)
 
  (i) Reflects the adjustment of the provision for the income tax benefit to
an effective rate of 38.87 percent before the amortization of goodwill created
from the acquisitions which is not deductible for income tax purposes.
   
  (j) Reflects the reclassification of $3,000,000 of equity to temporary
equity for the value of the Company's possible obligation under a share
purchase agreement with a third party. The Company expects to enter into the
share purchase agreement in October 1998. The Company may be required to
purchase shares that will be pledged by certain shareholders of the Company as
collateral for private borrowings in the event of default on such borrowings.
       
OTHER EFFECTS FROM ACQUISITIONS     
   
  Concurrent with the closings of the acquisitions of Taconic, Ellensburg and
Chouteau, certain employees of the acquired companies, whose positions and
responsibilities were either redundant with those of existing employees of the
Company or were replaceable with lower cost, outsourced functions, were
terminated. The effects of the reductions in work force for the completed
acquisitions did not have a significant effect on the quality of customer
service or upon the level of revenues generated by these acquired businesses.
The Company has similar plans for reductions in work force related to the
pending acquisition of Utilities.     
   
  The historical payroll and benefit expenses of those employees are included
in the accompanying pro forma statement of operations for the six months ended
June 30, 1998. If such reductions in work force had occurred on January 1,
1997, the effects of eliminating such historical expenses on pro forma net
earnings (loss) before income taxes would have been as follows:     
 
<TABLE>   
<CAPTION>
                                                                PRO FORMA FOR
                                                                  COMPLETED
                                                                ACQUISITIONS,
                                                                 NEW CREDIT
                                                                  FACILITY,
                                                                  OFFERING
                                                                AND UTILITIES
                                                                -------------
   <S>                                                          <C>
   Costs of duplicative employees and functions, net of
    incremental costs of outsourcing certain functions--
    Duplicative supervisory employees..........................   $289,486
    Duplicative staff-level employees..........................    125,041
    Outsourced functions, net..................................     58,333
</TABLE>    
   
  If these employees had been eliminated effective January 1, 1997, the
Company believes that the synergies of the acquisitions would have allowed the
Company to avoid the historical employee payroll and benefit costs of $187,229
for completed acquisitions and $285,631 for the pending acquisition, with no
significant effect on the revenues obtained from these acquired companies.
    
                                     P-12
<PAGE>
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
  NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
 
                                  -----------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Available Information....................................................   i
Summary..................................................................   1
Risk Factors.............................................................  13
Use of Proceeds..........................................................  21
Capitalization...........................................................  22
Selected Consolidated Financial and Operating Data.......................  23
The Exchange Offer.......................................................  25
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  32
Business.................................................................  40
Regulation...............................................................  52
Management...............................................................  59
Executive Compensation...................................................  61
Security Ownership of Certain Beneficial Owners and Management...........  63
Certain Relationships and Related Transactions...........................  65
Description of New Credit Facility.......................................  67
Description of Notes.....................................................  70
Certain Federal Tax Consequences......................................... 102
Plan of Distribution..................................................... 103
Legal Matters............................................................ 103
Experts.................................................................. 104
Glossary................................................................. 105
Index to Financial Statements............................................ F-1
Unaudited Pro Forma Consolidated Financial Statements.................... P-1
</TABLE>
 
  UNTIL     , 1998 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                                  $200,000,000
 
                                      MJD
                              COMMUNICATIONS, INC.
 
 OFFER TO EXCHANGE ITS 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B AND
     FLOATING RATE CALLABLE SECURITIES DUE 2008, SERIES B, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF ITS
    OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008 AND FLOATING RATE
                   CALLABLE SECURITIES DUE 2008, RESPECTIVELY
 
 
                                      LOGO
 
                                    -------
                                   PROSPECTUS
                                DATED     , 1998
                                    -------
 
 
 
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
 
                                    PART II
 
                  INFORMATION NOT REQUIRED IN THE PROSPECTUS
 
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
  MJD Communications, Inc.'s Certificate of Incorporation, as amended and
restated, indemnifies its officers and directors to the fullest extent
permitted by the Delaware General Corporation Law (the "DGCL"). Under Section
145 of the DGCL, a corporation may indemnify its directors, officers,
employees and agents and its former directors, officers, employees and agents
and those who serve, at the corporation's request, in such capacities with
another enterprise, against expenses (including attorneys' fees), as well as
judgments, fines and settlements in nonderivative lawsuits, actually and
reasonably incurred in connection with the defense of any action, suit or
proceeding in which they or any of them were or are made parties or are
threatened to be made parties by reason of their serving or having served in
such capacity. The DGCL provides, however, that such person must have acted in
good faith and in a manner such person reasonably believed to be in (or not
opposed to) the best interests of the corporation and, in the case of a
criminal action, such person must have had no reasonable cause to be believe
his or her conduct was unlawful. In addition, the DGCL does not permit
indemnification in an action or suit by or in the right of the corporation,
where such person has been adjudged liable to the corporation, unless, and
only to the extent that, a court determines that such person fairly and
reasonably is entitled to indemnity for costs the court deems proper in light
of liability adjudication. Indemnity is mandatory to the extent a claim, issue
or matter has been successfully defended. The Certificate of Incorporation, as
amended and restated, and the DGCL also prohibit limitations on officer or
director liability for acts or omissions which resulted in a violation of a
statute prohibiting certain dividend declarations, certain payments to
stockholders after dissolution and particular types of loans. The effect of
these provisions is to eliminate the rights of MJD Communications, Inc. and
its stockholders (through stockholders' derivative suits on behalf of MJD
Communications, Inc. to recover monetary damages against an officer or
director for breach of fiduciary duty as an officer or director (including
breaches resulting from grossly negligent behavior), except in the situations
described above. These provisions will not limit the liability of directors or
officers under the federal securities laws of the United States. The foregoing
summary of MJD Communications, Inc.'s Certificate of Incorporation, as amended
and restated, is qualified in its entirety by reference to the relevant
provisions thereof (incorporated as Exhibit 3.1).
 
  The Company will maintain officers' and directors' liability insurance of $5
million which will insure against liabilities that officers and directors of
the Company may incur in such capacities.
 
  See Item 22 for a statement of the Company's undertaking as to the
Commission's position respecting indemnification arising under the Securities
Act.
 
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
  A. EXHIBITS
 
<TABLE>   
<CAPTION>
 EXHIBIT                                                                  PAGE
 NUMBER                            DESCRIPTION                            NO.
 -------                           -----------                            ----
 <C>     <S>                                                              <C>
   2.1   Stock Purchase Agreement, dated March 6, 1997 among the
         Company, MJD Partners, L.P. Carousel Capital Partners, L.P.,
         Kelso Investment Associates V, L.P. and Kelso Equity Partners,
         V, L.P., as amended*
   2.2   Stock Purchase Agreement dated as of March 28, 1996 among MJD
         Services Corp., Rick A. Moore, Tom D. Moore, Penta-Gen
         Investments, Inc., and Odin Telephone Exchange, Inc.*
   2.3   Agreement and Plan of Merger dated as of March 27, 1998 by and
         among MJD Ventures, Inc., Utilities Acquisition Corp. and
         Utilities, Inc.*
   2.4   Agreement and Plan of Merger, dated as of August 6, 1996 among
         MJD Holdings Corp., C&E Acquisitions Corp. and Chatauqua and
         Erie Telephone Corporation*
   2.5   Stock Purchase Agreement, dated as of September 24, 1996 among
         MJD Holdings Corp., Kadoka Telephone Co., Bruce G. Conlee and
         Virginia L. Conlee*
</TABLE>    
 
                                     II-1
<PAGE>
 
<TABLE>   
<CAPTION>
 EXHIBIT                                                                   PAGE
 NUMBER                            DESCRIPTION                             NO.
 -------                           -----------                             ----
 <C>     <S>                                                               <C>
   2.6   Stock Purchase Agreement, dated as of June 24, 1997 among MJD
         Ventures, Inc., Gary Porter, Virginia M. Porter, Renee Porter,
         C-R Communications, Inc., C-R Telephone Company and certain
         stockholders*
   2.7   Agreement and Plan of Merger, dated as of September 2, 1997
         among MJD Holdings Corp., Taconic Acquisition Corp. and Taconic
         Telephone Corp.*
   2.8   Agreement and Plan of Merger, dated December 31, 1997 among MJD
         Ventures, Inc., Ellensburg Acquisition Corp. and Ellensburg
         Telephone Company*
   2.9   Agreement and Plan of Merger, dated as of March 12, 1998 among
         MJD Communications, Inc., Chouteau Acquisitions Corp., Chouteau
         Telephone Company and certain shareholders of Chouteau
         Telephone Company*
   3.1   Amended and Restated Certificate of Incorporation of the
         Company*
   3.2   Amended and Restated By-Laws of the Company*
   4.1   Indenture, dated as of May 5, 1998, between the Company and
         United States Trust Company of New York, as trustee, relating
         to the Company's $125,000,000 9 1/2% Senior Subordinated Notes
         due 2008 and $75,000,000 Floating Rate Callable Securities due
         2008*
   4.2   Form of Initial Fixed Rate Security*
   4.3   Form of Initial Floating Rate Security*
   4.4   Form of Exchange Fixed Rate Security*
   4.5   Form of Exchange Floating Rate Security*
   4.6   Form of Purchase Agreement dated as of April 30, 1998 between
         the Company and the Initial Purchasers named therein*
   4.7   Registration Agreement dated as of April 30, 1998 between the
         Company and the Initial Purchasers named therein*
   5.1   Opinion of Paul, Hastings, Janofsky & Walker LLP*
  10.1   Credit Agreement dated as of March 30, 1998 among the Company,
         various lending institutions, NationsBanc of Texas, N.A. and
         Bankers Trust Company
  10.2   Form of B Term Note*
  10.3   Form of C Term Note--Floating Rate*
  10.4   Form of C Term Note--Fixed Rate*
  10.5   Form of RF Note*
  10.6   Form of AF Note*
  10.7   Subsidiary Guarantee, dated as of March 30, 1998, by MJD
         Holdings Corp., MJD Ventures, Inc., MJD Services Corp., ST
         Enterprises, Ltd. for the benefit of Bankers Trust Company*
  10.8   Pledge Agreement, dated as of March 30, 1998 among MJD
         Communications, Inc., ST Enterprises, Ltd., MJD Holdings Corp.,
         MJD Services Corp., MJD Ventures, Inc., C-R Communications,
         Inc., as pledgors, and Bankers Trust Company, as collateral
         agent and pledgee*
  10.9   Capital Contribution Agreement, dated as of March 27, 1998
         among Kelso Investment Associates V, L.P., Kelso Equity
         Partners V, L.P., Carousel Capital Partners, L.P., MJD
         Communications, Inc. and Bankers Trust Company*
  10.10  Stockholder's Agreement, dated as of July 31, 1997 among Kelso
         Investment Associates V, L.P., Kelso Equity Partners V, L.P.,
         Carousel Capital Partners V, L.P., the Company and MJD
         Partners, L.P.
  10.11  Registration Rights Agreement, dated as of July 31, 1997 among
         Kelso Investment Associates V, L.P., Kelso Equity Partners,
         L.P., the Company and MJD Partners, L.P.*
  10.12  Financial Advisory Agreements, dated as of July 31, 1997 among
         the Company, MJD Holdings Corp. and affiliates of each of Kelso
         Investment Associates V, L.P., Kelso Equity Partners, L.P. and
         Carousel Capital Partners, L.P.*
  10.13  Share Exchange Agreement, dated as of July 31, 1997 between the
         Company and MJD Partners, L.P.*
  10.14  Contribution Agreement, dated as of July 31, 1997 between Meyer
         Haberman, Jack H. Thomas, Eugene R. Johnson and Bugger
         Associates, Inc. and MJD Partners, L.P.*
</TABLE>    
 
                                      II-2
<PAGE>
 
<TABLE>   
<CAPTION>
 EXHIBIT                                                                   PAGE
 NUMBER                            DESCRIPTION                             NO.
 -------                           -----------                             ----
 <C>     <S>                                                               <C>
  10.15  Contribution Agreement, dated as of July 31, 1997 between MJD
         Partners, L.P. and the Company*
  10.16  Amended and Restated Class A Voting Common Stock Purchase
         Warrants of the Company*
  10.17  Consulting Agreement, dated as of July 31, 1997 between MJD
         Partners, Inc. and Bugger Associates, Inc.*
  10.18  Severance Agreement, dated as of July 31, 1997 between ST
         Enterprises, LTD and John P. Duda*
  10.19  Severance Agreement, dated as of July 31, 1997 among the
         Company, MJD Partners, Inc. and Eugene B. Johnson*
  10.20  Severance Agreement, dated as of July 31, 1997 between the
         Company and Walter E. Leach, Jr.*
  10.21  Severance Agreement, dated as of July 31, 1997 among the
         Company, MJD Partners, Inc. and Jack H. Thomas*
  10.22  Amendment to Credit Agreement dated as of July 30, 1998, among
         the Company, various lending institutions, NationsBanc of
         Texas, N.A. and Bankers Trust Company*
  10.23  Form of Purchase Agreement and Subordination Agreement between
         Bankers Trust Company and the Company
  12     Ratio of Earnings to fixed charges calculation (filed herewith)
  21     Subsidiaries of the Company*
  23.1   Consent of Paul, Hastings, Janofsky & Walker LLP (included in
         Exhibit 5.1)*
  23.2   Consent of Moss Adams, LLP, Independent Auditors
  23.3   Consent of Ernst & Young LLP, Independent Auditors
  23.4   Consent of Kiesling Associates LLP
  23.5   Consent of Berry, Dunn, McNeil & Parker
  23.6   Consent of KPMG Peat Marwick
  24.1   Power of Attorney (included in Part II of this Registration
         Statement)
  25.1   Statement of Eligibility of United States Trust Company of New
         York, as Trustee, on Form T-1*
  27     Financial Data Schedule
  99.1   Form of Letter of Transmittal*
  99.2   Form of Notice of Guaranteed Delivery*
</TABLE>    
- --------
 * Previously filed.
 
  B. FINANCIAL STATEMENT SCHEDULES
 
<TABLE>
 <C> <S>
     Schedule II Opinion to Schedule III
     Schedule III Valuation and Qualifying Accounts
</TABLE>
 
ITEM 22. UNDERTAKINGS
 
  (1) The undersigned registrant hereby undertakes:
 
    a. To file, during any period in which offers or sales are being made, a
  post-effective amendment to this registration statement:
 
      (i) To include any prospectus required by Section 10(a)(3) of the
    Securities Act of 1933;
 
      (ii) To reflect in the prospectus any facts or events arising after
    the effective date of the registration statement (or the most recent
    post-effective amendment thereof) which, individually or in the
    aggregate, represent a fundamental change in the information set forth
    in the registration statement. Notwithstanding the foregoing, any
    increase or decrease in volume of securities offered (if the total
    dollar value of securities offered would not exceed that which was
    registered) and any deviation from the low or high of the estimated
    maximum offering range may be reflected in the form of prospectus filed
    with the Commission pursuant to Rule 424(b) if, in the aggregate, the
    changes in volume and price represent no more than a 20 percent change
    in the maximum aggregate offering price set forth in the "Calculation
    of Registration Fee" table in the effective registration statement;
 
      (iii) To include any material information with respect to the plan of
    distribution not previously disclosed in the registration statement or
    any material change to such information in the registration statement.
 
                                     II-3
<PAGE>
 
    b. That, for the purpose of determining any liability under the
  Securities Act of 1933, each such post-effective amendment shall be deemed
  to be a new registration statement relating to the securities offered
  therein, and the offering of such securities at that time shall be deemed
  to be the initial bona fide offering thereof.
 
    c. To remove from registration by means of a post-effective amendment any
  of the securities being registered which remain unsold at the termination
  of the offering.
 
  (2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
 
    (a) For purposes of determining any liability under the Securities Act of
  1933, the information omitted from the form of prospectus filed as part of
  a registration statement in reliance upon Rule 430A and contained in the
  form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
  (4) or 497(h) under the Securities Act shall be deemed to be part of the
  registration statement as of the time it was declared effective.
 
    (b) For the purposes of determining any liability under the Securities
  Act of 1933, each post-effective amendment that contains a form of
  prospectus shall be deemed to be a new registration statement relating to
  the securities offered therein, and the offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.
 
  (3) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
 
  (4) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
 
                                     II-4
<PAGE>
 
                                   SIGNATURES
   
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHARLOTTE, STATE OF
NORTH CAROLINA ON THE 1ST DAY OF OCTOBER, 1998.     
 
                                         MJD Communications, Inc.
 
                                                 /s/ Walter E. Leach, Jr.
                                         By: __________________________________
                                                  WALTER E. LEACH, JR.
                                              SENIOR VICE PRESIDENT, CHIEF
                                            FINANCIAL OFFICER AND SECRETARY
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
 
             SIGNATURE                       TITLE                 DATE
             ---------                       -----                 ----
 
                 *                    Director                  
- ------------------------------------                         October 1, 1998
        DANIEL G. BERGSTEIN                                            
 
                 *                    Director                  
- ------------------------------------                         October 1, 1998
           MEYER HABERMAN                                              
 
                 *                    Director, Chairman        
- ------------------------------------   of the Board of       October 1, 1998
           JACK H. THOMAS              Directors,                      
                                       President and
                                       Chief Executive
                                       Officer
 
                 *                    Director, Vice            
- ------------------------------------   Chairman of the       October 1, 1998
         EUGENE B. JOHNSON             Board of                        
                                       Directors,
                                       Executive Vice
                                       President
 
                 *                    Director                  
- ------------------------------------                         October 1, 1998
         GEORGE E. MATELICH                                            
 
                 *                    Director                  
- ------------------------------------                         October 1, 1998
          REID G. LEGGETT                                              
 
                 *                    Director                  
- ------------------------------------                         October 1, 1998
         NELSON SCHWAB, III                                            
 
                 *                    Director                  
- ------------------------------------                         October 1, 1998
        FRANK K. BYNUM, JR.                                            
 
                 *                    Senior Vice               
- ------------------------------------   President, Chief      October 1, 1998
          WALTER E. LEACH              Financial Officer               
                                       and Secretary
                                       (Principal
                                       Financial Officer)
 
                 *                    Controller                
- ------------------------------------   (Principal            October 1, 1998
             LISA HOOD                 Accounting                      
                                       Officer)
 
      /s/ Walter E. Leach, Jr.
*By: _______________________________
          ATTORNEY-IN-FACT
 
                                      II-5

<PAGE>
 
         INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
 
The Board of Directors
MJD Communications, Inc.:
 
  Under date of February 27, 1998, except the last two paragraphs of note 2
and note 16 which are as of April 2, 1998 and note 17 which is as of April 8,
1998, we reported on the consolidated balance sheets of MJD Communications,
Inc. as of December 31, 1996 and 1997, and the related consolidated statements
of operations, shareholders' equity (deficit), and cash flows for each of the
years in the three-year period ended December 31, 1997, which are included in
the Registration Statement on Form S-4. In connection with our audits of the
aforementioned financial statements, we also audited the related financial
statement schedule in the Registration Statement on Form S-4. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
 
  In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
 
                                          KPMG Peat Marwick LLP
 
Lincoln, Nebraska
February 27, 1998
<PAGE>
 
                   MID COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                        BALANCE AT          WRITE-OFFS, BALANCE
                                        BEGINNING  BAD DEBT   NET-OF    AT END
                                         OF YEAR   EXPENSE  RECOVERIES  OF YEAR
                                        ---------- -------- ----------- -------
<S>                                     <C>        <C>      <C>         <C>
Allowance for doubtful accounts:
  Year ended December 31, 1995.........  $735,598  165,167    646,912   253,853
                                         ========  =======    =======   =======
  Year ended December 31, 1996.........  $253,853    4,812    200,931    57,734
                                         ========  =======    =======   =======
  Year ended December 31, 1997.........  $ 57,734      --       8,530    49,204
                                         ========  =======    =======   =======
</TABLE>
 
                 See accompanying independent auditors' report.
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>   
<CAPTION>
 EXHIBIT                                                                   PAGE
 NUMBER                            DESCRIPTION                             NO.
 -------                           -----------                             ----
 <C>     <S>                                                               <C>
   2.1   Stock Purchase Agreement, dated March 6, 1997 among the
         Company, MJD Partners, L.P. Carousel Capital Partners, L.P.,
         Kelso Investment Associates V, L.P. and Kelso Equity Partners,
         V, L.P., as amended*
   2.2   Stock Purchase Agreement dated as of March 28, 1996 among MJD
         Services Corp., Rick A. Moore, Tom D. Moore, Penta-Gen
         Investments, Inc., and Odin Telephone Exchange, Inc.*
   2.3   Agreement and Plan of Merger dated as of March 27, 1998 by and
         among MJD Ventures, Inc., Utilities Acquisition Corp. and
         Utilities, Inc.*
   2.4   Agreement and Plan of Merger, dated as of August 6, 1996 among
         MJD Holdings Corp., C&E Acquisitions Corp. and Chatauqua and
         Erie Telephone Corporation*
   2.5   Stock Purchase Agreement, dated as of September 24, 1996 among
         MJD Holdings Corp., Kadoka Telephone Co., Bruce G. Conlee and
         Virginia L. Conlee*
   2.6   Stock Purchase Agreement, dated as of June 24, 1997 among MJD
         Ventures, Inc., Gary Porter, Virginia M. Porter, Renee Porter,
         C-R Communications, Inc., C-R Telephone Company and certain
         stockholders*
   2.7   Agreement and Plan of Merger, dated as of September 2, 1997
         among MJD Holdings Corp., Taconic Acquisition Corp. and Taconic
         Telephone Corp.*
   2.8   Agreement and Plan of Merger, dated December 31, 1997 among MJD
         Ventures, Inc., Ellensburg Acquisition Corp. and Ellensburg
         Telephone Company*
   2.9   Agreement and Plan of Merger, dated as of March 12, 1998 among
         MJD Communications, Inc., Chouteau Acquisitions Corp., Chouteau
         Telephone Company and certain shareholders of Chouteau
         Telephone Company*
   3.1   Amended and Restated Certificate of Incorporation of the
         Company*
   3.2   Amended and Restated By-Laws of the Company*
   4.1   Indenture, dated as of May 5, 1998, between the Company and
         United States Trust Company of New York, as trustee, relating
         to the Company's $125,000,000 9 1/2% Senior Subordinated Notes
         due 2008 and $75,000,000 Floating Rate Callable Securities due
         2008*
   4.2   Form of Initial Fixed Rate Security*
   4.3   Form of Initial Floating Rate Security*
   4.4   Form of Exchange Fixed Rate Security*
   4.5   Form of Exchange Floating Rate Security*
   4.6   Form of Purchase Agreement dated as of April 30, 1998 between
         the Company and the Initial Purchasers named therein*
   4.7   Registration Agreement dated as of April 30, 1998 between the
         Company and the Initial Purchasers named therein*
   5.1   Opinion of Paul, Hastings, Janofsky & Walker LLP*
  10.1   Credit Agreement dated as of March 30, 1998 among the Company,
         various lending institutions, NationsBanc of Texas, N.A. and
         Bankers Trust Company
  10.2   Form of B Term Note*
  10.3   Form of C Term Note--Floating Rate*
  10.4   Form of C Term Note--Fixed Rate*
  10.5   Form of RF Note*
  10.6   Form of AF Note*
  10.7   Subsidiary Guarantee, dated as of March 30, 1998, by MJD
         Holdings Corp., MJD Ventures, Inc., MJD Services Corp., ST
         Enterprises, Ltd. for the benefit of Bankers Trust Company*
  10.8   Pledge Agreement, dated as of March 30, 1998 among MJD
         Communications, Inc., ST Enterprises, Ltd., MJD Holdings Corp.,
         MJD Services Corp., MJD Ventures, Inc., C-R Communications,
         Inc., as pledgors, and Bankers Trust Company, as collateral
         agent and pledgee*
</TABLE>    
<PAGE>
 
<TABLE>   
<CAPTION>
 EXHIBIT                                                                   PAGE
 NUMBER                            DESCRIPTION                             NO.
 -------                           -----------                             ----
 <C>     <S>                                                               <C>
  10.9   Capital Contribution Agreement, dated as of March 27, 1998
         among Kelso Investment Associates V, L.P., Kelso Equity
         Partners V, L.P., Carousel Capital Partners, L.P.,
         MJD Communications, Inc. and Bankers Trust Company*
  10.10  Stockholder's Agreement, dated as of July 31, 1997 among Kelso
         Investment Associates V, L.P., Kelso Equity Partners V, L.P.,
         Carousel Capital Partners V, L.P., the Company and MJD
         Partners, L.P.
  10.11  Registration Rights Agreement, dated as of July 31, 1997 among
         Kelso Investment Associates V, L.P., Kelso Equity Partners,
         L.P., the Company and MJD Partners, L.P.*
  10.12  Financial Advisory Agreements, dated as of July 31, 1997 among
         the Company, MJD Holdings Corp. and affiliates of each of Kelso
         Investment Associates V, L.P., Kelso Equity Partners, L.P. and
         Carousel Capital Partners, L.P.*
  10.13  Share Exchange Agreement, dated as of July 31, 1997 between the
         Company and MJD Partners, L.P.*
  10.14  Contribution Agreement, dated as of July 31, 1997 between Meyer
         Haberman, Jack H. Thomas, Eugene R. Johnson and Bugger
         Associates, Inc. and MJD Partners, L.P.*
  10.15  Contribution Agreement, dated as of July 31, 1997 between MJD
         Partners, L.P. and the Company*
  10.16  Amended and Restated Class A Voting Common Stock Purchase
         Warrants of the Company*
  10.17  Consulting Agreement, dated as of July 31, 1997 between MJD
         Partners, Inc. and Bugger Associates, Inc.*
  10.18  Severance Agreement, dated as of July 31, 1997 between ST
         Enterprises, LTD and John P. Duda*
  10.19  Severance Agreement, dated as of July 31, 1997 among the
         Company, MJD Partners, Inc. and Eugene B. Johnson*
  10.20  Severance Agreement, dated as of July 31, 1997 between the
         Company and Walter E. Leach, Jr.*
  10.21  Severance Agreement, dated as of July 31, 1997 among the
         Company, MJD Partners, Inc. and Jack H. Thomas*
  10.22  Amendment to Credit Agreement dated as of July 30, 1998, among
         the Company, various lending institutions, NationsBanc of
         Texas, N.A. and Bankers Trust Company*
  10.23  Form of Purchase Agreement and Subordination Agreement between
         Bankers Trust Company and the Company
  12     Ratio of Earnings to fixed charges calculation (filed herewith)
  21     Subsidiaries of the Company*
  23.1   Consent of Paul, Hastings, Janofsky & Walker LLP (included in
         Exhibit 5.1)*
  23.2   Consent of Moss Adams, LLP, Independent Auditors
  23.3   Consent of Ernst & Young LLP, Independent Auditors
  23.4   Consent of Kiesling Associates LLP
  23.5   Consent of Berry, Dunn, McNeil & Parker
  23.6   Consent of KPMG Peat Marwick
  24.1   Power of Attorney (included in Part II of this Registration
         Statement)
  25.1   Statement of Eligibility of United States Trust Company of New
         York, as Trustee, on Form T-1*
  27     Financial Data Schedule
  99.1   Form of Letter of Transmittal*
  99.2   Form of Notice of Guaranteed Delivery*
</TABLE>    
- --------
   
 * Previously filed.     

<PAGE>
 
                                                                    EXHIBIT 10.1
 
                                                   [CONFORMED COPY WITH EXHIBITS
                                                  F AND G CONFORMED AS EXECUTED]



================================================================================


                               CREDIT AGREEMENT


                                     among


                           MJD COMMUNICATIONS, INC.,


                         VARIOUS LENDING INSTITUTIONS,


                          NATIONSBANK OF TEXAS, N.A.,
                             as SYNDICATION AGENT


                                      and


                            BANKERS TRUST COMPANY,
                            as ADMINISTRATIVE AGENT


                     ____________________________________

                          Dated as of March 30, 1998
                     ____________________________________


                                 $315,000,000

================================================================================
<PAGE>
 
                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>
                                                                    Page
                                                                    ----
<S>                                                                 <C>  
SECTION 1. Amount and Terms of Credit.............................     1
     1.01  Commitment.............................................     1
     1.02  Minimum Borrowing Amounts, etc.........................     3
     1.03  Notice of Borrowing....................................     3
     1.04  Disbursement of Funds..................................     3
     1.05  Notes..................................................     4
     1.06  Conversions............................................     6
     1.07  Pro Rata Borrowings....................................     7
     1.08  Interest...............................................     7
     1.09  Interest Periods.......................................     8
     1.10  Increased Costs, Illegality, etc.......................     9
     1.11  Compensation...........................................    11
     1.12  Change of Lending Office...............................    12
     1.13  Replacement of Lenders.................................    12

SECTION 2. Fees...................................................    13
     2.01  Fees...................................................    13
     2.02  Voluntary Reduction of Commitments.....................    14
     2.03  Mandatory Adjustments of Commitments, etc..............    14

SECTION 3. Payments...............................................    16
     3.01  Voluntary Prepayments..................................    16
     3.02  Mandatory Prepayments..................................    17
     3.03  Method and Place of Payment............................    22
     3.04  Net Payments...........................................    22

SECTION 4. Conditions Precedent...................................    24
     4.01  Conditions Precedent to Closing Date...................    24
     4.02  Conditions Precedent to Term Loans and RF Loans........    28
     4.03  Conditions Precedent to All Loans......................    30

SECTION 5. Representations, Warranties and Agreements.............    31
     5.01  Corporate Status.......................................    31
     5.02  Corporate Power and Authority..........................    31
     5.03  No Violation...........................................    31
     5.04  Litigation.............................................    31
     5.05  Use of Proceeds; Margin Regulations....................    32
     5.06  Governmental Approvals.................................    32
</TABLE>

                                      (i)
<PAGE>
 
<TABLE>
<CAPTION> 
                                                                    Page
                                                                    ----
<S>                                                                 <C> 
     5.07  Investment Company Act.................................    33
     5.08  Public Utility Holding Company Act.....................    33
     5.09  True and Complete Disclosure...........................    33
     5.10  Financial Condition; Financial Statements..............    33
     5.11  Security Interests.....................................    34
     5.12  Acquisitions...........................................    35
     5.13  Tax Returns and Payments...............................    35
     5.14  Compliance with ERISA..................................    35
     5.15  Subsidiaries...........................................    36
     5.16  Intellectual Property..................................    37
     5.17  Environmental Matters..................................    37
     5.18  Labor Relations........................................    37
     5.19  Compliance with Statutes, etc..........................    37

SECTION 6. Affirmative Covenants..................................    38
     6.01  Information Covenants..................................    38
     6.02  Books, Records and Inspections.........................    39
     6.03  Insurance..............................................    40
     6.04  Payment of Taxes.......................................    40
     6.05  Corporate Franchises...................................    40
     6.06  Compliance with Statutes, etc..........................    40
     6.07  ERISA..................................................    40
     6.08  Good Repair............................................    42
     6.09  End of Fiscal Years; Fiscal Quarters...................    42
     6.10  Interest Rate Agreement................................    42
     6.11  Approvals..............................................    42
     6.12  CoBank Capital.........................................    42

SECTION 7. Negative Covenants.....................................    43
     7.01  Changes in Business....................................    43
     7.02  Consolidation, Merger, Sale or Purchase of Assets, etc.    43
     7.03  Liens..................................................    45
     7.04  Indebtedness...........................................    47
     7.05  Capital Expenditures...................................    49
     7.06  Advances, Investments and Loans........................    49
     7.07  Limitation on Creation of Subsidiaries.................    50
     7.08  Modifications..........................................    51
     7.09  Dividends, etc.........................................    51
     7.10  Transactions with Affiliates...........................    53
</TABLE>

                                     (ii)
<PAGE>
 
<TABLE>
<CAPTION> 
                                                                    Page
                                                                    ----
<S>                                                                 <C> 
     7.11  Interest Coverage Ratio................................    53
     7.12  Leverage Ratio.........................................    54
     7.13  Senior Leverage Ratio..................................    55
     7.14  Limitation On Issuance of Stock........................    56
     7.15  Designated Senior Debt.................................    56

SECTION 8. Events of Default......................................    56
     8.01  Payments...............................................    56
     8.02  Representations, etc...................................    56
     8.03  Covenants..............................................    56
     8.04  Default Under Other Agreements.........................    57
     8.05  Bankruptcy, etc........................................    57
     8.06  ERISA..................................................    57
     8.07  Pledge Agreement.......................................    58
     8.08  Subsidiary Guaranty....................................    58
     8.09  Judgments..............................................    58

SECTION 9. Definitions............................................    59

SECTION 10. The Agents............................................    87
     10.01  Appointment...........................................    87
     10.02  Nature of Duties......................................    88
     10.03  Lack of Reliance on the Agents........................    88
     10.04  Certain Rights of the Administrative Agent............    88
     10.05  Reliance..............................................    89
     10.06  Indemnification.......................................    89
     10.07  Each Agent in its Individual Capacity.................    89
     10.08  Holders...............................................    89
     10.09  Resignation by the Administrative Agent...............    90

SECTION 11. Miscellaneous.........................................    90
     11.01  Payment of Expenses, etc..............................    90
     11.02  Right of Setoff.......................................    91
     11.03  Notices...............................................    92
     11.04  Benefit of Agreement..................................    92
     11.05  No Waiver; Remedies Cumulative........................    94
     11.06  Payments Pro Rata.....................................    95
     11.07  Calculations; Computations............................    95
     11.08  Governing Law; Submission to Jurisdiction; Venue;
                   Waiver of Jury Trial...........................    96
</TABLE>

                                     (iii)
<PAGE>
 
<TABLE>
<CAPTION> 
                                                                            Page
                                                                            ----
<S>                                                                         <C>
     11.09  Counterparts..........................................            96
     11.10  Effectiveness.........................................            96
     11.11  Headings Descriptive..................................            97
     11.12  Amendment or Waiver...................................            97
     11.13  Survival..............................................            98
     11.14  Domicile of Loans.....................................            98
     11.15  Confidentiality.......................................            98
     11.16  Lender Register.......................................            98
</TABLE> 

ANNEX I        --   Commitments
ANNEX II       --   Addresses
ANNEX III      --   Subsidiaries
ANNEX IV       --   ERISA
ANNEX V        --   Existing Liens
ANNEX VI       --   Existing Indebtedness
ANNEX VII      --   Existing Investments
ANNEX VIII     --   Governmental Approvals
ANNEX IX       --   Affiliate Transactions
                
                
EXHIBIT A      --   Form of Notice of Borrowing
EXHIBIT B-1    --   Form of B Term Note
EXHIBIT B-2    --   Form of C Term Note-Floating Rate
EXHIBIT B-3    --   Form of C Term Note-Fixed Rate
EXHIBIT B-4    --   Form of RF Note
EXHIBIT B-5    --   Form of AF Note
EXHIBIT C      --   Form of Section 3.04 Certificate
EXHIBIT D-1    --   Form of Opinion of Paul, Hastings, Janofsky & Walker LLP
EXHIBIT D-2    --   Form of Opinion of White & Case LLP
EXHIBIT E      --   Form of Officers' Certificate
EXHIBIT F      --   Form of Subsidiary Guaranty
EXHIBIT G      --   Form of Pledge Agreement
EXHIBIT H      --   Form of Solvency Certificate
EXHIBIT I      --   Form of Capital Contribution Agreement
EXHIBIT J      --   Form of Consent Letter
EXHIBIT K      --   Form of Assignment Agreement

                                     (iv)
<PAGE>
 
          CREDIT AGREEMENT, dated as of March 30, 1998, among MJD
COMMUNICATIONS, INC., a Delaware corporation, the lenders from time to time
party hereto (each, a "Lender" and, collectively, the "Lenders"), NATIONSBANK OF
TEXAS, N.A., as Syndication Agent (the "Syndication Agent"), and BANKERS TRUST
COMPANY, as Administrative Agent (the "Administrative Agent" and together with
the Syndication Agent, collectively, the "Agents"). Unless otherwise defined
herein, all capitalized terms used herein and defined in Section 9 are used
herein as so defined.


                             W I T N E S S E T H :
                             - - - - - - - - - -  


          WHEREAS, subject to and upon the terms and conditions herein set
forth, the Lenders are willing to make available to the Borrower the credit
facilities provided for herein;


          NOW, THEREFORE, IT IS AGREED:

          SECTION 1.  Amount and Terms of Credit.
                      -------------------------- 

          1.01  Commitment.  Subject to and upon the terms and conditions
                ----------                                               
herein set forth, each Lender severally agrees to make a loan or loans (each, a
"Loan" and, collectively, the "Loans") to the Borrower, which Loans shall be
drawn, to the extent such Lender has a commitment under such Facility, under the
B Term Facility, the C Term Facility, the Revolving Facility and the Acquisition
Facility, as set forth below:

          (a)  Loans under the B Term Facility (each, a "B Term Loan" and,
collectively, the "B Term Loans") (i) shall be made to the Borrower pursuant to
one or more drawings on and after the Closing Date and prior to the B
Termination Date, provided that B Term Loans incurred pursuant to B Term
Commitments created pursuant to a B Term Commitment Renewal shall not be subject
to the foregoing but shall be made within the time frame specified in the
definition of B Term Commitment Renewal, (ii) except as hereinafter provided,
may, at the option of the Borrower, be incurred and maintained as, and/or
converted into, Base Rate Loans or Eurodollar Loans, provided that all B Term
Loans made as part of the same Borrowing shall, unless specifically provided
herein, consist of Loans of the same Type and (iii) shall not exceed in
aggregate principal amount for any Lender in respect of any incurrence of B Term
Loans the B Term Commitment, if any, of such Lender as in effect immediately
prior to such incurrence. Once repaid, B Term Loans may not be reborrowed,
provided that B Term Loans may be subsequently incurred to the extent of the B
Term Commitments created pursuant to the B Term Commitment Renewal.
<PAGE>
 
          (b)  Loans under the C Term Facility shall be made pursuant to the
Total C Term Commitment (each, a "C Term Loan-Floating Rate" and, collectively,
the "C Term Loans-Floating Rate") and pursuant to the CoBank Commitment (each, a
"C Term Loan-Fixed Rate" and, collectively, the "C Term Loans-Fixed Rate"), with
(A) the C Term Loans-Floating Rate (i) to be made to the Borrower pursuant to a
single drawing on the Closing Date (and not thereafter), (ii) except as
hereinafter provided, and, in any event, at the option of the Borrower, to be
incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar
Loans, provided that all C Term Loans-Floating Rate made as part of the same
Borrowing shall, unless specifically provided herein, consist of Loans of the
same Type and (iii) not to exceed in aggregate principal amount for any Lender
at the time of incurrence of C Term Loans-Floating Rate the C Term Commitment,
if any, of such Lender as in effect on such date immediately prior to such
incurrence and (B) the C Term Loans-Fixed Rate to be made to the Borrower by
CoBank on the Closing Date (and not thereafter) by converting the CoBank
Continuing Loans into C Term Loans-Fixed Rate in the aggregate amount of the
CoBank Commitment. Once repaid, C Term Loans-Floating Rate and C-Term Loans-
Fixed Rate may not be reborrowed.

          (c)  Loans under the Revolving Facility (each, an "RF Loan" and,
collectively, the "RF Loans") (i) shall be made to the Borrower at any time and
from time to time on and after the Closing Date and prior to the AF/RF Maturity
Date, (ii) except as hereinafter provided, may, at the option of the Borrower,
be incurred and maintained as, and/or converted into, Base Rate Loans or
Eurodollar Loans, provided that all RF Loans made as part of the same Borrowing
shall, unless otherwise specifically provided herein, consist of Loans of the
same Type, (iii) may be repaid and reborrowed in accordance with the provisions
hereof, and (iv) shall not exceed (giving effect to any incurrence thereof and
the use of the proceeds of such incurrence) for any Lender in aggregate
principal amount at any time outstanding the Revolving Commitment, if any, of
such Lender at such time.

          (d)  Loans under the Acquisition Facility (each, an "AF Loan" and,
collectively, the "AF Loans") (i) shall be made to the Borrower at any time and
from time to time on and after the B Utilization Date and prior to the AF/RF
Maturity Date, (ii) except as hereinafter provided, may, at the option of the
Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans
or Eurodollar Loans, provided that all AF Loans made as part of the same
Borrowing shall, unless otherwise specifically provided herein, consist of Loans
of the same Type, (iii) may be repaid and reborrowed in accordance with the
provisions hereof, and (iv) shall not exceed (giving effect to any incurrence
thereof and the use of the proceeds of such incurrence) for any Lender at any
time outstanding in aggregate principal amount the Acquisition Commitment, if
any, of such Lender at such time.

                                      -2-
<PAGE>
 
          1.02  Minimum Borrowing Amounts, etc.  The aggregate principal amount
                -------------------------------                                
of each Borrowing shall not be less than the Minimum Borrowing Amount. More than
one Borrowing may be incurred on any day, provided that at no time shall there
be outstanding more than eight Borrowings of Eurodollar Loans.

          1.03  Notice of Borrowing.  (a)  Whenever the Borrower desires to
                -------------------                                        
incur Loans under any Facility, it shall give the Administrative Agent at its
Notice Office, (x) prior to 12:00 Noon (New York time), at least three Business
Days' prior written notice (or telephonic notice promptly confirmed in writing)
of each proposed incurrence of Eurodollar Loans and (y) prior to 11:00 A.M. (New
York time) on the proposed date thereof, written notice (or telephonic notice
promptly confirmed in writing) of each proposed incurrence of Base Rate Loans
and Fixed Rate Loans. Each such notice (each, a "Notice of Borrowing") shall be
in the form of Exhibit A and shall be irrevocable and shall specify (i) the
Facility pursuant to which such incurrence is being made, (ii) the aggregate
principal amount of the Loans to be made pursuant to such incurrence, (iii) the
date of incurrence (which shall be a Business Day) and (iv) whether the
respective Borrowing shall consist of Base Rate Loans, Eurodollar Loans or Fixed
Rate Loans and, if Eurodollar Loans, the Interest Period to be initially
applicable thereto. The Administrative Agent shall promptly give each Lender
written notice (or telephonic notice promptly confirmed in writing) of each
proposed incurrence of Loans of such Lender's proportionate share thereof and
of the other matters covered by the Notice of Borrowing.

          (b)  Without in any way limiting the obligation of the Borrower to
confirm in writing any telephonic notice permitted to be given hereunder, the
Administrative Agent, prior to receipt of written confirmation may act without
liability upon the basis of and consistent with such telephonic notice, believed
by the Administrative Agent in good faith to be from an Authorized Officer of
the Borrower. In each such case, the Borrower hereby waives the right to dispute
the Administrative Agent's record of the terms of such telephonic notice, unless
such record reflects gross negligence or willful misconduct on the part of the
Administrative Agent.

          1.04  Disbursement of Funds.  (a)  No later than 1:00 P.M. (New York
                ---------------------                                         
time) (2:00 P.M. (New York time) in the case of Base Rate Loans made pursuant to
same day notice) on the date specified in each Notice of Borrowing, each Lender
with a Commitment under the respective Facility will make available its pro rata
                                                                        --- ----
share of each Borrowing requested to be made on such date, provided that no
proceeds of the C Term Loans-Fixed Rate will be made available to the Borrower,
with the C Term Loans-Fixed Rate to constitute the conversion of the outstanding
CoBank Continuing Loans. All such amounts shall be made available to the
Administrative Agent in Dollars and immediately available funds at the Payment
Office and the Administrative Agent promptly will make available to the Borrower
by depositing to its account at the Payment Office or as otherwise directed in
the applicable 

                                      -3-
<PAGE>
 
Notice of Borrowing the aggregate of the amounts so made available in the type
of funds received. Unless the Administrative Agent shall have been notified by
any Lender prior to the date of the proposed incurrence that such Lender does
not intend to make available to the Administrative Agent its portion of the
Borrowing or Borrowings to be made on such date, the Administrative Agent may
assume that such Lender has made such amount avail able to the Administrative
Agent on such date, and the Administrative Agent, in reliance upon such
assumption, may (in its sole discretion and without any obligation to do so)
make available to the Borrower a corresponding amount. If such corresponding
amount is not in fact made available to the Administrative Agent by such Lender
and the Administrative Agent has made available same to the Borrower, the
Administrative Agent shall be entitled to recover such corresponding amount from
such Lender. If such Lender does not pay such corresponding amount forthwith
upon the Administrative Agent's demand therefor, the Administrative Agent may
notify the Borrower, and, upon receipt of such notice, the Borrower shall
promptly pay such corresponding amount to the Administrative Agent. The
Administrative Agent shall also be entitled to recover on demand from such
Lender or the Borrower, as the case may be, interest on such corresponding
amount in respect of each day from the date such corresponding amount was made
available by the Administrative Agent to the Borrower to the date such
corresponding amount is recovered by the Administrative Agent, at a rate per
annum equal to (x) if paid by such Lender, the overnight Federal Funds Effective
Rate or (y) if paid by the Borrower, the then applicable rate of interest,
calculated in accordance with Section 1.08, for the respective Loans.

          (b)  Nothing herein shall be deemed to relieve any Lender from its
obligation to fulfill its commitments hereunder or to prejudice any rights which
the Borrower may have against any Lender as a result of any default by such
Lender hereunder.

          1.05  Notes.  (a)  The Borrower's obligation to pay the principal of,
                -----                                                          
and interest on, the Loans made to it by each Lender shall be evidenced (i) if B
Term Loans, by a promissory note substantially in the form of Exhibit B-1 with
blanks appropriately completed in conformity herewith (each, a "B Term Note"
and, collectively, the "B Term Notes"), (ii) if C Term Loans-Floating Rate, by a
promissory note substantially in the form of Exhibit B-2 with blanks
appropriately completed in conformity herewith (each, a "C Term Note-Floating
Rate" and, collectively, the "C Term Notes-Floating Rate"), (iii) if C Term
Loans-Fixed Rate, by promissory notes substantially in the form of Exhibit B-3
(the "C Term Notes-Fixed Rate"), (iv) if RF Loans, by a promissory note
substantially in the form of Exhibit B-4 with blanks appropriately completed in
conformity herewith (each, an "RF Note" and, collectively, the "RF Notes") and
(v) if AF Loans, by a promissory note substantially in the form of Exhibit B-5,
with blanks appropriately completed in conformity herewith (each, an "AF Note"
and, collectively, the "AF Notes").

                                      -4-
<PAGE>
 
          (b)  The B Term Note issued to each Lender that makes any B Term Loan
shall (i) be executed by the Borrower, (ii) be payable to the order of such
Lender and be dated the Closing Date, (iii) be in a stated principal amount
equal to the B Term Commitment of such Lender on the Closing Date (or in the
case of a new B Term Note issued pursuant to Section 1.13 or 11.04, the B Term
Loans and B Term Commitment then being assigned) and be payable in the principal
amount of B Term Loans evidenced thereby, (iv) mature on the B Maturity Date,
(v) bear interest as provided in the appropriate clause of Section 1.08 in
respect of the Base Rate Loans and Eurodollar Loans, as the case may be,
evidenced thereby, (vi) be subject to mandatory repayment as provided in Section
3.02 and (vii) be entitled to the benefits of this Agreement and the other
Credit Documents.

          (c)  The C Term Note-Floating Rate issued to each Lender that makes
any C Term Loan-Floating Rate shall (i) be executed by the Borrower, (ii) be
payable to the order of such Lender and be dated the Closing Date, (iii) be in a
stated principal amount equal to the C Term Loans-Floating Rate made by such
Lender on the Closing Date (or in the case of a new C Term Note-Floating Rate
issued pursuant to Section 1.13 or 11.04, the respective C Term Loans-Floating
Rate evidenced thereby at the time of issuance) and be payable in the principal
amount of C Term Loans-Floating Rate evidenced thereby, (iv) mature on the C
Maturity Date, (v) bear interest as provided in the appropriate clause of
Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case
may be, evidenced thereby, (vi) be subject to mandatory repayment as provided in
Section 3.02 and (vii) be entitled to the benefits of this Agreement and the
other Credit Documents.

          (d)  The C Term Note-Fixed Rate issued to each Lender that makes or
acquires any C Term Loan-Fixed Rate shall (i) be executed by the Borrower,
(ii) be payable to the order of such Lender and be dated the Closing
Date, (iii) be in a stated principal amount equal to the relevant C Term Loans-
Fixed Rate continued by CoBank on the Closing Date (or in the case of a new C
Term Note-Fixed Rate issued pursuant to Section 1.13 or 11.04, the respective C
Term Loans Fixed Rate evidenced thereby at the time of issuance) and be payable
in the principal amount of C Term Loans-Fixed Rate evidenced thereby, (iv)
mature on the C Maturity Date, (v) bear interest as provided in Section 1.08(c)
in respect of the Fixed Rate Loans evidenced thereby, (vi) be subject to
mandatory repayment as provided in Section 3.02 and (vii) be entitled to the
benefits of this Agreement and the other Credit Documents.

          (e)  The RF Note issued to each RF Lender shall (i) be executed by the
Borrower, (ii) be payable to the order of such RF Lender and be dated the
Closing Date, (iii) be in a stated principal amount equal to the Revolving
Commitment of such RF Lender and be payable in the principal amount of the RF
Loans evidenced thereby, (iv) mature on the AF/RF Maturity Date, (v) bear
interest as provided in the appropriate clause of Section 1.08 in respect of the
Base Rate Loans and Eurodollar Loans, as the case may be, evidenced 

                                      -5-
<PAGE>
 
thereby, (vi) be subject to mandatory repayment as provided in Section 3.02 and
(vii) be entitled to the benefits of this Agreement and the other Credit
Documents.

          (f)  The AF Note issued to each AF Lender shall (i) be executed by the
Borrower, (ii) be payable to the order of such AF Lender and be dated the
Initial AF Borrowing Date, (iii) be payable in the principal amount of the AF
Loans evidenced thereby, (iv) mature on the AF/RF Maturity Date, (v) bear
interest as provided in the appropriate clause of Section 1.08 in respect of the
Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby,
(vi) be subject to mandatory repayment as provided in Section 3.02 and (vii) be
entitled to the benefits of this Agreement and the other Credit Documents.

          (g)  Each Lender will note on its internal records the amount of each
Loan made by it and each payment in respect thereof and will, prior to any
transfer of any of its Notes, endorse on the reverse side thereof the
outstanding principal amount of Loans evidenced thereby. Failure to make any
such notation shall not affect the Borrower's obligations in respect of such
Loans.

          1.06  Conversions.  The Borrower shall have the option to convert on
                -----------                                                   
any Business Day all or a portion at least equal to the applicable Minimum
Borrowing Amount of the outstanding principal amount of the Loans owing pursuant
to a single Facility into a Borrowing or Borrowings pursuant to such Facility of
another Type of Loan provided that (i) no partial conversion of a Borrowing of
Eurodollar Loans shall reduce the outstanding principal amount of the Eurodollar
Loans made pursuant to such Borrowing to less than the Minimum Borrowing Amount
applicable thereto, (ii) Base Rate Loans and C Term Loans-Fixed Rate may not be
converted into Eurodollar Loans when a Default under Section 8.01 or an Event of
Default is in existence on the date of the proposed conversion if the
Administrative Agent or the Required Lenders shall have determined in its or
their sole discretion not to permit such conversion, (iii) Borrowings of
Eurodollar Loans resulting from this Section 1.06 shall be limited in number as
provided in Section 1.02 and (iv) no conversion of any C Term Loan-Fixed Rate
shall be made pursuant to this Section 1.06 until the FRE Date applicable
thereto, at which time such Loans shall be converted into Eurodollar Loans
and/or Base Rate Loans as elected by the Borrower in the absence of giving any
such notice, shall be automatically converted into Base Rate Loans) and such
resulting Eurodollar Loans and Base Rate Loans shall thereafter be subject to
conversion as provided in this Section 1.06. Each such con version shall be
effected by the Borrower giving the Administrative Agent at its Notice Office,
prior to 12:00 Noon (New York time), at least three Business Days' (or one
Business Day's, in the case of a conversion into Base Rate Loans) prior written
notice (or telephonic notice promptly confirmed in writing) (each, a "Notice of
Conversion") specifying the Loans to be so converted (including the relevant
Facility), the Type of Loans to be converted into and, if to be converted into a
Borrowing of Eurodollar Loans, the Interest Period to be initially applicable
there to.  The Administrative 

                                      -6-
<PAGE>
 
Agent shall give each Lender prompt notice of any such proposed conversion
affecting any of its Loans.

          1.07  Pro Rata Borrowings.  All Loans under this Agreement (other
                -------------------                                        
than C Term Loans-Fixed Rate) shall be made by the Lenders pro rata on the basis
                                                           --- ----
of their B Term Commitments, C Term Commitments, Revolving Commitments or
Acquisition Commitments, as the case may be, if any. It is understood that no
Lender shall be responsible for any default by any other Lender in its
obligation to make Loans hereunder and that each Lender shall be obligated to
make the Loans provided to be made by it hereunder, regardless of the failure of
any other Lender to fulfill its commitments hereunder.

          1.08  Interest.  (a)  The unpaid principal amount of each Base Rate
                --------                                                     
Loan shall bear interest from the date of the Borrowing thereof until the
earlier of repayment or conversion thereof and maturity (whether by acceleration
or otherwise) at a rate per annum which shall at all times be the Applicable
Base Rate Margin plus the Base Rate in effect from time to time.

          (b)  The unpaid principal amount of each Eurodollar Loan shall bear
interest from the date of the Borrowing thereof until the earlier of repayment
or conversion thereof and maturity (whether by acceleration or otherwise) at a
rate per annum which shall at all times be the Applicable Eurodollar Margin plus
the relevant Eurodollar Rate.

          (c)  The unpaid principal amount of each C Term Loan-Fixed Rate shall
bear interest until maturity (whether by acceleration or otherwise) as provided
in the C Term Notes-Fixed Rate.

          (d)  Interest in respect of any overdue amount payable hereunder shall
accrue at a rate per annum equal to the Base Rate in effect from time to time
plus the sum of (i) 2% and (ii) the Applicable Base Rate Margin, provided that
principal in respect of Eurodollar Loans and C Term Loans-Fixed Rate (prior to
the applicable FRE Date) shall bear interest from the date the same becomes due
(whether by acceleration or otherwise) until (x) in the case of Eurodollar
Loans, the end of the Interest Period then applicable to such Eurodollar Loan
and (y) in the case of C Term Loans-Fixed Rate until paid in full, at a rate per
annum no less than one which is equal to 2% in excess of the rate of interest
applicable thereto on such date.

          (e)  Interest shall accrue from and including the date of any
Borrowing to but excluding the date of any repayment thereof and shall be
payable (i) in respect of each Base Rate Loan, quarterly in arrears on the last
Business Day of each March, June, September and December commencing on June 30,
1998, (ii) in respect of each Eurodollar Loan, on the last day of each Interest
Period applicable thereto and, in the case of an Interest Period in excess 

                                      -7-
<PAGE>
 
of three months, on each date occurring at three month intervals after the first
day of such Interest Period, (iii) in respect of each such Loan, on any
prepayment or conversion (on the amount prepaid or converted), at maturity
(whether by acceleration or otherwise) and, after such maturity, on demand and
(iv) in respect of the C Term Loans-Fixed Rate, as provided in the relevant C
Term Note-Fixed Rate.

          (f)  All computations of interest hereunder shall be made in
accordance with Section 11.07(b).

          (g)  The Administrative Agent, upon determining the interest rate for
any Borrowing of Eurodollar Loans for any Interest Period, shall promptly notify
the Borrower and the Lenders thereof.

          1.09  Interest Periods.  (a)  At the time the Borrower gives a Notice
                ----------------                                               
of Borrowing or Notice of Conversion in respect of the making of, or conversion
into, a Borrowing of Eurodollar Loans (in the case of the initial Interest
Period applicable thereto) or prior to 12:00 Noon (New York time) on the third
Business Day prior to the expiration of an Interest Period applicable to a
Borrowing of Eurodollar Loans, it shall have the right to elect by giving the
Administrative Agent written notice (or telephonic notice promptly confirmed in
writing) of the Interest Period applicable to such Borrowing, which Interest
Period shall, at the option of the Borrower, be a one, two, three, six or, to
the extent available to all Lenders with a Commitment and/or outstanding Loans
under the respective Facility, nine or twelve month period. Notwithstanding
anything to the contrary contained above:

                  (i)    the initial Interest Period for any Borrowing of
        Eurodollar Loans shall commence on the date of such Borrowing (including
        the date of any conversion from a Borrowing of Base Rate Loans) and each
        Interest Period occurring thereafter in respect of such Borrowing shall
        commence on the day on which the next preceding Interest Period expires;

                  (ii)   if any Interest Period begins on a day for which there
        is no numerically corresponding day in the calendar month at the end of
        such Interest Period, such Interest Period shall end on the last
        Business Day of such calendar month;

                  (iii)  if any Interest Period would otherwise expire on a day
        which is not a Business Day, such Interest Period shall expire on the
        next succeeding Business Day, provided that if any Interest Period would
        otherwise expire on a day which is not a Business Day but is a day of
        the month after which no further Business Day occurs in such month, such
        Interest Period shall expire on the next preceding Business Day;

                                      -8-
<PAGE>
 
                  (iv)   no Interest Period with respect to a Borrowing of RF
        Loans or AF Loans shall extend beyond the AF/RF Maturity Date;

                  (v)    no Interest Period with respect to any B Term Loans, C
        Term Loans-Floating Rate or C Term Loans-Fixed Rate outstanding as
        Eurodollar Loans may be elected that would extend beyond any date upon
        which a Scheduled Repayment is required to be made in respect of such
        Loans if, after giving effect to the selection of such Interest Period,
        the aggregate principal amount of B Term Loans or C Term Loans-Floating
        Rate or C Term Loans-Fixed Rate outstanding as Eurodollar Loans,
        respectively, maintained as Eurodollar Loans with Interest Periods
        ending after such date would exceed the aggregate principal amount of B
        Term Loans, C Term Loans-Floating Rate or C Term Loans-Fixed Rate
        outstanding as Eurodollar Loans, as the case may be, permitted to be
        outstanding after such Scheduled Repayment; and

                  (vi)   no Interest Period may be elected at any time when a
        Default under Section 8.01 or an Event of Default is then in existence
        if the Administrative Agent or the Required Lenders shall have
        determined in its or their sole discretion not to permit such election.

          (b)  If upon the expiration of any Interest Period, the Borrower has
failed to (or may not) elect a new Interest Period to be applicable to the
respective Borrowing of Eurodollar Loans as provided above, the Borrower shall
be deemed to have elected to convert such Borrowing into a Borrowing of Base
Rate Loans effective as of such expiration.

          1.10  Increased Costs, Illegality, etc.  (a)  In the event that (x)
                ---------------------------------                            
in the case of clause (i) below, the Administrative Agent or (y) in the case of
clauses (ii) and (iii) below, any Lender shall have determined (which
determination shall, absent manifest error, be final and conclusive and binding
upon all parties hereto):

                  (i)    on any date for determining the Eurodollar Rate for any
        Interest Period that, by reason of any changes arising after the date of
        this Agreement affecting the interbank Eurodollar market, adequate and
        fair means do not exist for ascertaining the applicable interest rate on
        the basis provided for in the definition of Eurodollar Rate or the
        making or continuance of any Eurodollar Loan has become impracticable as
        a result of a contingency occurring after the Effective Date which
        materially and adversely affects the interbank Eurodollar market;

                  (ii)   at any time, that such Lender shall incur increased
        costs or reductions in the amounts received or receivable hereunder with
        respect to any Eurodollar Loans (other than taxes covered by Section
        3.04 and any increased cost or reduction in the amount received or
        receivable resulting from the imposition of or a change in the rate 

                                      -9-
<PAGE>
 
        of taxes or similar charges) because of (x) any change since the
        Effective Date in any applicable law, governmental rule, regulation,
        guideline or order (or in the interpretation or administration thereof
        and including the introduction of any new law or governmental rule,
        regulation, guideline or order) (such as, for example, but not limited
        to, a change in official reserve requirements, but, in all events,
        excluding reserves required under Regulation D to the extent included in
        the computation of the Eurodollar Rate) and/or (y) other circumstances
        affecting the interbank Eurodollar market or the position of such Lender
        in such market; or

                  (iii)  at any time, that the making or continuance of any
        Eurodollar Loan has become unlawful by compliance by such Lender in good
        faith with any law, governmental rule, regulation, guideline or order
        (or would conflict with any such governmental rule, regulation,
        guideline or order not having the force of law but with which such
        Lender customarily complies even though the failure to comply therewith
        would not be unlawful);

then, and in any such event, such Lender (or the Administrative Agent in the
case of clause (i) above) shall (x) on such date and (y) within ten Business
Days of the date on which such event no longer exists give notice (by telephone
confirmed in writing) to the Borrower and to the Administrative Agent of such
determination (which notice the Administrative Agent shall promptly transmit to
each of the other Lenders). Thereafter (x) in the case of clause (i) above,
Eurodollar Loans shall no longer be available until such time as the
Administrative Agent notifies the Borrower and the Lenders that the
circumstances giving rise to such notice by the Administrative Agent no longer
exist, and any Notice of Borrowing or Notice of Con version given by the
Borrower with respect to Eurodollar Loans which have not yet been incurred shall
be deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the
Borrower shall pay to such Lender, within 10 Business Days after the Borrower's
receipt of written demand therefor, such additional amounts (in the form of an
increased rate of, or a different method of calculating, interest or otherwise
as such Lender in its reasonable discretion shall determine after consultation
with the Borrower) as shall be required to compensate such Lender for such
increased costs or reductions in amounts receivable here under (a written notice
as to the additional amounts owed to such Lender, describing the basis for such
increased costs and showing the calculation thereof, submitted to the Borrower
by such Lender shall, absent manifest error, be final and conclusive and binding
upon all parties hereto) and (z) in the case of clause (iii) above, the Borrower
shall take one of the actions specified in Section 1.10(b) as promptly as
possible and, in any event, within the time period required by law.

          (b)  At any time that any Eurodollar Loan is affected by the
circumstances described in Section 1.10(a)(ii), the Borrower may (and in the
case of a Eurodollar Loan affected pursuant to Section 1.10(a)(iii), the
Borrower shall within the time period required

                                     -10-
<PAGE>
 
by law) either (x) if the affected Eurodollar Loan is then being made pursuant
to a Borrowing, cancel said Borrowing by giving the Administrative Agent
telephonic notice (confirmed promptly in writing) thereof on the same date that
the Borrower was notified by a Lender pursuant to Section 1.10(a)(ii) or (iii),
or (y) if the affected Eurodollar Loan is then outstanding, upon at least three
Business Days' notice to the Administrative Agent, require the affected Lender
to convert each such Eurodollar Loan into a Base Rate Loan (which conversion, in
the case of the circumstances described in Section 1.10(a)(iii), shall occur no
later than the last day of the Interest Period then applicable to such
Eurodollar Loan (or such earlier date as shall be required by applicable law));
provided, that if more than one Lender is affected at any time, then all
- --------
affected Lenders must be treated the same pursuant to this Section 1.10(b).

          (c)  If any Lender shall have determined that the adoption or
effectiveness of any applicable law, rule or regulation regarding capital
adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, in each case
after the Effective Date, or compliance by such Lender or its parent corporation
with any request or directive regarding capital adequacy (whether or not having
the force of law) of any such authority, central bank or comparable agency first
made after the Effective Date, has or would have the effect of reducing the rate
of return on such Lender's or its parent corporation's capital or assets as a
consequence of its commitments or obligations hereunder to a level below that
which such Lender or its parent corporation could have achieved but for such
adoption, effectiveness, change or compliance (taking into consideration such
Lender's or its parent corporation's policies with respect to capital adequacy),
then from time to time, within 10 Business Days after demand by such Lender
(with a copy to the Administrative Agent), the Borrower shall pay to such Lender
such additional amount or amounts as will compensate such Lender or its parent
corporation for such reduction. Each Lender, upon determining in good faith that
any additional amounts will be payable pursuant to this Section 1.10(c), will
give prompt written notice thereof to the Borrower, which notice shall describe
the basis for such claim and set forth in reasonable detail the calculation of
such additional amounts, although the failure to give any such notice shall not
release or diminish any of the Borrower's obligations to pay additional amounts
pursuant to this Section 1.10(c) upon the subsequent receipt of such notice.

          1.11  Compensation.  (a) The Borrower shall, without duplication,
                ------------                                               
compensate each Lender, upon its written request (which request shall set forth
the basis for requesting such compensation and reasonably detailed calculations
thereof), for all reasonable losses, expenses and liabilities (including,
without limitation, any loss, expense or liability incurred by reason of the
liquidation or reemployment of deposits or other funds required by such Lender
to fund its Eurodollar Loans but excluding in any event the loss of anticipated
profits) which such Lender may sustain: (i) if for any reason (other than a
default by any 

                                     -11-
<PAGE>
 
Lender or the Administrative Agent) a Borrowing of Eurodollar Loans by the
Borrower does not occur on a date specified therefor in a Notice of Borrowing or
Notice of Conversion (whether or not withdrawn by the Borrower or deemed
withdrawn pursuant to Section 1.10(a)); (ii) if any prepayment, repayment or
conversion of any of its Eurodollar Loans occurs on a date which is not the last
day of an Interest Period applicable thereto; (iii) if any prepayment of any of
its Eurodollar Loans is not made on any date specified in a notice of prepayment
given by the Borrower; or (iv) as a consequence of (x) any other default by the
Borrower to repay its Eurodollar Loans when required by the terms of this
Agreement or (y) an election made pursuant to Section 1.10(b).

          (b)  Notwithstanding anything in this Agreement to the contrary, to
the extent any notice or request required by Section 1.10, 1.11 or 3.04 of this
Agreement is given by any Lender more than 120 days after such Lender obtained,
or reasonably should have obtained, knowledge of the occurrence of the event
giving rise to the additional costs, reductions in amounts, losses, taxes or
other additional amounts of the type described in such Section, such Lender
shall not be entitled to compensation under Section 1.10, 1.11 or 3.04 of this
Agreement for any amounts incurred or accruing prior to the giving of such
notice to the Borrower.

           1.12  Change of Lending Office.  Each Lender agrees that, upon the
                 ------------------------                                    
occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or
(iii), 1.10(c) or 3.04 with respect to such Lender, it will, if requested by the
Borrower, use reasonable efforts (subject to overall policy considerations of
such Lender) to designate another lending office for any Loans affected by such
event, provided that such designation is made on such terms that such Lender
       --------
and its lending office suffer no material economic, legal or regulatory
disadvantage, with the object of avoiding the consequence of the event giving
rise to the operation of any such Section. Nothing in this Section 1.12 shall
affect or postpone any of the obligations of the Borrower or the right of any
Lender provided in Section 1.10 or 3.04.

           1.13  Replacement of Lenders.  (x) Upon the occurrence of any event
                 ----------------------                                       
giving rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c) or
Section 3.04 with respect to any Lender which results in such Lender charging to
the Borrower increased costs materially in excess of those being charged
generally by the Lenders, (y) if a Lender becomes a Defaulting Lender and/or (z)
in the case of a refusal by a Lender to consent to a proposed change, waiver,
discharge or termination with respect to this Agreement which has been approved
by the Required AF/RF Lenders and the Required TF Lenders, the Borrower shall
have the right, if no Default under Section 8.01 or Event of Default then
exists, to replace such Lender (the "Replaced Lender") with one or more other
Eligible Transferee or Transferees, none of whom shall constitute a Defaulting
Lender at the time of such replacement (collectively, the "Replacement Lender")
reasonably acceptable to the Administrative Agent, provided that (i) at the time
of any replacement pursuant to this 

                                     -12-
<PAGE>
 
Section 1.13, the Replacement Lender shall enter into one or more Assignment
Agreements pursuant to Section 11.04(b) (and with all fees payable pursuant to
said Section 11.04(b) to be paid by the Replacement Lender) pursuant to which
the Replacement Lender shall acquire all of the Commitments and outstanding
Loans of the Replaced Lender and, in connection therewith, shall pay to the
Replaced Lender an amount equal to the sum of (A) an amount equal to the
principal of, and all accrued and unpaid interest on, all outstanding Loans of
the Replaced Lender and an amount equal to all accrued and unpaid Fees owing to
the Replaced Lender pursuant to Section 2.01, and (ii) all obligations of the
Borrower owing to the Replaced Lender (other than those specifically described
in clause (i) above in respect of which the assignment purchase price has been,
or is concurrently being, paid) shall be paid in full to such Replaced Lender by
the Borrower concurrently with such replacement. Upon the execution of the
respective Assignment Agreements, the payment of amounts referred to in clauses
(i) and (ii) above and, if so requested by the Replacement Lender, delivery to
the Replacement Lender of the appropriate Note or Notes executed by the
Borrower, the Replacement Lender shall become a Lender hereunder and the
Replaced Lender shall cease to constitute a Lender hereunder, except with
respect to indemnification provisions applicable to the Replaced Lender under
this Agreement, which shall survive as to such Replaced Lender.

           SECTION 2.  Fees.
                       ---- 

           2.01  Fees.  (a)  The Borrower agrees to pay to the Administrative
                 ----                                                        
Agent a commitment commission (the "TF Commitment Commission") for the account
of each Lender with a B Term Commitment that is a Non-Defaulting Lender for any
period on and after the Closing Date during which any B Term Commitments are
outstanding, computed for each day at a rate per annum equal to the Applicable
CC Percentage for such day on the B Term Commitment on such day of such Lender.
Such TF Commitment Commission shall be due and payable in arrears on the last
Business Day of each calendar quarter and on the B Termination Date.

          (b)  The Borrower agrees to pay to the Administrative Agent a
commitment commission (the "RF Commitment Commission") for the account of each
RF Lender that is a Non-Defaulting Lender for the period from and including the
Closing Date to but not including the date upon which the Total Revolving
Commitment has been terminated, computed for each day at the rate per annum
equal to the Applicable CC Percentage for such day on the unutilized Revolving
Commitment on such day of such Lender. Such RF Commitment Commission shall be
due and payable in arrears on the last Business Day of each calendar quarter and
on the date upon which the Total Revolving Commitment is terminated.

          (c)  The Borrower agrees to pay to the Administrative Agent a
commitment commission (the "AF Commitment Commission") for the account of each
AF Lender that is 

                                     -13-
<PAGE>
 
a Non-Defaulting Lender for the period during which any Acquisition Commitments
are outstanding, computed for each day at the rate per annum equal to the
Applicable CC Percentage for such day on the unutilized Acquisition Commitment
on such day of such Lender. Such AF Commitment Commission shall be due and
payable quarterly in arrears on the last Business Day of each calendar quarter
and upon the date on which the Total Acquisition Commitment is terminated.

          (d)  The Borrower shall pay to (x) each Agent on the Closing Date, for
its own account and/or for distribution to the Lenders, such fees as heretofore
agreed by the Borrower and the Agents, (y) the Administrative Agent, for its own
account, such other fees as agreed to between the Borrower and the
Administrative Agent, when and as due and (z) CoBank, for its own account, on
the Closing Date, such fees as heretofore agreed by the Borrower and CoBank.

          (e)  All computations of Fees shall be made in accordance with Section
11.07(b).

          2.02 Voluntary Reduction of Commitments.  (a)  Upon at least one
               ----------------------------------                         
Business Day's prior written notice (or telephonic notice confirmed in writing)
to the Administrative Agent at its Notice Office (which notice shall be deemed
to be given on a certain day only if given before 2:00 P.M. (New York time) on
such day and shall be promptly transmitted by the Administrative Agent to each
of the Lenders), the Borrower shall have the right, without premium or penalty,
to reduce, in whole or in part, the unutilized Total Revolving Commitment or
unutilized Total Acquisition Commitment, as the case may be, provided that (w)
any such partial reduction shall apply to proportionately and permanently reduce
the Revolving Commitment or Acquisition Commitment, as the case may be, of each
Lender with such a Commitment, (x) no such reduction shall reduce any Non-
Defaulting Lender's Revolving Commitment or Acquisition Commitment, as the case
may be, in an amount greater than the then unutilized Revolving Commitment or
Acquisition Commitment, as the case may be, of such Lender, (y) any reduction of
the Total Revolving Commitment or Total Acquisition Commitment, as the case may
be, pursuant to this Section 2.02(a) shall reduce the then remaining Scheduled
Reductions applicable thereto pro rata and (z) any partial reduction pursuant to
                              --- ----
this Section 2.02 shall be in the amount of at least $1,000,000.

          (b)  At any time after the Closing Date and prior to the B Termination
Date upon at least one Business Day's prior written notice (or telephone notice
promptly confirmed in writing) to the Administrative Agent at its Notice Office
(which notice the Administrative Agent shall promptly transmit to each of the
Lenders), the Borrower shall have the right, without premium or penalty, to
reduce, in whole or in part, the remaining Total B Term Commitment. The amount
of any reduction of the Total B Term Commitment effected

                                     -14-
<PAGE>
 
pursuant to this Section 2.02(b) and/or Section 2.03(b)(ii), (iii)
and/or (iv) shall be applied to reduce pro rata the remaining Scheduled
                                       --- ----
Repayments of B Term Loans.

           2.03  Mandatory Adjustments of Commitments, etc.   (a)  The Total
                 ------------------------------------------                 
Commitment (and the Commitment of each Lender) shall terminate in its entirety
on the Expiration Date unless the Closing Date has occurred on or before such
date.

           (b)   The Total B Term Commitment shall (i) be reduced on the date
any B Term Loans are incurred in an amount equal to the aggregate principal
amount of B Term Loans so incurred, (ii) terminate in its entirety (to the
extent not theretofore terminated) at 5:00 P.M. (New York time) on the B
Termination Date, whether or not any B Term Loans are incurred on such date,
(iii) until terminated in full, be reduced on each day on which Term Loans, if
still outstanding, would be required to be repaid pursuant to Sections
3.02(A)(c), (e) and (f) by the amount, if any, by which the amount required to
be applied pursuant to said Sections to repay B Term Loans (determined as if an
unlimited amount of Term Loans were actually outstanding) exceeds the aggregate
principal amount of B Term Loans being repaid, (iv) terminate in its entirety
(to the extent not theretofore terminated) on the date of the initial issuance
of any Permitted Subordinated Debt, (v) terminate in its entirety on the day on
which a Change of Control occurs and (vi) be increased after any B Term Loans
have been mandatorily repaid pursuant to Section 3.02 or the Total B Term Loan
Commitment has been reduced pursuant to clause (iii) or (iv) above in the
aggregate amount of such repayment and/or reduction to the extent new B Term
Commitments are provided pursuant to a B Term Commitment Renewal.

           (c)   The Total C Term Commitment shall terminate in its entirety on
the Closing Date (after giving effect to the making of C Term Loans-Floating
Rate on such date).

           (d)   The Total Revolving Commitment shall be reduced on June 30,
2001 and on each successive three-month anniversary of such date in an aggregate
amount equal to 1/13th of Total Revolving Commitment outstanding on June 30,
2001 (each such reduction, together with each reduction of the Total Acquisition
Commitment required by Section 2.03(e), as the same may be reduced as provided
in Section 2.02 and, in the case of the Total Acquisition Commitment, Section
2.03(f), a "Scheduled Reduction").

           (e)   The Total Acquisition Commitment shall be reduced on each of
March 31, 2002 and each successive three-month anniversary of such date in an
aggregate amount equal to 1/10th of the Total Acquisition Commitment outstanding
on March 31, 2002.

           (f)   The Total Revolving Commitment and Total Acquisition Commitment
(to the extent outstanding) shall each be reduced on each date on which (x) no
Term Loans or Term Commitments are outstanding (after giving effect to the
application on or prior to such

                                     -15-
<PAGE>
 
date of the provisions of Sections 3.02(A) and 2.03(b)) and (y) Term Loans, if
still outstanding, would be required to be repaid pursuant to Sections
3.02(A)(c), (d), (e), (f) or (g) by the amount, if any, by which the amount
required to be applied pursuant to said Sections as a result of the events
described therein (determined as if an unlimited amount of Term Loans were
actually outstanding) exceeds the aggregate principal amount of Term Loans being
repaid and the B Term Commitments being reduced as a result of such events, with
any commitment reduction pursuant to this Section 2.03(f) to apply pro rata
                                                                   --- ----
between the Total Revolving Commitment and the Total Acquisition Commitment.

          (g) Each of the Total Revolving Commitment and the Total Acquisition
Commitment shall terminate in its entirety on the earlier of (x) the AF/RF
Maturity Date and (y) the date on which a Change of Control occurs.

          (h) Each partial reduction of the Commitments under a Facility
pursuant to this Section 2.03 shall apply proportionately to the Commitment
under such Facility of each Lender.

          SECTION 3.  Payments.
                      -------- 

          3.01  Voluntary Prepayments. The Borrower shall have the right to
                ---------------------
prepay Loans (other than C Term Loans-Fixed Rate, with any prepayment in respect
thereof to be as set forth in the C Term Notes-Fixed Rate) in whole or in part,
without premium or penalty, from time to time on the following terms and
conditions: (i) the Borrower shall give the Administrative Agent at the Payment
Office written notice (or telephonic notice promptly confirmed in writing) of
its intent to prepay the Loans, whether such Loans are B Term Loans, C Term
Loans-Floating Rate, RF Loans or AF Loans, the amount of such pre payment and
(in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which
made, which notice shall be given by the Borrower prior to 12:00 Noon (New York
time) on the Business Day prior to the date of such prepayment, and which notice
shall promptly be transmitted by the Administrative Agent to each of the
Lenders; (ii) each partial prepayment of any Borrowing shall be in an aggregate
principal amount of at least $1,000,000, provided that no partial prepayment of
Eurodollar Loans made pursuant to a Borrowing shall reduce the aggregate
principal amount of the Loans outstanding pursuant to such Borrowing to an
amount less than the Minimum Borrowing Amount applicable thereto; (iii) each
prepayment in respect of any Loans made pursuant to a Borrowing shall be applied
pro rata among such Loans provided that at the Borrower's election in connection
- --- ----
with any prepayment of RF Loans or AF Loans pursuant to this Section 3.01, such
prepayment shall not be applied to any RF Loans or AF Loans, as the case may be,
of a Defaulting Lender; and (iv) each prepayment of Term Loans pursuant to this
Section 3.01 shall be applied to B Term Loans (in an amount equal to the B TF
Percentage of such prepayment) and C Term Loans (in an amount equal to the C TF
Percentage of such prepayment) and shall reduce the remaining

                                     -16-
<PAGE>
 
Scheduled Repayments of each of the B Term Loans and the C Term Loans (x) first,
in direct order of maturity to those Scheduled Repayments which will be due and
payable within twelve months after the date of the respective payment and (y)
second, to the extent in excess thereof, on a pro rata basis (based upon the
                                              --- ----
then remaining principal amount of each such Scheduled Repayment).

          3.02  Mandatory Prepayments.
                --------------------- 

          (A)  Requirements:
               ------------ 

          (a)  (i) If on any date (and after giving effect to all other
repayments on such date) the aggregate outstanding principal amount of RF Loans
made by Non-Defaulting Lenders exceeds the Adjusted Total Revolving Commitment
as then in effect, the Borrower shall repay on such date the principal of
outstanding RF Loans of Non-Defaulting Lenders in an aggregate amount equal to
such excess.

          (ii)  If on any date (and after giving effect to all other repayments
on such date) the aggregate outstanding principal amount of AF Loans made by 
Non-Defaulting Lenders exceeds the Adjusted Total Acquisition Commitment then in
effect, the Borrower shall repay on such date the principal of outstanding AF
Loans of Non-Defaulting Lenders in an aggregate amount equal to such excess.

          (iii) If on any date prior to the first anniversary of the Closing
Date the Borrower issues Permitted Subordinated Debt at any time that the Senior
Leverage Ratio exceeds 4.0 to 1.0, the proceeds (net of underwriting discounts
and commissions, private placement and/or initial purchaser fees and other
reasonable fees and expenses associated therewith) of such issuance shall be
applied as a mandatory repayment of RF Loans (to the extent outstanding) to the
extent necessary to reduce the Senior Leverage Ratio to 4.0 to 1.0.

          (b)   (i) On each date set forth below, the Borrower shall repay the
principal amount of B Term Loans set forth opposite such date (each such
repayment, together with each repayment of C Term Loans required by clause
(b)(ii) below, as the same may be reduced as provided in Sections 2.02(b) and
3.02(B), a "Scheduled Repayment"):

<TABLE>
<CAPTION>
     Date                                       Amount  
     ----                                       ------
<S>                                          <C>        
June 30, 1998                                $   387,500
September 30, 1998                           $   387,500
December 31, 1998                            $   387,500
March 31, 1999                               $   387,500 
</TABLE> 

                                     -17-
<PAGE>
 
<TABLE> 
<S>                                          <C> 
June 30, 1999                                $   387,500
September 30, 1999                           $   387,500
December 31, 1999                            $   387,500
March 31, 2000                               $   387,500
                                                        
                                                        
June 30, 2000                                $   387,500
September 30, 2000                           $   387,500
December 31, 2000                            $   387,500
March 31, 2001                               $   387,500
                                                        
                                                        
June 30, 2001                                $   387,500
September 30, 2001                           $   387,500
December 31, 2001                            $   387,500
March 31, 2002                               $   387,500
                                                        
                                                        
June 30, 2002                                $   387,500
September 30, 2002                           $   387,500
December 31, 2002                            $   387,500
March 31, 2003                               $   387,500
                                                        
                                                        
June 30, 2003                                $   387,500
September 30, 2003                           $   387,500
December 31, 2003                            $   387,500
March 31, 2004                               $   387,500
                                                        
                                                        
June 30, 2004                                $   387,500
September 30, 2004                           $   387,500
December 31, 2004                            $24,154,167
March 31, 2005                               $24,154,167
                                                        
                                                        
June 30, 2005                                $24,154,167
September 30, 2005                           $24,154,167
December 31, 2005                            $24,154,167
B Maturity Date                              $24,154,167 
</TABLE>

, provided that any increase in the Total B Term Commitment pursuant to a B Term
Commitment Renewal shall be applied pro rata to increase the then remaining
                                    --- ----
Scheduled Repayments set forth above.

                                     -18-
<PAGE>
 
     (ii)  On each date set forth below, the Borrower shall repay the principal
amount of C Term Loans-Floating Rate and C Term Loans-Fixed Rate, respectively,
set forth opposite such date:

<TABLE>
<CAPTION>
                              Floating Rate            Fixed Rate 
     Date                        Amount                  Amount   
     ----                        ------                  ------ 
<S>                           <C>                      <C>        
April 1, 1998                    $        0            $  313,567 
June 30, 1998                    $   58,734            $  301,638 
September 30, 1998               $   58,734            $  307,321 
December 31, 1998                $   58,734            $  330,617 
March 31, 1999                   $   58,734            $  336,530 
                                                                  
June 30, 1999                    $   58,734            $  342,560 
September 30, 1999               $   58,734            $  348,712 
December 31, 1999                $   58,734            $  363,736 
March 31, 2000                   $   58,734            $  370,135 
                                                                  
June 30, 2000                    $   58,734            $  376,663 
September 30, 2000               $   58,734            $  383,321 
December 31, 2000                $   58,734            $  402,613 
March 31, 2001                   $   58,734            $  409,540 
                                                                  
June 30, 2001                    $   58,734            $  416,606 
September 30, 2001               $   58,734            $  515,704 
December 31, 2001                $   58,734            $  529,893 
March 31, 2002                   $   58,734            $  539,266 
                                                                  
June 30, 2002                    $   58,734            $  548,826 
September 30, 2002               $   58,734            $  521,965 
December 31, 2002                $   58,734            $  531,665 
March 31, 2003                   $   58,734            $  541,567 
                                                                  
June 30, 2003                    $   58,734            $  551,674 
September 30, 2003               $   58,734            $  561,990 
December 31, 2003                $   58,734            $  572,520 
March 31, 2004                   $   58,734            $  583,267 
                                                                  
June 30, 2004                    $   58,734            $  594,237 
September 30, 2004               $   58,734            $   49,807 
December 31, 2004                $   58,734            $   49,807 
March 31, 2005                   $   58,734            $   49,807  
</TABLE>

                                     -19-
<PAGE>
 
<TABLE>
<S>                              <C>                   <C>        
June 30, 2005                    $2,731,131            $4,970,106 
September 30, 2005               $2,731,131            $4,970,106 
December 31, 2005                $2,731,131            $4,970,106 
March 31, 2006                   $2,731,131            $4,970,106 
                                                                  
June 30, 2006                    $2,731,131            $4,970,106 
September 30, 2006               $2,731,131            $4,970,106 
December 31, 2006                $2,731,131            $4,970,106 
C Maturity Date                  $2,731,131            $4,970,106  
</TABLE>

          (c)  On the fifth Business Day following the date of receipt thereof
by the Borrower and/or any of its Subsidiaries of the Net Cash Proceeds from any
Asset Sale, an amount equal to 100% of the Net Cash Proceeds from such Asset
Sale shall be applied as a mandatory repayment of principal of the then
outstanding Term Loans and if no Term Loans are then outstanding, to the RF
Loans and the AF Loans, pro rata, among such Loans, provided that up to 100% of
                        --- ----                    --------
the Net Cash Proceeds from Asset Sales shall not be required to be used to so
repay Loans to the extent the Borrower elects, as hereinafter provided, to cause
such Net Cash Proceeds to be used within 180 days to finance an Acquisition or
Acquisitions or Permitted Acquisitions (a "Reinvestment Election"). The Borrower
may exercise its Reinvestment Election with respect to an Asset Sale if (x) no
Default or Event of Default exists and (y) the Borrower delivers a Reinvestment
Notice to the Administrative Agent no later than five Business Days following
the date of the consummation of the respective Asset Sale, with such
Reinvestment Election being effective with respect to the Net Cash Proceeds of
such Asset Sale equal to the Anticipated Reinvestment Amount specified in such
Reinvestment Notice.

          (d)  On the Business Day following the receipt thereof by the
Borrower, if at the time of such receipt the Senior Leverage Ratio exceeds 4.0
to 1.0, an amount equal to 100% of the proceeds (net of underwriting discounts
and commissions, private placement and/or initial purchaser fees and other 
reasonable fees and expenses associated therewith and of any repayment of RF
Loans required by Section 3.02(A)(a)(iii)) from the issuance of Permitted
Subordinated Debt by the Borrower shall be applied as a mandatory repayment of
principal of the then outstanding Term Loans to the extent necessary to reduce
the Senior Leverage Ratio to 4.0 to 1.0, provided that if any such Permitted
Subordinated Debt is issued prior to the consummation of the Ellensberg
Acquisition, then up to $74.0 million of such proceeds that, pursuant to Section
3.02(B)(a), would be required to be used to repay Term Loans shall not be
required to be so applied to the extent that the Borrower elects, as hereinafter
provided, to cause such proceeds to be used within 45 days to finance the
Ellensberg Acquisition or to effect the Permitted PSD Repurchase (a "Special PSD
Election"). The Borrower may exercise its Special PSD Election if it delivers a
Special PSD

                                     -20-
<PAGE>
 
Notice to the Administrative Agent not later than one Business Day following the
date of any issuance of Permitted Subordinated Debt.

          (e)  On the date of the receipt thereof by the Borrower, if at the
time of such receipt the Senior Leverage Ratio exceeds 4.0 to 1.0, an amount
equal to 100% of the proceeds (net of underwriting discounts and commissions,
private placement and/or initial purchaser fees and other reasonable fees and
expenses associated therewith) of any sale or issuance of its equity or of any
equity contribution (other than equity issued to management and other employees
of the Borrower and its Subsidiaries) shall be applied as a mandatory repayment
of principal of the then outstanding Term Loans to the extent necessary to
reduce the Senior Leverage Ratio to 4.0 to 1.0.

          (f)  On the Reinvestment Prepayment Date with respect to a
Reinvestment Election, an amount equal to the Reinvestment Prepayment Amount, if
any, for such Reinvestment Election shall be applied as a repayment of the
principal amount of the then outstanding Term Loans.

          (g)  On the date occurring 45 days after the date of a Special PSD
Election, an amount equal to the related Special PSD Prepayment Amount, if any,
shall be applied as a repayment of the principal amount of the then outstanding
Term Loans.

          (h)  To the extent not theretofore repaid pursuant to the provisions
of this Agreement, (i) all outstanding RF Loans and AF Loans, respectively,
shall be repaid in full upon the termination of the Total Revolving Commitment
or the Total Acquisition Commitment, as the case may be, and (ii) all
outstanding Term Loans shall be repaid in full on the date a Change in Control
occurs.

          (B)  Application:
               ----------- 

          (a)  Each mandatory repayment of Term Loans required to be made
pursuant to Section 3.02(A) shall be applied (i) in the case of any mandatory
repayment required pursuant to Section 3.02(A)(d) or (g), first, to the
                                                          -----
outstanding B Term Loans, if any, in an amount equal to the lesser of the amount
of such prepayment and the then outstanding principal amount of B Term Loans
and, second, commencing on the first anniversary of the Closing Date, if the
     ------
amount of such repayment exceeds the then outstanding principal amount of B Term
Loans, if any, to the outstanding C Term Loans, if any, (ii) in the case of any
mandatory repayment required pursuant to Section 3.02(A)(c),(e) or (f), to the
outstanding B Term Loans, if any, in an amount equal to the B TF Percentage of
such prepayment and to the outstanding C Term Loans, if any, in an amount equal
to the C TF Percentage of such prepayment and (iii) to reduce pro rata the then
                                                              --- ----
remaining Scheduled Repayments of the respective Facility.

                                     -21-
<PAGE>
 
          (b)   With respect to each prepayment of Loans required by Section
3.02(A), (other than C Term Loans-Fixed Rate to the extent provided in the
relevant C Term Note-Fixed Rate), the Borrower may designate the Types of Loans
which are to be prepaid and the specific Borrowing(s) under the affected
Facility pursuant to which made provided that (i) if any prepayment of
                                --------
Eurodollar Loans made pursuant to a single Borrowing shall reduce the
outstanding Loans made pursuant to such Borrowing to an amount less than the
Minimum Borrowing Amount for such Borrowing, such Borrowing shall be immediately
converted into Base Rate Loans; (ii) each prepayment of any Loans under a
Facility shall be applied pro rata among such Loans; and (iii) except for the
                          --- ----
differing treatments of Defaulting Lenders and Non-Defaulting Lenders as
expressly provided in Section 3.02(A)(a), each prepayment of any Eurodollar
Loans made pursuant to a Borrowing shall be applied pro rata among such
                                                    --- ----
Eurodollar Loans. In the absence of a designation by the Borrower as described
in the preceding sentence, the Administrative Agent shall, subject to the
above, make such designation in its sole discretion with a view, but no
obligation, to minimize breakage costs owing under Section 1.11.

          3.03  Method and Place of Payment.  Except as otherwise specifically
                ---------------------------                                   
provided herein, all payments under this Agreement shall be made to the
Administrative Agent for the ratable account of the Lenders entitled thereto,
not later than 1:00 P.M. (New York time) on the date when due and shall be made
in immediately available funds and in Dollars at the Payment Office, it being
understood that written notice by the Borrower to the Administrative Agent to
make a payment from the funds in the Borrower's account at the Payment Office
shall constitute the making of such payment to the extent of such funds held in
such account. Any payments under this Agreement which are made later than 1:00
P.M. (New York time) shall be deemed to have been made on the next succeeding
Business Day. Whenever any payment to be made hereunder shall be stated to be
due on a day which is not a Business Day, the due date thereof shall be extended
to the next succeeding Business Day and, with respect to payments of principal,
interest shall be payable during such extension at the applicable rate in effect
immediately prior to such extension.

           3.04  Net Payments.  (a)  All payments made by the Borrower hereunder
                 ------------                                                   
and/or under any Note will be made without setoff, counterclaim or other
defense. Except as provided in Section 3.04(b), all such payments will be made
free and clear of, and without deduction or withholding for, any present or
future taxes, levies, imposts, duties, fees, assessments or other charges of
whatever nature now or hereafter imposed by any jurisdiction or by any political
subdivision or taxing authority thereof or therein with respect to such payments
(but excluding, except as provided in the second succeeding sentence, any tax
imposed on or measured by the net income or net profits of a Lender pursuant to
the laws of the jurisdiction in which it is organized or the jurisdiction in
which the principal office or applicable lending office of such Lender is
located or any subdivision thereof or therein) and all interest, penalties or
similar liabilities with respect to such non-excluded taxes, levies,

                                     -22-
<PAGE>
 
imposts, duties, fees, assessments or other charges (all such non-excluded
taxes, levies, imposts, duties, fees, assessments or other charges being
referred to collectively as "Taxes"). If any Taxes are so levied or imposed, the
Borrower agrees to pay the full amount of such Taxes, and such additional
amounts as may be necessary so that every payment of all amounts due under this
Agreement and/or under any Note, after withholding or deduction for or on
account of any Taxes, will not be less than the amount provided for herein or
therein. If any amounts are payable in respect of Taxes pursuant to the
preceding sentence, the Borrower agrees to reimburse each Lender, upon the
written request of such Lender, for taxes imposed on or measured by the net
income or net profits of such Lender pursuant to the laws of the jurisdiction in
which such Lender is organized or in which the principal office or applicable
lending office of such Lender is located or under the laws of any political
subdivision or taxing authority of any such jurisdiction in which such Lender is
organized or in which the principal office or applicable lending office of such
Lender is located and for any withholding of taxes as such Lender shall
determine are payable by, or withheld from, such Lender, in respect of such
amounts so paid to or on behalf of such Lender pursuant to the preceding
sentence and in respect of any amounts paid to or on behalf of such Lender
pursuant to this sentence. The Borrower will furnish to the Agent within 45 days
after the date the payment of any Taxes is due pursuant to applicable law
certified copies of tax receipts evidencing such payment by the Borrower. The
Borrower agrees to indemnify and hold harmless each Lender, and reimburse such
Lender upon its written request, for the amount of any Taxes so levied or
imposed and paid by such Lender.

          (b)  Each Lender that is not a United States person (as such term is
defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes
agrees to deliver to the Borrower and the Agent on or prior to the Effective
Date, or in the case of a Lender that is an assignee or transferee of an
interest under this Agreement pursuant to Section 1.13 or 11.04 (unless the
respective Lender was already a Lender hereunder immediately prior to such
assignment or transfer), on the date of such assignment or transfer to such
Lender, (i) two accurate and complete original signed copies of Internal Revenue
Service Form 4224 or 1001 (or successor forms) certifying to such Lender's
entitlement to a complete exemption from United States withholding tax with
respect to payments to be made under this Agreement and under any Note, or (ii)
if the Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the
Code and cannot deliver either Internal Revenue Service Form 1001 or 4224
pursuant to clause (i) above, (x) a certificate substantially in the form of
Exhibit C (any such certificate, a "Section 3.04 Certificate") and (y) two
accurate and complete original signed copies of Internal Revenue Service Form W-
8 (or successor form) certifying to such Lender's entitlement to a complete
exemption from United States withholding tax with respect to payments of
interest to be made under this Agreement and under any Note. In addition, each
Lender agrees that from time to time after the Effective Date, when a lapse of
time or change in circumstances renders the previous certification obsolete or
inaccurate in any material respect, it will deliver to the Borrower and the

                                     -23-
<PAGE>
 
Administrative Agent two new accurate and complete original signed copies of
Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Section 3.04
Certificate, as the case may be, and such other forms as may be required in
order to confirm or establish the entitlement of such Lender to a continued
exemption from or reduction in United States withholding tax with respect to
payments under this Agreement and any Note, or it shall immediately notify the
Borrower and the Administrative Agent of its inability to deliver any such Form
or Certificate, in which case such Lender shall not be required to deliver any
such Form or Certificate pursuant to this Section 3.04(b). Notwithstanding
anything to the contrary contained in Section 3.04(a), but subject to Section
11.04(b) and the immediately succeeding sentence, (x) the Borrower shall be
entitled, to the extent it is required to do so by law, to deduct or withhold
income or similar taxes imposed by the United States (or any political sub
division or taxing authority thereof or therein) from interest, Fees or other
amounts payable by it hereunder for the account of any Lender which is not a
United States person (as such term is defined in Section 7701(a)(30) of the
Code) for U.S. Federal income tax purposes to the extent that such Lender has
not provided to the Borrower U.S. Internal Revenue Service Forms that establish
a complete exemption from such deduction or withholding and (y) the Borrower
shall not be obligated pursuant to Section 3.04(a) hereof to gross-up payments
to be made by it to a Lender in respect of income or similar taxes imposed by
the United States if (I) such Lender has not provided to the Borrower the
Internal Revenue Service Forms required to be provided to the Borrower pursuant
to this Section 3.04(b) or (II) in the case of a payment, other than interest,
to a Lender described in clause (ii) above, to the extent that such Forms do not
establish a complete exemption from withholding of such taxes. Notwithstanding
anything to the contrary contained in the preceding sentence or elsewhere in
this Section 3.04 and except as set forth in Section 11.04(b), the Borrower
agrees to pay any additional amounts and to indemnify each Lender in the manner
set forth in Section 3.04(a) (without regard to the identity of the jurisdiction
requiring the deduction or withholding) in respect of any Taxes deducted or
withheld by it as described in the immediately preceding sentence as a result of
any changes after the Effective Date in any applicable law, treaty, governmental
rule, regulation, guideline or order, or in the interpretation thereof, relating
to the deducting or withholding of such Taxes.

          (c)  If the Borrower pays any additional amount under this Section
3.04 to a Lender and such Lender determines in its sole discretion that it has
actually received or realized in connection therewith any refund or any
reduction of, or credit against, its Tax liabilities in or with respect to the
taxable year in which the additional amount is paid, such Lender shall pay to
the Borrower an amount that the Lender shall, in its sole discretion, determine
is equal to the net benefit, after tax, which was obtained by the Lender in such
year as a consequence of such refund, reduction or credit.

                                     -24-
<PAGE>
 
          SECTION 4.   Conditions Precedent.
                       -------------------- 

          4.01  Conditions Precedent to Closing Date.  The obligation of the
                ------------------------------------                        
Lenders to make Loans on the Closing Date is subject to the satisfaction of each
of the following conditions at such time:

          (a)  Effectiveness; Notes.  (i) The Effective Date shall have occurred
               --------------------                                             
and (ii) there shall have been delivered to the Administrative Agent for the
account of each Lender the appropriate Note or Notes executed by the Borrower,
in each case, in the amount, maturity and as otherwise provided herein.

          (b)  Opinions of Counsel. The Administrative Agent shall have received
               -------------------
opinions, addressed to each Agent and each of the Lenders and dated the Closing
Date, from (i) Paul, Hastings, Janofsky & Walker LLP (and/or other counsel
reasonably acceptable to the Agents), special counsel to the Credit Parties,
which opinion shall cover the matters contained in Exhibit D-1 hereto (except to
the extent relating to any Acquisition not consummated on the Closing Date and
to any Person not a Subsidiary on the Closing Date), and (ii) White & Case LLP,
special counsel to the Agents, which opinion shall cover the matters contained
in Exhibit D-2 hereto, which opinions shall be in form and substance reasonably
satisfactory to the Agents.

          (c)  Corporate Proceedings.  (i)  The Administrative Agent shall have
               ---------------------                                           
received a certificate, dated the Closing Date, signed by an Authorized Officer
of the Borrower in the form of Exhibit E with appropriate insertions and
deletions, together with (x) copies of the certificate of incorporation, by-laws
or other organizational documents of each Credit Party and (y) the resolutions
of each Credit Party referred to in such certificate and all of the foregoing
(including each such certificate of incorporation and by-laws) shall be
reasonably satisfactory to the Administrative Agent and (z) a statement that all
of the applicable conditions set forth in Section 4.03 have been satisfied as of
such date.

          (ii)  On the Closing Date, all corporate and legal proceedings and all
instruments and agreements in connection with the transactions contemplated by
this Agreement and the other Credit Documents shall be reasonably satisfactory
in form and substance to the Administrative Agent, and the Administrative Agent
shall have received all information and copies of all certificates, documents
and papers, including good standing certificates and any other records of
corporate proceedings and governmental approvals (other than those set forth on
Annex VIII), if any, which the Agents may have reasonably requested in
connection therewith, such documents and papers, where appropriate, to be
certified by proper corporate or governmental authorities.

                                     -25-
<PAGE>
 
          (d)  Plans; etc.  On or prior to the Closing Date, there shall have
               -----------                                                   
been made available to the Administrative Agent:

          (i)    all Plans (and for each Plan that is required to file an annual
     report on Internal Revenue Service Form 5500-series, a copy of the most
     recent such report (including, to the extent required, the related
     financial and actuarial statements and other supporting statements,
     certifications, schedules and information), and for each Plan that is a
     "single-employer plan," as defined in Section 4001(a)(15) of ERISA, the
     most recently prepared actuarial valuation therefor) and any other
     "employee benefit plans," as defined in Section 3(3) of ERISA, and any
     other material agreements, plans or arrangements, with or for the benefit
     of current or former employees of the Borrower or any of its Subsidiaries
     or any ERISA Affiliate (provided that the foregoing shall apply in the case
     of any multiemployer plan, as defined in 4001(a)(3) of ERISA, only to the
     extent that any document described therein is in the possession of the
     Borrower or any Subsidiary of the Borrower or any ERISA Affiliate or
     reasonably available thereto from the sponsor or trustee of any such plan);

          (ii)   any collective bargaining agreements or any other similar
     agreement or arrangements covering the employment arrangements of the
     employees of the Borrower or any of its Subsidiaries;

          (iii)  all agreements entered into by the Borrower or any Subsidiary
     governing the terms and relative rights of its capital stock;

          (iv)   any material agreement with respect to the management of the
     Borrower or any of its Subsidiaries;

          (v)    any material employment agreements entered into by the Borrower
     or any of its Subsidiaries; and

          (vi)   any tax sharing, tax allocation and other similar agreements
     entered into by the Borrower and/or any of its Subsidiaries with any entity
     not a Credit Party;

with all of the foregoing to be reasonably satisfactory to the Administrative
Agent.

          (e)  Adverse Change, etc. Since February 18, 1998, nothing shall have
               -------------------
occurred, and neither Agent shall have first become aware of any facts or
conditions not previously known, in each case which either Agent shall
reasonably determine (a) has had, or is reasonably likely to have, a material
adverse effect on the rights or remedies of the Lenders or the Agents hereunder
or under any other Credit Document, or on the ability of the Credit 

                                     -26-
<PAGE>
 
Parties taken as a whole to perform their obligations under the Credit Documents
or (b) has had or is reasonably likely to have a Material Adverse Effect.

             (f)  Litigation.  There shall be no actions, suits or proceedings
                  ----------                                                  
pending or, to the knowledge of the Borrower, threatened (a) with respect to
this Agreement or any other Credit Document or (b) which either Agent shall
reasonably determine has had or is reasonably likely to have (i) a Material
Adverse Effect or (ii) a material adverse effect on the rights or remedies of
the Lenders or the Agents hereunder or under any other Credit Document or on the
ability of the Credit Parties taken as a whole to perform their obligations
under the Credit Documents.

             (g)  Approvals.  All necessary material governmental and third
                  ---------                                                
party approvals (other than those set forth on Annex VIII) in connection with
the Credit Documents (including, without limitation, all necessary material
approvals required by the FCC and the applicable PUCs) shall have been obtained
and remain in effect.

             (h)  Subsidiary Guaranty.  Each Intermediary Holding Company that  
                  -------------------                                         
is a Subsidiary on the Closing Date shall have duly authorized, executed and
delivered a Subsidiary Guaranty in the form of Exhibit F hereto (as modified,
amended, amended and restated or supplemented from time to time in accordance
with the terms hereof and thereof, the "Subsidiary Guaranty"), and the
Subsidiary Guaranty shall be in full force and effect.

             (i)  Pledge Agreement.  The Borrower and each Parent Company that
                  ----------------                                            
is a Subsidiary on the Closing Date shall have each duly authorized, executed
and delivered a Pledge Agreement in the form of Exhibit G (as modified, amended,
amended and restated or supplemented from time to time in accordance with the
terms thereof and hereof, the "Pledge Agreement") and shall have delivered to
the Collateral Agent, as pledgee thereunder, all of the certificates
representing the Pledged Securities owned by such Persons, endorsed in blank or
accompanied by executed and undated stock powers, and the Pledge Agreement shall
be in full force and effect.

             (j)  Solvency.  The Borrower shall have delivered to the
                  --------                                           
Administrative Agent, a solvency certificate, dated the Closing Date and in the
form of Exhibit H hereto.

             (k)  Capital Contribution Agreement.  The Specified Shareholders
                  ------------------------------                             
shall have duly authorized, executed and delivered an agreement (the "Capital
Contribution Agreement") in the form of Exhibit I hereto and such Capital
Contribution Agreement shall be in full force and effect.

                                     -27-
<PAGE>
 
             (l)  Consent Letter.  The Administrative Agent shall have received
                  --------------                                               
a letter from CT Corporation System, substantially in the form of Exhibit J
hereto, indicating its consent to its appointment by each Credit Party as its
agent to receive service of process.

             (m)  Refinancing.  On the Closing Date and concurrently with the
                  -----------                                                
incurrence of Loans on such date, (x) the Indebtedness to be Refinanced (other
than the CoBank Continuing Loans converted pursuant to Section 1.01(b)(B)) shall
have been repaid in full, together with interest thereon, (y) the CoBank
Continuing Loans shall have been converted into C Term Loans-Fixed Rate pursuant
to Section 1.01(b)(B) and (z) the creditors under the Indebtedness to be
Refinanced shall have terminated and released all security interests in and
Liens on the capital stock of and/or assets owned by the Borrower or any of its
Subsidiaries, and the Administrative Agent shall have received evidence
(including releases) in form, scope and substance satisfactory to it that the
matters set forth in this Section 4.01(m) have been satisfied at such time.

             (n)  Fees.  The Borrower shall have paid to the Agents and the
                  ----                                                     
Lenders all Fees and expenses agreed upon by such parties to be paid on or prior
to the Closing Date (for which, in the case of legal fees and expenses, the
Borrower shall have received in advance a written invoice in reasonable detail).

             4.02  Conditions Precedent to Term Loans and RF Loans. The
                   -----------------------------------------------
obligation of the Lenders to make Term Loans and/or RF Loans on any date
(including on the Closing Date) to finance an Acquisition is subject, at the
time of such incurrence of such Loans, to the satisfaction of the following
conditions:

             (a)  Consummation of the Acquisition, etc.  The Acquisition being
                  -------------------------------------                       
financed with the proceeds of such Term Loans and/or RF Loans (x) shall have
received all requisite board of directors and shareholder approval and (y) shall
have been consummated in accordance with the Acquisition Documents relating to
such Acquisition (the "Applicable Acquisition Documents") and all applicable
laws, and the Administrative Agent shall have received true and correct copies
of each of the Applicable Acquisition Documents, certified as such by an
Authorized Officer of the Borrower, each of which shall have been duly
authorized, executed and delivered by the parties thereto and shall be in full
force and effect and in form and substance reasonably satisfactory to the Agents
(it being agreed that the Acquisition Documents relating to the Ellensburg
Acquisition and the Taconic Acquisition in the form delivered to the Agents
prior to the Effective Date are satisfactory to the Agents except as modified by
schedules subsequently delivered and that any increase in the purchase price
under the Acquisition Documents relating to the Ellensburg Acquisition
unspecified in amount shall, to the extent in excess of $5 million, be
satisfactory to the Agents). On or prior to such time, all conditions precedent
set forth in the Applicable Acquisition Documents shall have been satisfied, or
waived or consented to with the consent of the Agents, not to be unreasonably
withheld (with all conditions stated to require the approval or satisfaction

                                     -28-
<PAGE>
 
of, or to be acceptable to, the Borrower and/or any Subsidiary to require the
approval or satisfaction of, or to be acceptable to, the Agents, not be
unreasonably withheld) and all applicable waiting periods with respect thereto
have expired without, in all such cases, any action being taken by any competent
authority which imposes material adverse conditions upon the consummation of
such Acquisition.

             (b)  Capital Contributions.  If the Acquisition being financed is
                  ---------------------                                       
the Ellensburg Acquisition or the Taconic Acquisition, the Borrower shall have
received at the time of the consummation of such Acquisition additional cash
common equity investments from the Borrower's shareholders aggregating (without
duplication) $15.0 million in the case of the Ellensburg Acquisition and/or
$16.3 million in the case of the Taconic Acquisition, as the case may be.

             (c)  Opinions.  The Administrative Agent shall have received an
                  --------                                                  
opinion or opinions, addressed to each Agent and each Lender, and dated the date
of such Loans, from Paul, Hastings, Janofsky & Walker LLP (and/or other counsel
reasonably acceptable to the Agents) covering the matters contained in Exhibit 
D-1 relating to the Acquisition being financed and the Persons becoming Credit
Parties as a result thereof, which opinion shall be in form and substance
reasonably satisfactory to the Agents.

             (d)  Corporate Proceedings.  The Administrative Agent shall have
                  ---------------------                                      
received a certificate dated the date of such Loans, signed by an Authorized
Officer of the Borrower in the form of Exhibit E hereto (but only to the extent
relating to the Acquisition being financed and the new Credit Parties resulting
from such Acquisition), together with all organizational documents and
resolutions referred to therein, and all the foregoing shall be reasonably
satisfactory to the Agents, (y) all the documentation specified in Section
4.01(d) to the extent relating to such new Credit Parties shall have been made
available to the Administrative Agent and (z) each of such new Credit Parties
shall have duly authorized, executed and delivered (i) a counterpart of the
Subsidiary Guaranty (if an Intermediary Holding Company) and/or (ii) a
counterpart of the Pledge Agreement (if a Parent Company) and, in such case,
shall have delivered to the Collateral Agent, as pledgee thereunder, all of the
certificates representing the Pledged Securities owned by such new Credit
Parties, endorsed in blank or accompanied by executed and undated stock powers.

             (e)  Litigation.  There shall be no material actions, suits or
                  ----------                                               
proceedings pending or, to the knowledge of the Borrower, threatened (a) with
respect to the Acquisition being financed or (b) which either Agent shall
reasonably determine has had or is reasonably likely to have a Material Adverse
Effect.

             (f)  Audits and Financial Statements for Certain Acquisitions.  (i)
                  --------------------------------------------------------      
If the Acquisition being financed is the El Paso Acquisition or the Chouteau
Acquisition, each of the Lenders shall have received an audit of the financial
statements referred to in

                                     -29-
<PAGE>
 
Section 5.10(b)(iii) or (iv), as the case may be, prepared by Kiesling
Associates LLP (in the case of the financial statements of El Paso) and Sartain,
Fischbein & Company (in the case of the financial statements of Chouteau), which
accounting firm shall have delivered an unqualified opinion in respect thereof.

                    (ii) If the Acquisition being financed is the UI
Acquisition, each of the Lenders shall have received the consolidated balance
sheet of UI as at December 31, 1997 and the related consolidated statements of
operations and cash flows for the period ended as of said date, audited by an
independent accounting firm reasonably acceptable to the Agents, who shall have
delivered an unqualified opinion in respect thereof, which statements shall have
been prepared in accordance with GAAP and practices consistently applied, except
to the extent, if any, provided in the notes thereto and shall present fairly
the consolidated financial position of UI at the date thereof and the results
for the period covered thereby in accordance with GAAP, except to the extent, if
any, provided in the notes thereto.

             (g)  Refinancing.  (i) Except to the extent such security interets
                  -----------                                                  
and Liens are otherwise permitted by Section 7.03, the creditors of the Acquired
Company or Companies to be acquired with the proceeds of such Loans shall have
terminated and released all security interests in and Liens on the capital stock
and/or assets owned by such Acquired Company or Companies to the satisfaction of
the Administrative Agent, (ii) the Administrative Agent shall have received
evidence (including releases) in form, scope and substance satisfactory in that
the matters set forth in clause (i) above have been satisfied at such time and
(iii) except in the case of any Acquisition consummated on the Closing Date, the
Borrower shall have delivered to the Administrative Agent a revised Annex V,
modified to include Liens on the assets of such Acquired Companies that are to
remain outstanding, that is satisfactory to the Administrative Agent.

             4.03  Conditions Precedent to All Loans.  The obligation of each
                   ---------------------------------                         
Lender to make Loans (including Loans made on the Closing Date) is subject, at
the time of the making of each such Loan, to the satisfaction of the following
conditions:

             (a)  Notice of Borrowing.  The Administrative Agent shall have
                  -------------------                                      
received a Notice of Borrowing meeting the requirements of Section 1.03.

             (b)  No Default; Representations and Warranties.  At the time of
                  ------------------------------------------                 
each making of Loans and also after giving effect thereto, (i) there shall exist
no Default or Event of Default and (ii) all representations and warranties made
by any Credit Party contained herein or in the other Credit Documents shall be
true and correct in all material respects with the same effect as though such
representations and warranties had been made on and as of the date of such
Loans, except to the extent that such representations and warranties expressly
relate to an earlier date, in which case such representations and warranties
shall be true and correct as of such earlier date.

                                     -30-
<PAGE>
 
             (c)  Senior Leverage Ratio.  No Loans may be made at any time when
                  ---------------------                                        
the Senior Leverage Ratio is above 4.0 to 1.0 except for the incurrence of (i)
Loans to finance the Specified Purposes, (ii) RF Loans in an aggregate
outstanding amount not to exceed $30 million to be used solely to finance
working capital purposes and (iii) RF Loans in an aggregate amount at the time
of the incurrence thereof equal to an Interim Prepayment Amount outstanding at
such time to the extent such RF Loans are used to fund an Acquisition or a
Permitted Acquisition effected pursuant to the Reinvestment Election that
created such Interim Prepayment Amount and/or to repay Term Loans as required on
the Reinvestment Prepayment Date with respect to such Reinvestment Election.

             The acceptance of the benefits of each Loan shall constitute a
representation and warranty by the Borrower that all of the applicable
conditions specified in Section 4.01 (in the case of Loans on the Closing Date),
4.02 (in the case of Term Loans and/or RF Loans incurred to finance
Acquisitions) and/or 4.03 (in the case of all Loans), as the case may be, have
been satisfied as of that time. All of the certificates, legal opinions and
other documents and papers referred to in Sections 4.01 and 4.02, unless
otherwise specified, shall be delivered to the Administrative Agent for the
benefit of each of the Lenders and, except for the Notes, in sufficient
counterparts for each of the Lenders and shall be reasonably satisfactory in
form and substance to the Agents.

             SECTION 5.  Representations, Warranties and Agreements.  In order
                         ------------------------------------------           
to induce the Lenders to enter into this Agreement and to make the Loans, the
Borrower makes the following representations and warranties to, and agreements
with, the Lenders, all of which shall survive the execution and delivery of this
Agreement and the making of the Loans:

             5.01  Corporate Status.  Each of the Borrower and its Subsidiaries
                   ----------------                                            
(i) is a duly organized and validly existing corporation and is in good
standing, in each case under the laws of the jurisdiction of its organization
and has the corporate power and authority to own its property and assets and to
transact the business in which it is engaged and (ii) is duly qualified and is
authorized to do business and, to the extent relevant, is in good standing in
all jurisdictions where it is required to be so qualified and where the failure
to be so qualified, authorized or in good standing is reasonably likely to have
a Material Adverse Effect.

             5.02  Corporate Power and Authority.  Each Credit Party has the
                   -----------------------------                            
corporate power and authority to execute, deliver and carry out the terms and
provisions of the Credit Documents to which it is a party and has taken all
necessary action to authorize the execution, delivery and performance of the
Credit Documents to which it is a party. Each Credit Party has duly executed and
delivered each Credit Document to which it is a party and each such Credit
Document constitutes the legal, valid and binding obligation of such Person
enforceable in accordance with its terms, except to the extent that the
enforceability thereof

                                     -31-
<PAGE>
 
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws relating to or affecting creditors' rights generally and
general equitable principles (regardless of whether enforcement is sought in
equity or at law).

             5.03  No Violation.  Neither the execution, delivery or performance
                   ------------                                                 
by any Credit Party of the Credit Documents to which it is a party nor
compliance with the terms and provisions thereof, (i) will contravene any
applicable provision of any law, statute, rule, regulation, order, writ,
injunction or decree of any court or governmental instrumentality, (ii) will
(after giving effect to the Refinancing) conflict or be inconsistent with or
result in any breach of, any of the terms, covenants, conditions or provisions
of, or constitute a default under, or (other than pursuant to the Pledge
Agreement) result in the creation or imposition of (or the obligation to create
or impose) any Lien upon any of the property or assets of the Borrower or any of
its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust
or other material agreement or instrument to which the Borrower or any of its
Subsidiaries is a party or by which it or any of its property or assets are
bound or to which it may be subject or (iii) will violate any provision of the
organizational documents (including by-laws) of the Borrower or any of its
Subsidiaries.

             5.04  Litigation.  There are no actions, suits or proceedings
                   ----------                                             
pending or, to the knowledge of the Borrower, threatened with respect to the
Borrower or any of its Subsidiaries (i) that have had, or that are reasonably
likely to have, a Material Adverse Effect or (ii) that have, or that are
reasonably likely to have had, a material adverse effect on the rights or
remedies of the Lenders or on the ability of the Credit Parties taken as a whole
to perform their obligations under the Credit Documents.

             5.05  Use of Proceeds; Margin Regulations.  (a)  The proceeds of
                   -----------------------------------                       
all Term Loans shall be utilized to finance the Acquisitions, to effect the
Refinancing, to retire Existing Warrants, to repurchase outstanding shares of
preferred stock of the Borrower having an aggregate liquidation preference of
$130,164 for an aggregate purchase price equal to such liquidation preference
plus accrued dividends of $12,131 (the "Preferred Repurchase") and to pay
certain fees and expenses relating to the Transaction (all of the foregoing,
collectively, the "Specified Purposes").

             (b)  (i) The proceeds of RF Loans may be used for working capital
and capital expenditure requirements (including to finance Permitted CLEC
Expenditures), to effect the Preferred Repurchase and to retire Existing
Warrants and, on and after the B Utilization Date, to finance Acquisitions and
Permitted Acquisitions.

             (c)  The proceeds of AF Loans may only be used (x) to finance
capital expenditure requirements and Permitted Acquisitions and/or (y) to repay
RF Loans to the extent that the proceeds of such RF Loans had been used to
finance capital expenditure requirements and/or Permitted Acquisitions.

                                     -32-
<PAGE>
 
             (d)  Neither the making of any Loan hereunder, nor the use of the
proceeds thereof, will violate the provisions of Regulation G, T, U or X of the
Board of Governors of the Federal Reserve System and no part of the proceeds of
any Loan will be used to purchase or carry any Margin Stock or to extend credit
for the purpose of purchasing or carrying any Margin Stock, provided that
proceeds of AF Loans may be utilized to purchase Margin Stock if (A) such
purchase (x) is pursuant to a Permitted Acquisition of the Person issuing such
Margin Stock and (y) is effected pursuant to a friendly transaction (as
determined by the Agents) not in violation of such Regulations G, T, U or X and
(B) at no time shall the market value of all Margin Stock held by the Borrower
and its Subsidiaries exceed 25% of the consolidated total assets of the Borrower
subject to Sections 7.02 and 7.03.

             5.06  Governmental Approvals.  Except for (x) such approvals set
                   ----------------------                                    
forth on Annex VIII as have not been obtained and (y) such consents, approvals
and filings as have been obtained or made on or prior to the Closing Date and
remain in full force and effect, no order, consent, approval, license, 
authorization, or validation of, or filing, recording or registration with, or
exemption by, any foreign or domestic governmental or public body or authority
(including, without limitation, the FCC and applicable PUCs), or any subdivision
thereof, is required to authorize or is required in connection with (i) the
execution, delivery and performance of any Credit Document or (ii) the legality,
validity, binding effect or enforceability of any Credit Document.

             5.07  Investment Company Act.  Neither the Borrower nor any of its
                   ----------------------                                      
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.

             5.08  Public Utility Holding Company Act.  Neither the Borrower nor
                   ----------------------------------                           
any of its Subsidiaries is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.

             5.09  True and Complete Disclosure.  All factual information (taken
                   ----------------------------                                 
as a whole) heretofore or contemporaneously furnished by or on behalf of the
Borrower in writing to the Agents for purposes of or in connection with this
Agreement or any transaction contemplated herein is, and all other such factual
information (taken as a whole) hereafter furnished by or on behalf of any Credit
Party in writing to the Lenders hereunder will be, true and accurate in all
material respects on the date as of which such information is dated or certified
and not incomplete by omitting to state any material fact necessary to make such
information (taken as a whole) not misleading at such time in light of the
circumstances under which such information was provided. The projections and pro
                                                                             ---
forma financial information contained in such materials are based on good faith
- -----
estimates and assumptions believed by the Borrower to be reasonable at the time
made (it being recognized by the Lenders that such

                                     -33-
<PAGE>
 
projections as to future events are not to be viewed as facts and that actual
results during the period or periods covered by any such projections may differ
from the projected results and that such assumptions and estimates may prove to
be inaccurate).

             5.10  Financial Condition; Financial Statements.  (a)  On and as of
                   -----------------------------------------                    
the Closing Date, on a pro forma basis after giving effect to the Transaction
                       --- -----
(determined as if each Acquisition (other than the UI Acquisition) was
consummated on the Closing Date) and all Indebtedness incurred, and to be
incurred (including, without limitation, the Loans and the application of the
proceeds thereof), and Liens created, and to be created, by each Credit Party in
connection therewith, (x) the fair valuation of all of the tangible and
intangible assets of the Borrower and its Subsidiaries (on a consolidated basis)
will exceed their debts, (y) the Borrower and its Subsidiaries will not have
incurred or intended to incur debts beyond their ability to pay such debts as
such debts mature and (z) the Borrower and its Subsidiaries will not have
unreason ably small capital with which to conduct their business. For purposes
of this Section 6.10, "debt" means any liability on a claim, and "claim" means
(i) the right to payment whether or not such a right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured; or (ii) the right to an
equitable remedy for breach of performance if such breach gives rise to a
payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured
or unsecured.

             (b)  (i) The consolidated balance sheet of Ellensburg as at
December 31, 1997 and the related consolidated statements of operations and cash
flows for the period ended as of said date, which have been audited by Moss-
Adams LLP, who delivered an unqualified opinion in respect thereof, (ii) the
consolidated balance sheet of Taconic as at December 31, 1997 and the related
consolidated statements of operations and cash flows for the period ended as of
said date, which have been audited by KPMG Peat Marwick LLP, who delivered an
unqualified opinion in respect thereof, (iii) the consolidated balance sheet of
El Paso as at December 31, 1997 and the related consolidated statements of
operations and cash flows for the period ended as of said date, and (iv) the
consolidated balance sheet of Chouteau as at December 31, 1997 and the related
consolidated statements of operations and cash flows for the period ended as of
said date, copies of all of which have heretofore been furnished to each Lender,
present fairly the consolidated financial position of the respective Acquired
Companies at the dates of said statements and the results for the periods
covered thereby in accordance with GAAP, except to the extent provided in the
notes to said financial statements. All such financial statements have been
prepared in accordance with GAAP and practices consistently applied except to
the extent provided in the notes to said financial statements. The pro forma
                                                                   --- -----
consolidated balance sheet of the Borrower as of December 31, 1997, a copy of
which has heretofore been furnished to each Lender, presents a good faith
estimate of the consolidated pro forma financial condition of the Borrower
                             --- -----
(after giving effect to the Transaction, including the consummation of each
Acquisition (other than the UI Acquisition)

                                     -34-
<PAGE>
 
and all Indebtedness incurred or to be incurred in connection therewith) as at
the date thereof. Nothing has occurred since December 31, 1997 that has had or
is reasonably likely to have a Material Adverse Effect.

             (c)  Except as reflected in the financial statements described in
Section 5.10(b) or in the footnotes thereto, there were as of the Closing Date
no liabilities or obligations with respect to the Borrower or any of its
Subsidiaries (or any of the Acquired Companies) of a nature (whether absolute,
accrued, contingent or otherwise and whether or not due) which, either
individually or in aggregate, is reasonably likely to be material to the
Borrower and its Subsidiaries (after giving effect to each Acquisition other
than the UI Acquisition) taken as a whole, except as incurred in the ordinary
course of business consistent with past practices.

             5.11  Security Interests.  At any time on or after the Closing
                   ------------------                                      
Date, the Pledge Agreement creates, as security for the obligations purported to
be secured thereby, a valid and enforceable Lien on all of the Collateral
subject thereto at such time, at such time superior to and prior to the rights
of all third Persons and subject to no other Liens (except for Liens permitted
under Section 7.03(a)), in favor of the Collateral Agent for the benefit of the
Secured Creditors, which Lien has been perfected under applicable law. No
filings or recordings are required in order to perfect, or continue the
perfection of, the Lien on the Pledged Securities created under the Pledge
Agreement, except for filings or recordings required in connection with the
Pledge Agreement which shall have been made on or prior to the Closing Date or
as otherwise required in accordance with the terms of the Pledge Agreement.

             5.12  Acquisitions.  All representations and warranties by the
                   ------------                                            
Borrower or any Subsidiary thereof formed to effect any Acquisition set forth in
the Acquisition Documents relating to Acquisitions that have been consummated
and, to the knowledge of the Borrower, all representations and warranties made
by all other Persons in such Acquisition Documents, were true and correct in all
material respects as of the time such representations and warranties were made
and shall be true and correct in all material respects as of the date Term Loans
and/or RF Loans are incurred to finance such Acquisition as if such
representations and warranties were made on and as of such date, except to the
extent such representations and warranties expressly relate to an earlier date.

             5.13  Tax Returns and Payments.  Each of the Borrower and its
                   ------------------------                               
Subsidiaries has filed all federal income tax returns and all other material tax
returns, domestic and foreign, required to be filed by it and has paid all
material taxes and assessments payable by it which have become due, except for
those contested in good faith and adequately disclosed and fully provided for on
the financial statements of the Borrower and its Subsidiaries if and to the
extent required by GAAP. Each of the Borrower and its Subsi diaries has at all
times paid, or has provided adequate reserves (in the good faith judgment of the
management of 

                                     -35-
<PAGE>
 
the Borrower) for the payment of, all federal, state and foreign income taxes
applicable for all prior fiscal years which are still open for audit and for the
current fiscal year to date. There is no action, suit, proceeding,
investigation, audit, or claim now pending or, to the knowledge of the Borrower,
threatened by any authority regarding any taxes relating to the Borrower or any
of its Subsidiaries which is reasonably likely to have a Material Adverse
Effect.

          5.14  Compliance with ERISA.  (i) Annex IV sets forth each Plan and
                ---------------------                                        
Multiemployer Plan; (ii) except as set forth on Annex IV, each Plan (and each
related trust, insurance contract or fund) is in substantial compliance with its
terms and with all applicable laws, including without limitation ERISA and the
Code; each Plan which is intended to be qualified under Section 401(a) of the
Code has received a determination letter from the Internal Revenue Service to
the effect that it meets the requirements of Section 401(a) of the Code; except
as set forth on Annex IV, no Reportable Event has occurred with respect to a
Plan; to the knowledge of the Borrower, no Multiemployer Plan is insolvent or in
reorganization; except as set forth on Annex IV, no Plan has an Unfunded Current
Liability which, when added to the aggregate amount of Unfunded Current
Liabilities with respect to all other Plans, exceeds $750,000; no Plan which is
subject to Section 412 of the Code or Section 302 of ERISA has an accumulated
funding deficiency, within the meaning of such sections of the Code or ERISA, or
has applied for or received a waiver of an accumulated funding deficiency or an
extension of any amortization period, within the meaning of Section 412 of the
Code or Section 303 or 304 of ERISA; all contributions required to be made with
respect to a Plan or a Multiemployer Plan have been timely made; neither the
Borrower nor any Subsidiary nor any ERISA Affiliate has incurred any material
liability (including any indirect, contingent or secondary liability) to or on
account of a Plan or a Multiemployer Plan pursuant to Section 409, 502(i),
502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section
401(a)(29), 4971 or 4975 of the Code or reasonably expects to incur any such
liability under any of the foregoing sections with respect to any Plan or any
Multiemployer Plan; no condition exists which presents a material risk to the
Borrower or any Subsidiary or any ERISA Affiliate of incurring a material
liability to or on account of a Plan or, to the knowledge of the Borrower, of
any Multiemployer Plan pursuant to the foregoing provisions of ERISA and the
Code; no proceedings have been instituted to terminate or appoint a trustee to
administer any Plan which is subject to Title IV of ERISA; except as would not
result in any material liability, no action, suit, proceeding, hearing, audit or
investigation with respect to the administration, operation or the investment of
assets of any Plan (other than routine claims for benefits) is pending, or to
the best knowledge of the Borrower expected or threatened; using actuarial
assumptions and computation methods consistent with Part 1 of subtitle E of
Title IV of ERISA, the aggregate liabilities of the Borrower and its
Subsidiaries and its ERISA Affiliates to all Multiemployer Plans in the event of
a complete withdrawal therefrom, as of the close of the most recent fiscal year
of each such Plan ended prior to the date of the most recent Loan incurrence,
would not exceed $15,000; except as would not result in a material liability,
each group health plan (as defined

                                     -36-
<PAGE>
 
in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or
has covered employees or former employees of the Borrower, any Subsidiary or any
ERISA Affiliate has at all times been operated in compliance with the provisions
of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no
lien imposed under the Code or ERISA on the assets of the Borrower or any
Subsidiary or any ERISA Affiliate exists or is reasonably likely to arise on
account of any Plan; and the Borrower and its Subsidiaries do not maintain or
contribute to any employee welfare benefit plan (as defined in Section 3(1) of
ERISA) which provides benefits to retired employees or other former employees
(other than as required by Section 601 of ERISA) or any Plan the obligations
with respect to which could reasonably be expected to have a material adverse
effect on the ability of the Borrower to perform its obligations under this
Agreement.

          5.15  Subsidiaries.  On and as of the Closing Date and after giving
                ------------                                                 
effect to the consummation of the Acquisitions effected on such date, the
Borrower has no Subsidiaries other than those Subsidiaries listed on Annex III,
which correctly sets forth, as of the Closing Date and after giving effect to
the consummation of the Acquisitions effected on such date, the percentage
ownership (direct and indirect) of the Borrower in each class of capital stock
of each of its Subsidiaries and also identifies the direct owner thereof.

          5.16  Intellectual Property.  Each of the Borrower and its
                ---------------------                               
Subsidiaries owns or holds a valid transferable license to use all the patents,
trademarks, service marks, trade names, technology, know-how, copyrights,
licenses, franchises and formulas or rights with respect to the foregoing, that
are used in the operation of the business of the Borrower or such Subsidiary as
presently conducted and are material to such business where the failure to own
or hold a valid license is reasonably likely to have a Material Adverse Effect.

          5.17  Environmental Matters.  Each of the Borrower and its
                ---------------------                               
Subsidiaries is in material compliance with all applicable Environmental Laws
governing its business for which failure to comply is reasonably likely to have
a Material Adverse Effect, and neither the Borrower nor any of its Subsidiaries
is liable for any material penalties, fines or forfeitures for failure to comply
with any of the foregoing in the manner set forth above. All licenses, permits,
registrations or approvals required for the business of the Borrower and each of
its Subsidiaries under any Environmental Law have been secured and each of the
Borrower and its Subsidiaries is in substantial compliance therewith, except
such licenses, permits, registrations or approvals the failure to secure or to
comply therewith is not reasonably likely to have a Material Adverse Effect.
There are no Environmental Claims pending or, to the knowledge of the Borrower
threatened, against the Borrower or any of its Subsidiaries wherein any decision
ruling or finding is reasonably likely to have a Material Adverse Effect.

          5.18  Labor Relations.  No Credit Party is engaged in any unfair labor
                ---------------                                           
practice that is reasonably likely to have a Material Adverse Effect. There is
(i) no unfair

                                     -37- 
<PAGE>
 
labor practice complaint pending against any Credit Party or, to the Borrower's
knowledge, threatened against any of them, before the National Labor Relations
Board, and no grievance or arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against any Credit Party or, to
the Borrower's knowledge, threatened against any of them, (ii) no strike, labor
dispute, slowdown or stoppage pending against any Credit Party or, to the
Borrower's knowledge, threatened against any Credit Party and (iii) no union
representation question, to the Borrower's knowledge, existing with respect to
the employees of any Credit Party and no union organizing activities, to the
Borrower's knowledge, are taking place, except with respect to any matter
specified in clause (i), (ii) or (iii) above, either individually or in the
aggregate, such as is not reasonably likely to have a Material Adverse Effect.

          5.19  Compliance with Statutes, etc.  Each of the Borrower and its
                ------------------------------                              
Subsidiaries is in compliance with all applicable statutes, regulations and
orders of, and all applicable restrictions imposed by, all governmental bodies,
domestic or foreign, in respect of the conduct of its business and the owner
ship of its property, except such non-compliance as has not had, and is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect.

          SECTION 6.  Affirmative Covenants.  The Borrower hereby covenants and
                      ---------------------                                
agrees that until the Commitments have terminated, no Notes are outstanding and
the Loans, together with interest, Fees and all other Obligations (other than
any indemnities described in Section 11.13 which are not then owing) incurred
hereunder, are paid in full:

          6.01  Information Covenants.  The Borrower will furnish to each 
                ---------------------                                    
Lender:

          (a)   Annual Financial Statements.  Within 90 days after the close of
                ---------------------------                                 
each fiscal year of the Borrower, the consolidated and consolidating balance
sheet of the Borrower and the Intermediary Holding Companies, as at the end of
such fiscal year and the related consolidated and consolidating statements of
operations and of cash flows for such fiscal year, and in each case setting
forth comparative consolidated and consolidating figures for the preceding
fiscal year, and (x) in the case of consolidated statements, examined by
independent certified public accountants of recognized national standing whose
opinion shall not be qualified as to the scope of audit and as to the status of
the Borrower as a going concern or (y) in the case of consolidating statements,
certified by the chief financial officer of the Borrower, together with a
certificate of such accounting firm stating that in the course of its regular
audit of the business of the Borrower and the Intermediary Holding Companies,
which audit was conducted in accordance with generally accepted auditing
standards, no Default or Event of Default which has occurred and is continuing
has come to their attention or, if such a Default or Event of Default has come
to their attention a statement as to the nature thereof.

                                     -38-
<PAGE>
 
          (b)  Quarterly Financial Statements.  Within 45 days after the close
               ------------------------------                           
of each of the first three quarterly accounting periods in each fiscal year
commencing March 31, 1998, the consolidated and consolidating balance sheet of
the Borrower and the Intermediary Holding Companies, as at the end of such
quarterly period and the related consolidated and consolidating statements of
operations and of cash flows for such quarterly period and for the elapsed
portion of the fiscal year ended with the last day of such quarterly period, and
in each case setting forth comparative consolidated and consolidating figures
for the related periods in the prior fiscal year, all of which shall be in
reasonable detail and certified by the chief financial officer or controller of
the Borrower, subject to changes resulting from audit and normal year-end audit
adjustments.

          (c)  Monthly Reports.  Commencing April 30, 1998, within 45 days after
               ---------------                                            
after the end of each monthly accounting period of the fiscal years ended
December 31, 1998 and December 31, 1999 (other than the last monthly accounting
period in any such fiscal year), the internally prepared consolidating income
statements of the Borrower and the Intermediary Holding Companies for such
period, all of which shall be certified by the chief financial officer or
controller of the Borrower subject to changes resulting from audit and normal
year-end audit adjustments.

          (d)  Budgets; etc.  Not more than 30 days after the commencement of
               -------------                                                 
each fiscal year of the Borrower ending after the Closing Date, consolidated and
consolidating budgets of the Borrower and its Subsidiaries in reasonable detail
for each of the twelve months of such fiscal year as customarily prepared by
management for its internal use setting forth, with appropriate discussion, the
principal assumptions upon which such budgets are based. Together with each
delivery of consolidated financial statements pursuant to Sections 6.01(a), (b)
and (c), a comparison of the current year-to-date consolidated financial results
for the Borrower against the consolidated budget of the Borrower required to be
submitted pursuant to this clause (d) shall be presented.

          (e)  Officer's Certificates.  At the time of the  delivery of the
               ----------------------                                      
financial statements provided for in Sections 6.01(a), (b) and (c), a
certificate of the chief financial officer, controller or other Authorized
Officer of the Borrower to the effect that no Default or Event of Default exists
or, if any Default or Event of Default does exist, specifying the nature and
extent thereof, which certificate in the case of the certificate delivered
pursuant to Sections 6.01(a) and (b), shall set forth the calculations required
to establish (I) the Leverage Ratio as at the last day of the fiscal year or
fiscal quarter covered by such financial statements and (II) whether the
Borrower and its Subsidiaries were in compliance with the provisions of Sections
7.11, 7.12 and 7.13 as at the end of such fiscal period.

          (f)  Notice of Default or Litigation.  Promptly, and in any event
               -------------------------------                             
within five Business Days after any officer of the Borrower obtains knowledge
thereof, notice of (x) the occurrence of any event which constitutes a Default
or Event of Default, which notice shall

                                     -39-
<PAGE>
 
specify the nature thereof, the period of existence thereof and what action the
Borrower proposes to take with respect thereto and (y) the commencement of, or
any significant adverse development in, any litigation or governmental
proceeding pending against the Borrower or any of its Subsidiaries which has had
or is reasonably likely to have a Material Adverse Effect or has had or is
reasonably likely to have a material adverse effect on the ability of the Credit
Parties to perform their obligations under the Credit Documents.

          (g)   Other Information. Promptly upon transmission thereof, copies of
                -----------------
any filings and registrations with, and reports to, the Securities and Exchange
Commission or any successor thereto (the "SEC") by the Borrower or any of its
Subsidiaries, and with reasonable promptness, such other information or
documents (financial or otherwise) as the Administrative Agent on its own behalf
or on behalf of the Required Lenders may reasonably request from time to time.

          6.02  Books, Records and Inspections.  The Borrower will, and will 
                ------------------------------                              
cause its Subsidiaries to, permit, upon reasonable notice to the chief financial
officer, controller or any other Authorized Officer of the Borrower, officers
and designated representatives of the Administrative Agent or the Required
Lenders to visit and inspect any of the properties or assets of the Borrower and
any of its Subsidiaries in their possession and to examine the books of account
of the Borrower and any of its Subsidiaries and discuss the affairs, finances
and accounts of the Borrower and of any of its Subsidiaries with, and be advised
as to the same by, its and their officers and independent accountants, all at
such reasonable times and intervals during normal business hours and to such
reasonable extent as the Administrative Agent or the Required Lenders may
desire.

          6.03  Insurance.  The Borrower will, and will cause each of its
                ---------                                                
Subsidiaries to, at all times maintain in full force and effect insurance with
reputable and solvent insurers in such amounts, covering such risks and
liabilities and with such deductibles or self-insured retentions as are in
accordance with normal industry practice. The Borrower will, and will cause each
of its Subsidiaries to, furnish to the Administrative Agent on the Closing Date
and thereafter annually, upon request of the Administrative Agent, a summary of
the insurance carried.

          6.04  Payment of Taxes.  The Borrower will pay and discharge, and will
                ----------------                                           
cause each of its Subsidiaries to pay and discharge, all taxes, assessments and
governmental charges or levies imposed upon it or upon its income or profits, or
upon any properties belonging to it, prior to the date on which penalties attach
thereto, and all lawful claims which, if unpaid, would become a Lien or charge
upon any material properties of the Borrower or any of its Subsidiaries,
provided that neither the Borrower nor any Subsidiary shall be required to pay
any such tax, assessment, charge, levy or claim which is being contested in good
faith and by proper proceedings if it has maintained adequate reserves (in the

                                     -40-
<PAGE>
 
good faith judgment of the management of the Borrower) with respect thereto
in accordance with GAAP.

          6.05  Corporate Franchises.  The Borrower will do, and will cause each
                --------------------                                       
Subsidiary to do, or cause to be done, all things reasonably necessary to
preserve and keep in full force and effect its existence and to preserve its
material rights and franchises, other than those the failure to preserve which
could not reasonably be expected to have a Material Adverse Effect, provided
that any transaction permitted by Section 7.02 will not constitute a breach of
this Section 6.05.

          6.06  Compliance with Statutes, etc.  The Borrower will, and will
                ------------------------------                             
cause each Subsidiary to, comply with all applicable statutes, regulations and
orders of, and all applicable restrictions imposed by, all governmental bodies,
domestic or foreign (including all Environmental Laws), in respect of the
conduct of its business and the ownership of its property other than those the
non-compliance with which is not reasonably likely to have a Material Adverse
Effect or have a material adverse effect on the ability of the Credit Parties to
perform their obligations under the Credit Documents.

          6.07  ERISA.  As soon as possible and, in any event, within 10 days
                -----                                                        
after the Borrower knows or has reason to know of the occurrence of any of the
following, the Borrower will deliver to each of the Lenders a certificate of the
chief financial officer of the Borrower setting forth the full details as to
such occurrence and the action, if any, that the Borrower, any Subsidiary or any
ERISA Affiliate is required or proposes to take, together with any notices
required or proposed to be given to or filed with or by the Borrower, any
Subsidiary, any ERISA Affiliate, the PBGC, a Plan or Multiemployer Plan
participant or the Plan administrator with respect thereto: that a Reportable
Event has occurred (except to the extent that the Borrower has previously
delivered to the Lender a certificate and notices (if any) concerning such event
pursuant to the next clause hereof); that a contributing sponsor (as defined in
Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA is subject
to the advance reporting requirement of PBGC Regulation Section 4043.61 (without
regard to subparagraph (b)(1) thereof), and an event described in sub section
 .62, .63, .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 is
reasonably expected to occur with respect to such Plan within the following 30
days; that an accumulated funding deficiency, within the meaning of Section 412
of the Code or Section 302 of ERISA, has been incurred or an application may
reasonably be expected to be or has been made for a waiver or modification of
the minimum funding standard (including any required installment payments) or an
extension of any amortization period under Section 412 of the Code or Section
303 or 304 of ERISA with respect to a Plan; that any contribution required to be
made with respect to a Plan or Multiemployer Plan has not been timely made; that
a Plan or Multiemployer Plan has been or may be reasonably be expected to be
terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA; that a Plan has an Unfunded Current Liability which, when added to the
aggregate amount of Unfunded Current Liabilities with respect to

                                     -41-
<PAGE>
 
all other Plans, exceeds the aggregate amount of such Unfunded Current
Liabilities that existed on the Closing Date by $100,000; that proceedings may
reasonably be expected to be or have been instituted to terminate or appoint a
trustee to administer a Plan which is subject to Title IV of ERISA; that a
proceeding has been instituted pursuant to Section 515 of ERISA to collect a
delinquent contribution to a Multiemployer Plan; that the Borrower, any
Subsidiary or any ERISA Affiliate will or may reasonably be expected to incur
any material liability (including any indirect, contingent, or secondary
liability) to or on account of the termination of or withdrawal from a Plan or
Multiemployer Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of
ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of
the Code or Section 409 or 502(i) or 502(l) of ERISA or with respect to a group
health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the
Code) under Section 4980B of the Code; or that the Borrower or any Subsidiary
may incur any material liability pursuant to any employee welfare benefit plan
(as defined in Section 3(1) of ERISA) that provides benefits to retired
employees or other former employees (other than as required by Section 601 of
ERISA) or any Plan in addition to the liability that existed on the Closing Date
pursuant to any such plan or plans. Upon request by any Lender, the Borrower
will deliver to such Lender a complete copy of the annual report (on Internal
Revenue Service Form 5500-series) of each Plan (including, to the extent
required, the related financial and actuarial statements and opinions and other
supporting statements, certifications, schedules and information) required to be
filed with the Internal Revenue Service. In addition to any certificates or
notices delivered to the Lenders pursuant to the first sentence hereof, copies
of any records, documents or other information required to be furnished to the
PBGC, and any material notices received by the Borrower, any Subsidiary or any
ERISA Affiliate with respect to any Plan or Multiemployer Plan shall be
delivered to the Lender no later than 10 days after the date such records,
documents and/or information has been furnished to the PBGC or such notice has
been received by the Borrower, the Subsidiary or the ERISA Affiliate, as
applicable.

          6.08  Good Repair.  The Borrower will, and will cause each of its
                -----------                                                
Subsidiaries to, ensure that its material properties and equipment used or
useful in its business are kept in good repair, working order and condition,
normal wear and tear excepted, and, subject to Section 7.05, that from time to
time there are made in such properties and equipment all needful and proper
repairs, renewals, replacements, extensions, additions, betterments and
improvements thereto, to the extent and in the manner useful or customary for
companies in similar businesses.

          6.09  End of Fiscal Years; Fiscal Quarters.  The Borrower will, for
                ------------------------------------                         
financial reporting purposes, cause (i) each of its, and each of its
Subsidiaries', fiscal years and fourth fiscal quarters to end on December 31 of
each year and (ii) each of its, and each of its Subsidiaries', first three
fiscal quarters to end on the last day of March, June and September of each
year.

                                     -42-
<PAGE>
 
          6.10  Interest Rate Agreement.  The Borrower will enter into Interest
                -----------------------                               
Rate Agreements reasonably satisfactory to the Agents (x) no later than the date
occurring 30 days after the Closing Date, to the extent, if any, necessary so
that at least 25% of the aggregate outstanding principal amount of the
Consolidated Debt at the time of the entering into of any such Interest Rate
Agreement has a fixed interest rate or is covered by such Interest Rate
Agreements for a period of at least two years following the Closing Date and (y)
no later than the date occurring nine months after the Closing Date, to the
extent, if any, necessary so that at least 50% of outstanding Consolidated Debt
at the time of the entering into of any such Interest Rate Agreement has a fixed
interest rate or is covered by such Interest Rate Agreements for a period of at
least two years following the Closing Date.

          6.11  Approvals.  The Borrower will use reasonable best efforts to
                ---------                                                   
obtain as promptly as practicable after (i) the Closing Date, the approvals set
forth in Annex VIII and (ii) the consummation of any Permitted Acquisition, any
approvals not obtained on or prior to the date of the consummation of such
Permitted Acquisition, provided that (x) it shall not be a default under this
Section 6.11 if the Borrower fails to obtain any such approval, after having
used reasonable best efforts to obtain same and (y) the Borrower may cease to
seek to obtain any such approvals if it has been advised by counsel or the
applicable governmental agency that it will not, or is not reasonably likely to,
obtain such approval, provided further that, in the event the Borrower is able
to obtain any approval required to be obtained in accordance with the terms of
this Section 6.11, the Borrower shall use reasonable best efforts to obtain as
promptly as practicable after receipt of such approval, an opinion of local
counsel reasonably satisfactory to the Administrative Agent covering the
regulatory aspects of the respective Acquisition or Permitted Acquistion, as the
case may be, which opinion shall be in form and substance reasonably
satisfactory to the Administrative Agent.

          6.12  CoBank Capital.  The Borrower will purchase such participation 
                --------------                                  
certificates in CoBank as CoBank may require from time to time in accordance
with its bylaws. The Borrower hereby consents and agrees that the amount of any
distributions with respect to its patronage with CoBank that are made in
qualified written notices of allocation (as defined in 26 U.S.C. 1388) and that
are received by the Borrower from CoBank, will be taken into account by the
Borrower at their stated Dollar amounts whether the distribution be evidenced by
a participation certificate or other form of written notice that such
distribution has been made and recorded in the name of the Borrower on the
records of CoBank.

          SECTION 7.  Negative Covenants.  The Borrower hereby covenants and
                      ------------------                                    
agrees that until the Commitments have terminated, no Notes are outstanding and
the Loans, together with interest, Fees and all other Obligations (other than
any indemnities described in Section 11.13 which are not then owing) incurred
hereunder, are paid in full:

          7.01  Changes in Business.  The Borrower will not permit at any time
                -------------------                                      
the business activities taken as a whole conducted by the Borrower and its
Subsidiaries to be

                                     -43-
<PAGE>
 
materially different from the business activities taken as a whole (including
incidental activities) conducted by the Borrower and its Subsidiaries on the
Closing Date (determined as if all the Acquisitions were consummated on such
date) and businesses reasonably related thereto (the "Business").

          7.02  Consolidation, Merger, Sale or Purchase of Assets, etc.  The
                -------------------------------------------------------     
Borrower will not, and will not permit any Subsidiary to, wind up, liquidate or
dissolve its affairs, or enter into any transaction of merger or consolidation,
or convey, sell, lease or otherwise dispose of all or any part of its property
or assets (other than inventory or obsolete equipment or excess equipment no
longer needed in the conduct of the business in the ordinary course of business)
or purchase, lease or otherwise acquire all or any part of the property or
assets of any Person (other than purchases or other acquisitions of inventory,
leases, materials and equipment in the ordinary course of business) or agree to
do any of the foregoing at any future time without a contingency relating to
obtaining any required approval hereunder, except that the following shall be
permitted:

          (a)   (i) any Subsidiary may be merged or consolidated with or into,
     or be liquidated into, the Borrower or a Subsidiary Guarantor (so long as
     the Borrower or such Subsidiary Guarantor is the surviving corporation), or
     all or any part of its business, properties and assets may be conveyed,
     sold or transferred to the Borrower or any Subsidiary Guarantor, provided
                                                                      --------
     that neither the Borrower nor any Subsidiary Guarantor may be a party to
     any merger, consolidation or liquidation otherwise permitted by this clause
     (a) (i) involving a Person that is not a Subsidiary except in connection
     with a Permitted Acquisition, (ii) any Subsidiary that is not a Subsidiary
     Guarantor may be merged or consolidated with or into, or convey, sell or
     transfer its assets to, another Subsidiary that is not a Subsidiary
     Guarantor, provided that if the stock of either such Person was pledged
     pursuant to the Pledge Agreement the stock of the surviving entity or the
     transferee entity, as the case may be, shall also be pledged pursuant to a
     Pledge Agreement and (iii) each of Chautauqua & Erie Telephone Company and
     ST Long Distance Corporation may transfer CLEC assets to MJD TeleChoice, so
     long as the aggregate fair market value of all such assets so transferred
     by such Persons (determined in good faith by senior management of the
     Borrower) on and after the Closing Date does not exceed $5,000,000,
     provided that no such merger or consolidation otherwise permitted above
     between a Pledged Subsidiary and Non-Pledged Subsidiary, and no such
     conveyance, sale or transfer by a Pledged Subsidiary to a Non-Pledged
     Subsidiary, shall be permitted unless, after giving effect thereto, the Pro
     Forma EBITDA Test is satisfied;

          (b)   capital expenditures to the extent within the limitations set
     forth in Section 7.05 hereof;

                                     -44-
<PAGE>
 
          (c)  the investments, acquisitions and transfers or dispositions of
     properties permitted pursuant to Section 7.06;

          (d)  each of the Borrower and any Subsidiary may lease (as lessee)
     real or personal property in the ordinary course of business (so long as
     such lease does not create a Capitalized Lease Obligation not otherwise
     permitted by Section 7.04(c));

          (e)  licenses or sublicenses by the Borrower and its Subsidiaries of
     intellectual property in the ordinary course of business, provided, that
                                                               --------      
     such licenses or sublicenses shall not interfere with the business of the
     Borrower or any Subsidiary;

          (f)  (i) sales or dispositions of Non-Core Assets to the extent that
     the aggregate Net Cash Proceeds received from all such sales and
     dispositions permitted by this clause (f)(i) shall not exceed $40,000,000
     in the aggregate and $25,000,000 in any fiscal year of the Borrower and
     (ii) additional sales or dispositions of assets to the extent that the
     aggregate Net Cash Proceeds received from all such sales and dispositions
     permitted by this clause (f)(ii) shall not exceed $2,500,000 in any fiscal
     year of the Borrower, provided that (x) each such sale or disposition
     pursuant to this clause (f) shall be in an amount at least equal to the
     fair market value thereof and for proceeds consisting of at least 85% cash
     and (y) the Net Cash Proceeds of any such sale are applied to repay the
     Loans to the extent required by Section 3.02(A)(c), provided further that
                                                         ----------------
     the sale or disposition of the capital stock of any Subsidiary of the
     Borrower pursuant to this clause (f) shall be prohibited unless it is for
     all of the outstanding capital stock of such Subsidiary owned by the
     Borrower and its Subsidiaries;

          (g)  the Acquisitions;

          (h)  leases and subleases permitted under Section 7.03(d) and (g);
     and

          (i)  Permitted Acquisitions.

          7.03 Liens.  The Borrower will not, and will not permit any of its
               -----                                                        
Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with
respect to any property or assets of any kind (real or personal, tangible or
intangible) of the Borrower or any such Subsidiary whether now owned or
hereafter acquired, or sell any such property or assets subject to an
understanding or agreement, contingent or otherwise, to repurchase such property
or assets (including sales of accounts receivable or notes with recourse to the
Borrower or any of its Subsidiaries) or assign any right to receive income,
except:

                                     -45-
<PAGE>
 
          (a)  Liens for taxes not yet delinquent or Liens for taxes being
     contested in good faith and by appropriate proceedings for which adequate
     reserves (in the good faith judgment of the management of the Borrower)
     have been established;

          (b)  Liens in respect of property or assets of the Borrower or any of
     its Subsidiaries imposed by law which were incurred in the ordinary course
     of business, such as carriers', warehousemen's and mechanics' Liens,
     statutory landlord's Liens, and other similar Liens arising in the ordinary
     course of business, and (x) which do not in the aggregate materially
     detract from the value of such property or assets or materially impair the
     use thereof in the operation of the business of the Borrower or any of its
     Subsidiaries or (y) which are being contested in good faith by appropriate
     proceedings, which proceedings have the effect of preventing the forfeiture
     or sale of the property or asset subject to such Lien;

          (c)  Liens created by or pursuant to this Agreement or the other
     Credit Documents;

          (d)  Liens created pursuant to (x) Capital Leases in respect of
     Capitalized Lease Obligations permitted by Section 7.04(c) and (y) Capital
     Leases securing Permitted MJD Capital Debt;

          (e)  Liens arising from judgments, decrees or attachments and Liens
     securing appeal bonds arising from judgments, in each case in circumstances
     not constituting an Event of Default under Section 8.09;

          (f)  Liens (other than any Lien imposed by ERISA) incurred or deposits
     made in the ordinary course of business in connection with workers'
     compensation, unemployment insurance and other types of social security, or
     to secure the performance of tenders, statutory obligations, surety and
     appeal bonds, bids, leases, government contracts, performance and 
     return-of-money bonds and other similar obligations incurred in the
     ordinary course of business (exclusive of obligations in respect of the
     payment for borrowed money);

          (g)  leases or subleases granted to others not interfering in any
     material respect with the business of the Borrower or any of its
     Subsidiaries;

          (h)  easements, rights-of-way, restrictions, minor defects or
     irregularities in title and other similar charges or encumbrances not
     interfering in any material respect with the ordinary conduct of the
     business of the Borrower or any of its Subsidiaries;

          (i)  Liens arising from precautionary UCC financing statement filings
     regarding operating leases entered into by the Borrower or any of its
     Subsidiaries in the

                                     -46-
<PAGE>
 
     ordinary course of business and statutory and common law landlords' liens
     under leases to which the Borrower or any of its Subsidiaries is a party;

          (j)  purchase money Liens securing payables arising from the purchase
     by the Borrower or any Subsidiary Guarantor of any equipment or goods in
     the normal course of business, provided that such payables shall not
     constitute Indebtedness;

          (k)  any interest or title of a lessor under any lease permitted by
     this Agreement;

          (l)  Liens in existence on, and which are to continue in effect after,
     the Closing Date which are listed, and the property subject thereto
     described in, Annex V, plus extensions and renewals of such Liens, provided
     that (x) the aggregate principal amount of the Indebtedness, if any,
     secured by such Liens does not increase from that amount outstanding at the
     time of any such extension or renewal and (y) any such extension or renewal
     does not encumber any additional assets or properties of the Borrower or
     any of its Subsidiaries;

          (m)  Liens arising pursuant to purchase money mortgages or security
     interests securing Indebtedness representing the purchase price (or
     financing of the purchase price within 90 days after the respective
     purchase) of assets acquired by the Borrower or any Subsidiary after the
     Closing Date, provided that (x) any such Liens attach only to the assets so
     acquired, (y) the Indebtedness secured by any such Lien does not exceed
     100%, nor is less than 70%, of the lesser of the fair market value or
     purchase price of the property being purchased at the time of the 
     incurrence of such Indebtedness and (z) all Indebtedness secured by Liens
     created pursuant to this clause (m) (other than Permitted MJD Capital Debt)
     shall not exceed $5,000,000 at any time outstanding;

          (n)  if (x) the Taconic Acquisition is consummated, Liens on assets of
     Taconic existing on the Closing Date and securing the Indebtedness of
     Taconic permitted by Section 7.04(f)(i); and (y) the UI Acquisition is
     consummated, Liens on assets of UI existing on the Closing Date and
     securing the Indebtedness of UI permitted by Section 7.04(f)(iii); and

          (o)  Liens on property or assets acquired pursuant to a Permitted
     Acquisition, or on property or assets of a Person in existence at the time
     such Person is acquired pursuant to a Permitted Acquisition, in each case
     securing Permitted Acquired Debt, provided that (x) such Liens do not
                                       --------                    
     attach to the capital stock of any Subsidiary of the Borrower and (y) such
     Liens existed prior to, and were not incurred in contemplation of, such
     Permitted Acquisition and do not attach to any other asset of the Borrower
     or any of its Subsidiaries.

                                     -47-
<PAGE>
 
          7.04  Indebtedness.  The Borrower will not, and will not permit any
                ------------                                                 
of its Subsidiaries to, contract, create, incur, assume or suffer to exist any
Indebtedness, except:

          (a)   Indebtedness incurred pursuant to this Agreement and the other
     Credit Documents;

          (b)   Indebtedness owing by (i) any Subsidiary Guarantor to another
     Subsidiary Guarantor or the Borrower, (ii) the Borrower to any Subsidiary
     Guarantor, (iii) any Subsidiary that is not a Subsidiary Guarantor to any
     other Subsidiary that is not a Subsidiary Guarantor, (iv) the Borrower or
     any Subsidiary Guarantor to any Subsidiary that is not a Subsidiary
     Guarantor, so long as such Indebtedness is subordinated to the Obligations
     on a basis satisfactory to the Administrative Agent and/or (v) any
     Subsidiary that is not a Subsidiary Guarantor to the Borrower and/or a
     Subsidiary Guarantor, so long as such Indebtedness constitutes a senior
     obligation and is evidenced by an intercompany note (which may be a grid
     note) pledged to the Collateral Agent pursuant to the Pledge Agreement;

          (c)   Capitalized Lease Obligations initially incurred after the
     Closing Date, provided that the aggregate Capitalized Lease Obligations
     (exclusive of Permitted MJD Capital Debt) outstanding at any time under all
     Capital Leases entered into after Closing Date shall not exceed $2,000,000;

          (d)   Indebtedness under Interest Rate Agreements to the extent
     entered into in compliance with Section 6.10;

          (e)   Indebtedness incurred pursuant to purchase money mortgages
     permitted by Section 7.03(m);

          (f)   if (i) the Taconic Acquisition is consummated and after giving
     effect thereto, up to $7 million of Indebtedness of Taconic, to the extent
     existing on the Closing Date, may remain outstanding after such
     consummation, less the aggregate amount of all repayments of principal
     thereon effected after the Closing Date, (ii) the Chouteau Acquisition is
     consummated and after giving effect thereto, up to $7 million of
     subordinated Indebtedness of the Borrower, in form and substance
     satisfactory to the Agents, that is issued in connection with such
     consummation less any repayments of principal made thereon and (iii) the UI
     Acquisition is consummated and after giving effect thereto, up to $12.51
     million of Indebtedness of UI, to the extent existing on the Closing Date,
     may remain outstanding after such consummation, less the aggregate amount
     of all repayments of principal thereon effected after the Closing Date;

                                     -48-
<PAGE>
 
          (g)   Indebtedness (the "Existing Indebtedness") in existence on, and
     which is to continue in effect after, the Closing Date and which is listed
     on Annex VI hereto, without giving effect to any subsequent extension,
     renewal or refinancing thereof except as permitted pursuant to Section
     7.04(l);

          (h)   Indebtedness of the Borrower or any of its Subsidiaries which
     may be deemed to exist in connection with agreements providing for
     indemnification, purchase price adjustments and similar obligations in
     connection with Permitted Acquisitions, Acquisitions or sales of assets
     permitted by this Agreement (so long as any such obligations are those of
     the Person making the respective acquisition or sale, and are not
     guaranteed by any other Person);

          (i)   Permitted Acquired Debt;

          (j)   Permitted Subordinated Debt to the extent (I) the proceeds
     thereof are utilized to repay Loans to the extent required by Section
     3.02(A)(a)(iii) and/or 3.02(A)(d) and (II) after giving effect to any
     incurrence of Permitted Subordinated Debt (and the use of the proceeds
     thereof), Section 7.12 shall be complied with as of the last day of the
     last fiscal quarter then ended (determined as if such Permitted
     Subordinated Debt had been issued on such last day);

          (k)   Permitted MJD Capital Debt;

          (l)   Permitted Refinancing Indebtedness, so long as no Default or
     Event of Default is in existence at the time of the incurrence thereof and
     immediately after giving effect thereto;

          (m)   Indebtedness of the Borrower consisting of (i) CLEC Back-Stop
     Letters of Credit and reimbursement obligations with respect thereto, so
     long as the aggregate outstanding stated amounts of all such letters of
     credit and reimbursement obligations do not exceed $1,000,000 at any time
     and (ii) Permitted Letters of Credit and reimbursement obligations with
     respect thereto, so long as the aggregate outstanding stated amounts of all
     such letters of credit and reimbursement obligations do not exceed
     $1,000,000 at any time; and

          (n)   additional unsecured Indebtedness of the Borrower and the
     Subsidiary Guarantors not to exceed an aggregate outstanding principal
     amount of $5.0 million at any time.

          7.05  Capital Expenditures.  (a)  The Borrower will not, and will not
                --------------------                                           
permit any of its Subsidiaries to, incur Consolidated Capital Expenditures,
provided that the Borrower and its Subsidiaries may make (i) Permitted CLEC
Expenditures and (ii) Other

                                     -49-
<PAGE>
 
Consolidated Capital Expenditures not to exceed in the aggregate in any fiscal
year an amount equal to 30% of Consolidated EBITDA for such fiscal year.

          (b)   In the event that the maximum amount which is permitted to be
expended in respect of Other Consolidated Capital Expenditures during any fiscal
year pursuant to Section 7.05(a) (without giving effect to this clause (b)) is
not fully expended during such fiscal year, the maximum amount which may be
expended during the immediately succeeding fiscal year pursuant to Section
7.05(a) shall be increased by such unutilized amount.

          7.06  Advances, Investments and Loans.  The Borrower will not, and 
                -------------------------------                             
will not permit any of its Subsidiaries to, lend money or credit or make
advances to any Person, or purchase or acquire any stock, obligations or
securities of, or any other interest in, or make any capital contribution to any
Person, except:

          (a)   the Borrower or any Subsidiary may invest in cash and Cash
     Equivalents;

          (b)   the Borrower and any Subsidiary may acquire and hold receivables
     owing to them, if created or acquired in the ordinary course of business
     and payable or dischargeable in accordance with customary trade terms
     and/or reasonable extensions thereof;

          (c)   the intercompany Indebtedness described in Section 7.04(b) shall
     be permitted;

          (d)   loans and advances to officers, directors and employees in the
     ordinary course of business (x) for relocation purposes and/or the purchase
     from the Borrower of the capital stock (or options or warrants relating
     thereto) of the Borrower and (y) otherwise in an aggregate principal amount
     not to exceed $1 million at any time outstanding shall be permitted;

          (e)   the Borrower and each Subsidiary may acquire and own investments
     (including debt obligations) received in connection with the bankruptcy or
     reorganization of suppliers and customers and in settlement of delinquent
     obligations of, and other disputes with, customers and suppliers arising in
     the ordinary course of business;

          (f)   Interest Rate Agreements entered into pursuant to Section 6.10
     shall be permitted;

          (g)   advances, loans and investments in existence on the Effective
     Date and listed on Annex VII, without giving effect to any additions
     thereto or replacements thereof, shall be permitted;

                                     -50-
<PAGE>
 
          (h)   the Borrower and each Subsidiary may make capital contributions
     (i) to any of their Subsidiaries to the extent a Subsidiary Guarantor and
     (ii) to any Subsidiary that is not a Subsidiary Guarantor, if after giving
     effect thereto the aggregate capital contributions (net of any return
     thereon) made after the Closing Date permitted pursuant to this clause (ii)
     shall not exceed an amount equal to 25% of the Consolidated Capital
     Expenditures permitted to be made by the Borrower and its Subsidiaries
     during the then fiscal year of the Borrower;

          (i)   Subsidiaries may be established or created in accordance with
     the provisions of Section 7.07;

          (j)   Acquisitions and Permitted Acquisitions shall be permitted;

          (k)   investments constituting, or to be used to make, Permitted CLEC
     Expenditures by the Borrower and its Subsidiaries in any corporation that
     is (or, after giving effect to such investment, will be) directly or
     indirectly wholly-owned by the Borrower to the extent such corporation is
     engaged in no business other than the competitive local exchange carrier
     business (any such corporation, a "CLEC Company");

          (l)   loans and investments not otherwise permitted by the foregoing
     clauses (a) through (k), provided that the aggregate amount of the loans
     and investments made pursuant to this clause (l) shall not exceed
     $2,000,000; and

          (m)   the Borrower and its Subsidiaries may acquire and hold
     investments consisting of non-cash consideration received from sales of
     assets effected in accordance with the requirements of Sections 7.02(f).

          7.07  Limitation on Creation of Subsidiaries.  The Borrower will not,
                --------------------------------------                         
and will not permit any Subsidiary to, establish, create or acquire any direct
Subsidiary; provided that the Borrower and its Subsidiaries shall be permitted
to establish, create or acquire Wholly-Owned Subsidiaries (or 90%-Owned
Subsidiaries in the case of Telcos), so long as (i) 100% of the capital stock of
such new Subsidiary (if a Parent Company) or at least 90% of the capital stock
of such new Subsidiary (if a TelCo) is pledged pursuant to the Pledge Agreement
(provided that the stock of any new TelCo acquired or created pursuant to a
Permitted Acquisition shall not have to be pledged if, after giving effect to
the acquisition or creation thereof, the Pro Forma EBITDA Test is satisfied) and
the certificates representing such stock, together with stock powers duly
executed in blank, are delivered to the Collateral Agent and (ii) such new
Subsidiary executes a counterpart of the Subsidiary Guaranty (in the case of a
new Intermediary Holding Company) and/or the Pledge Agreement (in the case of a
new Parent Company), in each case on the same basis (and to the same extent) as
such

                                     -51-
<PAGE>
 
Subsidiary would have executed such Credit Documents if it were a Credit Party
on the Closing Date.

          7.08  Modifications.  The Borrower will not, and will not permit any
                -------------                                                 
of its Subsidiaries to:

          (a)   make (or give any notice in respect thereof) any voluntary or
     optional payment or prepayment or redemption or acquisition for value of
     (including, without limitation, by way of depositing with the trustee with
     respect thereto money or securities before due for the purpose of paying
     when due) or exchange of any Permitted Acquired Debt, any Indebtedness
     permitted by Section 7.04(f), any Permitted Subordinated Debt, any
     Permitted Refinancing Indebtedness or any Existing Indebtedness, provided
     that (i) the respective obligor may refinance any of the foregoing
     Indebtedness with the proceeds of Permitted Refinancing Indebtedness so
     long as no Default or Event of Default is in existence at the time of the
     incurrence of such Permitted Refinancing Indebtedness and immediately after
     giving effect thereto and (ii) in the event the Borrower has made a Special
     PSD Election and the Ellensberg Acquisition has not been consummated prior
     to the date occurring 45 days after such Special PSD Election, the Borrower
     may effect the Permitted PSD Repurchase;

          (b)   amend or modify (or permit the amendment or modification of) in
     any manner adverse to the interests of the Lenders, any provisions of any
     Permitted Acquired Debt, any Permitted Refinancing Indebtedness, any
     Indebtedness permitted by Section 7.04(f), any Permitted Subordinated Debt
     or any Existing Indebtedness; and/or

          (c)   amend, modify or change in any manner adverse to the interests
     of the Lenders the organizational documents (including by-laws) of any
     Credit Party, the Existing Warrants, any agreement entered into by the
     Borrower with respect to its capital stock, or any Acquisition Document or
     enter into any new agreement in any manner adverse to the interests of the
     Lenders with respect to the capital stock of the Borrower.

          7.09  Dividends, etc.  (a)  The Borrower will not, and will not permit
                ---------------                                          
any of its Subsidiaries to, declare or pay any dividends (other than dividends
payable solely in capital stock of such Person) or return any capital to, its
stockholders, members and/or other owners or authorize or make any other
distribution, payment or delivery of property or cash to its stockholders,
members and/or other owners as such, or redeem, retire, purchase or otherwise
acquire, directly or indirectly, for a consideration, any shares of any class of
its capital stock or other ownership interests now or hereafter outstanding (or
any warrants for or options or stock appreciation rights in respect of any of
such shares), or set aside any 

                                     -52-
<PAGE>
 
funds for any of the foregoing purposes, or permit any of its Subsidiaries to
purchase or otherwise acquire for consideration any shares of any class of the
capital stock or other ownership interests of the Borrower or any other
Subsidiary, as the case may be, now or hereafter outstanding (or any options or
warrants or stock appreciation rights issued by such Person with respect to its
capital stock) (all of the foregoing "Dividends"), except that:

          (i)    any Subsidiary may pay dividends or return capital or make
     distributions and other similar payments with regard to its capital stock
     or other membership interests to the Borrower or to another Subsidiary;

          (ii)   the Borrower or any of its Subsidiaries may purchase the
     Minority Shares for an aggregate purchase price not to exceed $750,000;

          (iii)  the Borrower, STE or Sidney Telephone may retire or redeem all
     the Existing Warrants on or after the Closing Date with the proceeds of
     Loans for the price required by the terms thereof, provided that none of
     the Borrower, STE or Sidney Telephone shall voluntarily agree to a price to
     be paid for the Existing Warrants (as opposed to a determination of such
     price by third parties as provided in the Existing Warrants) without the
     consent of the Agents (which consent shall not be unreasonably withheld);

          (iv)   the Preferred Repurchase shall be permitted to be effected; and

          (v)    the Borrower may redeem or repurchase its stock (or options,
     warrants and/or appreciation rights in respect thereof) from shareholders,
     officers, employees, consultants and directors (or their estates) upon the
     death, permanent disability, retirement or termination of employment of any
     such Person or otherwise in accordance with any shareholder agreement,
     stock option plan or any employee stock ownership plan provided that (x) no
     Default or Event of Default is then in existence or would arise therefrom
     and (y) the aggregate amount of all cash paid in respect of all such
     shares, options, warrants and rights so redeemed or repurchased in any
     calendar year, does not exceed $1 million;

          (b)  The Borrower will not, and will not permit any of its
Subsidiaries to, create or otherwise cause or suffer to exist (other than as a
result of a requirement of law) any encumbrance or restriction which prohibits
or otherwise restricts (A) the ability of any Subsidiary to (a) pay dividends or
make other distributions or pay any Indebtedness owed to the Borrower or any
Subsidiary, (b) make loans or advances to the Borrower or any Subsidiary, (c)
transfer any of its properties or assets to the Borrower or any Subsidiary or
(B) the ability of any Subsidiary to create, incur, assume or suffer to exist
any Lien upon its property or assets to secure the Obligations, other than
prohibitions or restrictions existing under or by reason of: (i) this Agreement
and the other Credit Documents; (ii) applicable law; (iii)

                                     -53-
<PAGE>
 
customary non-assignment provisions entered into in the ordinary course of
business and consistent with past practices; (iv) any restriction or encumbrance
with respect to a Subsidiary imposed pursuant to an agreement which has been
entered into for the sale or disposition of all or substantially all of the
capital stock or assets of such Subsidiary, so long as such sale or disposition
is permitted under this Agreement; (v) Liens permitted under Sections 7.03(d),
(m) and/or (n) and any documents or instruments governing the terms of any
Indebtedness or other obligations secured by any such Liens, provided that such
prohibitions or restrictions apply only to the assets subject to such Liens and
(vi) any agreement or instrument governing Permitted Acquired Debt, to the
extent such restriction or encumbrance (x) is not applicable to any Person or
the properties or assets of any Person (other than the Person or the properties
or assets of the Person acquired pursuant to the respective Permitted
Acquisition) and (y) was not created (or made more restrictive) in connection
with or in anticipation of the respective Permitted Acquisition.

          7.10  Transactions with Affiliates.  The Borrower will not, and will
                ----------------------------                             
not permit any Subsidiary to, enter into any transaction or series of
transactions after the Closing Date whether or not in the ordinary course of
business, with any Affiliate other than on terms and conditions substantially as
favorable to the Borrower or such Subsidiary as would be obtainable by the
Borrower or such Subsidiary at the time in a comparable arm's-length transaction
with a Person other than an Affiliate, provided that the foregoing restrictions
shall not apply to (i) transactions solely among Credit Parties and their 90%-
Owned Subsidiaries, (ii) employment arrangements entered into in the ordinary
course of business with officers of the Borrower and its Subsidiaries, (iii)
customary fees paid to members of the Board of Directors of the Borrower and of
its Subsidiaries, (iv) management fees paid to MJD Partners, Inc. during any
fiscal year not in excess of 2.5% of Consolidated EBITDA for such year and, so
long as no Default or Event of Default exists at the time of any such payment or
would result therefrom, advisory fees paid to Kelso and Carousel during any
fiscal year not in excess of 1% of Consolidated EBITDA for such year, (v)
arrangements with directors, officers and employees not otherwise prohibited by
this Agreement, (vi) payment of customary legal fees and expenses to Paul,
Hastings, Janofsky & Walker LLP and (vii) the transactions set forth on Annex IX
hereto.

          7.11  Interest Coverage Ratio.  (a) At any time prior to the Trigger
                -----------------------                               
Date, the Borrower will not permit the ratio of (i) Consolidated Annualized
EBITDA as at the end of any fiscal quarter set forth below to (ii) Consolidated
Interest Expense for the four quarters then ending to be less than the ratio set
forth opposite such fiscal quarter:

<TABLE>
<CAPTION>
       Fiscal Quarter Ending:                      
       ---------------------               
        Ratio                           
        -----                           
       <S>                                   <C> 
       September 30, 1998
</TABLE> 

                                     -54-
<PAGE>
 
<TABLE> 
       <S>                                   <C> 
          through March 31, 1999             1.50 to 1.0
       June 30, 1999
          through September 30, 2000         1.75 to 1.0
       Thereafter                            2.00 to 1.0
</TABLE>

          (b)   At any time on and after the Trigger Date, the Borrower will not
permit the ratio of (i) Consolidated Annualized EBITDA as of the end of any
fiscal quarter set forth below to (ii) Consolidated Interest Expense for the
four quarters then ending to be less than the ratio set forth opposite such
fiscal quarter:

<TABLE>
<CAPTION>
       Fiscal Quarter Ending:                  
       ---------------------              
        Ratio                            
        -----                            
       <S>                              <C> 
       Trigger Date
          through September 30, 2001    1.50 to 1.0
       December 31, 2001
          through September 30, 2002    1.70 to 1.0
       December 31, 2002
          through September 30, 2003    1.80 to 1.0
       Thereafter                       2.00 to 1.0
</TABLE>

          7.12  Leverage Ratio.  (a)  At any time prior to the Trigger Date, the
                --------------                                              
Borrower will not permit the Leverage Ratio determined as at the end of any 
fiscal quarter set forth below to be more than the ratio set forth opposite such
fiscal quarter:

<TABLE>
<CAPTION>
       Fiscal Quarter Ending:                       
       ---------------------                        
        Ratio                                        
        -----                                       
       <S>                              <C>   
       June 30, 1998
          through March 31, 1999        6.50 to 1.0
       June 30, 1999
          through September 30, 2000    5.75 to 1.0
       December 31, 2000
          through September 30, 2001    5.50 to 1.0
       December 31, 2001
          through September 30, 2002    5.25 to 1.0
       December 31, 2002
          through September 30, 2003    5.00 to 1.0
       December 31, 2003
</TABLE> 

                                     -55-
<PAGE>
 
<TABLE> 
       <S>                              <C> 
          through September 30, 2004    4.50 to 1.0
       Thereafter                       4.25 to 1.0
</TABLE>

          (b)   At any time on and after the Trigger Date, the Borrower will not
permit the Leverage Ratio determined as at the end of any fiscal quarter set
forth below to be more than the ratio set forth opposite such fiscal quarter:

<TABLE>                                      
<CAPTION>                                    
       Fiscal Quarter Ending:                
       ---------------------                 
        Ratio                                
        -----                                
       <S>                              <C>  
       Trigger Date
          through September 30, 2002    6.50 to 1.0
       December 31, 2002
          through September 30, 2003    6.00 to 1.0
       Thereafter                       5.50 to 1.0
</TABLE>

          7.13  Senior Leverage Ratio.  (a) At any time prior to the Trigger
                ---------------------                                       
Date, the Borrower will not permit the Senior Leverage Ratio determined as at
the end of any fiscal quarter set forth below to be more than the ratio set
forth opposite such fiscal quarter:

<TABLE>                                     
<CAPTION>                                   
       Fiscal Quarter Ending:               
       ---------------------                
        Ratio                               
        -----                               
       <S>                              <C>  
       June 30, 1998
          through March 31, 1999        6.40 to 1.0

       June 30, 1999
          through September 30, 2000    5.50 to 1.0
       December 31, 2000
          through September 30, 2001    5.25 to 1.0
       December 31, 2001
          through September 30, 2002    5.00 to 1.0
       December 31, 2002
          through September 30, 2003    4.75 to 1.0
       December 31, 2003
          through September 30, 2004    4.25 to 1.0
       Thereafter                       4.00 to 1.0
</TABLE>

provided that if (x) a contribution has to be made to the Borrower under the
Capital Contribution Agreement as of June 30, 1999 pursuant to the terms
thereof, (y) the full $15 million available under the Capital Contribution
Agreement is so contributed and (z) after

                                     -56-
<PAGE>
 
giving effect to such contribution and the concurrent repayment of Loans, the
Senior Leverage Ratio on June 30, 1999 is 5.50 to 1.0 or above, then the maximum
Senior Leverage Ratio permitted on June 30, 1999 shall be increased to 6.00 to
1.0 and such maximum Senior Leverage Ratio shall stay in effect until June 30,
2000, at which time the maximum Senior Leverage Ratio will decrease to 5.50 to
1.0, with the above table to be thereafter applicable.

          (b) At any time on and after the Trigger Date, the Borrower will not
permit the Senior Leverage Ratio determined as at the end of any fiscal quarter
set forth below to be more than the ratio set forth opposite such quarter:

<TABLE>
<CAPTION>
     Fiscal Quarter Ending:            
     ---------------------           
     Ratio
     -----
     <S>                                  <C>
 
     Trigger Date
       through September 30, 2001
     4.00 to 1.0
     December 31, 2001
       through September 30, 2002         3.75 to 1.0
     December 31, 2002
       though September 30, 2003          3.50 to 1.0 
     Thereafter                           3.25 to 1.0
</TABLE>

          7.14 Limitation On Issuance of Stock. The Borrower will not permit any
               -------------------------------
of its Subsidiaries, directly or indirectly, to issue any shares of such
Subsidiary's capital stock or other securities (or warrants, rights or options
to acquire shares or other equity securities), except (i) for replacements of
then outstanding shares of capital stock, (ii) for stock splits, stock dividends
and similar issuances which do not decrease the percentage ownership of the
Borrower and its Subsidiaries taken as a whole in any class of the capital stock
of such Subsidiary, (iii) for issuances to the Borrower or any of its
Subsidiaries in connection with the creation of new Subsidiaries permitted under
Section 7.07, (iv) to qualify directors to the extent required by applicable law
and (v) for shares of STE and Sidney Telephone issued in connection with the
exercise of any of the Existing Warrants.
              
          7.15 Designated Senior Debt. The Borrower shall not designate any
               ----------------------                                       
Indebtedness as Designated Senior Debt (as defined in the indenture governing
Permitted Subordinated Debt).

          SECTION 8. Events of Default. Upon the occurrence of any of the
                      -----------------
following specified events (each, an "Event of Default"):

                                     -57-
<PAGE>
 
     8.01 Payments. The Borrower shall (i) default in the payment when due of
          --------                                                     
any principal of the Loans or (ii) default, and such default shall continue for
five or more Business Days, in the payment when due of any interest on the Loans
or any Fees or any other amounts owing hereunder or under any other Credit
Document; or

     8.02 Representations, etc. Any representation, warranty or statement made
          --------------------                                 
by any Credit Party herein or in any other Credit Document or in any statement
or certificate delivered or required to be delivered pursuant hereto or thereto
shall prove to be untrue in any material respect on the date as of which made or
deemed made; or

     8.03 Covenants. Any Credit Party shall (a) default in the due performance
          ---------                                                
or observance by it of any term, covenant or agreement contained in Section 6.10
or 7, or (b) default in the due performance or observance by it of any term,
covenant or agreement (other than those referred to in Section 8.01, 8.02 or
clause (a) of this Section 8.03) contained in this Agreement and such default
shall continue unremedied for a period of at least 30 days after written notice
to the Borrower by the Administrative Agent or the Required Lenders; or

     8.04 Default Under Other Agreements. (a) The Borrower or any of its
          ------------------------------                              
Subsidiaries shall (i) default in any payment with respect to any Indebtedness
(other than the Obligations) beyond the period of grace, if any, applicable
thereto or (ii) default in the observance or performance of any agreement or
condition relating to any such Indebtedness or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Indebtedness
(or a trustee or agent on behalf of such holder or holders) to cause, any such
Indebtedness to become due prior to its stated maturity; or (b) any such
Indebtedness of the Borrower or any of its Subsidiaries shall be declared to be
due and payable (or shall be required to be prepaid as a result of a default
thereunder or of an event of the type that constitutes an Event of Default)
prior to the stated maturity thereof, provided that it shall not constitute an
Event of Default pursuant to this Section 8.04 unless the aggregate principal
amount of all Indebtedness referred to in clauses (a) and (b) above exceeds $3.0
million in the aggregate at any one time; or

     8.05 Bankruptcy, etc. The Borrower or any Material Subsidiary shall
          ---------------
commence a voluntary case concerning itself under Title 11 of the United States
Code entitled "Bankruptcy," as now or hereafter in effect, or any successor
thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the
Borrower or any of its Material Subsidiaries and the petition is not
controverted within 20 days, or is not dismissed within 60 days, after
commencement of the case; or a custodian (as defined in the Bankruptcy Code) is
appointed for, or takes charge of, all or substantially all of the property of
the Borrower or any of its Material Subsidiaries; or the Borrower or any of its
Material Subsidiaries commences any other proceeding under any reorganization,
arrangement, adjustment of debt,

                                     -58-
<PAGE>
 
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Borrower or any
of its Material Subsidiaries; or there is commenced against the Borrower or any
of its Material Subsidiaries any such proceeding which remains undismissed for a
period of 60 days; or the Borrower or any of its Material Subsidiaries is
adjudicated insolvent or bankrupt; or any order of relief or other order
approving any such case or proceeding is entered; or the Borrower or any of its
Material Subsidiaries suffers any appointment of any custodian or the like for
it or any substantial part of its property to continue undischarged or unstayed
for a period of 60 days; or the Borrower or any of its Material Subsidiaries
makes a general assignment for the benefit of creditors; or any corporate action
is taken by the Borrower or any of its Material Subsidiaries for the purpose of
effecting any of the foregoing; or

     8.06 ERISA. (a) Any Plan or Multiemployer Plan shall fail to satisfy the
          -----
minimum funding standard required for any plan year or part thereof under
Section 412 of the Code or Section 302 of ERISA or a waiver of such standard or
extension of any amortization period is sought or granted under Section 412 of
the Code or Section 303 or 304 of ERISA, a Reportable Event shall have occurred,
a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan
subject to Title IV of ERISA shall be subject to the advance reporting
requirement of PBGC Regulation Section 4043.61 (without regard to sub paragraph
(b)(1) thereof) and an event described in subsection .62, .63, .64, .65, .66,
 .67 or .68 of PBGC Regulation Section 4043 shall be reasonably expected to occur
with respect to such Plan within the following 30 days, any Plan which is
subject to Title IV of ERISA shall have had or is likely to have a trustee
appointed to administer such Plan, any Plan or Multiemployer Plan which is
subject to Title IV of ERISA is, shall have been or is likely to be terminated
or to be the subject of termination proceedings under ERISA, any Plan shall have
an Unfunded Current Liability, a contribution required to be made with respect
to a Plan, Multiemployer Plan has not been timely made, the Borrower or any
Subsidiary or any ERISA Affiliate has incurred or is likely to incur any
liability to or on account of a Plan or Multiemployer Plan under Section 409,
502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or
Section 401(a)(29), 4971 or 4975 of the Code or on account of a group health
plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code)
under Section 4980B of the Code, or the Borrower or any Subsidiary has incurred
or is likely to incur liabilities pursuant to one or more employee welfare
benefit plans (as defined in Section 3(1) of ERISA) that provide benefits to
retired employees or other former employees (other than as required by Section
601 of ERISA) or Plans; (b) there shall result from any such event or events the
imposition of a lien, the granting of a security interest, or a liability or a
material risk of incurring a liability; and (c) such lien, security interest or
liability, individually, and/or in the aggregate, in the opinion of the Required
Lenders, has had, or is reasonably likely to have, a Material Adverse Effect; or

     8.07 Pledge Agreement. (a) Except in each case to the extent resulting from
          ---------------- 
the negligent or willful failure of the Collateral Agent to continue to hold
Pledged Securities

                                     -59-
<PAGE>
 
under the Pledge Agreement, the Pledge Agreement shall cease to be, in any
material respect, in full force and effect, or shall cease, in any material
respect, to give the Collateral Agent the Liens, powers and privileges purported
to be created thereby in favor of the Collateral Agent, or (b) any Credit Party
shall default in the due performance or observance of any material term,
covenant or agreement on its part to be performed or observed pursuant to the
Pledge Agreement and such default shall continue for 15 or more days after
written notice to the respective Credit Party by the Administrative Agent; or

     8.08 Subsidiary Guaranty. Any Subsidiary Guaranty or any material provision
          -------------------
thereof shall cease to be in full force and effect, or any Subsidiary Guarantor
or any Person acting by or on behalf of such Subsidiary Guarantor shall deny or
disaffirm such Subsidiary Guarantor's obligations under any Subsidiary Guaranty;
or

     8.09 Judgments. One or more judgments or decrees shall be entered against
          ---------
the Borrower or any of its Subsidiaries involving a liability (to the extent not
paid or covered by insurance) in excess of $3.0 million in the aggregate for all
such judgments and decrees for the Borrower and its Subsidiaries and all such
judgments and decrees in excess of such amount shall not have been vacated,
discharged or stayed or bonded pending appeal within 60 days from the entry
thereof;

then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Administrative Agent shall, upon the written
request of the Required Lenders, by written notice to the Borrower, take any or
all of the following actions, without prejudice to the rights of the
Administrative Agent or any Lender to enforce its claims against any Subsidiary
Guarantor or the Borrower, except as otherwise specifically provided for in this
Agreement (provided that, if an Event of Default specified in Section 8.05 shall
           --------
occur with respect to the Borrower, the result which would occur upon the giving
of written notice by the Administrative Agent as specified in clauses (i) and
(ii) below shall occur automatically without the giving of any such notice): (i)
declare the Total Commitment terminated, whereupon the Commitment of each Lender
shall forthwith terminate immediately and any Fees shall forthwith become due
and payable without any other notice of any kind; (ii) declare the principal of
and any accrued interest in respect of all Loans and all obligations owing
hereunder to be, whereupon the same shall become, forthwith due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Borrower; and (iii) enforce, as Collateral Agent (or
direct the Collateral Agent to enforce), any and all of the Liens and rights
created pursuant the Pledge Agreement.

     SECTION 9. Definitions. As used herein, the following terms shall have the
                -----------
meanings herein specified unless the context otherwise requires. Defined terms
in this Agreement shall include in the singular number the plural and in the
plural the singular:

                                     -60-
<PAGE>
 
          "Acquired Companies" shall mean each of the parent corporations that
are acquired by the Borrower pursuant to the Acquisitions, and their respective
Subsidiaries.

          "Acquisition Commitment" shall mean, with respect to each Lender, the
amount, if any, specified by such Lender in a written notice to the Borrower and
the Administrative Agent as its Acquisition Commitment in response to a written
request by the Borrower to some or all of the then existing Lenders and to other
Eligible Transferees acceptable to the Agents and the Borrower to provide
Acquisition Commitments (or such lesser amount as is allocated to such Lender by
the Agents if the aggregate Acquisition Commitments offered by all Lenders
exceed the maximum Acquisition Commitments requested by the Borrower (which
maximum shall not exceed $165 million) and which amount shall be set forth
opposite such Lender's name in a revised Annex I prepared by the Administrative
Agent directly below the column entitled "Acquisition Commitment," as the same
may be (x) reduced or terminated from time to time pursuant to Section 2.02,
2.03 and/or 8 or (y) adjusted from time to time as a result of assignments to or
from such Lender pursuant to Section 1.13 and/or 11.04.

          "Acquisition Documents" shall mean, with respect to any Acquisition,
the Agreement and Plan of Merger executed by the Borrower, an Intermediary
Holding Company, an acquisition Subsidiary and the respective Acquired Company
(or other purchase or similar agreement) governing such Acquisition and all
other material agreements and documents relating to such Acquisition, in the
form delivered to the Administrative Agent pursuant to Section 4.02(a) and as
same may be amended, modified, amended and restated or supplemented from time to
time pursuant to the terms hereof and thereof.

          "Acquisition Facility" shall mean the Facility evidenced by the Total
Acquisition Commitment.

          "Acquisitions" shall mean the Chouteau Acquisition, the Ellensburg
Acquisition, the El Paso Acquisition, the Taconic Acquisition and the UI
Acquisition.

          "Adjusted Total Acquisition Commitment" shall mean at any time the
Total Acquisition Commitment less the aggregate Acquisition Commitment of all
Defaulting Lenders.

          "Adjusted Total Revolving Commitment" shall mean at any time the Total
Revolving Commitment less the aggregate Revolving Commitments of all Defaulting
Lenders.

          "Administrative Agent" shall have the meaning provided in the first
paragraph of this Agreement and shall include any successor to the
Administrative Agent appointed pursuant to Section 10.09.

                                     -61-
<PAGE>
 
     "AF Commitment Commission" shall have the meaning provided in Section
2.01(c).

     "AF Lender" shall mean at any time each Lender with an Acquisition
Commitment or with outstanding AF Loans.

     "AF Loan" shall have the meaning provided in Section 1.01(d).

     "AF Note" shall have the meaning provided in Section 1.05(a).

     "AF/RF Maturity Date" shall mean September 30, 2004.

     "Affiliate" shall mean, with respect to any Person, any other Person
directly or indirectly controlling (including but not limited to all directors
and officers of such Person), controlled by, or under direct or indirect common
control with such Person. A Person shall be deemed to control a corporation if
such Person possesses, directly or indirectly, the power (i) to vote 10% or more
of the securities having ordinary voting power for the election of directors of
such corporation or (ii) to direct or cause the direction of the management and
policies of such corporation, whether through the ownership of voting
securities, by contract or otherwise.

     "Agents" shall have the meaning provided in the first paragraph of this
Agreement.

     "Agreement" shall mean this Credit Agreement, as the same may be from time
to time further modified, amended, amended and restated and/or supplemented.

     "Anticipated Reinvestment Amount" shall mean, with respect to any
Reinvestment Election, the amount specified in the Reinvestment Notice delivered
by the Borrower in connection therewith as the amount of the Net Cash Proceeds
from the related Asset Sale that the Borrower intends to use to finance one or
more Acquisitions or Permitted Acquisitions within 180 days.

     "Applicable Acquisition Documents" shall have the meaning provided in
Section 4.02(a).

     "Applicable Base Rate Margin" shall mean (i) in the case of AF Loans and RF
Loans, 1.50% less the Margin Reduction Discount, if any, (ii) in the case of B
             ----  
Term Loans, 1.75% less the Margin Reduction Discount, if any and (iii) in the
                  ----
case of C Term Loans-Floating Rate, 2.00% less the Margin Reduction Discount, if
                                          ----
any.

                                     -62-
<PAGE>
 
     "Applicable CC Percentage" shall mean (i) .375% at any time the Applicable
Eurodollar Margin for RF Loans is 1.50%; and (ii) .50% at all other times.

     "Applicable Eurodollar Margin" shall mean (i) in the case of AF Loans and
RF Loans, 2.50% less the Margin Reduction Discount, if any, (ii) in the case of
                ----    
B Term Loans, 2.75% less the Margin Reduction Discount, if any and (iii) in the
                    ----     
case of C Term Loans-Floating Rate, 3.00% less the Margin Reduction Discount, if
                                          ----   
any.

     "Asset Sale" shall mean and include (x) the sale, transfer or other
disposition by the Borrower or any Subsidiary to any Person other than the
Borrower or any Subsidiary Guarantor of any asset of the Borrower or such
Subsidiary (other than sales, transfers or other dispositions in the ordinary
course of business of inventory and/or obsolete or excess equipment) and/or (y)
the receipt by the Borrower or any Subsidiary of any insurance, condemnation or
similar proceeds in connection with a casualty or taking of any of its assets in
excess of the costs incurred by the Borrower and its Subsidiaries in respect of
such event and of repairing or replacing the assets so damaged, destroyed or
taken but in all cases only to the extent that the aggregate Net Cash Proceeds
of all such sales, transfers, dispositions and receipts in any fiscal year are
in excess of $1,000,000.

     "Assignment Agreement" shall mean the Assignment Agreement in the form of
Exhibit K (appropriately completed).

     "Authorized Officer" shall mean any senior officer of the Borrower
designated as an authorized officer in writing to the Administrative Agent by
the Borrower.

     "B Maturity Date" shall mean March 31, 2006.

     "B Term Commitment" shall mean, with respect to each Lender, (A) the
amount, if any, set forth opposite such Lender's name on Annex I hereto directly
below the column entitled "B Term Commitment" as the same may be (x) reduced or
terminated from time to time pursuant to Section 2.02, 2.03 and/or 8 and/or (y)
adjusted from time to time as a result of assignments to or from such Lender
pursuant to Section 1.13 and/or 11.04 plus (B) the amount, if any, of a B Term
Commitment of such Lender committed to pursuant to a B Term Commitment Renewal.

     "B Term Commitment Renewal" shall mean the providing of additional B Term
Commitments from time to time after any mandatory repayment of B Term Loans
and/or mandatory reduction of B Term Commitments pursuant to Section
2.03(b)(iii) or (iv) (each, a "B Reduction Event") in an aggregate amount (the
"Additional B Commitment Amount"), selected by the Borrower, not to exceed the
principal amount of the B Term Loans so repaid and the B Term Commitments so
reduced, with any B Term Commitment Renewal to be effected by: (i) the Borrower
requesting in writing some or all of the Lenders

                                     -63-
<PAGE>
 
and/or other Eligible Transferees acceptable to the Agents and the Borrower to
provide an additional B Term Commitment, which request shall be given within 90
days following the B Reduction Event but in any event prior to the date
occurring 255 days after the Closing Date and (ii) each such Lender or Eligible
Transferee who desires to do so, providing a written notice to the Borrower and
the Administrative Agent in response to such request setting forth the
additional B Term Commitment it will offer, with the amount so specified (or
such lesser amount as is allocated to such Lender by the Agents if the aggregate
offered additional B Term Commitments exceed the Additional B Commitment Amount)
to be such Person's additional B Term Commitment, it being agreed that any such
additional B Term Commitments shall terminate on the date occurring 270 days
after the Closing Date (after giving effect to the making of B Term Loans, if
any, on such date) and each such Person with an additional B Term Commitment
shall be a Lender.

     "B Term Facility" shall mean the Facility evidenced by the Total B Term
Commitment.

     "B Term Loan" shall have the meaning provided in Section 1.01(a).

     "B Term Note" shall have the meaning provided in Section 1.05(a).

     "B Termination Date" shall mean the date occurring 270 days after the
Closing Date.

     "B TF Percentage" shall mean, at any time of determination thereof, a
fraction (expressed as a percentage) the numerator of which is equal to the sum
of (x) the aggregate principal amount of B Term Loans outstanding at such time
and (y) the Total B Term Commitment at such time and the denominator of which is
equal to the sum of (x) the aggregate principal amount of B Term Loans and C
Term Loans outstanding at such time and (y) the Total B Term Commitment at such
time.

     "B Utilization Date" shall mean the date on which the Total B Term
Commitment is first reduced to zero (determined without giving effect to any
increase to the B Term Commitment pursuant to a B Term Commitment Renewal).

     "Bankruptcy Code" shall have the meaning provided in Section 8.05.

     "Base Rate" at any time shall mean the higher of (i) the rate which is 1/2
of 1% in excess of the Federal Funds Effective Rate and (ii) the Prime Lending
Rate.

     "Base Rate Loan" shall mean each Loan (other than any C Term Loan-Fixed
Rate prior to the FRE Date applicable thereto) bearing interest at the rates
provided in Section 1.08(a).

                                     -64-
<PAGE>
 
     "Borrower" shall mean MJD Communications, Inc., a Delaware corporation.

     "Borrowing" shall mean the incurrence of Base Rate Loans or Eurodollar
Loans pursuant to a single Facility by the Borrower from the Lenders having
Commitments with respect to such Facility on a pro rata basis on a given date
                                               --- ----   
(or resulting from conversions on a given date), having in the case of
Eurodollar Loans the same Interest Period; provided that Base Rate Loans
incurred pursuant to Section 1.10(b) shall be considered part of any related
Borrowing of Eurodollar Loans.

     "BTCo" shall mean Bankers Trust Company in its individual capacity.

     "Business" shall have the meaning provided in Section 7.01.

     "Business Day" shall mean (i) for all purposes other than as covered by
clause (ii) below, any day excluding Saturday, Sunday and any day which shall be
in the City of New York a legal holiday or a day on which banking institutions
are authorized by law or other governmental actions to close and (ii) with
respect to all notices and determinations in connection with, and payments of
principal and interest on, Eurodollar Loans, any day which is a Business Day
described in clause (i) and which is also a day for trading by and between banks
in Dollar deposits in the interbank Eurodollar market.

     "C Maturity Date" shall mean March 31, 2007.

     "C Term Commitment" shall mean, with respect to each Lender, the amount, if
any, set forth opposite such Lender's name on Annex I hereto directly below the
column entitled "C Term Commitment" as the same may be terminated pursuant to
Section 2.03.

     "C Term Facility" shall mean the Facility evidenced by the Total C Term
Commitment and the CoBank Commitment.

     "C Term Loan-Fixed Rate" and "C Term Loan-Floating Rate" shall each have
the meaning provided in Section 1.01(b).

     "C Term Loans" shall mean and include the C Term Loans-Floating Rate and
the C Term Loans-Fixed Rate.

     "C Term Notes-Fixed Rate" and "C Term Note-Floating Rate" shall each have
the meaning provided in Section 1.05(a).

     "C Term Notes" shall mean and include the C Term Notes-Fixed Rate and the C
Term Notes-Floating Rate.

                                     -65-
<PAGE>
 
     "C TF Percentage" shall mean, at any time of determination thereof 100%
less the then B TF Percentage.

     "Capital Contribution Agreement" shall have the meaning provided in Section
4.01(k).

     "Capital Lease" as applied to any Person shall mean any lease of any
property (whether real, personal or mixed) by that Person as lessee which, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that Person.

     "Capitalized Lease Obligations" shall mean all obligations under Capital
Leases of the Borrower or any of its Subsidiaries in each case taken at the
amount thereof accounted for as liabilities in accordance with GAAP.

     "Carousel" shall mean Carousel Capital Partners, L.P., a Delaware limited
partnership.

     "Carousel Affiliate" shall mean Carousel and each investment fund
controlled by Carousel.

     "Cash Equivalents" shall mean (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) having maturities of not more
than six months from the date of acquisition, (ii) Dollar denominated time
deposits, certificates of deposit and bankers' acceptances of (x) any Lender
that is a domestic commercial bank of recognized standing having capital and
surplus in excess of $500,000,000 or (y) any bank (or the parent company of such
bank) whose short-term commercial paper rating from Standard & Poor's Ratings
Services, a division of McGraw-Hill, Inc. ("S&P") is at least A-1 or the
equivalent thereof or from Moody's Investors Service, Inc. ("Moody's") is at
least P-1 or the equivalent thereof (any such bank, an "Approved Bank"), in each
case with maturities of not more than six months from the date of acquisition,
(iii) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any bank meeting the qualifications specified in clause (ii) above, (iv)
commercial paper issued by any Approved Bank or by the parent company of any
Approved Bank and commercial paper issued by, or guaranteed by, any industrial
or financial company with a short-term commercial paper rating of at least A-1
or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by
Moody's, or guaranteed by any industrial company with a long term unsecured debt
rating of at least A or A2, or the equivalent of each thereof, from S&P or
Moody's, as the case may be, and in each case maturing within six months after
the date of acquisition, (v) marketable direct obligations issued by any state
of the United States of America or any political subdivision of any such state
or any public instrumentality thereof

                                     -66-
<PAGE>
 
maturing within six months from the date of acquisition thereof and, at the time
of acquisition, having one of the two highest ratings obtainable from either S&P
or Moody's, and (vi) investments in money market funds substantially all of
whose assets are comprised of securities of the type described in clauses (i)
through (v) above.

     "Cash Proceeds" shall mean, with respect to any Asset Sale, the aggregate
cash payments (including any cash received by way of deferred payment pursuant
to a note receivable issued in connection with such Asset Sale, other than the
portion of such deferred payment constituting interest, but only as and when so
received) received by the Borrower and/or any Subsidiary from such Asset Sale.

     "CERCLA" shall mean the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, 42 U.S.C. (S) 9601 et seq.
                                                          -- ----

     "Change of Control" shall mean at any time and for any reason (a) prior to
a Qualified IPO, the Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act) on a fully diluted
basis in the aggregate of at least 50.1% of the total economic and voting
interest in the Borrower's capital stock, (b) on and after a Qualified IPO, (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes the
"beneficial owner" (as defined in clause (a) above) on a fully diluted basis of
more than 25% of the total voting interest in the capital stock of the Borrower
or (ii) during any period of two consecutive years individuals who at the
beginning of such period constituted the Board of Directors of the Borrower
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the stockholders of the Borrower was approved
by a vote of a majority of the directors of the Borrower then still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Borrower then in office
or (c) a "change of control" or similar event shall occur as provided in any
other agreement governing or evidencing material Indebtedness of the Borrower.

     "Chouteau" shall mean Chouteau Telephone Company, an Oklahoma corporation.

     "Chouteau Acquisition" shall mean the acquisition by the Borrower of
Chouteau pursuant to the Applicable Acquisition Documents.

     "CLEC" shall mean competitive local exchange carriers.

     "CLEC Back-Stop Letters of Credit" shall mean each standby letter of credit
issued by a financial institution for the account of the Borrower in support of
the

                                     -67-
<PAGE>
 
reimbursement obligations of MJD TeleChoice under any letter of credit issued
for its account in support of obligations incurred in the ordinary course of
business with respect to customer deposits and other similar statutorily
mandated obligations.

     "CLEC Company" shall have the meaning in Section 7.06(k) and shall in
any event include MJD TeleChoice.

     "CLEC Expenditures" shall mean expenditures with respect to the
acquisition, creation and/or maintenance of any CLEC.

     "Closing Date" shall mean the date on which the initial Loans under this
Agreement are made.

     "CoBank" shall mean CoBank, ACB.

     "CoBank Commitment" shall mean $51,506,404, as the same may be
terminated pursuant to Section 2.03.

     "CoBank Continuing Loans" shall mean the principal amounts outstanding
under the CoBank loans identified below which are accruing interest at the fixed
rates identified below for periods ending on the dates identified below:

<TABLE>
<CAPTION>
             Existing Principal  Interest Period End
Loan No.           Amount               Date          Current Interest Rate
- --------     ------------------  -------------------  ----------------------
<S>          <C>                 <C>                  <C>
000084977        $10,000,000.00        09/02/02                9.96%

000085771        $15,000,000.00        09/05/00                9.23%

000084932        $11,077,685.00        09/02/02                9.96%

574742001        $ 2,674,839.89        08/30/04               10.37%

574742002        $ 9,513,879.29        09/30/04               10.57%

000085156        $ 3,240,000.00        09/02/02                9.76%
</TABLE>

     "Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time, and the regulations promulgated and rulings issued thereunder. Section
references to the Code are to the Code, as in effect at the date of this
Agreement and any subsequent provisions of the Code, amendatory thereof,
supplemental thereto or substituted therefor.

     "Collateral" shall mean all of the Collateral as defined in the Pledge
Agreement.

                                     -68-
<PAGE>
 
     "Collateral Agent" shall mean the Administrative Agent acting as
collateral agent for the Lenders.

     "Commitment" shall mean, with respect to each Lender, such Lender's Term
Commitment, Revolving Commitment, Acquisition Commitment and/or CoBank
Commitment.

     "Commitment Commission" shall mean the TF Commitment Commission, the
RF Commitment Commission and the AF Commitment Commission.

     "Consolidated Annualized EBITDA" shall mean, as of the last day of any
fiscal quarter, (x) Consolidated EBITDA for the six month's then ended
multiplied by (y) two.

     "Consolidated Capital Expenditures" shall mean, for any period, the
aggregate of all cash expenditures (including in all events all amounts expended
under Capital Leases (other than Capital Leases evidencing MJD Capital Debt) but
excluding any amount representing capitalized interest) by the Borrower and its
Subsidiaries during that period that, in conformity with GAAP, are or are
required to be included in the property, plant or equipment reflected in the
consolidated balance sheet of the Borrower and its Subsidiaries, provided that
Consolidated Capital Expenditures shall in any event (x) exclude the purchase
price paid in cash in connection with the acquisition of any Person (including
through the purchase of all of the capital stock or other ownership interests of
such Person or through merger or consolidation) pursuant to an Acquisition or a
Permitted Acquisition whether or not allocable to property, plant and equipment
and (y) exclude amounts expended with insurance proceeds.

     "Consolidated Debt" shall mean, as of any date of determination, (i) the
aggregate stated balance sheet amount of all Indebtedness of the Borrower and
its Subsidiaries on a consolidated basis as determined in accordance with GAAP
plus (ii) any Indebtedness for borrowed money of any other Person as to which
the Borrower and/or any of its Subsidiaries has created a guarantee or other
Contingent Obligation (but only to the extent of such guarantee or other
Contingent Obligation).

     "Consolidated EBIT" shall mean, for any period, (A) the sum of the amounts
for such period of (i) Consolidated Net Income, (ii) provisions for taxes based
on income, (iii) Consolidated Interest Expense, (iv) amortization or write-off
of deferred financing costs to the extent deducted in determining Consolidated
Net Income, (v) losses on sales of assets (excluding sales in the ordinary
course of business) and other extraordinary losses, (vi) non-core income
relating to Non-Core Assets to the extent not included in any determination of
Consolidated Net Income, (vii) to the extent Consolidated EBIT is being
determined for any period that includes all or a portion of the twelve-month
period ended December 31, 1997,

                                     -69-
<PAGE>
 
any non-recurring losses incurred during such twelve-month period associated
with the start-up of ST Long Distance Corporation to the extent same do not
exceed $1.4 million for the twelve-month period ended December 31, 1997, (viii)
dividends paid by CoBank to the Borrower on common stock of CoBank held by the
Borrower to the extent not included in any determination of Consolidated Net
Income and (ix) the non-cash cash portion of any retirement or pension plan
expense incurred by the Borrower or any of its Subsidiaries less (B) gains on
sales of assets (excluding sales in the ordinary course of business) and other
extraordinary gains and other one-time non-cash gains, all as determined on a
consolidated basis in accordance with GAAP.

          "Consolidated EBITDA" shall mean, for any period, the sum of the
amounts for such period of (i) Consolidated EBIT, (ii) depreciation expense and
(iii) amortization expense including any amortization or write-off related to
the write-up of any assets as a result of purchase accounting, provided that
Consolidated EBITDA for any such period during which an Acquisition or a
Permitted Acquisition was consummated or a disposition of a business was
effected shall be determined on a pro forma basis as if such Acquisition or
                                  --- -----                 
Permitted Acquisition were consummated or disposition effected, as the case may
be, on the first day of such period and, in the event the Borrower delivers to
the Administrative Agent within 20 Business Days following the consummation of
an Acquisition or a Permitted Acquisition a Cost Adjustment Certificate, as if
the savings based on the cost reduction synergies set forth therein were
achieved for each day during such pre-consummation period (such pro forma
                                                                --- ----  
determination to be made on the basis that a one day pro rata share of the cost
                                                     --- ---- 
reduction synergies set forth in such Cost Adjustment Certificate to be achieved
during the first full 12 months following such consummation will apply to each
day during such pre-consummation period).


          "Consolidated Interest Expense" shall mean, for any period, total
interest expense (including the portion that is attributable to Capital Leases
in accordance with GAAP) of the Borrower and its Subsidiaries on a consolidated
basis with respect to all outstanding Indebtedness of the Borrower and its
Subsidiaries (including, without limitation, all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing and without duplication net costs and/or net benefits under
Interest Rate Agreements, but excluding, however, amortization of deferred
financing costs to the extent included in total interest expense), provided that
for the purposes of determining Consolidated Interest Expense as used in Section
7.11, Consolidated Interest Expense for any date of determination prior to March
31, 1999 shall mean Consolidated Interest Expense for the period from the
Closing Date to such date of determination as so determined, that is annualized.

          "Consolidated Net Income" shall mean for any period, the net income
(or loss) of the Borrower and its Subsidiaries on a consolidated basis for
such period taken as a single accounting period determined in conformity with
GAAP, provided that there shall be 
      --------                                                          

                                     -70-
<PAGE>
 
excluded from the calculation thereof (without duplication) (i) the income (or
loss) of any Person (other than Subsidiaries of the Borrower) in which any other
Person (other than the Borrower or any of its Subsidiaries) has a joint
interest, except to the extent of the amount of dividends or other distributions
actually paid to the Borrower or any of its Subsidiaries by such Person during
such period, (ii) the income (or loss) of any Person accrued prior to the date
it becomes a Subsidiary of the Borrower or is merged into or consolidated with
the Borrower or any of its Subsidiaries or that Person's assets are acquired by
the Borrower or any of its Subsidiaries, (iii) the income of any Subsidiary of
the Borrower to the extent that the declaration or payment of dividends or
similar distributions by that Subsidiary of that income is not at the time
permitted by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Subsidiary, (iv) all one time costs and expenses paid during such period in
respect of the Transaction and (v) non-cash costs arising from implementation of
SFAS 106 and SFAS 109.

          "Contingent Obligations" shall mean as to any Person any obligation of
such Person guaranteeing or intending to guarantee any Indebtedness, leases,
dividends or other obligations ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(a) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (b) to advance or supply funds (i) for the
purchase or payment of any such primary obligation or (ii) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (c) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation or (d) otherwise to assure or hold harmless the owner of
such primary obligation against loss in respect thereof, provided, however, that
the term Contingent Obligation shall not include endorsements of instruments for
deposit or collection in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated
maximum of the Contingent Obligation or, if none, the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if there is no stated or determinable amount of the primary
obligation, the maximum reasonably anticipated liability in respect thereof
(assuming such Person is required to perform thereunder) as determined by such
Person in good faith.

          "Cost Adjustment Certificate" shall mean, with respect to an
Acquisition or a Permitted Acquisition, a certificate executed by an Authorized
Officer of the Borrower setting forth the factually supportable and identifiable
cost reduction synergies estimated in good faith to result from such Acquisition
or Permitted Acquisition, as the case may be, during the 12 months following the
date of the consummation of such Acquisition or Permitted Acquisition, as the
case may be, which certificate shall be in form and substance reasonably
satisfactory to the Agents.

                                     -71-
<PAGE>
 
          "Credit Documents" shall mean this Agreement, the Notes, the Pledge
Agreement and the Subsidiary Guaranty.

          "Credit Party" shall mean the Borrower and each Subsidiary party to a
Credit Document.

          "Default" shall mean any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.

          "Defaulting Lender" shall mean any Lender with respect to which a
Lender Default is in effect.

          "Dividends" shall have the meaning provided in Section 7.09.

          "Dollars" and the sign "$" shall each mean freely transferable lawful
money of the United States.

          "Effective Date" shall have the meaning provided in Section 11.10.

          "Eligible Transferee" shall mean and include a commercial bank,
financial institution or other institutional "accredited investor" as defined
in SEC Regulation D.

          "Ellensburg" shall mean Ellensburg Telephone Company, a Washington
corporation.

          "Ellensburg Acquisition" shall mean the acquisition of Ellensburg by
the Borrower pursuant to the Applicable Acquisition Documents.

          "El Paso" shall mean Ravenswood Communications, Inc., an Illinois
corporation.

          "El Paso Acquisition" shall mean the acquisition of El Paso by the
Borrower pursuant to the Applicable Acquisition Documents.

          "Environmental Claims" means any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigations (other than internal reports prepared
by the Borrower or any of its Subsidiaries solely in the ordinary course of such
Person's business and not in response to any third party action or request of
any kind) or proceedings relating to any Environmental Law or any permit issued,
or any approval given, under any such Environmental Law (hereafter, "Claims"),
including, without limitation, (a) any and all Claims by governmental or
regulatory authorities for enforcement, cleanup, removal, response, remedial or
other actions

                                    -72-  
<PAGE>
 
or damages pursuant to any applicable Environmental Law, and (b) any and all
Claims by any third party seeking damages, contribution, indemnification, cost
recovery, compensation or injunctive relief resulting from Hazardous Materials
arising from alleged injury or threat of injury to health, safety or the
environment.

          "Environmental Law" means any applicable federal, state, foreign or
local statute, law, rule, regulation, ordinance, code and rule of common law now
or hereafter in effect and in each case as amended, and any binding judicial or
administrative interpretation thereof, including any binding judicial or
administrative order, consent decree or judgment, relating to the environment or
Hazardous Materials, including, without limitation, CERCLA; RCRA; the Federal
Water Pollution Control Act, as amended, 33 U.S.C. (S) 1251  et seq.; the 
                                                             -- ----  
Toxic Substances Control Act, 15 U.S.C. (S) 7401 et seq.; the
                                                 -- ----     
Clean Air Act, 42 U.S.C. (S) 2601 et seq.; the Safe Drinking Water Act, 42
                                  -- ----                                 
U.S.C. (S) 300F et seq.; the Oil Pollution Act of 1990, 33 U.S.C. (S) 2701 et
                -- ----                                                    --
seq.; and any applicable state and local or foreign counterparts or equivalents.
- ----                                                               

          "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder. Section references to ERISA are to ERISA, as in effect at the
date of this Agreement and any subsequent provisions of ERISA, amendatory
thereof, supplemental thereto or substituted therefor.

          "ERISA Affiliate" shall mean each person (as defined in Section 3(9)
of ERISA) which together with the Borrower or a Subsidiary would be deemed to be
a "single employer" within the meaning of Section 414(b) or (c) of the Code and
with respect to Sections 412 and 4971 of the Code and Section 302 of ERISA,
Section 414(b), (c), (m) or (o) of the Code.

          "Eurodollar Loans" shall mean each Loan (other than any C Term Loan-
Fixed Rate prior to the FRE Date applicable thereto) bearing interest at the
rates provided in Section 1.08(b).

          "Eurodollar Rate" shall mean with respect to each Interest Period for
a Eurodollar Loan, (i) the offered quotation to first-class banks in the
interbank Eurodollar market by the Administrative Agent for dollar deposits of
amounts in same day funds comparable to the outstanding principal amount of the
Eurodollar Loans for which an interest rate is then being determined with
maturities comparable to the Interest Period to be applicable to such Eurodollar
Loans, determined as of 10:00 A.M. (New York time) on the date which is two
Business Days prior to the commencement of such Interest Period divided (and
rounded upward to the next whole multiple of 1/16 of 1%) by (ii) a percentage
equal to 100% minus the then stated maximum rate of all reserve requirements
(including, without limitation, any marginal, emergency, supplemental, special
or other reserves) applicable to

                                     -73-
<PAGE>
 
any member bank of the Federal Reserve System in respect of Eurocurrency
liabilities as defined in Regulation D (or any successor category of liabilities
under Regulation D).

          "Event of Default" shall have the meaning provided in Section 8.
 
          "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

          "Existing Indebtedness" shall have the meaning provided in Section
7.04(g).

          "Existing Warrants" shall mean warrants to purchase up to 12,500
shares of common stock of STE and up to 7.69 shares of common stock of Sidney
Telephone, in each case as such number of shares may be adjusted pursuant to the
terms of such warrants after the Closing Date, as the same may be amended,
modified or supplemented after the Closing Date pursuant to the terms thereof
and hereof.

          "Expiration Date" shall mean June 30, 1998.

          "Facility" shall mean any of the credit facilities established under
this Agreement, i.e., the B Term Facility, the C Term Facility, the Revolving
                ----                                                         
Facility or the Acquisition Facility.

          "FCC" shall mean the Federal Communications Commission and any
successor regulatory body.

          "Federal Funds Effective Rate" shall mean for any period, a
fluctuating interest rate equal for each day during such period to the weighted
average of the rates on overnight Federal Funds transactions with members of the
Federal Reserve System arranged by Federal Funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for such day
on such transactions received by the Administrative Agent from three Federal
Funds brokers of recognized standing selected by the Administrative Agent.

          "Fees" shall mean all amounts payable pursuant to, or referred to in,
Section 2.01.

          "Fixed Rate Loans" shall mean the C Term Loans-Fixed Rate.

          "FRE Date," with respect to any C Term Loan-Fixed Rate, shall have the
meaning provided in the C Term Note-Fixed Rate evidencing such C Term Loan-
Fixed Rate.

                                     -74-
<PAGE>
 
          "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect on the date of this Agreement; it being
understood and agreed that determinations in accordance with GAAP for purposes
of Section 7, including defined terms as used therein, are subject (to the
extent provided therein) to Section 11.07(a).

          "Hazardous Materials" shall mean (a) petroleum or petroleum products,
radioactive materials, asbestos in any form that is friable, urea formaldehyde
foam insulation, and radon gas; (b) any chemicals, materials or substance
defined as or included in the definition of "hazardous substances," "hazardous
waste", "hazardous materials," "extremely hazardous substances," restricted
hazardous waste," "toxic substances," "toxic pollutants," "contaminants," or
"pollutants," or words of similar import, under any applicable Environmental
Law; and (c) any other chemical, material or substance, the release of which is
prohibited, limited or regulated by any governmental authority.

          "Indebtedness" of any Person shall mean, without duplication, (i) all
indebtedness of such Person for borrowed money, (ii) the deferred purchase
price of assets or services which in accordance with GAAP would be shown on
the liability side of the balance sheet of such Person, (iii) the face amount of
all letters of credit issued for the account of such Person and, without
duplication, all drafts drawn there under, (iv) all indebtedness of a second
Person secured by any Lien on any property owned by such first Person, whether
or not such indebtedness has been assumed (to the extent of the fair market
value of such property), (v) all Capitalized Lease Obligations of such Person,
(vi) all obligations of such Person to pay a specified purchase price
for goods or services whether or not delivered or accepted, i.e., take-or-pay
                                                            ----             
and similar obligations, (vii) all net obligations of such Person under
Interest Rate Agreements and (viii) all Contingent Obligations of such Person
(other than Contingent Obligations arising from the guaranty by such Person
of the obligations of the Borrower and/or its Subsidiaries to the extent such
guaranteed obligations do not constitute Indebtedness and are otherwise
permitted hereunder), provided that Indebtedness shall not include trade
                      --------                                          
payables, accrued expenses and receipt of progress and advance payments, in
each case arising in the ordinary course of business.

          "Indebtedness to be Refinanced" shall mean Indebtedness of the
Borrower and its Subsidiaries owing to CoBank (exclusive of the CoBank
Continuing Loans), Rural Telephone Financing Corp. and Fleet Equity Partners in
such aggregate principal amounts as are set forth in the pay-off letters
delivered by such Persons to the Administrative Agent on the Closing Date.


          "Initial AF Borrowing Date" shall mean the date upon which the initial
incurrence of AF Loans occurs.
 
          "Interest Period" with respect to any Loan shall mean the interest
period applicable thereto, as determined pursuant to Section 1.09.

                                     -75-
<PAGE>
 
          "Interim Prepayment Amount" shall mean, at any time, (i) the
Anticipated Reinvestment Amount specified in a Reinvestment Notice delivered no
earlier than 180 days prior to such time less (ii) the aggregate principal
amount of RF Loans made after the delivery of such Reinvestment Notice and prior
to such time to finance Permitted Acquisitions or Acquisitions effected pursuant
to the related Reinvestment Election.

          "Interest Rate Agreement" shall mean any interest rate swap agreement,
any interest rate cap agreement, any interest rate collar agreement or other
similar agreement or arrangement designed to protect the Borrower or any
Subsidiary against fluctuations in interest rates.

          "Intermediary Holding Company" shall mean MJD Holdings Corp., MJD
Ventures, Inc., MJD Services Corp., STE and any other Subsidiary first acquired
or created after the Closing Date that is not an operating company (but that
owns directly or indirectly one or more operating companies) and is not subject
to regulatory restrictions on borrowings or issuances of guaranties of
indebtedness for borrowed money.

          "Kelso" shall mean Kelso Investment Associates V, L.P., a Delaware
limited partnership, and Kelso Equity Partners V, L.P., a Delaware limited
partnership.

          "Kelso Affiliate" shall mean Kelso and each investment fund controlled
by Kelso.

          "Lender" shall have the meaning provided in the first paragraph of
this Agreement.

          "Lender Default" shall mean (i) the refusal (which has not been
retracted) or failure of a Lender to make available its portion of any
incurrence of Loans or (ii) a Lender having notified the Administrative Agent
and/or the Borrower that it does not intend to comply with the obligations under
Section 1.01, in the case of either clause (i) or (ii) as a result of the
appointment of a receiver or conservator with respect to such Lender at the
direction or request of any regulatory agency or authority.

          "Lender Register" shall have the meaning provided in Section 11.16.

          "Leverage Ratio" shall mean, at any date of determination, the ratio
of (x) the remainder of (i) Consolidated Debt on such date less (ii) the
                                                           ----         
amount, if positive, of (A) the aggregate amount of cash or Cash Equivalents
held by the Borrower and its Subsidiaries on such date less (B) all overdue
accounts payable of the Borrower and its Subsidiaries at such time not paid in
accordance with past practice as determined as of the Closing Date to (y)
Consolidated Annualized EBITDA as of the last day of the fiscal quarter then or
last ended.

                                     -76-
<PAGE>
 
          "Lien" shall mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement or any
lease in the nature thereof).

          "Loan" shall have the meaning provided in Section 1.01.

          "Management Affiliate" shall mean Messrs. Duda, Leach, Thomas, Johnson
and Bergstein or (to the extent same are controlled by one or more of the
foregoing Persons) Bugger Associates and MJD Partners, L.P.

          "Margin Reduction Discount" shall mean zero, provided that the Margin
                                                       --------                
Reduction Discount shall be increased to .25% per annum (in the case of B Term
Loans and C Term Loans-Floating Rate) or .50%, .75% or 1.00% per annum (in the
case of RF Loans and AF Loans), as specified in clauses (i), (ii), (iii) or (iv)
below, as the case may be, when, and for so long as, the ratio set forth in such
clause has been satisfied as at the end of the then Relevant Fiscal Quarter:

          (i)   the Margin Reduction Discount for B Term Loans and C Term Loans-
     Floating Rate shall be .25% per annum in the event that as of the end of
     the Relevant Fiscal Quarter the Leverage Ratio is less than 5.00 to 1; or

          (ii)  the Margin Reduction Discount for RF Loans and AF Loans shall
     be .50% per annum in the event that as of the end of the Relevant Fiscal
     Quarter the Leverage Ratio is less than 5.50 to 1 but equal to or greater
     than 5.00 to 1;

          (iii) the Margin Reduction Discount for RF Loans and AF Loans shall
     be .75% per annum in the event that as of the end of the Relevant Fiscal
     Quarter the Leverage Ratio is equal to or greater than 4.50 to 1 but less
     than 5.00 to 1; and

          (iv)  the Margin Reduction Discount for RF Loans and AF Loans shall
     be 1.00% per annum in the event that as of the end of the Relevant Fiscal
     Quarter the Leverage Ratio is less than 4.50 to 1.

The Leverage Ratio shall be determined as of the last day of the Relevant Fiscal
Quarter, by delivery of an officer's certificate of the Borrower to the Lenders
pursuant to Section 6.01(e), which certificate shall set forth the calculation
of the Leverage Ratio.  The Margin Reduction Discount so determined shall apply,
except as set forth below, from the date on which such officer's certificate is
delivered to the Administrative Agent to the earlier of (x) the date on which
the next certificate is delivered to the Administrative Agent pursuant to
Section 6.01(e) and (y) the 45th day following the end of the fiscal quarter in
which such first certificate was delivered to the Administrative Agent (or the
90th day if such fiscal quarter was the last fiscal quarter of a fiscal year).
Notwithstanding anything to the contrary contained above, the 

                                     -77-
<PAGE>
 
Margin Reduction Discount shall be zero (x) if no officer's certificate has
been delivered to the Lenders pursuant to Section 6.01(e) which sets forth the
Leverage Ratio as of the last day of the Relevant Fiscal Quarter or the
financial statements upon which any such calculations are based have not been
delivered, until such a certificate and/or financial statements are delivered
and (y) at all times when there shall exist a Default under Section 8.01 or an
Event of Default. It is understood and agreed that the Margin Reduction Discount
as provided above shall in no event be cumulative and only the Margin Reduction
Discount available pursuant to any of clauses (i), (ii), (iii) or (iv) if any,
contained in this definition shall be applicable.

          "Margin Stock" shall have the meaning provided in Regulation U.

          "Material Adverse Effect" shall mean a material adverse effect on the
business, property, assets, liabilities or condition (financial or otherwise)
of the Borrower and its Subsidiaries taken as a whole after giving effect to the
Transaction.

          "Material Subsidiary" shall mean any Subsidiary having gross assets at
any time with a value of at least 5% of consolidated gross assets of the
Borrower and its Subsidiaries and/or gross revenues for the last four fiscal
quarters of at least 5% of the consolidated gross revenues of the Borrower and
its Subsidiaries.

          "Minimum Borrowing Amount" shall mean (i) in the case of B Term Loans,
$10,000,000 (or, if the Total B Term Commitment is less than $10,000,000, the
greater of the then remaining Total B Term Commitment and $1,000,000) and (ii)
in the case of C Term Loans, AF Loans and RF Loans (x) maintained as Base Rate
Loans, $500,000 and (y) maintained as Eurodollar Loans, $1,000,000.

          "Minority Shares" shall mean up to 15% of the capital stock of Odin
Telephone Company held by Richfield Associates on the Closing Date and the four
shares of Sunflower Telephone Inc. held on the Closing Date by Frank and Matilda
Schreck and Foulston & Siefkin Trust Account for H.A. and Mary Simpson.

          "MJD Capital" shall mean MJD Capital Corp., a South Dakota
corporation.

          "MJD TeleChoice" shall mean MJD TeleChoice, Inc., a Delaware
corporation.

          "Multiemployer Plan" shall mean any multiemployer plan as defined in
section 4001(a)(3) of ERISA which is contributed to by (or to which there is an
obligation to contribute of) the Borrower or any of its Subsidiaries or an ERISA
Affiliate and each such plan for the five year period immediately following the
latest date on which the Borrower, 

                                     -78-
<PAGE>
 
any such Subsidiary or ERISA Affiliate contributed to or had an obligation to
contribute to such plan.

          "NationsBank" shall mean NationsBank of Texas, N.A.

          "Net Cash Proceeds" shall mean, with respect to any Asset Sale, the
Cash Proceeds resulting therefrom net (without duplication) of expenses of sale
(including payment of principal, premium and interest of Indebtedness secured by
the assets the subject of the Asset Sale and required to be, and which is,
repaid under the terms thereof as a result of such Asset Sale), and incremental
taxes paid or payable as a result thereof.

          "90%-Owned Subsidiary" shall mean any Subsidiary to the extent at
least 90% of the capital stock or other ownership interests in such Subsidiary
is owned directly or indirectly by the Borrower.

          "Non-Core Assets" shall mean (i) assets of the Borrower and its
Subsidiaries not used in their core business of providing local exchange carrier
services (e.g., assets used in the operation of the cable television business,
          ----                                                                
cellular telephone business and radio stations) and (ii) the stock and/or other
equity interests in any Subsidiary not primarily engaged in the core business of
providing local exchange carrier services, in the case of either clause (i) or
(ii) to the extent such assets are certified as non-core assets by an Authorized
Officer of the Borrower in an officer's certificate delivered to the
Administrative Agent.

          "Non-Defaulting Lender" shall mean a Lender that is not a Defaulting
Lender.

          "Non-Pledged Subsidiary" shall mean any Subsidiary that is not a
Pledged Subsidiary.

          "Note" shall mean and include each B Term Note, each C Term Note, each
RF Note and each AF Note.

          "Notice of Borrowing" shall have the meaning provided in Section 1.03.

          "Notice of Conversion" shall have the meaning provided in Section
1.06.

          "Notice Office" shall mean the office of the Administrative Agent at
130 Liberty Street, New York, New York or such other office as the
Administrative Agent may designate to the Borrower in writing from time to time.

          "Obligations" shall mean all amounts, direct or indirect, contingent
or absolute, of every type or description, and at any time existing, owing to
the Administrative 

                                     -79-
<PAGE>
 
Agent, the Collateral Agent, or any Lender pursuant to the terms of this
Agreement or any other Credit Document.

          "Other Consolidated Capital Expenditures" shall mean all Consolidated
Capital Expenditures other than CLEC Expenditures.

          "Parent Company" shall mean at any time each Subsidiary (including
each Intermediary Holding Company that is a Subsidiary at such time) that owns
the capital stock of any Subsidiary that is a TelCo.

          "Payment Office" shall mean the office of the Administrative Agent at
130 Liberty Street, New York, New York or such other office as the
Administrative Agent may designate to the Borrower and the Lenders in writing
from time to time.

          "PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor thereto.

          "Permitted Acquired Debt" shall mean Indebtedness of a Subsidiary
acquired after the Closing Date pursuant to a Permitted Acquisition, to the
extent such Indebtedness was outstanding prior to the consummation of the
Permitted Acquisition and remains outstanding as Indebtedness of the respective
Subsidiary after giving effect thereto, provided that (i) such Indebtedness was
not incurred in connection with or in anticipation of such Permitted Acquisition
or the respective Person becoming Subsidiary of the Borrower, (ii) such
Indebtedness does not constitute Indebtedness of the Borrower or any of its
Subsidiaries other than the respective Subsidiary acquired pursuant to the
respective Permitted Acquisition and shall not be secured by any assets of any
Person other than assets of the Subsidiary so acquired serving as security
therefor at the time of the respective Permitted Acquisition, (iii) no Person
(other than the respective Subsidiary or a direct parent or a Subsidiary of the
respective Subsidiary to the extent such parent or Subsidiary is acquired in
connection with such Permitted Acquisition) shall have any liability (contingent
or otherwise) with respect to any Permitted Acquired Debt and (iv) the aggregate
principal amount of all such Indebtedness shall not exceed at any time
outstanding more than 5% of the Senior Consolidated Debt as such time.

          "Permitted Acquisition" shall mean any acquisition by the Borrower or
any Subsidiary Guarantor of a company, business, division or product line
located in the United States if (i) immediately prior to, and after giving
effect to, such acquisition all the covenants contained in this Agreement
(including Sections 7.11, 7.12 and 7.13) shall be complied with on a pro forma
                                                                     --- -----
basis (as if the acquisition had been consummated on the first day of the six
month period then last ended) and (ii) the acquired company, business, division
or product line is in the Business and, after giving effect to such acquisition,
constitutes a Subsidiary or 

                                     -80-
<PAGE>
 
(in the case of a business, division or product line) is owned by a Subsidiary,
provided that no Acquisition shall constitute a Permitted Acquisition.

          "Permitted CLEC Expenditures" shall mean CLEC Expenditures to the
extent that such CLEC Expenditures shall not exceed $5 million per fiscal year
($15 million per fiscal year during any period in which the Senior Leverage
Ratio is 4.0 to 1.0 or less), provided that if the aforesaid maximum amount
which is permitted for CLEC Expenditures for any fiscal year is not expended
then the maximum amount of Permitted CLEC Expenditures which may be expended
during any year of the immediately succeeding two fiscal years shall be
increased in the aggregate by such unused amount.

          "Permitted Holders" shall mean each Carousel Affiliate, each Kelso
Affiliate and each Management Affiliate.

          "Permitted Letters of Credit" shall mean (i) each standby letter of
credit issued by a financial institution acceptable to the Administrative Agent
for the account of the Borrower or any of its Subsidiaries in support of
obligations arising in the ordinary course of business of the Borrower or such
Subsidiary and (ii) each trade letter of credit issued by a financial
institution acceptable to the Administrative Agent for the account of the
Borrower or any of its Subsidiaries and for the benefit of sellers of goods to
the Borrower or such Subsidiary in support of commercial transactions of the
Borrower or such Subsidiary in the ordinary course of business.

          "Permitted Liens" shall mean Liens described in clauses (a) through
(o), inclusive, of Section 7.03.

          "Permitted MJD Capital Debt" shall mean Indebtedness of MJD Capital
under Capital Leases and purchase money mortgages in respect of equipment
acquired by MJD Capital to lease or sublease to subsidiaries of the Borrower,
provided that the maximum amount of such Indebtedness incurred in any fiscal
year shall not exceed $2.5 million.

          "Permitted PSD Repurchase" shall mean the obligation of the Borrower
to repurchase Permitted Subordinated Debt issued prior to the consummation of
the Ellensberg Acquisition in an aggregate principal amount not to exceed $74.0
million (i.e., the anticipated consideration required to effect the Ellensburg
         -----
Acquisition) if such Acquisition is not consummated within 45 days of the
issuance of such Permitted Subordinated Debt in accordance with the terms of the
documentation governing the same.

          "Permitted Refinancing Indebtedness" shall mean any Indebtedness of
the Borrower and/or any Subsidiary of the Borrower issued or given in exchange
for, or the proceeds of which are used to, extend, refinance, renew, replace,
substitute or refund any Indebtedness of such Person permitted pursuant to
Sections 7.04(f), (g), (i) and (j) or any

                                     -81-
<PAGE>
 
Indebtedness of such Person issued to so extend, refinance, renew, replace,
substitute or refund any such Indebtedness, so long as (a) such Indebtedness has
a weighted average life to maturity greater than or equal to the weighted
average life to maturity of the Indebtedness being refinanced, (b) such
refinancing or renewal does not (i) increase the amount of such Indebtedness
outstanding immediately prior to such refinancing or renewal or (ii) add
guarantors, obligors or security from that which applied to such Indebtedness
being refinanced or renewed, (c) such refinancing or renewal Indebtedness has
substantially the same (or, from the perspective of the Lenders, more favorable)
subordination provisions, if any, as applied to the Indebtedness being renewed
or refinanced, and (d) all other terms of such refinancing or renewal
(including, without limitation, with respect to the amortization schedules,
redemption provisions, maturities, covenants, defaults and remedies), taken as a
whole, are not less favor able to the respective borrower than those previously
existing with respect to the Indebtedness being refinancing or renewed.

          "Permitted Subordinated Debt" shall mean unsecured and unguaranteed
Indebtedness of the Borrower that is fully subordinated to the payment in full
of all of the Obligations, all of the terms and conditions of which shall be
reasonably satisfactory to the Agents.

          "Person" shall mean any individual, partnership, joint venture, firm,
corporation, limited liability company, association, trust or other enterprise
or any government or political subdivision or any agency, department or
instrumentality thereof.

          "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA
(other than a multiemployer plan as defined in Section 3(37) of ERISA), which is
maintained or contributed to by (or to which there is an obligation to
contribute of) the Borrower or any of its Subsidiaries or an ERISA Affiliate and
that is subject to Title IV of ERISA, and each such plan for the five year
period immediately following the latest date on which the Borrower any such
Subsidiary of the Borrower or an ERISA Affiliate maintained, contributed to or
had an obligation to contribute to such plan.

          "Pledge Agreement" shall have the meaning provided in Section 4.01(i).

          "Pledged Securities" shall mean all the Pledged Securities as defined
in the Pledge Agreement.

          "Pledged Subsidiary" shall mean each Subsidiary the capital stock of
which is pledged pursuant to the Pledge Agreement.

          "Preferred Repurchase" shall have the meaning provided in Section
5.05(a).

                                     -82-
<PAGE>
 
          "Prime Lending Rate" shall mean the rate which BTCo announces from
time to time as its prime lending rate, the Prime Lending Rate to change when
and as such prime lending rate changes. The Prime Lending Rate is a reference
rate and does not necessarily represent the lowest or best rate actually charged
to any customer. BTCo may make commercial loans or other loans at rates of
interest at, above or below the Prime Lending Rate.

          "Pro Forma EBITDA Test" shall be satisfied, after giving effect to any
merger, consolidation, conveyance, sale or transfer referred to in Section
7.02(a) or the creation or acquisition of a new TelCo pursuant to a Permitted
Acquisition the capital stock of which is not to be pledged under the Pledge
Agreement, if the percentage of Consolidated EBITDA for the 12 months last ended
at such time (determined in the case of the acquisition or creation of a new
TelCo pursuant to a Permitted Acquisition as if such Permitted Acquisition was
consummated on the first day of such 12 month period) attributable to all Non-
Pledged Subsidiaries does not exceed 10%.

          "PUC" shall mean a public utility commission, public service
commission or any similar agency or commission.

          "Qualified IPO" shall mean a registered initial public offering of the
common stock of the Borrower generating proceeds of at least $75,000,000.

          "RCRA" shall mean the Resource Conservation and Recovery Act, as
amended, 42 U.S.C. (S) 6901 et seq.
                            -- ----

          "Refinancing" shall mean the refinancing transactions contemplated by
Section 4.01(m).

          "Regulation D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System as from time to time in effect and any successor to
all or a portion thereof establishing reserve requirements.

          "Regulation U" shall mean Regulation U of the Board of Governors of
the Federal Reserve System as from time to time in effect and any successor to
all or a portion thereof establishing margin requirements.

          "Reinvestment Election" shall have the meaning provided in Section
3.02(A)(c).

          "Reinvestment Notice" shall mean a written notice signed by an
Authorized Officer of the Borrower stating that the Borrower, in good faith,
intends and expects that the Borrower and its Subsidiaries will use all or a
specified portion of the Net Cash Proceeds of

                                     -83-
<PAGE>
 
an Asset Sale to finance a Permitted Acquisition or an Acquisition within 180
days following the consummation of such Asset Sale.

          "Reinvestment Prepayment Amount" shall mean, with respect to any
Reinvestment Election, the amount, if any, on the Reinvestment Prepayment Date
relating thereto by which (a) the Anticipated Reinvestment Amount in respect of
such Reinvestment Election exceeds (b) the aggregate amount thereof expended by
the Borrower and its Subsidiaries to finance Permitted Acquisitions.

          "Reinvestment Prepayment Date" shall mean, with respect to any
Reinvestment Election, the earliest of (i) the date, if any, upon which the
Administrative Agent, on behalf of the Required Lenders, shall have delivered a
written termination notice to the Borrower, provided that such notice may only
be given while an Event of Default under 8.01 exists and (ii) the date occurring
180 days after the date of the related Reinvestment Notice.

          "Relevant Fiscal Quarter" shall mean, at any time, the last fiscal
quarter of the Borrower with respect to which an officer's certificate has been
delivered to the Lenders pursuant to Section 6.01(e).

          "Replaced Lender" shall have the meaning provided in Section 1.13.

          "Replacement Lender" shall have the meaning provided in Section 1.13.

          "Reportable Event" shall mean an event described in Section 4043(c) of
ERISA with respect to a Plan that is subject to Title IV of ERISA other than
those events as to which the 30-day notice period is waived under subsection
 .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043.

          "Required AF Lenders" shall mean Non-Defaulting Lenders whose
outstanding Acquisition Commitments (or, after the termination thereof,
outstanding AF Loans) constitute greater than 50% of the Adjusted Total
Acquisition Commitment (or, after the termination thereof, the outstanding AF
Loans of Non-Defaulting Lenders). 

          "Required AF/RF Lenders" shall mean Non-Defaulting Lenders the sum of
whose outstanding Acquisition Commitments and Revolving Commitments (or, after
the termination thereof, outstanding AF Loans or RF Loans, as the case may be)
constitute greater than 50% of the sum of (i) the Adjusted Total Acquisition
Commitment (or, after the termination thereof, the outstanding AF Loans of Non-
Defaulting Lenders) and (ii) the Adjusted Total Revolving Commitment (or, after
the termination thereof, the outstanding RF Loans of Non-Defaulting Lenders).

                                     -84-
<PAGE>
 
          "Required B TF Lenders" shall mean Non-Defaulting Lenders the sum of
whose outstanding B Term Loans and B Term Commitments under such Facility
represents an amount greater than 50% of the sum of all outstanding B Term Loans
and B Term Commitments.
 
          "Required C TF Lenders" shall mean Non-Defaulting Lenders the sum of
whose outstanding C Term Loans represents an amount greater than (i) in the
event that any single Lender holds outstanding C Term Loans representing an
amount greater than 45% of the sum of all outstanding C Term Loans, 75% of the
sum of all outstanding C Term Loans and (ii) in all other circumstances, 50% of
the sum of all outstanding C Term Loans.

          "Required RF Lenders" shall mean Non-Defaulting Lenders whose
outstanding Revolving Commitments (or, after the termination thereof,
outstanding RF Loans) constitute greater than 50% of the Adjusted Total
Revolving Commitment (or, after the termination thereof, the outstanding RF
Loans of Non-Defaulting Lenders).

          "Required Lenders" shall mean Non-Defaulting Lenders the sum of whose
Acquisition Commitments (or, after the termination thereof, outstanding AF
Loans), Revolving Commitments (or, after the termination thereof, outstanding RF
Loans), outstanding Term Loans and Term Commitments constitute greater than 50%
of the sum of (i) the Adjusted Total Acquisition Commitment (or, after the
termination thereof, the outstanding AF Loans of Non-Defaulting Lenders), (ii)
the Adjusted Total Revolving Commitment (or, after the termination thereof, the
outstanding RF Loans of Non-Defaulting Lenders), (iii) all outstanding Term
Loans of Non-Defaulting Lenders and (iv) all Term Commitments of Non-Defaulting
Lenders.

          "Required TF Lenders" shall mean Non-Defaulting Lenders the sum of
whose outstanding Term Loans and Term Commitments represents an amount greater
than 50% of the sum of all outstanding Term Loans and Term Commitments of Non-
Defaulting Lenders.

          "Revolving Commitment" shall mean, with respect to each Lender, the
amount set forth opposite such Lender's name in Annex I hereto directly below
the column entitled "Revolving Commitment," as the same may be (x) reduced or
terminated from time to time pursuant to Section 2.02, 2.03 and/or 8 or (y)
adjusted from time to time as a result of assignments to or from such Lender
pursuant to Section 1.13 and/or 11.04.

          "Revolving Facility" shall mean the Facility evidenced by the Total
Revolving Commitment.

          "RF Commitment Commission" shall have the meaning provided in Section
2.01(b).

                                     -85-
<PAGE>
 
          "RF Lender" shall mean at any time each Lender with a Revolving
Commitment or with outstanding RF Loans.

          "RF Loan" shall have the meaning provided in Section 1.01(c).

          "RF Note" shall have the meaning provided in Section 1.05(a).

          "Scheduled Reduction" shall have the meaning provided in Section
2.03(d).

          "Scheduled Repayment" shall have the meaning provided in Section
3.02(A)(b).

          "SEC" shall have the meaning provided in Section 6.01(g).

          "SEC Regulation D" shall mean Regulation D as promulgated under the
Securities Act of 1933, as amended, as the same may be in effect from time to
time.

          "Section 3.04 Certificate" shall have the meaning provided in Section
3.04(b)(ii).

          "Secured Creditor" shall mean and include any Secured Creditor as
defined in the Pledge Agreement.

          "Senior Consolidated Debt" shall mean, at any time, (i) Consolidated
Debt at such time less (ii) any such Consolidated Debt that constitutes
Permitted Subordinated Debt, Indebtedness permitted by Section 7.04(f)(ii)
and/or Permitted Refinancing Indebtedness incurred to refinance the foregoing
types of Indebtedness.

          "Senior Leverage Ratio" shall mean, at any date of determination, the
ratio of (x) the remainder of (i) Senior Consolidated Debt on such date less
                                                                        ----
(ii) the amount, if positive, of (A) the aggregate amount of all cash and Cash
Equivalents held by the Borrower and its Subsidiaries at such time less (B) all
overdue accounts payable of the Borrower and its Subsidiaries at such time not
paid in accordance with past practice as determined as of the Closing Date to
(y) Consolidated Annualized EBITDA as of the last day of the fiscal quarter then
or last ended.

          "Sidney Telephone" shall mean Sidney Telephone Company, a Maine
corporation.

          "Special PSD Election" shall have the meaning provided in Section
3.02(A)(d).

                                     -86-
<PAGE>
 
          "Special PSD Notice" shall mean a written notice signed by an
Authorized Officer of the Borrower stating that the Borrower, in good faith,
intends and expects that the Borrower and its Subsidiaries will use $74.0
million to finance the Ellensburg Acquisition within 45 days following the
incurrence of the Permitted Subordinated Debt or will apply such amount pursuant
to the Permitted PSD Repurchase if such Acquisition is not so consummated.

          "Special PSD Prepayment Amount" shall mean the amount, if any, on the
date occurring 45 days after the Special PSD Election by which (a) $74.0 million
exceeds (b) the aggregate amounts expended by the Borrower and its Subsidiaries
to finance the Ellensburg Acquisition and/or to effect the Permitted PSD
Repurchase.

          "Specified Purposes" shall have the meaning provided in Section
5.05(a).

          "Specified Shareholders" shall mean Kelso and Carousel.

          "STE" shall mean ST Enterprises, Ltd., a Kansas corporation.

          "Subsidiary" of any Person shall mean and include (i) any corporation
more than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person directly or
indirectly through Subsidiaries and (ii) any partnership, association, joint
venture or other entity in which such Person directly or indirectly through
Subsidiaries, has more than a 50% equity interest at the time, provided that,
except for purposes of Sections 5.04, 5.13, 5.14, 6.01(f), 6.04, 6.07, 6.09,
7.10, 8.05, 8.06 and 8.09, neither MJD TeleChoice nor any other CLEC Company
shall constitute a Subsidiary. Unless otherwise expressly provided, all
references herein to "Subsidiary" shall mean a Subsidiary of the Borrower.

          "Subsidiary Guarantors" shall mean each Subsidiary party to the
Subsidiary Guaranty.

          "Subsidiary Guaranty" shall have the meaning provided in Section
4.01(h).

          "Syndication Agent" shall have the meaning provided in the first
paragraph of this Agreement.

          "Taconic" shall mean Taconic Telephone Corp., a New York corporation.

          "Taconic Acquisition" shall mean the acquisition of Taconic by the
Borrower pursuant to the Applicable Acquisition Documents.

                                     -87-
<PAGE>
 
          "Taxes" shall have the meaning provided in Section 3.04(a).

          "TelCo" shall mean any Subsidiary that is an operating company (except
to the extent same is a Non-Core Asset).

          "Term Commitment" shall mean for any Lender the sum of its B Term
Commitment and its C Term Commitment.

          "Term Loans" shall mean, collectively, the B Term Loans and the C Term
Loans.

          "TF Commitment Commission" shall have the meaning provided in Section
2.01(a).

          "Total Acquisition Commitment" shall mean the sum of the Acquisition
Commitments of each of the Lenders, provided that the Total Acquisition
Commitment shall not at any time exceed $165 million.

          "Total B Term Commitment" shall mean the sum of the B Term Commitments
of each of the Lenders.

          "Total C Term Commitment" shall mean the sum of the C Term Commitments
of each of the Lenders.

          "Total Commitment" shall mean the sum of the Total B Term Commitment,
the Total C Term Commitment, the Total Revolving Commitment, the Total
Acquisition Commitment and the CoBank Commitment.

          "Total Revolving Commitment" shall mean the sum of the Revolving
Commitments of each of the Lenders.

          "Total Term Commitment" shall mean, at any time, the sum of the Total
B Term Commitment and Total C Term Commitment.

          "Transaction" shall mean (i) the consummation of the Acquisitions,
(ii) the repayment of all Indebtedness of the Acquired Companies except as
permitted by Section 7.04 and (iii) the incurrence of Term Loans on the Closing
Date.

          "Trigger Date" shall mean the date, which shall be the last day of a
fiscal quarter ending after the Closing Date, as of which the Senior Leverage
Ratio is first determined to be 4.00 to 1.0 or less.

                                     -88-
<PAGE>
 
          "Type" shall mean any type of Loan determined with respect to the
interest option applicable thereto, i.e., a Base Rate Loan or Eurodollar Loan.
                                    ----                                

          "UCC" shall mean the Uniform Commercial Code as in effect from time to
time in New York.

          "UI" shall mean Utilities, Inc., a Maine corporation.

          "UI Acquisition" shall mean the acquisition by the Borrower of UI
pursuant to the Applicable Acquisition Documents.

          "Unfunded Current Liability" of any Plan shall mean the amount, if
any, by which the actuarial present value of the accumulated plan benefits under
the Plan as of the close of its most recent plan year, determined in accordance
with actuarial assumptions at such time consistent with Statement of Financial
Accounting Standards No. 87, exceeds the market value of the assets allocable
thereto.

          "U.S." shall mean the United States of America.

          "Wholly-Owned Subsidiary" of any Person shall mean any Subsidiary of
such Person to the extent all of the capital stock or other ownership interests
in such Subsidiary, other than directors' qualifying shares, is owned directly
or indirectly by such Person.

          "Written" or "in writing" shall mean any form of written communication
or a communication by means of telex, facsimile transmission, telegraph or
cable.

          SECTION 10.  The Agents.
                       ---------- 

          10.01  Appointment.  The Lenders hereby designate BTCo as
                 -----------
Administrative Agent (for purposes of this Section 10, the terms "Administrative
Agent" shall include BTCo in its capacity as Collateral Agent pursuant to the
Pledge Agreement) and NationsBank as Syndication Agent to act as specified
herein and in the other Credit Documents. Each Lender hereby irrevocably
authorizes, and each holder of any Note by the acceptance of such Note shall be
deemed irrevocably to authorize, the respective Agents to take such action on
its behalf under the provisions of this Agreement, the other Credit Documents
and any other instruments and agreements referred to herein or therein and to
exercise such powers and to perform such duties hereunder and thereunder as are
specifically delegated to or required of the respective Agent by the terms
hereof and thereof and such other powers as are reasonably incidental thereto.
The respective Agent may perform any of its duties hereunder by or through their
respective officers, directors, agents, employees or affiliates.

                                     -89-
<PAGE>
 
           10.02  Nature of Duties.  The respective Agent shall not have any
                  ----------------                                          
duties or responsibilities except those expressly set forth in this Agreement
and the other Credit Documents. Neither the respective Agent nor or any of its
respective officers, directors, agents, employees or affiliates shall be liable
for any action taken or omitted by them hereunder or under any other Credit
Document or in connection herewith or therewith, unless caused by their gross
negligence or willful misconduct. The duties of the respective Agent shall be
mechanical and administrative in nature; the respective Agent shall not have by
reason of this Agreement or any other Credit Document a fiduciary relationship
in respect of any Lender or the holder of any Note; and nothing in this
Agreement or any other Credit Document, expressed or implied, is intended to or
shall be so construed as to impose upon any Agent any obligations in respect of
this Agreement or any other Credit Document except as expressly set forth herein
or therein.

           10.03  Lack of Reliance on the Agents.  Independently and without
                  ------------------------------                            
reliance upon either Agent, each Lender and the holder of each Note, to the
extent it deems appropriate, has made and shall continue to make (i) its own
independent investigation of the financial condition and affairs of the Borrower
and its Subsidiaries in connection with the making and the continuance of the
Loans and the taking or not taking of any action in connection herewith and (ii)
its own appraisal of the creditworthiness of the Borrower and its Subsidiaries
and, except as expressly provided in this Agreement, neither Agent shall have
any duty or responsibility, either initially or on a continuing basis, to
provide any Lender or the holder of any Note with any credit or other
information with respect thereto, whether coming into its possession before the
making of the Loans or at any time or times thereafter. Neither Agent shall be
responsible to any Lender or the holder of any Note for any recitals,
statements, information, representations or warranties herein or in any
document, certificate or other writing delivered in connection herewith or for
the execution, effectiveness, genuineness, validity, enforceability, perfection,
collectibility, priority or sufficiency of this Agreement or any other Credit
Document or the financial condition of the Borrower and its Subsidiaries or be
required to make any inquiry concerning either the performance or observance of
any of the terms, provisions or conditions of this Agreement or any other Credit
Document, or the financial condition of the Borrower and its Subsidiaries or the
existence or possible existence of any Default or Event of Default.

           10.04  Certain Rights of the Administrative Agent.  If the
                  ------------------------------------------         
Administrative Agent shall request instructions from the Required Lenders with
respect to any act or action (including failure to act) in connection with this
Agreement or any other Credit Document, the Administrative Agent shall be
entitled to refrain from such act or taking such action unless and until the
Administrative Agent shall have received instructions from the Required Lenders;
and the Administrative Agent shall not incur liability to any Person by reason
of so refraining. Without limiting the foregoing, neither any Lender nor the
holder of any Note shall have any right of action whatsoever against the
Administrative Agent as a result of the 

                                     -90-
<PAGE>
 
Administrative Agent acting or refraining from acting hereunder or under any
other Credit Document in accordance with the instructions of the Required
Lenders.

           10.05  Reliance.  The Administrative Agent shall be entitled to rely,
                  --------                                                      
and shall be fully protected in relying, upon any note, writing, resolution,
notice, statement, certificate, telex, teletype, facsimile or telecopier
message, cablegram, radiogram, order or other document or telephone message
signed, sent or made by any Person that the Administrative Agent believed to be
the proper Person, and, with respect to all legal matters pertaining to this
Agreement and any other Credit Document and its duties hereunder and thereunder,
upon advice of counsel selected by the Administrative Agent.

           10.06  Indemnification.  To the extent an Agent is not reimbursed and
                  ---------------                                               
indemnified by the Borrower, each Defaulting Lender (to the extent so able) and
the Non-Defaulting Lenders will reimburse and indemnify the Administrative
Agent, in proportion to their respective Loans and Commitments, for and against
any and all liabilities, obligations, losses, damages, penalties, claims,
actions, judgments, costs, expenses or disbursements of whatsoever kind or
nature which may be imposed on, asserted against or incurred by such Agent in
performing its respective duties hereunder or under any other Credit Document,
in any way relating to or arising out of this Agreement or any other Credit
Document; provided that no Lender shall be liable for any portion of such
          --------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from the gross negligence or willful
misconduct of an Agent.

           10.07  Each Agent in its Individual Capacity.  With respect to its
                  -------------------------------------                      
obligation to make Loans under this Agreement, each Agent shall have the rights
and powers specified herein for a "Lender" and may exercise the same rights and
powers as though it were not performing the duties specified herein; and the
term "Lenders," "Required Lenders," "holders of Notes" or any similar terms
shall, unless the context clearly otherwise indicates, include each Agent in its
individual capacity. Each Agent may accept deposits from, lend money to, and
generally engage in any kind of banking, trust or other business with any Credit
Party or any Affiliate of any Credit Party as if it were not performing the
duties specified herein, and may accept fees and other consideration from the
Borrower, or any other Credit Party for services in connection with this
Agreement and otherwise without having to account for the same to the Lenders.

           10.08  Holders.  The Administrative Agent may deem and treat the
                  -------                                                  
payee of any Note as the owner thereof for all purposes hereof unless and until
a written notice of the assignment, transfer or endorsement thereof, as the case
may be, shall have been filed with the Administrative Agent. Any request,
authority or consent of any Person who, at the time of making such request or
giving such authority or consent, is the holder of any Note shall be conclusive
and binding on any subsequent holder, transferee, assignee or indorsee, as the
case may be, of such Note or of any Note or Notes issued in exchange therefor.

                                     -91-
<PAGE>
 
          10.09  Resignation by the Administrative Agent.  (a)  The
                 ---------------------------------------           
Administrative Agent may resign from the performance of all its functions and
duties hereunder and/or under the other Credit Documents at any time by giving
15 Business Days' prior written notice to the Borrower and the Lenders. Such
resignation shall take effect upon the appointment of a successor Administrative
Agent pursuant to clauses (b) and (c) below or as otherwise provided below.

          (b)  Upon any such notice of resignation, the Required Lenders shall
appoint a successor Administrative Agent hereunder or thereunder who shall be a
commercial bank or trust company reasonably acceptable to the Borrower (such
consent not to be unreasonably withheld).

          (c)  If a successor Administrative Agent shall not have been so
appointed within such 15 Business Day period, the Administrative Agent, with the
consent of the Borrower (such consent not to be unreasonably withheld), shall
then appoint a successor Administrative Agent who shall serve as Administrative
Agent hereunder or thereunder until such time, if any, as the Required Lenders
appoint a successor Administrative Agent as provided above.

          (d)  If no successor Administrative Agent has been appointed pursuant
to clause (b) or (c) above by the 30th Business Day after the date such notice
of resignation was given by the Administrative Agent, the Administrative Agent's
resignation shall become effective and the Required Lenders shall thereafter
perform all the duties of the Administrative Agent hereunder and/or under any
other Credit Document until such time, if any, as the Required Lenders appoint a
successor Administrative Agent as provided above.

          (e)  The Syndication Agent may resign from its duties hereunder at any
time upon four Business Days' prior written notice to the Borrower and the
Administrative Agent.

          SECTION 11.  Miscellaneous.
                       ------------- 

          11.01  Payment of Expenses, etc.  The Borrower agrees to:  (i)
                 -------------------------                              
whether or not the transactions herein contemplated are consummated, pay all
reasonable out-of-pocket costs and expenses of the Agents in connection with the
negotiation, preparation, execution and delivery of the Credit Documents and the
documents and instruments referred to therein and any amendment, waiver or
consent relating thereto (including, without limitation, the reasonable fees and
disbursements of White & Case LLP) and of each Agent and each of the Lenders in
connection with the enforcement of the Credit Documents and the documents and
instruments referred to therein (including, without limitation, the reasonable
fees and disbursements of counsel for the Agents and for each of the Lenders);
(ii) pay and hold each of the Lenders harmless from and against any and all
present and future stamp and other similar taxes with respect to the foregoing
matters and save each of the Lenders harmless from and 

                                     -92-
<PAGE>
 
against any and all liabilities with respect to or resulting from any delay or
omission (other than to the extent attributable to such Lender) to pay such
taxes; and (iii) indemnify each Lender (including in its capacity as Agent), its
officers, directors, employees, representatives and agents from and hold each of
them harmless against any and all losses, liabilities, claims, damages or
expenses incurred by any of them as a result of, or arising out of, or in any
way related to, or by reason of, (a) any investigation, litigation or other
proceeding (whether or not any Agent or any Lender is a party thereto and
whether or not any such investigation, litigation or other proceeding is between
or among any Agent, any Lender, any Credit Party or any third Person or
otherwise (except to the extent between or among any Lenders in their capacity
as such)) related to the entering into and/or performance of any Credit Document
or the use of the proceeds of any Loans hereunder or the Transaction or the
consummation of any transactions contemplated in any Credit Document, or (b) the
actual or alleged presence of Hazardous Materials in the air, surface water or
ground water or on the surface or subsurface of any property owned or operated
at any time by Borrower or any of its Subsidiaries or the generation, storage,
transportation, handling or disposal of Hazardous Materials by the Borrower or
any of its Subsidiaries at any location, or the noncompliance by the Borrower or
any of its Subsidiaries with any Environmental Law or any Environmental Claim in
connection with the Borrower or any of its Subsidiaries or business or
operations or any property owned or operated at any time by the Borrower or any
of its Subsidiaries, including, in each case, without limitation, the reasonable
fees and disbursements of counsel incurred in connection with any such
investigation, litigation or other proceeding (but excluding any such losses,
liabilities, claims, damages or expenses to the extent incurred by reason of the
gross negligence or willful misconduct of the Person to be indemnified or of any
other indemnitee who is such Person or an affiliate of such Person).

           11.02  Right of Setoff.  In addition to any rights now or hereafter
                  ---------------                                             
granted under applicable law or otherwise, and not by way of limitation of any
such rights, if an Event of Default then exists, each Lender is hereby
authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to any Credit Party or to any other Person,
any such notice being hereby expressly waived, to set off and to appropriate and
apply any and all deposits (general or special but not trust accounts) and any
other Indebtedness at any time held or owing by such Lender (including, without
limitation, by branches and agencies of such Lender wherever located) to or for
the credit or the account of any Credit Party against and on account of the
Obligations and liabilities of such Credit Party to such Lender under this
Agreement or under any of the other Credit Documents, including, without
limitation, all interests in Obligations of such Credit Party purchased by such
Lender pursuant to Section 11.06(b), and all other claims of any nature or
description arising out of or connected with this Agreement or any other Credit
Document, irrespective of whether or not such Lender shall have made any demand
hereunder and although said Obligations, liabilities or claims, or any of them,
shall be contingent or unmatured.

                                     -93-
<PAGE>
 
          11.03  Notices.  Except as otherwise expressly provided herein, all
                 -------                                                     
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, telecopier, facsimile or cable communication) and
mailed, telegraphed, telexed, telecopied, faxed, cabled or delivered, if to the
Borrower at the address specified opposite its signature below, if to any
Lender, at its address specified for such Lender on Annex II hereto; or, at such
other address as shall be designated by any party in a written notice to the
other parties hereto. All such notices and communications shall be mailed,
telegraphed, telexed, telecopied, or cabled or sent by overnight courier, and
shall be effective when received.

          11.04  Benefit of Agreement.  (a)  This Agreement shall be binding
                 --------------------                                       
upon and inure to the benefit of and be enforceable by the respective successors
and assigns of the parties hereto, provided that the Borrower may not assign or
                                   --------
transfer any of its rights or obligations hereunder without the prior written
consent of the Lenders. Each Lender may at any time grant participations in any
of its rights hereunder or under any of the Notes to another financial
institution, provided that in the case of any such participation, the
participant shall not have any rights under this Agreement or any of the other
Credit Documents (the participant's rights against such Lender in respect of
such participation to be those set forth in the agreement executed by such
Lender in favor of the participant relating thereto) and all amounts payable by
the Borrower hereunder shall be determined as if such Lender had not sold such
participation, except that the participant shall be entitled to the benefits of
Sections 1.10 and 3.04 of this Agreement to the extent that such Lender would be
entitled to such benefits if the participation had not been entered into or
sold, and, provided further, that no Lender shall transfer, grant or assign any
participation under which the participant shall have rights to approve any
amendment to or waiver of this Agreement or any other Credit Document except to
the extent such amendment or waiver would (i) extend the final scheduled
maturity of any Loan or Note in which such participant is participating (it
being understood that any waiver of any prepayment of, or the method of any
application of any prepayment to, the Loans shall not constitute an extension of
the final maturity date), or reduce the rate or extend the time of payment of
interest or Fees (except in connection with a waiver of the applicability of any
post-default increase in interest rates), or reduce the principal amount
thereof, or increase such participant's participating interest in any Commitment
over the amount thereof then in effect (it being understood that a waiver of any
Default or Event of Default or of a mandatory reduction in the Total Commitment
or a mandatory prepayment shall not constitute a change in the terms of any
Commitment), (ii) release all or substantially all of the Collateral or (iii)
consent to the assignment or transfer by the Borrower of any of its rights and
obligations under this Agreement or any other Credit Document.

          (b)  Notwithstanding the foregoing, (x) any Lender may assign all or a
portion of its outstanding B Term Loans and/or C Term Loans, its B Term
Commitment, Revolving Commitment and/or Acquisition Commitment and its rights
and obligations hereunder (which

                                     -94-
<PAGE>
 
assignment does not have to be pro rata among the Facilities) to (i) one or more
                               --------
Lenders and/or Affiliates of such Lender which are Eligible Transferees or (ii)
in the case of any Lender that is a fund that invests in loans, any other fund
that invests in loans and is managed and/or advised by the same investment
advisor of such Lender or by an Affiliate of such investment advisor, and (y)
with the consent of the Administrative Agent and, if no Default under Section
8.01 or 8.05 or Event of Default exists, the Borrower (which consents shall not
be unreasonably withheld), any Lender may assign all or a portion of its
outstanding B Term Loans and/or C Term Loans, its B Term Commitment, Revolving
Commitment and/or Acquisition Commitment and its rights and obligations
hereunder to one or more Eligible Transferees (treating any fund that invests in
loans and any other fund that invests in loans and is managed and/or advised by
the same investment advisor of such fund or by an Affiliate of such investment
advisor of such fund or by an Affiliate of such investment advisor as a single
Eligible Transferee). No assignment pursuant to the immediately preceding
sentence shall to the extent such assignment represents an assignment to an
institution other than one or more Lenders hereunder, be in an aggregate amount
less than $5,000,000 unless the entire Commitment and Loans of the assigning
Lender is so assigned. If any Lender so sells or assigns all or a part of its
rights hereunder or under the Notes, any reference in this Agreement or the
Notes to such assigning Lender shall thereafter refer to such Lender and to the
respective assignee to the extent of their respective interests and the 
respective assignee shall have, to the extent of such assignment (unless
otherwise provided therein), the same rights and benefits as it would if it were
such assigning Lender. Each assignment pursuant to this Section 11.04(b) shall
be effected by the assigning Lender and the assignee Lender executing an
Assignment Agreement and giving the Administrative Agent written notice thereof.
At the time of any such assignment, (i) either the assigning or the assignee
Lender shall pay to the Administrative Agent a nonrefundable assignment fee of
$3,500 (provided that only one assignment fee shall be payable in respect of any
reasonably contemporaneous assignment by a fund that invests in loans to any one
or more funds that invests in loans and are managed and/or advised by the same
investment advisor of such fund or by an Affiliate of such investment advisor),
(ii) Annex I shall be deemed to be amended to reflect the Commitments and Loans
of the respective assignee (which shall result in a direct reduction to the
Commitment of the assigning Lender) and of the other Lenders, and (iii) upon
surrender of the old Notes the Borrower will, at its own expense, issue new
Notes to the respective assignee and to the assigning Lender in conformity with
the requirements of Section 1.05, provided further that such transfer or
                                  ----------------
assignment will not become effective until recorded by the Administrative Agent
on the Lender Register pursuant to Section 11.16. To the extent of any
assignment pursuant to this Section 11.04(b) to a Person which is not already a
Lender hereunder and which is not a United States Person (as such term is
defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, the
respective assignee Lender shall provide to the Borrower and the Administrative
Agent the appropriate Internal Revenue Service Forms (and, if applicable, a
Section 3.04 Certificate) described in Section 3.04(b). To the extent that an
assignment pursuant to this Section 11.04(b) would, at the time of such
assignment, result in increased costs under Section 1.10 or 3.04 from those

                                     -95-
<PAGE>
 
being charged by the respective assigning Lender prior to such assignment, then
the Borrower shall not be obligated to pay such increased costs (although the
Borrower shall be obligated to pay any other increased costs of the type
described above resulting from changes after the date of the respective
assignment). Nothing in this clause (b) shall prevent or prohibit any Lender
from pledging its Notes or Loans to a Federal Reserve Bank in support of
borrowings made by such Lender from such Federal Reserve Bank and, with the
consent of the Administrative Agent and the Borrower (which consents shall not
be unreasonably withheld), any Lender which is a fund may pledge all or any
portion of its Loans and Notes to its trustee in support of its obligations to
its trustee.

          (c)  Notwithstanding any other provisions of this Section 11.04, no
transfer or assignment of the interests or obligations of any Lender hereunder
or any grant of participation therein shall be permitted if such transfer,
assignment or grant would require the Borrower or any of its Subsidiaries to (i)
file a registration statement with the SEC, (ii) qualify the Loans under the
"Blue Sky" laws of any State or (iii) integrate such transfer or assignment with
a separate securities offering of securities of the Borrower or any of its
Subsidiaries.

          (d)  Each Lender initially party to this Agreement hereby represents,
and each Person that became a Lender pursuant to an assignment permitted by this
Section 11 will, upon its becoming party to this Agreement, represent that it is
an Eligible Transferee which makes or invests in loans in the ordinary course of
its business and that it will make or acquire Loans for its own account in the
ordinary course of such business, provided that subject to the preceding clauses
                                  --------
(a) and (b), the disposition of any promissory notes or other evidences of or
interests in Indebtedness held by such Lender shall at all times be within its
exclusive control.

          11.05  No Waiver; Remedies Cumulative.  No failure or delay on the
                 ------------------------------                             
part of the Administrative Agent or any Lender in exercising any right, power or
privilege hereunder or under any other Credit Document and no course of dealing
between any Credit Party and the Administrative Agent or any Lender shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege hereunder or under any other Credit Document preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege hereunder or thereunder. The rights and remedies herein expressly
provided are cumulative and not exclusive of any rights or remedies which the
Administrative Agent or any Lender would otherwise have. No notice to or demand
on any Credit Party in any case shall entitle any Credit Party to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Administrative Agent or the Lenders to any other or
further action in any circumstances without notice or demand.

          11.06  Payments Pro Rata.  (a)  The Administrative Agent agrees that
                 -----------------                                            
promptly after its receipt of each payment from or on behalf of any Credit
Party in respect 

                                     -96-
<PAGE>
 
of any Obligations of such Credit Party hereunder, it shall distribute such
payment to the Lenders (other than any Lender that has expressly waived its
right to receive its pro rata share thereof) pro rata based upon their
                     --- ----
respective shares, if any, of the Obligations with respect to which such payment
was received.

          (b)  Each of the Lenders agrees that, if it should receive any amount
hereunder (whether by voluntary payment, by realization upon security, by the
exercise of the right of setoff or banker's lien, by counterclaim or cross
action, by the enforcement of any right under the Credit Documents, or
otherwise) which is applicable to the payment of the principal of, or interest
on, the Loans or Fees, of a sum which with respect to the related sum or sums
received by other Lenders is in a greater proportion than the total of such
Obligation then owed and due to such Lender bears to the total of such
Obligation then owed and due to all of the Lenders immediately prior to such
receipt, then such Lender receiving such excess payment shall purchase for cash
without recourse or warranty from the other Lenders an interest in the
Obligations of the respective Credit Party to such Lenders in such amount as
shall result in a proportional participation by all of the
Lenders in such amount, provided that if all or any portion of such excess
                        --------                                          
amount is thereafter recovered from such Lender, such purchase shall be
rescinded and the purchase price restored to the extent of such recovery, but
without interest.

          (c)  Notwithstanding anything to the contrary contained herein, the
provisions of the preceding Sections 11.06(a) and (b) shall be subject to the
express provisions of this Agreement which require, or permit, differing
payments to be made to Non-Defaulting Lenders as opposed to Defaulting Lenders.

          11.07  Calculations; Computations.  (a)  The financial statements to
                 --------------------------                                   
be furnished to the Lenders pursuant hereto shall be made and prepared in
accordance with GAAP consistently applied throughout the periods involved
(except as set forth in the notes thereto or as otherwise disclosed in
writing by the Borrower to the Lenders), provided that (x) except as otherwise
specifically provided herein, all computations determining compliance with
Sections 7.11, 7.12 and 7.13, including definitions used therein, shall utilize
accounting principles and policies in effect at the time of the preparation of,
and in conformity with those used to prepare, the December 31, 1997 historical
financial statements of the Acquired Companies delivered to the Lenders pursuant
to Section 5.10(b) and (y) that if at any time such computations utilize
accounting principles different from those utilized in the financial statements
furnished to the Lenders, such financial statements shall be accompanied by
reconciliation work-sheets.

          (b)  All computations of interest and Fees hereunder shall be made on
the actual number of days elapsed over a year of 360 days (365-366 days in
the case of interest on Base Rate Loans).

                                     -97-
<PAGE>
 
          11.08  Governing Law; Submission to Jurisdiction; Venue; Waiver of
                 -----------------------------------------------------------
Jury Trial.  (a)    This Agreement and the other Credit Documents and the rights
- ----------
rights and obligations of the parties hereunder and thereunder shall be
construed in accordance with and be governed by the law of the State of New
York. Any legal action or proceeding with respect to this Agreement or any other
Credit Document may be brought in the courts of the State of New York sitting in
the Borough of Manhattan or of the United States for the Southern District of
New York, and, by execution and delivery of this Agreement, each Credit Party
hereby irrevocably accepts for itself and in respect of its property, generally
and unconditionally, the jurisdiction of the aforesaid courts. Each Credit Party
further irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by registered or certified mail, postage prepaid, to each Credit Party
located outside New York City and by hand delivery to each Credit Party located
within New York City, at its address for notices pursuant to Section 11.03, such
service to become effective 30 days after such mailing. Each Credit Party hereby
irrevocably designates appoints and empowers CT Corporation System, with offices
on the date hereof located at 1633 Broadway, New York, New York 10019, as its
agent for service of process in respect of any such action or proceeding.
Nothing herein shall affect the right of the Administrative Agent, any Lender to
serve process in any other manner permitted by law or to commence legal
proceedings or otherwise proceed against any Credit Party in any other
jurisdiction.

          (b)    Each Credit Party hereby irrevocably waives any objection which
it may now or hereafter have to the laying of venue of any of the aforesaid
actions or proceedings arising out of or in connection with this Agreement or
any other Credit Document brought in the courts referred to in clause (a) above
and hereby further irrevocably waives and agrees not to plead or claim in any
such court that any such action or proceeding brought in any such court has been
brought in an inconvenient forum.

          (c)    Each of the parties to this Agreement hereby irrevocably waives
all right to a trial by jury in any action, proceeding or counterclaim arising
out of or relating to this Agreement, the other Credit Documents or the
transactions contemplated hereby or thereby.

          11.09  Counterparts.  This Agreement may be executed in any number of
                 ------------                                                  
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A set of counterparts
executed by all the parties hereto shall be lodged with the Borrower and the
Administrative Agent.

          11.10  Effectiveness.  This Agreement shall become effective on the
                 -------------                                               
date (the "Effective Date") on which the Borrower and each of the Lenders shall
have signed a copy hereof (whether the same or different copies) and shall have
delivered the same to the Administrative Agent at the Payment Office of the
Administrative Agent or, in the case of

                                     -98-
<PAGE>
 
the Lenders, shall have given to the Administrative Agent telephonic (confirmed
in writing), written telex or facsimile transmission notice (actually received)
at such office that the same has been signed and mailed to it. The
Administrative Agent will give the Borrower and each Lender prompt written
notice of the occurrence of the Effective Date.

          11.11  Headings Descriptive.  The headings of the several sections
                 --------------------                                       
and subsections of this Agreement are inserted for convenience only and shall
not in any way affect the meaning or construction of any provision of this
Agreement.

          11.12  Amendment or Waiver.  Neither this Agreement nor any other
                 -------------------                                       
Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination is
in writing signed by the Borrower, the Required AF/RF Lenders and the Required
TF Lenders, provided that no such change, waiver, discharge or termination
shall, without the consent of each Lender (other than a Defaulting Lender)
directly affected thereby, (i) extend the AF/RF Maturity Date, the B Maturity
Date or the C Maturity Date (it being understood that any waiver of any
prepayment of, or the method of application of any prepayment to, the Loans
shall not constitute any such extension), or reduce the rate or extend the time
of payment of interest (other than as a result of waiving the applicability of
any post-default increase in interest rates) or Fees, or reduce the principal
amount thereof, or increase the Commitment of any Lender over the amount thereof
then in effect (it being understood that a waiver of any Default or Event of
Default or of a mandatory reduction in the Total Commitment shall not constitute
a change in the terms of any Commitment of any Lender), (ii) amend, modify or
waive any provision of this Section 11.12, (iii) reduce the percentage specified
in, or (except to give effect to any additional facilities hereunder) otherwise
modify, the definition of Required Lenders, (iv) consent to the assignment or
transfer by the Borrower of any of its rights and obligations under this
Agreement, (v) release all or substantially all of the Collateral or (vi)
release all or substantially all of the Subsidiary Guaranties; provided further,
that no such change, waiver, discharge or termination shall, (t) without the
consent of the Required AF/RF Lenders, reduce the percentage specified in, or
otherwise modify, the definition of Required AF/RF Lenders, (u) without the
consent of the Required TF Lenders, reduce the percentage specified in, or
otherwise modify, the definition of Required TF Lenders, (v) without the consent
of the Required AF Lenders, reduce the percentage specified in, or otherwise
modify, the definition of Required AF Lenders or amend, waive or reduce any
Scheduled Reduction applicable to the Acquisition Facility, (w) without the
consent of the Required RF Lenders, reduce the percentage specified in, or
otherwise modify, the definition of Required RF Lenders or amend, waive or
reduce any Scheduled Reduction applicable to the Revolving Facility, (x) without
the consent of the Required B TF Lenders, reduce the percentage specified in, or
otherwise modify, the definition of Required B TF Lenders or amend, waive or
reduce any Scheduled Repayment applicable to the B Term Facility, (y) without
the consent of the Required C TF Lenders, reduce the percentage specified in, or
otherwise modify, the definition of Required C TF Lenders or amend, waive or

                                     -99-
<PAGE>
 
reduce any Scheduled Repayment applicable to the C Term Facility or (z) without
the consent of any Agent affected thereby, amend any provision of Section 10.

          11.13  Survival.  All indemnities set forth herein including, without
                 --------                                                      
limitation, in Section 1.10, 1.11, 3.04, 10.06 or 11.01 shall survive the
execution and delivery of this Agreement and the making and repayment of the
Loans.

          11.14  Domicile of Loans.  Each Lender may transfer and carry its
                 -----------------                                         
Loans at, to or for the account of any branch office, subsidiary or affiliate of
such Lender, provided that the Borrower shall not be responsible for costs
arising under Section 1.10 or 3.04 resulting from any such transfer (other than
a transfer pursuant to Section 1.12) to the extent not otherwise applicable to
such Lender prior to such transfer.

          11.15  Confidentiality.  Each of the Lenders agrees that it will use
                 ---------------                                              
its best efforts not to disclose without the prior consent of the Borrower
(other than to its employees, auditors, counsel or other professional advisors,
to affiliates or to another Lender if the Lender or such Lender's holding or
parent company in its sole discretion determines that any such party should have
access to such information) any information with respect to the Borrower or any
of its Subsidiaries which is furnished pursuant to any Credit Document and which
is designated by the Borrower or the Borrower to the Lenders in writing as
confidential; provided, that any Lender may disclose any such information (a) as
has become generally available to the public, (b) as may be required or
appropriate in any report, statement or testimony sub mitted to any municipal,
state or Federal regulatory body having or claiming to have jurisdiction over
such Lender or to the Federal Reserve Board or the Federal Deposit Insurance
Corporation or similar organiza tions (whether in the United States or
elsewhere) or their successors or to the National Association of Insurance
Commissioners, (c) as may be required or appropriate in response to any summons
or subpoena or in connection with any litigation (notice of which will be
promptly sent to the Borrower to the extent permitted by Law), (d) in order to
comply with any law, order, regulation or ruling applicable to such Lender, and
(e) to any prospective transferee that is an Eligible Transferee that is
acceptable to the Borrower in connection with any contemplated transfer of any
of the Notes or any interest therein by such Lender to the extent that such
prospective transferee is notified of the confidentiality requirements relating
thereto.  No Lender shall be obligated or required to return any materials
furnished by the Borrower or any Subsidiary. The Borrower hereby agrees that the
failure of a Lender to comply with the provisions of this Section 11.15 shall
not relieve the Credit Parties of any of their obligations to such Lender under
this Agreement and the other Credit Documents.

                                     -100-
<PAGE>
 
           11.16  Lender Register. The Borrower hereby designates the
                  ---------------                                    
Administrative Agent to serve as the Borrower's agent, solely for purposes of
this Section 11.16, to maintain a register (the "Lender Register") on which it
will record the Commitments from time to time of each of the Lender (including
Acquisition Commitments, if effected, and any B Term Commitments resulting from
a B Term Commitment Renewal), the Loans made by each of the Lenders and each
repayment in respect of the principal amount of the Loans of each of the
Lenders. Failure to make any such recordation, or any error in such recordation
shall not affect the Borrower's obligations in respect of such Loans. With
respect to any Lender, the transfer of the Commitments (or the post-Closing Date
effectiveness of new Commitments) or Loans of such Lender and the rights to the
principal of, and interest on, such Loans or any Loan made pursuant to such
Commitments shall not be effective until such transfer is recorded on the Lender
Register maintained by the Administrative Agent with respect to ownership of
such Commitments and Loans and prior to such recordation all amounts owing to
the transferor with respect to such Commitments and Loans shall remain owing to
the transferor. The registration of assignment or transfer of all or part of any
Commitments and Loans shall be recorded by the Administrative Agent on the
Lender Register only upon the acceptance by the Administrative Agent of a
properly executed and delivered Assignment Agreement pursuant to Section
11.04(b). The Borrower agrees to indemnify the Administrative Agent from and
against any and all losses, claims, damages and liabilities of whatsoever nature
which may be imposed on, asserted against or incurred by the Administrative
Agent in performing its duties under this Section 11.16 (but excluding such 
losses, claims, liabilities or liabilities incurred by reason of the 
Administrative Agent's gross negligence or willful misconduct).

                                     -101-
<PAGE>
 
          IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Agreement to be duly executed and delivered as of the date
first above written.


                                       MJD COMMUNICATIONS, INC.


                                       By  /s/ Walter Leach
                                          --------------------------------------
                                          Title: Vice President, Secretary and
                                          Chief Financial Officer



                                       BANKERS TRUST COMPANY,
                                       Individually and as Administrative Agent
 

                                       By  /s/ G. Andrew Keith
                                          --------------------------------------
                                           Title: Vice President



                                       NATIONSBANK OF TEXAS, N.A.,
 

                                       By  /s/ Pamela S. Kurtzman
                                          --------------------------------------
                                          Title: Vice President



                                       COBANK, ACB
 

                                       By  /s/ Rick L. Freeman
                                          --------------------------------------
                                          Title: Assistant Vice President
<PAGE>
 
                                       FIRST UNION NATIONAL BANK
 

                                       By  /s/ Jim Redman
                                          --------------------------------------
                                          Title: Senior Vice President



                                       PRIME INCOME TRUST

                                       By  /s/ Sheila Finnerty
                                          --------------------------------------
                                          Title: Assistant Vice President



                                       HELLER FINANCIAL, INC.
 

                                       By  /s/ Patrick Hayes
                                          --------------------------------------
                                          Title: Vice President



                                       THE TRAVELERS INSURANCE COMPANY
 

                                       By  /s/ Robert M. Mills
                                          --------------------------------------
                                          Title: Investment Officer



                                       UNION BANK OF CALIFORNIA, N.A.
 

                                       By  /s/ Christine P. Ball
                                          --------------------------------------
                                          Title: Vice President
<PAGE>
 
                                       CENTURA BANK
 

                                       By  /s/ Gregory Greer
                                          --------------------------------------
                                          Title: Corporate Banking Officer



                                       TORONTO DOMINION (TEXAS), INC.
 

                                       By  /s/ David G. Parker
                                          --------------------------------------
                                          Title:


                                       FLEET NATIONAL BANK
 

                                       By  /s/ Tanya M. Crossley
                                          --------------------------------------
                                          Title: Vice President



                                       MERRILL LYNCH SENIOR FLOATING
                                         RATE FUND, INC.
 

                                       By  /s/ Lynn C. Baranski
                                          --------------------------------------
                                          Title: Authorized Signatory



                                       PILGRIM AMERICA PRIME RATE TRUST
 

                                       By  /s/ Thomas Hunt
                                          --------------------------------------
                                          Title: Assistant Porfolio Manager
<PAGE>
 
                                                                         ANNEX I
                                                                         -------



                                  COMMITMENTS
                                  -----------

<TABLE>
<CAPTION>
                                B Term         C Term          CoBank       Revolving
     Lender                   Commitment     Commitment      Commitment    Commitment
     ------                  ------------  --------------  --------------  -----------
<S>                          <C>           <C>             <C>             <C>
Bankers Trust Company        $ 47,500,000  $ 7,993,595.94  $            0  $15,000,000

NationsBank of Texas,        
 N.A.                        $ 10,000,000  $            0  $            0  $15,000,000

CoBank, ACB                  $          0  $            0  $51,506,404.18  $         0

First Union National Bank    $ 10,000,000  $            0  $            0  $15,000,000

Prime Income Trust           $ 15,000,000  $ 3,999,999.97  $            0  $         0

Heller Financial, Inc.       $  5,000,000  $            0  $            0  $ 7,500,000

The Travelers Insurance      $ 15,000,000  $ 4,999,999.96  $            0  $         0
 Company

Union Bank of California,    $  7,500,000  $            0  $            0  $ 9,000,000
 N.A.

Centura Bank                 $ 10,000,000  $            0  $            0  $14,500,000

Toronto Dominion (Texas),    
 Inc. (for First Dominion    $  5,000,000  $ 1,999,999.98  $            0  $         0
 Capital)

Fleet National Bank          $  7,500,000  $            0  $            0  $ 9,000,000

Merrill Lynch Senior         
 Floating Rate Fund, Inc.    $ 10,000,000  $ 1,499,999.98  $            0  $         0

Pilgrim America Prime        
 Rate Trust                  $ 12,500,000  $ 2,999,999.98  $            0  $         0
                             ------------  --------------  --------------  ----------- 
                             $155,000,000  $23,493,595.82  $51,506,404.18  $85,000,000
                             ============  ==============  ==============  ===========
</TABLE>
<PAGE>
 
                                                                        ANNEX II
                                                                        --------



                                   ADDRESSES
                                   ---------


   Bankers Trust Company
   130 Liberty Street
   New York, New York  10006

      Attention:         Mary Kay Coyle
      Telephone No.:     (212) 250-2500
      Telecopier No.:    (212) 250-7218


   NationsBank of Texas, N.A.
   901 Main Street, 64th Floor
   Dallas, Texas  75202

      Attention:         Pam Kurtzman
      Telephone No.:     (214) 508-0997
      Telecopier No.:    (214) 508-9390


   CoBank ACB
   200 Galleria Parkway N.W., Suite 1900
   Atlanta, Georgia  30339

      Attention:         Rick Freeman
      Telephone No.:     (770) 618-3200
      Telecopier No.:    (770) 618-3202


   First Union National Bank
   One First Union Center
   301 South College Street
   Charlotte, North Carolina  28288-0735
 
      Attention:         Jeff Haristy
      Telephone No.:     (704) 374-4999
<PAGE>
 
                                                                        ANNEX II
                                                                          Page 2

      Telecopier No.:    (704) 374-4092

 
   Prime Income Trust (Dean Witter)
   Two World Trade Center, 72nd Floor
   New York, New York  10048
 
      Attention:         Sheila Finnerty
      Telephone No.:     (212) 392-5686
      Telecopier No.:    (212) 392-5345

 
   Heller Financial, Inc.
   500 West Monroe Street
   Chicago, Illinois  60661

      Attention:         Patrick Hayes
      Telephone No.:     (312) 441-7035
      Telecopier No.:    (312) 441-7357


   Heller Financial, Inc.
   900 Circle 7S Parkway
   Suite 900
   Atlanta, Georgia  30339

      Attention:         Betsy Edelman
      Telephone No.:     (770) 980-6016
      Telecopier No.:    (770) 980-6315


   The Travelers Insurance Company
   One Tower Square
   Hartford, Connecticut  06183-2030
 
      Attention:         Allen Cantrell
      Telephone No.:     (860) 954-2396
<PAGE>
 
                                                                        ANNEX II
                                                                          Page 3

      Telecopier No.:    (860) 954-5243


   Union Bank of California, N.A.
   445 South Figueroa Street
   Los Angeles, California  90071
 
      Attention:         Ryan Flanagan
      Telephone No.:     (713) 236-7001
      Telecopier No.:    (713) 236-5747
 

   Centura Bank
   200 Providence Road, 3rd Floor
   P.O. Box 626
   Charlotte, North Carolina  28207

      Attention:         Gregory Greer
      Telephone No.:     (704) 331-1478
      Telecopier No.:    (704) 331-1761


   First Dominion Capital
   1330 Avenue of the Americas
   New York, New York  10019
 
      Attention:         Andrew H. Marsh
      Telephone No.:     (212) 258-1010
      Telecopier No.:    (212) 258-1019
 
   Copy to:
 
   Toronto Dominion (Texas), Inc.
   909 Fannin Street
   Houston, TX 77010
 
      Attention:         David Parker
<PAGE>
 
                                                                        ANNEX II
                                                                          Page 4

      Telephone No.:     (713) 653-8248
      Telecopier No.:    (713) 652-2647
 

   Fleet National Bank
   1185 Avenue of the Americas, MCS16K
   16th Floor
   New York, New York  10167

      Attention:         Tanya Crossley
      Telephone No.:     (212) 819-6047
      Telecopier No.:    (212) 819-6202
 
 
   Merrill Lynch Senior Floating Rate Fund, Inc.
   800 Scudder Mill Road
   Sec. 1
   Plainsboro, New Jersey  08536
 
      Attention:         Lynn Baraski
      Telephone No.:     (609) 282-5013
      Telecopier No.:    (609) 282-2756
 
      Attention:         George Pelose
      Telephone No.:     (609) 282-2060
      Telecopier No.:    (609) 282-0727
 

   Pilgrim America Prime Rate Trust
   Two Renaissance Square
   40 North Central Avenue, Suite 1200
   Phoenix, Arizona  85004-4424

      Attention:         Tim Hunt
      Telephone No.:     (602) 417-8257
<PAGE>
 
                                                                        ANNEX II
                                                                          Page 5
 
      Telecopier No.:    (602) 417-8327
<PAGE>
 



                                   ANNEX III

                                 SUBSIDIARIES




A.  MJD COMMUNICATIONS, INC.
    ------------------------

    1.  Common Stock

             MJD Partners, L.P.                 38,145.00
             John P. Duda                          537.00   
             Walter E. Leach, Jr.                  490.00 
             Carousel                           47.881.93      
             Kelso                              47,881.93      
             Michael and Lindy Bergstein           414.00      
             Joel Bergstein MP Plan                311.00      
             Eugene B. Johnson                     400.00     
             Jack H. Thomas                        200.00     
             Peter Nixon                            30.00     
             Michael Stein                         300.00     
             Lisa Hood                              30.00     
             Pamela D. Clarke                       45.00     
             Patrick R. Eudy                       150.00     
             Patrick L. Morse                      100.00     
             Timothy W. Henry                       85.00     
                                             ------------    
                                                              
                     Subtotal                  137,000.86     
 
    2.  Options to Purchase Common Stock

             Jack H. Thomas                       1,421                         
             Eugene B. Johnson                    1,066                       
             Walter E. Leach, Jr.                   711                      
             John P. Duda                         1,066                       
                                                -------                       
                                                                                
                    Subtotal                      4,264                        

    3.  Class A Voting Common Stock Purchase Warrants

               Jack H. Thomas                       10
               Eugene B. Johnson                    21
               John P. Duda                         17
               Walter E. Leach, Jr.                 15
               Bugger Associates, Inc.              21
                                                  ----

                      Subtotal                      84.00
<PAGE>
 
B.  MJD HOLDINGS CORP. - 3,000 shares of Common Stock, par value $.01
    ------------------
    per share, authorized, 100 shares issued and outstanding.

            MJD Communications, Inc. - 100 shares                      
            Morehead Place, 521 E. Morehead Street,                    
            Suite 250, Charlotte, North Carolina 28202                  


C.  ST ENTERPRISES, LTD. - 200,000 shares of Common Stock, par value $.01
    -------------------- 
    per share, authorized, 90,000 shares issued and outstanding.

             MJD Communications, Inc. - 90,000 shares                 
             Morehead Place, 521 E. Morehead Street,                 
             Suite 250, Charlotte, North Carolina 28202               

    Common Stock Purchase Warrants - 12,857.01 warrants issued and outstanding.

             ALTA Subordinated Debt Partners II, L.P. - Warrants to purchase
             5,222.49 shares
                     c/o Burr, Egan, Deleage & Co.                    
                     One Embarcadero Center, Suite 4050               
                     San Francisco, California  94111                  

             ALTA Subordinated Debt Partners III, L.P. - Warrants to purchase
             7,411.54 shares
                      c/o Burr, Egan, Deleage & Co.                    
                      One Embarcadero Center, Suite 4050               
                      San Francisco, California  94111                  

             Steve McGeeney - Warrants to purchase 111.49 shares
                      c/o Paul, Hastings, Janofsky                  
                        & Walker LLP                                
                      Ninth Floor                                   
                      1055 Washington Boulevard                     
                      Stamford, Connecticut  06901-2217              

             Sylvana Zoberg - Warrants to purchase 111.49 shares
                      418 East 59th Street
                      New York, New York  10022


D.  All the issued and outstanding stock of the following entities is held by
    ST Enterprises, Ltd., P.O. Box 199, Dodge City, Kansas 67801:
<PAGE>
 
              NORTHLAND TELEPHONE COMPANY OF MAINE, INC. -               
              ------------------------------------------ 
              200 shares of Common stock, par value $.01 per              
              share, authorized, 100 shares issued and                    
              outstanding.                                                 

              STE/NE ACQUISITION CORP. (d/b/a NORTHLAND TELEPHONE  
              -----------------------         ------------------- 
              COMPANY OF VERMONT) - 1,000 shares of Common Stock,  
              ------------------
              par value $.01 per share, authorized, 1,000 shares issued 
              and outstanding                                           

              ST PAGING, INC. - 10,000 shares of Common Stock,            
              --------------  
              par value $.01 per share, authorized, 750 shares            
              issued and outstanding                                       

              ST COMMUNICATIONS, INC. - 10,000 shares of              
              ----------------------
              Common Stock, par value $100 per share,                 
              authorized, 54 shares issued and outstanding             

              ST COMPUTER RESOURCES, INC. - 10,000 shares of       
              --------------------------       
              Common Stock, no par value per share, authorized,            
              500 shares issued and outstanding                             

              ST BROADCASTING COMPANY, INC. - 1,500 shares of         
              ----------------------------     
              common stock, par value $100 per share,                     
              authorized, 750 shares issued and outstanding                


E.  BREADBASKET ENTERPRISES, INC. - 250,000 shares of Common Stock, par
    ----------------------------
    value $1.00 per share, authorized, 10,000 shares issued and outstanding

              ST Broadcasting Company, Inc. - 10,000 shares            
              P.O. Box 199,                                            
              Dodge City, Kansas 67801                                   

F.  ST LONG DISTANCE, INC. - 1,000 shares of Common Stock, par value $.01
    ---------------------
    per share, authorized, 100 shares issued and outstanding.

              ST Enterprises, Ltd. - 100 common shares               
              908 W. Frontview                                       
              P. O. Box 199                                          
              Dodge City, Kansas  67801                               

G.  SUNFLOWER TELEPHONE COMPANY, INC. - 1,500 shares of Common Stock,
    --------------------------------
    par value $100 per share, and 1,500 shares of Preferred Stock, par value
    $100 per share, authorized, 234 preferred shares issued and outstanding
    and 968 common shares issued (234 preferred shares and 282 common
    shares held in treasury)

                   ST Enterprises, Ltd. - 682 common shares
<PAGE>
 
                   Frank and Mathilda Schreck - 2 common shares        
                   Marienthal, Kansas  67863                            

                   Estate of Mary Simpson - 2 common shares
                           c/o Foulston & Siefkin Trust Account
                             for H.A. and/or Mary Simpson
                           Foulston & Siefkin L.L.P.
                           P.O. Box 1147
                           Dodge City, Kansas  67801


H.  STE FINANCE COMPANY, INC. - 30,000 shares of Common Stock, par value
    ------------------------
    $1.00 per share, authorized, 1,000 shares issued and outstanding.

                   Sunflower Telephone Company, Inc. - 1,000 common shares
                   P. O. Box 199
                   Dodge City, Kansas  67801


I.  MJD VENTURES, INC. - 100 shares of Common Stock, par value $.01 per share,
    -----------------    
    authorized, 100 shares issued and outstanding.

                   MJD Communications, Inc. - 100 common shares


J.  SIDNEY TELEPHONE COMPANY - 100,000 shares of Common Stock, par value $.01
    ------------------------
    per share, authorized, 100 common shares issued and outstanding.

                   MJD Ventures, Inc. - 100 common shares           
                   Morehead Place, 521 E. Morehead Street,          
                   Suite 250, Charlotte, North Carolina 28202        

                   ALTA Subordinated Debt Partners, II, L.P. -        
                   Warrants to purchase 3.18 common shares             

                   ALTA Subordinated Debt Partners III, L.P. -       
                   Warrants to purchase 4.51 common shares            


K.  MJD SERVICES CORP. - 100 shares of Common Stock, par value $.01 per share,
    -----------------
    authorized, 100 shares issued and outstanding.

                   MJD Communications, Inc. - 100 common shares


L.  All of the issued and outstanding stock of the following entities is held by
    MJD Services Corp., Morehead Place, 521 E. Morehead Street, Suite 250,
    Charlotte, North Carolina 28202:
<PAGE>
 
                   BLUESTEM TELEPHONE COMPANY - 100 shares of Common          
                   --------------------------    
                   Stock, par value $.01 per share, authorized, 100 shares
                   issued and outstanding                                 

                   BIG SANDY TELECOM, INC. - 100 shares of Common Stock,  
                   -----------------------
                   par value $.01 per share, authorized, 100 shares issued and
                   outstanding                   

                   COLUMBINE ACQUISITION CORP. - 100 shares of Common  
                   ---------------------------
                   Stock, par value $.01 per share, authorized, 100 common
                   shares issued and outstanding                          


M.  ODIN TELEPHONE EXCHANGE, INC. - 150 shares of Common Stock, no par value per
    -----------------------------
    share, authorized, 101 shares issued and outstanding (5.7143 shares held in
    treasury).

                   MJD Services Corp. - 80.9928 common shares
                   Morehead Place, 521 E. Morehead Street
                   Suite 250, Charlotte, North Carolina  28202

                   Richfield Associates, Inc. - 14.2929 common shares
                   400 Andrews Street
                   Suite 310
                   Rochester, New York  14604


N.  MJD TELECOM, INC. - 100 shares of Common Stock, par value $.01 per share,
    -----------------
    authorized, 100 shares issued and outstanding.

                   MJD Communications, Inc. - 100 shares


O.  CHAUTAUQUA & ERIE TELEPHONE CORPORATION - 100,000 shares of Common Stock,
    ---------------------------------------
    par value $.01 per share, and 35,000 shares of Preferred Stock, par value
    $50 per share, authorized, 100 common shares issued and outstanding and no
    preferred shares issued and outstanding.

                   MJD Holdings Corp. - 100 common shares
                   Morehead Place, 521 E. Morehead Street
                   Suite 250, Charlotte, North Carolina 28202


P.  KADOKA TELEPHONE CO. - 5,000 shares of Common Stock, par value $100 per
    --------------------
    share, authorized, 1,212 shares issued and outstanding.

                   MJD Holdings Corp. - 1,212 common shares

Q.  MJD TELECOM, INC. - 100 shares of Common Stock, par value $.01 per share,
    -----------------
    authorized, 100 shares issued and outstanding.


<PAGE>
 
                   MJD Communications, Inc. - 100 shares

R.  MJD TELECHOICE CORP. - 100 shares of Common Stock, par value $.01 per share,
    --------------------
    authorized, 100 shares issued and outstanding.

                   MJD Communications, Inc. - 100 shares

S.  MJD CAPITAL CORP. - 100 shares of Common Stock, par value $.01 per share,
    -----------------
    authorized, 100 shares issued and outstanding.

                   MJD Communications, Inc. - 100 shares

T.  C-R COMMUNICATIONS, INC. - 750 shares of Common Stock, without par value,
    ------------------------
    authorized, 749 shares issued and outstanding.

                   MJD Ventures, Inc. - 750 shares

U.  C-R TELEPHONE COMPANY - 100 shares of Common Stock, par value $10.00 per
    ---------------------
    share, authorized, 100 shares issued and outstanding.

                  C-R Communications, Inc. - 100 shares
<PAGE>
 


                                   ANNEX IV

         The following plans were the only plans maintained by MJD
Communications, Inc. or any of its Subsidiaries subject to Title IV of ERISA:

         1.      STE/NE Acquisition Corp. Pension Plan for Vermont Employees of
                 Transferred GTE Operations (Northland). This plan was
                 terminated in 1997 and the assets of the plan have been
                 distributed.

         2.       Chautaqua & Erie Telephone Corporation Management Pension
                  Plan. This plan was terminated in 1997 and the assets of the
                  plan have been distributed.

         3.       Pension Plan for Employees of Chautaqua & Erie Telephone
                  Corporation Union Pension Plan. This plan was terminated in
                  1997 and the assets of the plan have been distributed.

         4.       Taconic Telephone Corp. Union Employee Defined Benefit Plan.
                  The plan has been terminated and the assets are in the process
                  of being distributed.

         5.       Taconic Telephone Corp. Management Employee Defined Benefit
                  Plan. The plan has been terminated and the assets are in the
                  process of being distributed.

         The following outlines the retiree health benefits made available to
certain employees of MJD Communications, Inc. and its Subsidiaries:

         1.       Odin Telephone Exchange, Inc. has made available to retired
                  employees and surviving spouses of retired employees the
                  ability to purchase health care benefits at the group rate
                  paid by the company.

         2.       Chautaqua & Erie Telephone Corporation has made available to
                  retired management employees and surviving spouses of retired
                  management employees the ability to purchase health care
                  benefits at the group rate paid by the company. The Company
                  also provides that retired employees can purchase up to
                  $20,000 of life insurance coverage.
<PAGE>
 
                                    ANNEX V

                                EXISTING LIENS

A.  LIENS ON CAPITAL STOCK AND OTHER EQUITY INTERESTS OF MJD COMMUNICATIONS AND
    ---------------------------------------------------------------------------
    THE SUBSIDIARIES
    ----------------
 
    1.  Under Kansas law, the minority stockholders of Sunflower Telephone
        Company, Inc. have the right to participate in any issuance of stock by
        Sunflower Telephone Company, Inc. on a pro rata basis.


B.  ARRANGEMENTS REQUIRING MJD AND/OR THE SUBSIDIARIES TO ISSUE OR SELL CAPITAL
    ---------------------------------------------------------------------------
    STOCK OR OTHER EQUITY INTERESTS
    -------------------------------

    1.  There are currently outstanding 4,264 options to purchase shares of
        Class A Voting Common Stock of MJD Communications, Inc. pursuant to the
        MJD Communications, Inc. 1995 Stock Option Plan (the "Plan"). An
        additional 1,420 options are available for issuance under the Plan
        (there will not be additional issuances of options under the Plan). The
        options vest in 20% increments over the 5 year period beginning on the
        date of the optionholder's employment and are exercisable at the fair
        market value of the stock at the date of grant. A list of optionholders
        is set forth in Annex III.

    2.  There are currently outstanding 84 MJD Communications, Inc. Class A
        Voting Stock Purchase Warrants (the "Warrants"). The Warrants are
        exercisable at a price of $.01 per share at any time during the 20 year
        period following the date of issuance. A list of the holders of Warrants
        is set forth in Annex III (A).

    3.  There are currently outstanding 12,500 ST Enterprises, Ltd. Common Stock
        Purchase Warrants, exercisable at a price of $.01 per share when the
        fair market value of ST Enterprises, Ltd. exceeds a certain target
        (subject to the put rights described in Annex V(C) below). A list of the
        holders of such warrants is set forth in Annex III(C).

    4.  There are currently outstanding 7.69 Sidney Telephone Company Common
        Stock Purchase Warrants, exercisable at any time at a rate of $.01 per
        share. A list of the holders of such warrants is set forth in Annex
        III(J).
<PAGE>
 
C.  RIGHTS AND OBLIGATIONS TO REPURCHASE CAPITAL STOCK OR OTHER EQUITY INTERESTS
    ----------------------------------------------------------------------------
    1.  Pursuant to the Amended and Restated Certificate of Incorporation of MJD
        Communications, Inc., the Series C Preferred Stock then outstanding
        shall, at the option of the Corporation, be redeemed in whole or in part
        upon the occurrence of (i) an Investor Sale, (ii) the Sale of the
        Corporation, or (iii) an IPO (each an "Optional Redemption").

    2.  Pursuant to the Purchase Agreement dated as of June 30, 1994 for Notes
        and Warrants by and among MJD Communications, Inc., ST Enterprises,
        Ltd., BEDCO and the other parties thereto (the "BEDCO Purchase
        Agreement"), by the election of a majority-in-interest of the BEDCO
        Investors, the BEDCO Investors have the right to put their ST
        Enterprises, Ltd. Common Stock Purchase Warrants to ST Enterprises, Ltd.
        upon the earlier of June 30, 1999 for shares of common stock of ST
        Enterprises, Ltd. or their fair market value.

D.  MORTGAGES
    ---------
    1.  Supplemental Mortgage and Security Agreement dated as of February 1,
        1988 by Taconic Telephone Corp. in favor of the United States of America
        (as filed in Columbia, Dutchess and Rensselaer Counties, New York.

    2.  Restated Mortgage, Security Agreement and Financing Statement (the
        "Agreement") dated as of June 22, 1990 by C-R Telephone Company in favor
        of the United States of America. The underlying debt under the Agreement
        has been paid; the release of the liens under the Agreement is in
        process.

    3.  Supplemental Mortgage, Security Agreement and Financing Statement dated
        as of May 1, 1995 by C-R Telephone Company in favor of United States of
        America (the "Agreement"). The underlying debt under the Agreement has
        been paid; the release of the liens under the Agreement is in process.

E.  LIENS ON TANGIBLE PERSONAL PROPERTY
    -----------------------------------
    1.  Liens on the capital stock of the Subsidiaries as described in Annex
        V(A).

    2.  Liens on the tangible personal property of Taconic Telephone Corp. in
        favor of Key Bank N.A. and the United States of America pursuant to
        Supplemental Mortgage and Security Agreement dated as of February 1,
<PAGE>
 
        1988 by Taconic Telephone Corp. in favor of the United States of
        America. /1/

    3.  Liens on certain tangible personal property of Taconic Telephone Corp.
        in favor of KeyCorp. Leasing Ltd. pursuant to Operating Lease.

    4.  Liens on certain personal tangible property of Taconic Telephone Corp.
        in favor of IBM Credit Corporation pursuant to Operating Lease.

    5.  Liens on the personal tangible property of MJD Capital Corp. in favor of
        NationsBank N.A., pursuant to Promissory Note dated November 7, 1997 in
        the principal amount of $99,976.25.

    6.  Liens on certain personal tangible property of MJD Capital Corp. in
        favor of Centura Bank, pursuant to a Loan Agreement dated as of October
        8, 1997, between MJD Capital Corp. and Centura Bank (the "Loan
        Agreement"). MJD Capital Corp. has not made any borrowings pursuant to
        this credit facility.


F.      MISCELLANEOUS
        -------------
        1.  Equipment Lease dated August 1, 1997 (less than $50,000) between MJD
            Communications, Inc. and Centura Bank (the "Lease"). (The Lease will
            be assigned to MJD Capital Corp. post-closing.)

        2.  Lease between ST Enterprises, Ltd. and Clune Leasing Ltd. for one
            (1) Canon Copier with cabinet and ADF.

- --------------------
/1/ Key Bank N.A. loans to be repaid in full n March 30, 1998 and release of
    liens in favor of Key Bank N.A. will be terminated thereafter.
<PAGE>
 
                                   ANNEX VI

                             EXISTING INDEBTEDNESS

     1.   Indemnification Agreement dated July 31, 1994 among WFT Acquisition
Co., STE/NE Acquisition Corp. and Vermont Telephone Company, Inc.

     2.   Promissory Note dated October 8, 1997, from MJD Capital Corp. to
Centura Bank in the principal amount of $500,000.  MJD Capital Corp. has not
made any borrowings pursuant to this credit facility.

     3.   Promissory Note dated November 7, 1997 from MJD Capital Corp. to
NationsBank N.A. in the principal amount of $99,976.25 (under a $1 Million
facility).

     4.   Promissory Note from MJD Communications, Inc. to Farm Credit Leasing
Corporation in the principal amount of $38,997.13 dated August 28, 1997 (the
"Note"). (The Note will be assigned to MJD Capital Corp. post-closing.)

     5.   Secured Note and Co-Mortgage among Key Bank, RUS and Taconic Telephone
Corp. in the principal amount of $3,100,000./1/
                                             -

     6.   Promissory Note dated October 1, 1996 from C-R Communications, Inc. to
Communications Management, Inc. in the principal amount of $156,520.

     7.   Unsecured Demand Notes to C&E Telephone from various holders in the
aggregate principal amount of $879,000.  See list attached hereto.

     8.   Unsecured Revolving Note maturing on October 1, 1998 from Ellensburg
Telephone Corp. in the aggregate principal amount of $3 million in favor of US
Bank./2/
      -

- ------------
/1/ Key Bank portion of debt to be paid in full on March 30, 1998.
 -

/2/ There is no outstanding debt under this facility at this time.  We expect
 -
    this note to be canceled and to have the notes returned by May 1, 1998
    marked paid and satisfied.
<PAGE>
 
          9.  Unsecured Revolving Note maturing on March 10, 2001 from
Ellensburg Telephone Corp. in the aggregate principal amount of $6 million in
favor of RTFC./3/
               -

- ------------
/3/ There is no outstanding debt under this facility at this time. We expect
 -
    this note to be canceled and to have the notes returned by May 1, 1998
    marked paid and satisfied.

                                       2
<PAGE>
 
                       ATTACHMENT TO ITEM 7 ON ANNEX VI

                              DEMAND NOTE HOLDERS
                       CHAUTAUQUA & ERIE TELEPHONE CORP.
                   PROMISSORY NOTES AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
DATE OF NOTE                        NAME OF NOTE HOLDER                          SS NUMBER    $ AMOUNT   NOTE #   ACCT. #
- -------------------------------------------------------------------------------------------------------------------------
<C>           <S>                                                               <C>          <C>         <C>      <C>
     8/23/76  Beckman, Seymour A. or Margaret A.                                ###-##-####   10,000.00      568  D0617
     4/12/86  Beckman, Seymour or Margaret A.                                   ###-##-####    5,000.00      617  D0568
      5/8/90  Belcher, Alma R. and/or Camille A.                                ###-##-####    1,000.00     1204  D1204
      5/8/90  Belcher, Alma R. and/or Camille A.                                ###-##-####    1,000.00     1205  D1204
     5/22/81  Belcher, Robert or Isabelle                                       ###-##-####   10,000.00      931  D0931
      5/8/78  Benson, Roy W.                                                    ###-##-####    1,500.00      739  D0739
     12/9/78  Billerio, Frank and Calella Billerio, JTTEN                       ###-##-####    2,000.00      655  D0655
    12/20/78  Case, Agatha                                                      ###-##-####    5,000.00      682  D0682
      5/5/88  Challey, Douglas D. and/or Donna M.                               ###-##-####    1,000.00     1145  D1145
      8/4/93  Cochrane, William J. Testamentary Trust, Roderick A. Nixon, or    ###-##-####   35,000.00     1283  D1283
              successor, trustee
      8/4/93  Cochrane, Cecile B.                                               ###-##-####   25,000.00     1284  D1284
      3/3/98  Deck, Milford H. or Ruth M.                                       ###-##-####   10,000.00      566  D0566
      4/1/80  Dibble, Mary S.                                                   ###-##-####    5,000.00      812  D0812
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
 
                              DEMAND NOTE HOLDERS
                       CHAUTAUQUA & ERIE TELEPHONE CORP.
                    PROMISSORY NOTES AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
DATE OF NOTE                        NAME OF NOTE HOLDER                          SS NUMBER    $ AMOUNT   NOTE #   ACCT. #
- -------------------------------------------------------------------------------------------------------------------------
<C>           <S>                                                               <C>          <C>         <C>      <C>
      1/1/81  Dibble, Mary S.                                                   ###-##-####    3,000.00      878  D0812
      4/1/83  Edwards, Alice H. Susan E. Barnett                                ###-##-####    5,500.00      676  D0500
      4/1/83  Edwards, Alice H. Susan E. Barnett                                ###-##-####    5,000.00      940  D0500
     9/29/76  Frost, Jackson                                                    ###-##-####    3,000.00      621  D0621
     7/24/87  Gorndt, Elizabeth M. and/or Juanita D. Rudolph                    ###-##-####    5,000.00     1133  D1133
    12/18/95  Greenleaf, Patricia N.                                            ###-##-####    5,000.00     1323  D1232
     3/12/81  Hammer, Angelyn I.                                                ###-##-####   10,000.00      883  D0883
      2/8/80  Hanson, Vivian Mrs. and/or Judy Stratton                          ###-##-####    4,000.00      589  D0589
     4/11/80  Hanson, Vivian Mrs. and/or Judy Stratton                          ###-##-####    1,500.00      818  D0589
     4/29/87  Homeman, Thornton and Mary C.                                     ###-##-####   10,000.00     1124  D0699
      6/4/88  Horneman, Thornton and Mary C.                                    ###-##-####   10,000.00     1148  D0699
    10/18/89  Horneman, Thornton and Mary C                                     ###-##-####   28,000.00     1185  D0699
     8/24/90  Horneman, Thornton and Mary C.                                    ###-##-####   12,000.00     1210  D0699
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       2
<PAGE>
 
                              DEMAND NOTE HOLDERS
                       CHAUTAUQUA & ERIE TELEPHONE CORP.
                    PROMISSORY NOTES AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
DATE OF NOTE                        NAME OF NOTE HOLDER                          SS NUMBER    $ AMOUNT   NOTE #   ACCT. #
- -------------------------------------------------------------------------------------------------------------------------
<C>           <S>                                                               <C>          <C>         <C>      <C>
      7/6/76  Issler, William C.                                                ###-##-####   10,000.00      603  D0603
     4/28/81  Kaprolat, Elmer G. or Ruth M.                                     ###-##-####    1,000.00      889  D0889
     4/18/81  Kaprolat, Roger Q. or Ruth M.                                     ###-##-####    2,500.00      927  D0927
    12/14/82  Kaprolat, Roger Q. or Ruth M.                                     ###-##-####    1,000.00     1005  D0927
    12/28/84  Kaprolat, Roger Q. or Ruth M.                                     ###-##-####    1,000.00     1031  D0927
    12/11/86  Knibloe, Keith M.                                                 ###-##-####    5,000.00     1093  D1093
     5/20/94  LaPorte, George                                                   ###-##-####   20,000.00     1302  D1302
     8/31/92  LeFever Russell H. and/or Mary E.                                 ###-##-####   40,000.00     1251  D1132
     8/31/92  LeFever Russell H. and/or Mary E.                                 ###-##-####   25,000.00     1310  D1132
      2/4/87  Loyal Order of Moose Westfield Lodge                              ###-##-####   25,000.00     1098  D1098
    12/17/86  Loyal Order of Moose Westfield Lodge                              ###-##-####   20,000.00     1109  D1098
     2/16/94  Loyal Order of Moose Westfield Lodge                              ###-##-####   25,000.00     1297  D1098
      7/1/80  Manley, Nancy C.                                                  ###-##-####    2,000.00      838  D0838
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       3
<PAGE>
 
                              DEMAND NOTE HOLDERS
                       CHAUTAUQUA & ERIE TELEPHONE CORP.
                    PROMISSORY NOTES AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
DATE OF NOTE                        NAME OF NOTE HOLDER                          SS NUMBER    $ AMOUNT   NOTE #   ACCT. #
- -------------------------------------------------------------------------------------------------------------------------
<C>           <S>                                                               <C>          <C>         <C>      <C>
     7/29/80  Manley, Nancy C.                                                  ###-##-####    3,000.00      854  D0838
      5/7/81  Manley, Nancy, C.                                                 ###-##-####    2,500.00      917  D0838
     3/17/81  McLean, Arline I.                                                 ###-##-####    5,000.00      885  D0885
    10/23/78  Mellors, Charlotte B.                                             ###-##-####    5,000.00      751  D0751
      5/8/86  Mellors, Charlotte B.                                             ###-##-####    5,000.00     1064  D0751
      6/4/86  Mellors, Charlotte B.                                             ###-##-####    2,000.00     1074  D0751
     2/17/94  Mellors, Richard                                                  ###-##-####    2,000.00     1299  D1299
      7/1/84  Naaser, Olga B.                                                   ###-##-####    5,000.00     1023  D1023
      1/1/76  Orton, Beverly Irene                                              ###-##-####    1,000.00      557  D0557
      1/1/76  Daughrity, Patti Joanne                                           ###-##-####    1,000.00      558  D0558
      9/5/86  Ossman, Junes T.                                                  ###-##-####    1,000.00     1080  D0649
     12/8/78  Ossman, Junes T.                                                  ###-##-####      500.00      649  D0649
     12/8/78  Ossman, Richard J.                                                ###-##-####      500.00      650  D0650
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       4
<PAGE>
 
                              DEMAND NOTE HOLDERS
                       CHAUTAUQUA & ERIE TELEPHONE CORP.
                    PROMISSORY NOTES AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
DATE OF NOTE                        NAME OF NOTE HOLDER                          SS NUMBER    $ AMOUNT   NOTE #   ACCT. #
- -------------------------------------------------------------------------------------------------------------------------
<C>           <S>                                                               <C>          <C>         <C>      <C>
     4/28/81  Parker, Mrs. Doris H.                                             ###-##-####    3,000.00      892  D0892
     10/3/91  Rammelt, Ida T. and/or Nancy R. Johnston                          ###-##-####   90,000.00     1242  D0756
    10/18/92  Rammelt, Ida T. and/or Nancy R. Johnston                          ###-##-####   10,000.00     1254  D0756
     4/21/86  Rau, Dorothy T.                                                   ###-##-####    5,000.00      843  D0843
      5/8/81  Reinhoudt, Meriam Gayle                                           ###-##-####    1,500.00      921  D0921
      6/7/85  Riedesel, Beatrice or Herman                                      ###-##-####    2,000.00     1027  D1027
      6/7/85  Riedesel, Beatrice or Herman                                      ###-##-####    1,000.00     1042  D1027
     9/30/85  Riedesel, Beatrice or Herman                                      ###-##-####    1,000.00     1048  D1027
    12/28/87  Riedesel, Beatrice or Herman                                      ###-##-####    1,000.00     1137  D1027
     12/1/88  Riedesel, Beatrice or Herman                                      ###-##-####    1,000.00     1168  D1027
     5/24/89  Riedesel, Beatrice or Herman                                      ###-##-####    1,000.00     1170  D1027
     12/4/89  Riedesel, Beatrice or Herman                                      ###-##-####    1,000.00     1189  D1027
      7/1/83  Riedesel, Herman or Beatrice                                      ###-##-####    5,000.00     1009  D1009
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       5
<PAGE>
 
                              DEMAND NOTE HOLDERS
                       CHAUTAUQUA & ERIE TELEPHONE CORP.
                    PROMISSORY NOTES AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
DATE OF NOTE                        NAME OF NOTE HOLDER                          SS NUMBER    $ AMOUNT   NOTE #   ACCT. #
- -------------------------------------------------------------------------------------------------------------------------
<C>           <S>                                                               <C>          <C>         <C>      <C>
     7/31/84  Riedesel, Herman or Beatrice                                      ###-##-####    1,500.00     1022  D1009
      6/7/85  Riedesel, Herman or Beatrice                                      ###-##-####    5,000.00     1041  D1009
     12/4/89  Riedesel, Herman or Beatrice                                      ###-##-####    2,500.00     1190  D1009
     9/11/86  Rogers, Alice R.                                                  ###-##-####    7,000.00     1082  D1082
     10/3/97  Rogers, Alice R.                                                  ###-##-####    3,000.00     1337  D1082
      8/2/94  Schwartz, Benjamin                                                ###-##-####    8,000.00     1308  D1110
     2/21/95  Schwartz, Benjamin                                                ###-##-####   14,500.00     1317  D1110
      1/1/95  Schwartz, Ronald W.                                               ###-##-####   10,000.00     1312  D1312
     5/13/76  Smith, Maxine H.                                                  ###-##-####    1,000.00      596  D0596
     5/13/76  Smith, Maxine H.                                                  ###-##-####    1,000.00      597  D0596
     5/13/76  Smith, Maxine H.                                                  ###-##-####    1,000.00      598  D0596
      4/1/80  Smith, Maxine H.                                                  ###-##-####    2,000.00      814  D0596
     4/26/94  Smith, Maxine H.                                                  ###-##-####   10,000.00     1309  D1309
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       6
<PAGE>
 
                              DEMAND NOTE HOLDERS
                       CHAUTAUQUA & ERIE TELEPHONE CORP.
                    PROMISSORY NOTES AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
DATE OF NOTE                        NAME OF NOTE HOLDER                          SS NUMBER    $ AMOUNT   NOTE #   ACCT. #
- -------------------------------------------------------------------------------------------------------------------------
<C>           <S>                                                               <C>          <C>         <C>      <C>
     9/19/76  D. Mark Smith                                                     ###-##-####    5,000.00      742  D0742
      8/5/94  D. Mark or Nancy J. Smith                                         ###-##-####   10,000.00     1301  D1303
    12/17/91  Sonne, Olga H.                                                    ###-##-####   39,000.00     1243  D1243
     2/19/92  Stafford, Donald W.                                               ###-##-####   30,000.00     1245  D1245
     1/28/93  Stafford, Donald W.                                               ###-##-####   20,000.00     1274  D1245
     10/3/96  Stafford, Velma O. and Donald W.                                  ###-##-####   25,000.00     1329  D1290
    12/11/92  Steward, Michele E. or Paul D.                                    ###-##-####      500.00      914  D0785
    12/10/92  Steward, Michele E. or Paul D.                                    ###-##-####      500.00      992  D0785
      6/1/90  Thomas Mrs. Betty E. and/or Arthur E.                             ###-##-####    2,000.00     1207  D1078
      1/8/91  Thomas Mrs. Betty E. and/or Arthur E.                             ###-##-####    2,000.00     1223  D1078
      1/3/77  Town, Lucille                                                     ###-##-####    6,000.00      716  D0716
    12/15/76  Town, Terrence D. and Nancy L. Town                               ###-##-####    1,000.00      880  D0880
     4/19/81  Town, Terrence D. and Nancy L. Town                               ###-##-####    3,000.00      929  D0880
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       7
<PAGE>
 
                              DEMAND NOTE HOLDERS
                       CHAUTAUQUA & ERIE TELEPHONE CORP.
                    PROMISSORY NOTES AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
DATE OF NOTE                        NAME OF NOTE HOLDER                          SS NUMBER    $ AMOUNT   NOTE #   ACCT. #
- -------------------------------------------------------------------------------------------------------------------------
<C>           <S>                                                               <C>         <C>          <C>      <C>
      1/8/87  Wagar, Constance N.                                               ###-##-####   10,000.00     1102  D1102
      8/8/88  Wagar, Constance N.                                               ###-##-####   10,000.00     1151  D1102
    11/18/88  Wagar, Constance N.                                               ###-##-####   10,000.00     1155  D1102
     1/28/89  Wagar, John E. Trust Under Will f/b/o Constance N. Wagar and      ###-##-####   20,000.00     1326  D1164
              Samuel N. Wagar, Co-Trustee
    12/17/97  Ward, Betty and/or Harry F.                                       ###-##-####   40,500.00     1338  D1147
     3/23/94  Ward, Michael October 1993 Irrevocable Trust                      ###-##-####    3,000.00     1301  D1301
      6/8/94  Ward, Michael October 1993 Irrevocable Trust                      ###-##-####    8,500.00     1303  D1301
     3/12/92  Wolfenden, Terry L.                                               ###-##-####    2,500.00     1247  D1247
     12/6/76  Woloszyn, Chester B.                                              ###-##-####    3,000.00      647  D0647
     2/20/92  Zappla, Anthony R.                                                ###-##-####    4,000.00  1162 #2  D1162
    12/31/76  Zimmer, Earl L. and Olive B.                                      ###-##-####    5,000.00      715  D0715
      5/1/81  Zimmer, Earl L. and Olive B.                                      ###-##-####    5,000.00      898  D0715
- -------------------------------------------------------------------------------------------------------------------------
                                                                TOTAL AMOUNT                $879,009.00
                                                                                            ===========
</TABLE>

                                       8
<PAGE>
 
                                   ANNEX VII

                              EXISTING INVESTMENTS


A.  INVESTMENTS
    -----------
    1.  Odin Telephone Exchange, Inc. owns 2,006 shares (representing 14.28%) of
        the common stock, $.01 par value of Southern Illinois Cellular Corp.,
        ("SICC") which provides cellular telephone services within certain
        restricted areas of central and southern Illinois.

    2.  Sunflower Telephone Company, Inc. owns approximately 5.06% of
        Professional Electronic Networks, L.C., which owns 49.5% of Ohio
        Professional Electronic Network Limited Liability Company, a provider of
        online access to public records in the State of Ohio.

    3.  The following entities own shares of Rural Telephone Bank:

        o    Sunflower Telephone Company, Inc. -- 571 Class C shares
        o    Sidney Telephone Company -- 131 Class C shares
        o    Northland Telephone Company of Maine, Inc. -- 2,176 Class C shares
        o    Big Sandy Telecom, Inc. -- 5 Class C shares
        o    Odin Telephone Exchange, Inc. -- 33 Class C and 856 Class B shares
        o    C-R Telephone Company -- 18 Class C Shares.

    4.  ST Enterprises, Ltd. owns 4,033 shares (6.557%) of the Kansas
        Consolidated Professional Resources Limited Partnership, a telephone
        consulting firm.

    5.  ST Enterprises, Ltd. owns 1 share of Dodge City Country Club.

    6.  Big Sandy Telecom, Inc. owns 6,569 shares of Common Stock of USTN
        Holdings, Inc. (the "USTN Shares"). The USTN Shares are being converted
        into 6,569 shares of Illuminet Holdings, Inc. as a result of the name
        change from USTN Holdings, Inc. to Illuminet Holdings, Inc.

    7.  Odin Telephone Exchange, Inc. owns 2 shares of Class A Voting Common
        Stock and 1,155 shares of Class B Nonvoting Common Stock of U.S. Intelco
        Holdings, Inc., which will be converted into 7,713 shares of Illuminet
        Holdings, Inc.

 
    8.  C-R Telephone Company owns 2 shares of Class A Voting Common Stock and
        884 shares of Class B Nonvoting Common Stock which will be converted
        into 7,156 shares of Illuminet Holdings, Inc.

    9.  Sunflower Telephone Company, Inc. is the owner of 20 limited partnership
        units of Angeles Income Properties, Ltd. IV and 40 limited partnership
        units of Angeles Income Properties, Ltd.
<PAGE>
 
   10.  The Company and/or the Subsidiaries will invest from time to time in
        various short-term investments, including without limitation, commercial
        paper and certificates of deposit.

   11.  The following entities have ownership in CoBank in the form of Class B
        Participation Certificate:

         o    MJD Services Corp. - 100,053.78 units      
         o    MJD Holdings Corp. - 49,839.08 units       
         o    STE Finance Company, Inc. - 456,922.43 units
         o    STE/NE Acquisition Corp. - 179,346.46 units  
         o    Northland Telephone Company of Maine, Inc. - 626,730.33 units
         o    Sunflower Telephone Company, Inc. - 93,201.49 units       
         o    C&E Telephone Corp. - 8,852.2 units                       

   12.   MJD Ventures, Inc. held RTFC Subordinated Capital Certificates ("SCCs")
         originally issued at the time of the January 1996 acquisition of Sidney
         Telephone Company in the amount of $123,684.00. The Certificates will
         be repurchased by the RTFC as the loan balance is reduced. The SCC
         balance of 12/31/97 was $356,018.40.

   13.   MJD Ventures, Inc. holds Patronage Capital Certificates in RTFC in the
         amount of $14,605.37.

   14.   Sidney Telephone Company, Inc. holds Patronage Capital Certificates in
         RTFC in the amount of $4,389.31.

   15.   Stock option and warrants as described on Annex III.

   16.   C-R Cellular, Inc. owns 6.67% of the Illinois Valley Cellular RSA-2-I
         Partnership, an Illinois General Partnership which provides cellular
         telephone services within certain restricted areas of north central
         Illinois.

   17.  C-R Cellular, Inc. owns 6.67% of the Illinois Valley Cellular RSA-2-II
        Partnership, an Illinois General Partnership which provides cellular
        telephone services within certain restricted areas of north central
        Illinois.

   18.  C-R Cellular, Inc. owns 6.67% of the Illinois Valley Cellular RSA-2-III
        Partnership, an Illinois General Partnership which provides cellular
        telephone services within certain restricted areas of north central
        Illinois.

   19.  C-R Cellular, Inc. owns 700 shares (12.5%) of the Illinois Valley
        Cellular RSA 2, Inc., an Illinois corporation which provides switching
        services to the Illinois Valley Cellular RSA 2-I, 2-II and 2-III
        Partnerships described above.

   20.  C-R Communications, Inc. owns a 5.20833% membership interest in
        Illinet Communciations of Central Illinois, L.L.C., an Illinois limited
        liability company engaged in the operaton of cable television
        properties.

<PAGE>
 
   21.  C-R Communications, Inc. owns a 9.09% membership interest in Illinet
        Communications, L.L.C., an Illinois limited liability company engaged in
        the provision of internet network transport facilities and equipment.

   22.  C-R Long Distance owns one share of stock in Associated Network
        Partners, Inc. ("ANPI"), an Illinois corporation that was formed by a
        group of Illinois independent telephone companies to act as a buyers
        club for interexchange telephone capacity so that the participating LECs
        or their affiliates could pool their minutes in order to get volume
        discounts.

   23.  Chautauqua & Erie Network, Inc. owns a 3.847% general partnership
        interest in the New York State Independent Network Partnership
        ("NYSINET"), which operates a statewide SS7 network in New York.

   24.  Taconic Telephone Corp. owns 31,380 shares of Common Stock of Frontier
        Corp., a public company traded on the New York Stock Exchange.

   25.  Taconic Telephone Corp. owns 43,885 shares of Common Stock of USTN
        Holdings, Inc. (the "USTN Shares"). The STN Shares are being converted
        into 43,885 shares of Illuminet Holdings, Inc. as a result of a name
        change from USTN Holdings, Inc. to Illuminet Holdings, Inc.

   26.  Taconic Cellular Corp. owns a 16.667% general partnership interest in
        the Hudson Valley RSA Cellular Partnership.

   27.  Taconic Telephone Corp. owns a 7.5% limited partnership interest in the
        Orange County - Poughkeepsie Limited Partnership.

   28.  Taconet Corp. owns a 3.847% general partnership interest in the New York
        State Independent Network Partnership ("NYSINET"), which operates a
        statewide SS7 network in New York.

   29.  Taconet Wireless Corp. owns a 15% general partnership interest and a 14%
        limited partnership interest in the River Run PCS Limited Partnership.
        This partnership was formed for the purpose of bidding in the FCC
        auction of PCS licenses. The partnership was unsuccessful in the
        bidding, and is in the process of being dissolved.

   30.  Taconic Cellular Corp.owns a 25% general partnership interest in the
        Columbia/Greene Cellular Partnership, which acts as a retail agent for
        Nynex Mobile in the RSA 6 service area.
<PAGE>
 
B.  ADVANCES
    --------
         Travel and lodging advances in the ordinary course of business [not to
exceed $_________ per year].
<PAGE>
 
                                  ANNEX VIII
                                  ----------
                              REGULATORY MATTERS
                              ------------------

A.  MJD Communications, Inc. filed applications with the Colorado Public
    Utilities Commission to obtain consent for the pledge of MJD Communications,
    Inc.'s subsidiaries' stock and Inter-Company promissory notes, and for a
    change of control.

B.  MJD Communications, Inc. filed applications with the Vermont Public Utitlies
    Commission to obtain consent for the pledge of MJD Communications, Inc's
    subsidiaries' stock and Inter-Company promissory notes.


<PAGE>
 
                                   ANNEX IX
                                   --------     

                         TRANSACTIONS WITH AFFILIATES
                         ----------------------------

A.  Management Services Agreement dated as of August 1, 1996 by and between Odin
    Telephone Exchange, Inc. and MJD Services Corp.


<PAGE>
 
                                                                       EXHIBIT A
                                                                       ---------


                          FORM OF NOTICE OF BORROWING
                          ---------------------------


                                                          ___________ ___, _____



Bankers Trust Company,
 as Administrative Agent for the
 Lenders party to the Credit Agreement
 referred to below
130 Liberty Street
New York, New York 10006

Attention:  _____

Ladies and Gentlemen:

          The undersigned, MJD Communications, Inc. (the "Borrower"), refers to
the Credit Agreement, dated as of March 30, 1998 (as amended, amended and
restated, modified or supplemented from time to time, the "Credit Agreement,"
the capitalized terms defined therein being used herein as therein defined),
among the Borrower, the lenders from time to time party thereto (the "Lenders"),
NationsBank of Texas, N.A., as Syndication Agent, and you, as Administrative
Agent, and, pursuant to Section 1.03(a) of the Credit Agreement, hereby gives
you irrevocable notice that the undersigned hereby requests a Borrowing under
the Credit Agreement, and in that connection sets forth below the information
relating to such Borrowing (the "Proposed Borrowing") as required by Section
1.03(a) of the Credit Agreement:

     (i)   The Proposed Borrowing is to consist of [B Term Loans] [C Term 
Loans - Fixed Rate] [C Term Loans - Floating Rate] [RF Loans] [AF Loans].

     (ii)  The aggregate principal amount of the Proposed Borrowing is ________.

     (iii) The Business Day of the Proposed Borrowing is [____________]./1/

     (iv)  The Loans to be made pursuant to the Proposed Borrowing shall be
initially maintained as [Base Rate Loans] [Eurodollar Loans] [Fixed Rate Loans].
 
_______________________
     
/1/  Shall be a Business Day which (x) in the case of Base Rate Loans and Fixed
Rate Loans, may be the date hereof if this Notice of Borrowing is delivered to
the Administrative Agent at its Notice Office prior to 11:00 A.M. (New York
time) on such date and (y) in the case of Eurodollar Loans, shall be at least
three Business Days after the date hereof.
<PAGE>
 
                                                                       EXHIBIT A
                                                                          PAge 2

     
     (v) The initial Interest Period for the Proposed Borrowing is [one month]
[three months] [six months], subject to the availability to all Lenders with
Commitments and/or outstanding Loans under the respective Facility, [nine]
[twelve] month.]/2/

          The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the Proposed Borrowing:

          (A)  the representations and warranties contained in the Credit
     Agreement and the other Credit Documents are and will be true and correct
     in all material respects, both before and after giving effect to the
     Proposed Borrowing and to the application of the proceeds thereof, as
     though made on such date, unless stated to relate to a specific earlier
     date, in which case such representations and warranties shall be true and
     correct in all material respects as of such earlier date; and

          (B)  no Default or Event of Default has occurred and is continuing, or
     would result from such Proposed Borrowing or from the application of the
     proceeds thereof.

                              Very truly yours,

                              MJD COMMUNICATIONS, INC.



                              By:__________________________________________
                                   Name:
                                   Title:

_____________________

/2/  To be included for a Proposed Borrowing of Eurodollar Loans.
<PAGE>
 
                                                                     EXHIBIT B-1
                                                                     -----------



                              FORM OF B TERM NOTE
                              -------------------

  $________                                                  New York, New York

                                                             __________ __, ____

          FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation
(the "Borrower"), hereby promises to pay to the order of ________________ (the
"Lender"), in lawful money of the United States of America in immediately
available funds, at the Payment Office (as defined in the Agreement referred to
below) initially located at 130 Liberty Street, New York, New York 10006, on the
B Maturity Date (as defined in the Agreement) the principal sum of ___________
DOLLARS ($________) or, if less, the then unpaid principal amount of all B Term
Loans (as defined in the Agreement referred to below) made by the Lender
pursuant to the Agreement.

          The Borrower also promises to pay interest on the unpaid principal
amount hereof in like money at said office from the date hereof until paid at
the rates and at the times provided in Section 1.08 of the Agreement.

          This Note is one of the B Term Notes referred to in the Credit
Agreement, dated as of March 30, 1998, among the Borrower, the lenders from time
to time party thereto (including the Lender), NationsBank of Texas, N.A., as
Syndication Agent, and Bankers Trust Company, as Administrative Agent (as
amended, amended and restated, modified or supplemented from time to time, the
"Agreement"), and is entitled to the benefits thereof and of the other Credit
Documents (as defined in the Agreement).  This Note is secured pursuant to the
Pledge Agreement (as defined in the Agreement).  As provided in the Agreement,
this Note is subject to voluntary prepayment and mandatory repayment prior to
the B Maturity Date, in whole or in part.

          In case an Event of Default (as defined in the Agreement) shall occur
and be continuing, the principal of and accrued interest on this Note may be
declared to be due and payable in the manner and with the effect provided in the
Agreement.

          The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.
<PAGE>
 
                                                                     EXHIBIT B-1
                                                                          Page 2

          THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.


                                        MJD COMMUNICATIONS, INC.



                                        By_____________________________
                                          Name:
                                          Title:
<PAGE>
 
                                                                     EXHIBIT B-2
                                                                     -----------



                       FORM OF C TERM NOTE-FLOATING RATE
                       ---------------------------------

$________                                                     New York, New York
                                                              _________ __, ____

          FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation
(the "Borrower"), hereby promises to pay to the order of ________________ (the
"Lender"), in lawful money of the United States of America in immediately
available funds, at the Payment Office (as defined in the Agreement referred to
below) initially located at 130 Liberty Street, New York, New York 10006, on the
C Maturity Date (as defined in the Agreement) the principal sum of ___________
DOLLARS ($________) or, if less, the then unpaid principal amount of all C Term
Loans-Floating Rate (as defined in the Agreement referred to below) made by the
Lender pursuant to the Agreement.

          The Borrower also promises to pay interest on the unpaid principal
amount hereof in like money at said office from the date hereof until paid at
the rates and at the times provided in Section 1.08 of the Agreement.

          This Note is one of the C Term Notes-Floating Rate referred to in the
Credit Agreement, dated as of March 30, 1998, among the Borrower, the lenders
from time to time party thereto (including the Lender), NationsBank of Texas,
N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent
(as amended, amended and restated, modified or supplemented from time to time,
the "Agreement"), and is entitled to the benefits thereof and of the other
Credit Documents (as defined in the Agreement).  This Note is secured pursuant
to the Pledge Agreement (as defined in the Agreement).  As provided in the
Agreement, this Note is subject to voluntary prepayment and mandatory repayment
prior to the C Maturity Date in whole or in part.

          In case an Event of Default (as defined in the Agreement) shall occur
and be continuing, the principal of and accrued interest on this Note may be
declared to be due and payable in the manner and with the effect provided in the
Agreement.

          The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.
<PAGE>
 
                                                                     EXHIBIT B-2
                                                                          Page 2



          THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.


                                   MJD COMMUNICATIONS, INC.




                                   By___________________________________
                                     Name:
                                     Title:
<PAGE>
 
                                                                     EXHIBIT B-3
                                                                     -----------

                       FORM OF C TERM NOTE - FIXED RATE
                       --------------------------------

$________                                                    New York, New York

                                                             __________ __, ____

          FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation
(the "Borrower"), hereby promises to pay to the order of CoBank, ACB (the
"Lender"), in lawful money of the United States of America in immediately
available funds, at the Payment Office (as defined in the Agreement referred to
below) initially located at 130 Liberty Street, New York, New York 10006, the
principal sum of ___________ DOLLARS ($________), which aggregate amount shall
be payable as provided on Schedule I hereto.  Capitalized terms used and not
otherwise defined herein shall have the meanings ascribed to them in the
Agreement referred to below.

          The Borrower also promises to pay interest on the unpaid principal
amount hereof in like money at said office from the date hereof until paid at
the rates and at the times provided in Section 1 of this Note.  All payments of
principal, interest and all other amounts due under this Note shall be made in
the manner provided in Section 3.03 of the Agreement referred to below.

          This Note is one of the C Term Notes-Fixed Rate referred to in the
Credit Agreement, dated as of March 30, 1998, among the Borrower, the lenders
from time to time party thereto (including the Lender), NationsBank of Texas,
N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent
(as amended, amended and restated, modified or supplemented from time to time,
the "Agreement"), and is entitled to the benefits thereof and of the other
Credit Documents (as defined in the Agreement).  This Note is secured equally
and ratably with all other Notes issued pursuant to the Agreement and is subject
to voluntary prepayment as set forth in Section 2 below.

          In case an Event of Default shall occur and be continuing, the
principal of and accrued interest on this Note may be declared to be or become
due and payable in the manner and with the effect provided in the Agreement.

          SECTION 1.  Interest.  During the period commencing on the Closing
                      --------                                              
Date and ending on the FRE Date identified on Schedule I hereto (the "Fixed Rate
Period"), interest shall accrue on the unpaid principal amount of this Note at a
rate of ________ percent (____%) per annum and shall be payable quarterly in
arrears on the last Business Day of each March, June, September and December
commencing on June 30, 1998 and on any 
<PAGE>
 
                                                                     EXHIBIT B-3
                                                                          Page 2

prepayment, at maturity (whether by acceleration or otherwise) and, after such
maturity, on demand. From and after the FRE Date, interest shall be payable on
this Note as provided in the Agreement for Eurodollar Loans and/or Base Rate
Loans as the Loans evidenced hereby shall be maintained from time to time.

          SECTION 2.  Voluntary Prepayment.  During the Fixed Rate Period, the
                      --------------------                                    
Borrower may, on one Business Day's prior notice, prepay in full, but not in
part, the outstanding principal balance of this Note.  Notwithstanding the
foregoing, the Borrower's right to prepay shall be conditioned upon the payment
of a surcharge as defined and calculated below (the "Surcharge") on the date
such prepayment is made.  The Surcharge shall be an amount equal to the sum of:
(a) the present value of any funding losses incurred or imputed by CoBank to be
incurred as a result of such prepayment, plus, (b) .5% of the amount prepaid.
                                         ----                                 
Such Surcharge, including the amount of any funding losses incurred by CoBank,
shall be determined and calculated in accordance with methodology established by
CoBank and notified in writing to the Borrower.  After the FRE Date, this Note
may be prepaid as provided in the Agreement.

          SECTION 3.  Application of Mandatory Prepayments.  All mandatory
                      ------------------------------------                
prepayments of Term Loans required pursuant to Section 3.02(A)(c) through (g) of
the Agreement that are to be applied to the C Term Loans-Fixed Rate (x) will
first be applied to those C Term Loans-Fixed Rate as to which the FRE Date has
occurred (all in accordance with the Agreement) and (y) to the extent (after
giving effect to all payments under clause (x)) such prepayments are to be
applied to C Term Loans-Fixed Rate as to which the FRE Date has not occurred,
such prepayment amount shall, unless otherwise agreed by the Borrower and
CoBank, be allocated among the outstanding principal amounts of such C Term
Loans-Fixed Rate, as determined by CoBank.  To the extent any such prepayment is
applied to the outstanding principal balance of this Note during the Fixed Rate
Period, a Surcharge shall be payable in connection with such prepayment.

          SECTION 4.  Application of Scheduled Repayments.  Each Scheduled
                      -----------------------------------                 
Repayment of C Term Loans-Fixed Rate made by the Borrower shall be allocated to
this Note in accordance with the repayment schedule set forth on Schedule I
hereto.

          SECTION 5.  Waiver.  The Borrower hereby waives presentment, demand,
                      ------                                                  
protest or notice of any kind in connection with this Note.

          SECTION 6.  Governing Law.  THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE
                      -------------                                             
WITH AND BE GOVERNED BY 
<PAGE>
 
                                                                     EXHIBIT B-3
                                                                          Page 3

THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF
LAWS.


                              MJD COMMUNICATIONS, INC.



                              By______________________________________
                                Name:
                                Title:
<PAGE>

                                                                      Page 4

   Schedule I to the form of C term note - fixed rate (which form of C term note
is Exhibit B-3 to Exhibit 10.1 to the Registration Statement), to be attached at
a future date (i.e., in the event the C term note - fixed rate is completed upon
               ----
the occurrence of certain events).


<PAGE>
 
                                                                     EXHIBIT B-4
                                                                     -----------



                                FORM OF RF NOTE
                                ---------------


  _________$                                                  New York, New York
                                                             __________ __, ____


          FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation
(the "Borrower"), hereby promises to pay to the order of _______________________
(the "Lender"), in lawful money of the United States of America in immediately
available funds, at the Payment Office (as defined in the Agreement referred to
below) initially located at 130 Liberty Street, New York, New York 10006, on the
AF/RF Maturity Date (as defined in the Agreement) the principal sum of
_________________ DOLLARS ($_________) or, if less, the then unpaid principal
amount of all RF Loans (as defined in the Agreement) made by the Lender pursuant
to the Agreement.

          The Borrower promises also to pay interest on the unpaid principal
amount hereof in like money at said office from the date hereof until paid at
the rates and at the times provided in Section 1.08 of the Agreement.

          This Note is one of the RF Notes referred to in the Credit Agreement,
dated as of March 30, 1998, among the Borrower, the lenders from time to time
party thereto (including the Lender), NationsBank of Texas, N.A., as Syndication
Agent, and Bankers Trust Company, as Administrative Agent (as amended, amended
and restated, modified or supplemented from time to time, the "Agreement"), and
is entitled to the benefits thereof and of the other Credit Documents (as
defined in the Agreement).  This Note is secured pursuant to the Pledge
Agreement (as defined in the Agreement).  As provided in the Agreement, this
Note is subject to voluntary prepayment and mandatory repayment prior to the
AF/RF Maturity Date, in whole or in part.

          In case an Event of Default (as defined in the Agreement) shall occur
and be continuing, the principal of and accrued interest on this Note may be
declared to be due and payable in the manner and with the effect provided in the
Agreement.

          The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.
<PAGE>
 
                                                                     EXHIBIT B-4
                                                                          Page 2

          THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.


                              MJD COMMUNICATIONS, INC.


                              By_____________________________________________
                                Title:
<PAGE>
 
                                                                     EXHIBIT B-5
                                                                     -----------



                                FORM OF AF NOTE
                                ---------------


$ _________                                                  New York, New York
                                                             __________ __, ____


          FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation
(the "Borrower"), hereby promises to pay to the order of _______________________
(the "Lender"), in lawful money of the United States of America in immediately
available funds, at the Payment Office (as defined in the Agreement referred to
below) initially located at 130 Liberty Street, New York, New York 10006, on the
AF/RF Maturity Date (as defined in the Agreement) the principal sum of
_________________ DOLLARS ($_________) or, if less, the then unpaid principal
amount of all AF Loans (as defined in the Agreement) made by the Lender pursuant
to the Agreement.

          The Borrower promises also to pay interest on the unpaid principal
amount hereof in like money at said office from the date hereof until paid at
the rates and at the times provided in Section 1.08 of the Agreement.

          This Note is one of the AF Notes referred to in the Credit Agreement,
dated as of March 30, 1998, among the Borrower, the lenders from time to time
party thereto (including the Lender), NationsBank of Texas, N.A., as Syndication
Agent, and Bankers Trust Company, as Administrative Agent (as amended, amended
and restated, modified or supplemented from time to time, the "Agreement"), and
is entitled to the benefits thereof and of the other Credit Documents (as
defined in the Agreement).  This Note is secured pursuant to the Pledge
Agreement (as defined in the Agreement).  As provided in the Agreement, this
Note is subject to voluntary prepayment and mandatory repayment prior to the
AF/RF Maturity Date, in whole or in part.

          In case an Event of Default (as defined in the Agreement) shall occur
and be continuing, the principal of and accrued interest on this Note may be
declared to be due and payable in the manner and with the effect provided in the
Agreement.

          The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.
<PAGE>
 
                                                                     EXHIBIT B-5
                                                                          Page 2


          THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.


                                        MJD COMMUNICATIONS, INC.



                                        By_____________________________________
                                          Title:
<PAGE>
 
                                                                       EXHIBIT C
                                                                       ---------



                       FORM OF SECTION 3.04 CERTIFICATE
                       --------------------------------


          Reference is hereby made to the Credit Agreement, dated as of March
30, 1998, among MJD Communications, Inc. ("MJD"), various lenders from time to
time party thereto, NationsBank of Texas, N.A., as Syndication Agent, and
Bankers Trust Company, as Administrative Agent (as amended, amended and
restated, modified or supplemented from time to time, the "Credit Agreement").
Capitalized terms used herein that are not defined herein shall have the
meanings ascribed to them in the Credit Agreement. Pursuant to the provisions of
Section 3.04(b)(ii) of the Credit Agreement, the undersigned (the "Lender")
hereby represents and warrants that:

          1.  The Lender is not a "bank" for purposes of Section 881(c)(3)(A) of
     the Internal Revenue Code of 1986, as amended (the "Code").

          2.  The Lender is not subject to regulatory or other legal
     requirements as a "bank" in any jurisdiction and has not been treated as a
     "bank" for purposes of any tax, securities law or other filing or
     submission made to any governmental authority, any application made to a
     rating agency or qualification for any exemption from tax, securities law
     or other legal requirements.

          3.  The Lender meets all of the requirements under Code Section 871(h)
     or 881(c) to be eligible for a complete exemption from withholding of
     United States Taxes on interest payments made to it under the Credit
     Agreement.

          4.  The Lender shall promptly notify MJD and the Administrative Agent
     if any of the representations and warranties made herein are no longer true
     and correct.

                                        [NAME OF LENDER]



                                        By________________________________
                                          Title:

Date:  _______________, ____
<PAGE>
 
                                              March 30, 1998





To the Administrative Agent,
the Syndication Agent, the
Collateral Agent and each of
the Lenders party to the
Credit Agreement referred to below

Ladies and Gentlemen:

        We have acted as special New York counsel to MJD Communications, Inc., a
Delaware corporation (the "Borrower"), and each Subsidiary of the Borrower party
to any Document referred to below (collectively with the Borrower, the "Credit
Parties"), in connection with the execution and delivery of the Credit
Agreement, dated as of March 30, 1998 (the "Credit Agreement"), among the
Borrower, the financial institutions party thereto (the "Lenders"), NationsBank
of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as
Administrative Agent, and the transactions contemplated thereby. This opinion is
delivered to you pursuant to Section 4.01(b) of the Credit Agreement. Unless
otherwise indicated, capitalized terms used herein but not otherwise defined
herein shall have the respective meanings set forth in the Credit Agreement.

        In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of such documents as we
have deemed necessary or appropriate as a basis for the opinions set forth
herein, including, without limitation, the following (collectively, the
"Documents"): (a) the Credit Agreement, (b) the Notes, (c) the Subsidiary
Guaranty, (d) the Pledge Agreement, (e) the Applicable Acquisition Documents,
(f) the Capital Contribution Agreement and (g) such other public 
<PAGE>
 
Page 2



and corporate documents and records as we deem necessary or appropriate in
connection with this opinion.




        In our examination we have assumed (a) the genuineness of all signatures
(other than as to any Credit Party), (b) the authenticity of all documents
submitted to us as originals, (c) the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies, (d) all parties to the Documents,
other than the Credit Parties, have the requisite power and authority to
execute, deliver and perform such Documents, (e) such Documents have been duly
authorized by all requisite action of the parties thereto (other than the Credit
Parties), and have been duly executed and delivered by such parties, and (f) the
Documents are the legal, valid, binding and enforceable obligations of the
parties thereto (other than the Credit Parties). As to questions of fact not
independently verified by us we have relied, to the extent we deemed
appropriate, upon representations and certificates of officers of each Credit
Party, public officials and other appropriate persons.

        Whenever a statement herein is qualified by "known to us", "to our
knowledge" or a similar phrase, it is intended to indicate that, during the
course of our representation of the Credit Parties, no information that would
give us current actual knowledge of the inaccuracy of such statement has come to
the attention of those attorneys in this firm who have rendered legal services
in connection with the transaction described in the introductory paragraph
hereof. However, except as otherwise expressly indicated, we have not undertaken
any independent investigation to determine the accuracy of such statement, and
any limited inquiry undertaken by us during the preparation of this opinion
should not be regarded as such an investigation; no inference as to our
knowledge of any matters bearing on the accuracy of any such statement should be
drawn from the fact of our representation of any of the Credit Parties. We note
that Daniel G. Bergstein, a member of this Firm, is a director and an indirect
shareholder of the Borrower; however, Mr. Bergstein has not rendered any legal
services to the Borrower in connection with the transaction described in the
introductory paragraph hereof and none of his knowledge regarding the Borrower
may be imputed to any person who did render such services.

        Based upon the foregoing, we are of the opinion that:

        1. Each Credit Party (i) is a duly organized and validly existing
corporation in good standing under the laws of the jurisdiction of its
organization, (ii) has the corporate power and authority to own its property and
assets and to transact the 
<PAGE>
 
Page 3


business in which it is engaged and presently proposes to engage and (iii) is
duly qualified and is authorized to do business and is in good standing in all
jurisdictions where the failure to be so qualified could reasonably be expected
to have a Material Adverse Effect.

        2.  Each Credit Party has the corporate power and authority to
execute, deliver and carry out the terms and provisions of each of the Documents
to which it is a party and has taken all necessary corporate action to authorize
the execution, delivery and performance by it of each of the Documents to which
it is a party. Each Credit Party has duly executed and delivered each Document
to which it is a party and each such Document constitutes the legal, valid and
binding obligations of such Credit Party enforceable against such Credit Party
in accordance with its terms.

        3.  Neither the execution, delivery or performance by any Credit Party
of the Documents to which it is a party, nor compliance by them with the terms
and provisions thereof, nor the consummation of the transactions contemplated
therein, (i) will contravene any applicable provision of any law, statute, rule
or regulation (including, without limitation, Regulations G, T, U and X of the
Board of Governors of the Federal Reserve System) or any order, writ, injunction
or decree of any court or governmental instrumentality known to us to be
applicable to such Credit Party, (ii) will conflict or be inconsistent with or
result in any breach of, in each case in any material respect, any of the terms,
covenants, conditions or provisions of, or constitute a default under, or (other
than pursuant to the Pledge Agreement) result in the creation or imposition of
(or the obligation to create or impose) any Lien upon any of the property or
assets of the Borrower or any of its Subsidiaries pursuant to the terms of any
indenture, mortgage, deed of trust, debt agreement, debt instrument or other
material contract known to us to which the Borrower or any of its Subsidiaries
is a party or by which it or any of its property or assets are bound or to which
it may be subject or (iii) will violate any provision of the certificate of
incorporation, by-laws or equivalent organizational documents of such Credit
Party.

        4.  There are no actions, suits or proceedings pending or, to our
knowledge, threatened in writing, against the Borrower or any of its
Subsidiaries (i) with respect to the Transaction or any Document or (ii) that if
adversely determined, would reasonably be expected to have a Material Adverse
Effect.

        5.  No order, consent, approval, license, authorization, or validation
of, or filing, recording or registration with, or exemption by, any foreign or
domestic 

<PAGE>
 
Page 4


governmental or public body or authority (other than the Federal Communications
Commission and any applicable state public utility or similar commission ("PUC")
as to which we express no opinion), or any subdivision thereof, or any other
third party (except as have been obtained or made on or prior to the date hereof
and remain in full force and effect on the date hereof), is required to
authorize, or is required in connection with, (i) the execution, delivery and
performance of any Document or (ii) the legality, validity, binding effect or
enforceability of any such Document.

        6.  No Credit Party is an "investment company" or, to our knowledge,
a company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.

        7.  No Credit Party is a "holding company," or, to our knowledge,  a
"subsidiary company" of a "holding company," or , to our knowledge, an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company" within the meaning of the Public Utility Holding Company Act of 1935,
as amended.

        8.  Based solely on a review of the stock ledgers of each of the issuers
of equity securities listed on Annex B of the Pledge Agreement, each Credit
Party is the record owner of all of the Stock (as such term is defined in the
Pledge Agreement) listed under its name on Annex B to the Pledge Agreement. All
such Stock has been duly authorized and validly issued, is fully paid and non-
assessable, and is free of preemptive rights (however, we express no opinion as
to any preemptive rights that may have been granted by any Person other than a
Credit Party). After giving effect to the delivery to the Collateral Agent of
the Pledged Stock and Pledged Notes (as each such term is defined in the Pledge
Agreement), the security interest created in favor of the Collateral Agent under
the Pledge Agreement constitutes a valid and enforceable perfected security
interest in such Pledged Stock and Pledged Notes (and the proceeds thereof) in
favor of the Collateral Agent for the benefit of the Secured Creditors, subject
to no other security interest. No other filings or recordings are required in
order to perfect (or maintain the perfection of) the security interest in the
Pledged Stock and Pledged Notes created under the Pledge Agreement.
<PAGE>
 
Page 5


        The opinions set forth above are subject to the following qualifications
and exceptions:

        (a)  Our opinions set forth above are subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other law affecting creditors' rights generally.

        (b)  Our opinions are subject to the effect of general principles of
equity, including (without limitation) concepts of materiality, reasonableness,
good faith and fair dealing, election of remedies, estoppel and other similar
doctrines affecting the enforceability of agreements generally (regardless of
whether considered in a proceeding in equity or at law).

        (c)  The availability of specific performance, injunctive relief and
other equitable remedies is subject to the discretion of the tribunal before
which any proceeding therefor may be brought.

        (d)  Our opinions in paragraph 8 in respect of the security interests
created pursuant to the Pledge Agreement are subject to the effect of Section 
9-306 of the UCC.

        (e)  We express no opinion as to the enforceability of any provision
contained in any Document allowing any person to set off and apply any party's
deposits with such Person against such party's obligations under the Documents
without prior notice having been given to such party.

        (f)  We express no opinion as to the enforceability of (i) choice of law
or forum selection provisions, (ii) any waiver by the parties of any
constitutional rights or remedies, and (iii) any grants to the Administrative
Agent, the Collateral Agent or the Lenders of powers of attorney.

        (g)  Our opinions in paragraph 3 hereof, insofar as they relate to the
enforceability of indemnification provisions set forth in the Credit Documents,
are subject to the effect of federal and state securities laws and public policy
relating thereto. In addition, certain cases in the Federal District Courts have
called into question the enforceability of private contractual agreements
allocating financial responsibility under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), as between parties
who are potentially responsible parties under CERCLA, 
<PAGE>
 
Page 6

and the reasoning in such cases could be utilized by parties attempting to avoid
indemnity under both CERCLA and state environmental statutes which may contain
similar language respecting indemnity agreements.

        (h)  We express no opinion with respect to the effect of noncompliance
by the Lenders with any state or federal laws or regulations applicable to the
Lenders in connection with the transactions described in the Documents.

        (i)  We express no opinion as to the enforceability of any provision of
the Documents which purports to excuse the Administrative Agent, the Collateral
Agent or the Lenders from liability for, or require the Credit Parties to
indemnify the Administrative Agent, the Collateral Agent or the Lenders against,
the Administrative Agent's, the Collateral Agent's or the Lenders' gross
negligence or willful misconduct, as the case may be.

        (j)  The enforceability of provisions in the Documents to the effect
that terms may not be waived or modified except in writing may be limited under
certain circumstances.

        (k)  The rights of debtors, guarantors and other secured parties to
receive notices under Sections 9-504 and 9-505 of the UCC may not be waived
prior to default, the failure to comply with such notice requirements may bar or
limit the recovery of any deficiency remaining after the retention or sale of
repossessed collateral, and a secured party may be required to obtain, after
appropriate notice and hearing, a judgment or decree of a court of competent
jurisdiction permitting the secured party to enforce its rights to take
possession and dispose of any of its collateral.

        (l)  The rights of debtors, guarantors and other secured parties to
redeem collateral under Section 9-506 of the UCC may not be waived prior to
default.

        (m)  The duties to exercise reasonable care in the custody and
preservation of collateral in a secured party's possession and to deal with and
dispose of collateral in a commercially reasonable manner as required by the UCC
or other applicable law may not be disclaimed by agreement, waived or released
prior to a default.

        (n)  Notwithstanding certain language of the Documents relating to the
recovery of expenses, attorneys fees and legal expenses, the Administrative
Agent, the Collateral Agent and the Lenders may be limited to recovery of any
reasonable expenses 
<PAGE>
 
Page 7


or attorney's fees and legal expenses with respect to the enforcement of the
Documents or the liens and security interests created thereunder.

        (o)  We express no opinion as to any provisions in the Documents
(i) deeming sales of, or otherwise dealing with, pledged collateral to have been
made in a commercially reasonable manner; or (ii) restoring the Administrative
Agent, the Collateral Agent or any secured party to its original position after
the Administrative Agent or the Collateral Agent has commenced any proceeding
and such proceeding has been discontinued or abandoned for any reason or shall
have been determined adversely to the Administrative Agent or the Collateral
Agent.

        (p)  Except as expressly provided in paragraph 8 we express no opinion
with respect to a security interest in money, securities or instruments.

        (q)  With respect to the security interests created under the Pledge
Agreement, we have assumed with your permission and without independent
investigation that from and after the date of this opinion and at all relevant
times hereafter:

                      (i)   all the Pledged Stock and the Pledged Notes are and
                  will remain in the possession of the Collateral Agent in the
                  State of New York;

                      (ii)  the Pledgors had and have rights in or title to the
                  Pledged Stock and the Pledged Notes (and we do not express any
                  opinion herein as to any of such rights or title);

                      (iii) none of the Pledged Stock or the Pledged Notes
                  consists of uncertificated securities;

                      (iv)  the Secured Creditors (as defined in the Pledge
                  Agreement) do not have any knowledge of any adverse claim in
                  respect of the Pledged Stock or the Pledged Notes;

                      (v)   that the laws of the State of New York exclusively
                  govern the pledge of the Pledged Stock and the Pledged Notes
                  and the realization of any rights thereto under the Pledge
                  Agreement regardless of the jurisdiction of incorporation or
                  organization of any issuer of such Pledged Stock or the
                  Pledged Notes; and
<PAGE>
 
Page 8


                      (vi)  we have not been requested to render and, with your
                  permission, we express no opinion as to the applicability to
                  the obligations of the Borrower under the Credit Agreement of
                  Section 548 of the Bankruptcy Code and Article 10 of the New
                  York Debtor & Creditor Law relating to fraudulent transfers
                  and obligations. We understand, without independent
                  verification, that , to the extent they have deemed necessary
                  in the context of the proposed transaction, the Lenders have
                  satisfied themselves on the basis of, among other things, the
                  financial information furnished to the Lenders and their
                  knowledge of the credit facilities available to the Borrower,
                  that neither the Borrower nor any of its Subsidiaries is
                  insolvent and that neither the Borrower nor any of its
                  Subsidiaries will be rendered insolvent by the transactions
                  contemplated by the Credit Agreement and the other Credit
                  Documents and that, after giving effect to such transactions,
                  neither the Borrower nor any of its Subsidiaries will be left
                  with unreasonably small capital with which to engage in its
                  anticipated business and that neither the Borrower nor any of
                  its Subsidiaries will have intended to incur, or will have
                  believed it has incurred, debts beyond its ability to pay as
                  such debts mature.

        Notwithstanding the qualifications and exceptions set forth in clauses
(c), (e) and (f) above, such qualifications and exceptions do not render the
remedies under the Credit Documents inadequate for the practical realization of
the benefits intended to be provided under the Credit Documents.

        We are members of the Bar of the State of New York, and we do not hold
ourselves out as being conversant with, and express no opinion as to, the laws
of any jurisdiction other than those of the United States of America, the State
of New York and the general corporate law of the State of Delaware.

        This opinion is being furnished only to the addresses and is solely for
their benefit and the benefit of their permitted participants and assigns in
connection with the above transaction. This opinion may not be relied upon for
any other purpose, or relied upon by any other person, firm or corporation for
any purpose, without our prior written consent.


                                            Very truly yours,
<PAGE>
 
                                                                  March 27, 1998


SJG:EFL


To:  The Administrative Agent, the Syndication 
     Agent and the Lenders party to the Credit 
     Agreement referred to below


Re:  Credit Agreement, dated as of March 27, 1998 (the "Credit
     Agreement"), among MJD Communications, Inc. (the "Borrower"), the
     lenders from time to time party thereto (each, a "Lender" and,
     collectively, the "Lenders"), NationsBank of Texas, N.A., as
     Syndication Agent, and Bankers Trust Company, as Administrative
                 ---------------------------------------------------
     Agent
     -----


Ladies and Gentlemen:

          We have acted as special counsel to the Lenders party to the Credit
Agreement in connection with the execution and delivery of the Credit Agreement.
This opinion is delivered to you pursuant to Section 4.01(b) of the Credit
Agreement.  Terms used herein which are defined in the Credit Agreement shall
have the respective meanings set forth in the Credit Agreement unless otherwise
defined herein.

          In connection with this opinion, we have examined the originals, or
certified, conformed or reproduction copies, of all records, agreements,
instruments and documents as we have deemed relevant or necessary as the basis
for the opinions hereinafter expressed.  In stating our opinion, we have assumed
the genuineness of all signatures on original or certified copies, the
authenticity of documents submitted to us
<PAGE>
 
as originals and the conformity to original or certified copies of all copies
submitted to us as certified or reproduction copies.

          We have also assumed, for purposes of the opinions expressed herein,
that the parties to the Credit Agreement have the corporate power and authority
to enter into and perform the Credit Agreement and that the Credit Agreement has
been duly authorized, executed and delivered by each such party.

          Based upon the foregoing, and subject to the limitations set forth
herein, we are of the opinion that the Credit Agreement constitutes the valid
and binding obligation of each Credit Party enforceable in accordance with its
terms, except to the extent that enforcement may be limited by applicable
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally and by equity principles (regardless of whether
enforcement is sought in equity or at law).

          We have not been requested to render and, with your permission, we
express no opinion as to the applicability to the obligations of the Borrower
under the Credit Agreement of Section 548 of the Bankruptcy Code and Article 10
of the New York Debtor & Creditor Law relating to fraudulent transfers and
obligations.  We understand, without independent verification, that, to the
extent they have deemed necessary in the context of the proposed transaction,
the Lenders have satisfied themselves on the basis of, among other things, the
financial information furnished to the Lenders and their knowledge of the credit
facilities available to the Borrower, that neither the Borrower nor any of its
Subsidiaries is insolvent and that neither the Borrower nor any of its
Subsidiaries will be rendered insolvent by the transactions contemplated by the
Credit Agreement and the other Credit Documents and that, after giving effect to
such transactions, neither the Borrower nor any of its Subsidiaries will be left
with unreasonably small capital with which to engage in its anticipated business
and that neither the Borrower nor any of its Subsidiaries will have intended to
incur, or will have believed it has incurred, debts beyond its ability to pay as
such debts mature.

          This opinion is limited to the federal law of the United States of
America and the law of the State of New York.


                                        Very truly yours,

                                      -2-
<PAGE>
 
                                                                       EXHIBIT E
                                                                       ---------


                         FORM OF OFFICER'S CERTIFICATE
                         -----------------------------


          I, the undersigned, [President][Vice President] of MJD Communications,
Inc., a corporation organized and existing under the laws of the State of
Delaware (the "Company"), do hereby certify on behalf of the Company that:

          1.  This Certificate is furnished pursuant to the Credit Agreement,
dated as of March 30, 1998, among the Company, the lenders from time to time
party thereto, NationsBank of Texas, N.A., as Syndication Agent, and Bankers
Trust Company, as Administrative Agent (such Credit Agreement, as in effect on
the date of this Certificate, being herein called the "Credit Agreement").
Unless otherwise defined herein, capitalized terms used in this Certificate
shall have the meanings set forth in the Credit Agreement.

          2.  The following named individuals are elected or appointed officers
of the respective Credit Party set forth above such individuals' names below,
each holds the office of such Credit Party set forth opposite his name and has
held such office since ______ ___, 19__./1/ The signature written opposite the
name and title of each such officer is his genuine signature.

 
     [NAME OF CREDIT PARTY]
 
          Name/2/             Office              Signature

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

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

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

          3.  Attached hereto as Exhibit A is a certified copy of the
Certificate of Incorporation, Certificate of Formation or equivalent
organizational document of each Credit Party, as filed in the Office of the
Secretary of State of the State of such Credit


_______________

/1/  Insert a date prior to the time of any action relating to the Credit
Documents.
 
/2/  Include name, office and signature of each officer who will sign any Credit
Document on behalf of such Credit Party, including, in the case of the Company,
the officer who will sign the certification at the end of this Certificate.
<PAGE>
 
                                                                       EXHIBIT E
                                                                          Page 2


Party's organization, together with all amendments thereto adopted through the
date hereof.

          4.  Attached hereto as Exhibit B are true and correct copies of the
By-Laws, partnership agreement, limited liability company agreement or
equivalent organizational document of each Credit Party which are in full force
and effect on the date hereof, together with all amendments thereto adopted
through the date hereof and which, in the case of all By-Laws, were duly
adopted.

          5.  Attached hereto as Exhibit C are true and correct copies of the
resolutions of each Credit Party which were duly adopted on __________, 19__ [by
unanimous written consent of the Board of Directors of each Credit Party] [by a
meeting of the Board of Directors of each Credit Party at which a quorum was
present and acting throughout], and said resolutions have not been rescinded,
amended or modified.  Except as attached hereto as Exhibit C, no resolutions
have been adopted by the Board of Directors of any Credit Party which deal with
the execution, delivery or performance of any of the Credit Documents to which
such Credit Party is party.

          6.  On the date hereof, all of the applicable conditions set forth in
Sections 4.01(e), (f), (g) and (m), 4.02(a), (b) and (e) and 4.03(b) of the
Credit Agreement have been satisfied.

          7.  Attached hereto as Exhibit D are true and correct copies of all
Plans, employee benefit plans and other documents referred to in Section
4.01(d)(i) of the Credit Agreement.

          8.  Attached hereto as Exhibit E are true and correct copies of all
collective bargaining agreements and other similar agreements referred to in
Section 4.01(d)(ii) of the Credit Agreement.

          9.  Attached hereto as Exhibit F are true and correct copies of all
agreements governing the terms and relative rights of the capital stock of the
Company or any Subsidiary referred to in Section 4.01(d)(iii) of the Credit
Agreement.

          10. Attached hereto as Exhibit G are true and correct copies of all
material management agreements referred to in Section 4.01(d)(iv) of the Credit
Agreement.

          11. Attached hereto as Exhibit H are true and correct copies of all
material employment agreements referred to in Section 4.01(d)(v) of the Credit
Agreement.
<PAGE>
 
                                                                       EXHIBIT E
                                                                          Page 3


          12. Attached hereto as Exhibit I are true and correct copies of all
tax sharing agreements, tax allocation and other similar agreements referred to
in Section 4.01(d)(vi) of the Credit Agreement.

          13. Attached hereto as Exhibit J is a true and correct copy of the
Capital Contribution Agreement.

          14. Attached hereto as Exhibit K is a true and correct copy of the
documentation delivered in connection with the Refinancing pursuant to Section
4.01(m) of the Credit Agreement.

          15. Attached hereto as Exhibit L are true and correct copies of the
Applicable Acquisition Documents.

          16. On the date hereof, the representations and warranties contained
in the Credit Agreement or in the other Credit Documents are true and correct in
all material respects with the same effect as though such representations and
warranties had been made on the date hereof, both before and after giving effect
to the incurrence of Loans on the date hereof and the application of the
proceeds thereof, unless stated to relate to a specific earlier date, in which
case such representations and warranties were true and correct in all material
respects as of such earlier date.

          17. On the date hereof, no Default or Event of Default has occurred
and is continuing or would result from the making of any Loans on the date
hereof or from the application of the proceeds thereof.

          18. There is no proceeding for the dissolution or liquidation of any
Credit Party or threatening its existence.

          
          IN WITNESS WHEREOF, I have hereunto set my hand this __ day of March,
1998.


                              MJD COMMUNICATIONS, INC.


                              By_______________________
                               Name:
                               Title:
<PAGE>
 
                                                                      EXHIBIT E
                                                                         Page 4

          I, the undersigned, [Secretary/Assistant Secretary] of the Company, do
hereby certify that:

          1.  [Name of Person making above certifications] is the duly elected
and qualified [President/Vice President] of the Company and the signature above
is his genuine signature.

          2.  The certifications made by [name of Person making above
certifications] on behalf of the Company in Items 2, 3, 4, 5 and 18 above are
true and correct.


          IN WITNESS WHEREOF, I have hereunto set my hand this _______ day of
March, 1998.


                              MJD COMMUNICATIONS, INC.


                              By__________________________
                               Name:
                               Title:
<PAGE>

                                                                          Page 5
 
          Exhibits A through L to the Form of Officer's Certificate (which form
of officer's certificate is Exhibit E to Exhibit 10.1 to the Registration
Statement) to be attached at a future date (i.e., in the event the officer's
                                            ----
certificate is completed upon the occurrence of certain events).
<PAGE>
 
                                                             EXHIBIT F CONFORMED
                                                                     AS EXECUTED
                                                                                
                              SUBSIDIARY GUARANTY
                              -------------------


          SUBSIDIARY GUARANTY, dated as of March 30, 1998 (as amended, amended
and restated, modified or supplemented from time to time, this "Guaranty"), made
by each of the undersigned (each, a "Guarantor" and together with any other
entity that becomes a party hereto pursuant to Section 26 hereof, collectively,
the "Guarantors").  Except as otherwise defined herein, terms used herein and
defined in the Credit Agreement (as defined below) shall be used herein as
therein defined.


                             W I T N E S S E T H :
                             - - - - - - - - - -  


          WHEREAS MJD Communications, Inc. (the "Borrower"), the lenders from
time to time party thereto (the "Lenders"), Nationsbank of Texas, N.A., as
Syndication Agent (the "Syndication Agent"), and Bankers Trust Company, as
Administrative Agent (the "Administrative Agent", and together with the Lenders,
the Syndication Agent and the Collateral Agent, the "Lender Creditors"), have
entered into a Credit Agreement, dated as of March 30, 1998 (as amended, amended
and restated, modified or supplemented from time to time, the "Credit
Agreement"), providing for the making of Loans as contemplated therein;

          WHEREAS, the Borrower may from time to time be party to one or more
Interest Rate Agreements (each such Interest Rate Agreement with an Interest
Rate Creditor (as defined below), a "Secured Interest Rate Agreement") with
Bankers Trust Company, in its individual capacity ("BTCo"), any Lender or a
syndicate of financial institutions organized by BTCo or such Lender or an
affiliate of BTCo or such Lender (even if BTCo or any such Lender ceases to be a
Lender under the Credit Agreement for any reason), and any institution that
participates therein, and in each case their subsequent assigns (collectively,
the "Interest Rate Creditors," and together with the Lender Creditors,
collectively, the "Creditors");

          WHEREAS, each Guarantor is a wholly-owned direct or indirect
Subsidiary of the Borrower;

          WHEREAS, it is a condition to the making of Loans under the Credit
Agreement that each Guarantor shall have executed and delivered this Guaranty;
and
<PAGE>
 
          WHEREAS, each Guarantor will obtain benefits from the incurrence of
Loans by the Borrower under the Credit Agreement and the entering into of
Secured Interest Rate Agreements and, accordingly, desires to execute this
Guaranty in order to satisfy the conditions described in the preceding paragraph
and to induce the Lenders to make Loans to the Borrower and Interest Rate
Creditors to enter into Secured Interest Rate Agreements;


          NOW, THEREFORE, in consideration of the foregoing and other benefits
accruing to each Guarantor, the receipt and sufficiency of which are hereby
acknowledged, each Guarantor hereby makes the following representations and
warranties to the Creditors and hereby covenants and agrees with each Creditor
as follows:

          1.   Each Guarantor irrevocably and unconditionally, and jointly and
severally, guarantees:

          (i)  to the Lender Creditors, the full and prompt payment when due
     (whether at the stated maturity, by acceleration or otherwise) of (a) the
     principal of and interest on the Notes issued by, and the Loans made to,
     the Borrower under the Credit Agreement and (b) all other obligations
     (including obligations which, but for any automatic stay under Section
     362(a) of the Bankruptcy Code, would become due) and liabilities owing by
     the Borrower to the Lender Creditors under the Credit Agreement and the
     other Credit Documents (including, without limitation, indemnities, Fees
     and interest thereon) now existing or hereafter incurred under, arising out
     of or in connection with the Credit Agreement or any other Credit Document
     and the due performance and compliance with the terms of the Credit
     Documents by the Borrower (all such principal, interest, liabilities and
     obligations, the "Credit Document Obligations"); and

          (ii) to the Interest Rate Creditors, the full and prompt payment when
     due (whether at the stated maturity, by acceleration or otherwise) of all
     obligations (including obligations which, but for any automatic stay under
     Section 362(a) of the Bankruptcy Code, would become due) and liabilities
     owing by the Borrower under any Secured Interest Rate Agreement, whether
     now in existence or hereafter arising, and the due performance and
     compliance by the Borrower with all terms, conditions and agreements
     contained therein (all such obligations and liabilities, the "Interest Rate
     Obligations", and the Interest Rate Obligations together with the Credit
     Document Obligations, collectively, the "Guaranteed Obligations").

                                      -2-
<PAGE>
 
Each Guarantor understands, agrees and confirms that the Creditors may enforce
this Guaranty up to the full amount of the Guaranteed Obligations against each
Guarantor without proceeding against the Borrower, any other Guarantor or any
security for the Guaranteed Obligations, or under any other guaranty covering
all or a portion of the Guaranteed Obligations.  All payments by each Guarantor
under this Guaranty shall be made on the same basis as payments by the Borrower
under Sections 3.03 and 3.04 of the Credit Agreement.

          2.  Additionally, each Guarantor, jointly and severally,
unconditionally and irrevocably, guarantees the payment of any and all
Guaranteed Obligations to the Creditors whether or not due or payable by the
Borrower upon the occurrence in respect of the Borrower of any of the events
specified in Section 8.05 of the Credit Agreement, and unconditionally and
irrevocably, jointly and severally, promises to pay such Guaranteed Obligations
to the Creditors, on demand, in lawful money of the United States of America.

          3.  The liability of each Guarantor hereunder is exclusive and
independent of any security for or other guaranty of the indebtedness of the
Borrower whether executed by such Guarantor, any other Guarantor, any other
guarantor or by any other party, and the liability of each Guarantor hereunder
shall not be affected or impaired by (a) any direction as to application of
payment by the Borrower or by any other party, (b) any other continuing or other
guaranty, undertaking or maximum liability of a guarantor or of any other party
as to the indebtedness of the Borrower, (c) any payment on or in reduction of
any such other guaranty or undertaking, (d) any dissolution, termination or
increase, decrease or change in personnel by the Borrower or (e) any payment
made to any Creditor on the indebtedness which any Creditor repays to the
Borrower pursuant to court order in any bankruptcy, reorganization, arrangement,
moratorium or other debtor relief proceeding, and each Guarantor waives any
right to the deferral or modification of its obligations hereunder by reason of
any such proceeding.

          4.  The obligations of each Guarantor hereunder are independent of the
obligations of any other Guarantor, any other guarantor or the Borrower, and a
separate action or actions may be brought and prosecuted against each Guarantor
whether or not action is brought against any other Guarantor, any other
guarantor or the Borrower and whether or not any other Guarantor, any other
guarantor of the Borrower or the Borrower be joined in any such action or
actions.

          5.  Each Guarantor hereby waives notice of acceptance of this Guaranty
and notice of any liability to which it may apply, and waives promptness,
diligence, presentment, demand of payment, protest, notice of dishonor or
nonpayment of any such liabilities, suit or taking of other action by the
Administrative Agent or any other Creditor 

                                      -3-
<PAGE>
 
against, and any other notice to, any party liable thereon (including such
Guarantor or any other guarantor of the Borrower).

          6.  Any Creditor may at any time and from time to time without the
consent of, or notice to, any Guarantor, without incurring responsibility to
such Guarantor, without impairing or releasing the obligations of such Guarantor
hereunder, upon or without any terms or conditions and in whole or in part:

          (i)   change the manner, place or terms of payment of, and/or change
     or extend the time of payment of, renew or alter, any of the Guaranteed
     Obligations, any security therefor, or any liability incurred directly or
     indirectly in respect thereof, and the guaranty herein made shall apply to
     the Guaranteed Obligations as so changed, extended, renewed or altered;

          (ii)  sell, exchange, release, surrender, realize upon or otherwise
     deal with in any manner and in any order any property by whomsoever at any
     time pledged or mortgaged to secure, or howsoever securing, the Guaranteed
     Obligations or any liabilities (including any of those hereunder) incurred
     directly or indirectly in respect thereof or hereof, and/or any offset
     thereagainst;

          (iii) exercise or refrain from exercising any rights against the
     Borrower, any other guarantor or others or otherwise act or refrain from
     acting;

          (iv)  settle or compromise any of the Guaranteed Obligations, any
     security therefor or any liability (including any of those hereunder)
     incurred directly or indirectly in respect thereof or hereof, and may
     subordinate the payment of all or any part thereof to the payment of any
     liability (whether due or not) of the Borrower to creditors of the Borrower
     (other than the Creditors);

          (v)   apply any sums by whomsoever paid or howsoever realized to any
     liability or liabilities of the Borrower to the Creditors regardless of
     what liabilities of the Borrower remain unpaid;

          (vi)  consent to or waive any breach of, or any act, omission or
     default under, any of the Credit Documents, the Secured Interest Rate
     Agreements or any of the instruments or agreements referred to therein, or
     otherwise amend, modify or supplement any of the Credit Documents, the
     Secured Interest Rate Agreements or any of such other instruments or
     agreements; and/or

                                      -4-
<PAGE>
 
          (vii) act or fail to act in any manner referred to in this Guaranty
     which may deprive such Guarantor of its right to subrogation against the
     Borrower to recover full indemnity for any payments made pursuant to this
     Guaranty.

          7.  No invalidity, irregularity or unenforceability of all or any part
of the Guaranteed Obligations or of any security therefor shall affect, impair
or be a defense to this Guaranty, and this Guaranty shall be primary, absolute
and unconditional notwithstanding the occurrence of any event or the existence
of any other circumstances which might constitute a legal or equitable discharge
of a surety or guarantor except payment in full of the Guaranteed Obligations.

          8.  This Guaranty is a continuing one and all liabilities to which it
applies or may apply under the terms hereof shall be conclusively presumed to
have been created in reliance hereon.  No failure or delay on the part of any
Creditor in exercising any right, power or privilege hereunder shall operate as
a waiver thereof; nor shall any single or partial exercise of any right, power
or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.  The rights and remedies herein
expressly specified are cumulative and not exclusive of any rights or remedies
which any Creditor would otherwise have.  No notice to or demand on any
Guarantor in any case shall entitle such Guarantor to any other further notice
or demand in similar or other circumstances or constitute a waiver of the rights
of any Creditor to any other or further action in any circumstances without
notice or demand.  It is not necessary for any Creditor to inquire into the
capacity or powers of the Borrower or any of its Subsidiaries or the officers,
directors, partners or agents acting or purporting to act on its behalf, and any
indebtedness made or created in reliance upon the professed exercise of such
powers shall be guaranteed hereunder.

          9.  Any indebtedness of the Borrower now or hereafter held by any
Guarantor is hereby subordinated to the indebtedness of the Borrower to the
Creditors; and such indebtedness of the Borrower to any Guarantor, if the
Collateral Agent so requests after an Event of Default (as hereinafter defined)
has occurred, shall be collected, enforced and received by such Guarantor as
trustee for the Creditors and be paid over to the Creditors on account of the
indebtedness of the Borrower to the Creditors, but without affecting or
impairing in any manner the liability of such Guarantor under the other
provisions of this Guaranty.  Prior to the transfer by any Guarantor of any note
or negotiable instrument evidencing any indebtedness of the Borrower to such
Guarantor, such Guarantor shall mark such note or negotiable instrument with a
legend that the same is subject to this subordination.

          10. (a)  Each Guarantor hereby waives any right (except as shall be
required by applicable statute and cannot be waived) to require the Creditors
to:  (i) 

                                      -5-
<PAGE>
 
proceed against the Borrower, any other Guarantor, any other guarantor of the
Borrower or any other party; (ii) proceed against or exhaust any security held
from the Borrower, any other Guarantor, any other guarantor of the Borrower or
any other party; or (iii) pursue any other remedy in the Creditors' power
whatsoever. Each Guarantor waives any defense based on or arising out of any
defense of the Borrower, any other Guarantor, any other guarantor of the
Borrower or any other party other than payment in full of the Guaranteed
Obligations, including, without limitation, any defense based on or arising out
of the disability of the Borrower, any other Guarantor, any other guarantor of
the Borrower or any other party, or the unenforceability of the Guaranteed
Obligations or any part thereof from any cause, or the cessation from any cause
of the liability of the Borrower other than payment in full of the Guaranteed
Obligations. The Creditors may, at their election, foreclose on any security
held by the Administrative Agent, the Collateral Agent or the other Creditors by
one or more judicial or nonjudicial sales, whether or not every aspect of any
such sale is commercially reasonable (to the extent such sale is permitted by
applicable law), or exercise any other right or remedy the Creditors may have
against the Borrower or any other party, or any security, without affecting or
impairing in any way the liability of any Guarantor hereunder, except to the
extent the Guaranteed Obligations have been paid in full. Each Guarantor waives
any defense arising out of any such election by the Administrative Agent, the
Collateral Agent and the other Creditors, even though such election may operate
to impair or extinguish any right of reimbursement or subrogation or other right
or remedy of such Guarantor against the Borrower, any other Guarantor or any
other party or any security.

          (b)  Each Guarantor waives all presentments, demands for performance,
protests and notices, including, without limitation, notices of nonperformance,
notices of protest, notices of dishonor, notices of acceptance of this Guaranty,
and notices of the existence, creation or incurring of new or additional
Indebtedness.  Each Guarantor assumes all responsibility for being and keeping
itself informed of the Borrower's financial condition and assets, and of all
other circumstances bearing upon the risk of nonpayment of the Guaranteed
Obligations and the nature, scope and extent of the risks which any Guarantor
assumes and incurs hereunder, and agrees that the Creditors shall have no duty
to advise such Guarantor of information known to them regarding such
circumstances or risks.

          (c)  Until such time as the Guaranteed Obligations have been paid in
full in cash or Cash Equivalents, each Guarantor hereby waives all rights of
subrogation which it may at any time otherwise have as a result of this Guaranty
(whether contractual, under Section 509 of the Bankruptcy Code, or otherwise) to
the claims of the Creditors against the Borrower, any other Guarantor or any
other guarantor of the Guaranteed Obligations and all contractual, statutory or
common law rights of reimbursement, contribution or 

                                      -6-
<PAGE>
 
indemnity from the Borrower or any other Guarantor which it may at any time
otherwise have as a result of this Guaranty.

          11.  If and to the extent that any Guarantor makes any payment to any
Creditor or to any other Person pursuant to or in respect of this Guaranty, any
claim which such Guarantor may have against the Borrower by reason thereof shall
be subject and subordinate to the prior payment in full of the Guaranteed
Obligations to each Creditor.  Prior to the transfer by any Guarantor of any
note or negotiable instrument evidencing any indebtedness of the Borrower to
such Guarantor, such Guarantor shall mark such note or negotiable instrument
with a legend that the same is subject to this subordination.

          12.  Each Guarantor covenants and agrees that on and after the date
hereof and until the Total Commitment and all Secured Interest Rate Agreements
have been terminated, no Note remains outstanding and all Guaranteed Obligations
have been paid in full, such Guarantor shall take, or will refrain from taking,
as the case may be, all actions that are necessary to be taken or not taken so
that no violation of any provision, covenant or agreement contained in Section 6
or 7 of the Credit Agreement, and so that no Event of Default, is caused by the
actions of such Guarantor or any of its Subsidiaries.

          13.  Each Guarantor hereby jointly and severally agrees to pay, to the
extent not paid pursuant to Section 11.01 of the Credit Agreement, all
reasonable out-of-pocket costs and expenses (including, without limitation, the
reasonable fees and disbursements of counsel) of each Creditor in connection
with the enforcement of this Guaranty and of the Administrative Agent in
connection with any amendment, waiver or consent relating to this Guaranty.

          14.  This Guaranty shall be binding upon each Guarantor and its
successors and assigns and shall inure to the benefit of the Creditors and their
successors and assigns to the extent permitted under the Credit Agreement.

          15.  Neither this Guaranty nor any provision hereof may be changed,
waived, discharged or terminated except with the written consent of the Required
Lenders (or to the extent required by Section 11.12 of the Credit Agreement,
with the written consent of each Lender) and each Guarantor affected thereby (it
being understood that the addition or release of any Guarantor hereunder shall
not constitute a change, waiver, discharge or termination affecting any
Guarantor other than the Guarantor so added or released), provided that (x) no
                                                          --------            
such change, waiver, modification or variance shall be made to this Section 15
without the consent of each Creditor affected thereby and (y) any change,
waiver, modification or variance affecting the rights and benefits of a single
Class (as defined below) of Creditors (and not all Creditors in a like or
similar manner) shall 

                                      -7-
<PAGE>
 
require the written consent of the Requisite Creditors (as defined below) of
such Class. For the purpose of this Guaranty, the term "Class" shall mean each
class of Creditors, i.e., whether (i) the Lender Creditors as holders of the
                    ----
Credit Document Obligations or (ii) the Interest Rate Creditors as holders of
the Interest Rate Obligations. For the purpose of this Guaranty, the term
"Requisite Creditors" of any Class shall mean (i) with respect to the Credit
Document Obligations, the Required Lenders and (ii) with respect to the Interest
Rate Obligations, the holders of at least a majority of all obligations
outstanding from time to time under the Secured Interest Rate Agreements.

          16.  Each Guarantor acknowledges that an executed (or conformed) copy
of each of the Credit Documents and the Secured Interest Rate Agreements has
been made available to its principal executive officers and such officers are
familiar with the contents thereof.

          17.  In addition to any rights now or hereafter granted under
applicable law (including, without limitation, Section 151 of the New York
Debtor and Creditor Law) and not by way of limitation of any such rights, upon
the occurrence and during the continuance of an Event of Default (such term
shall mean and include any "Event of Default" as defined in the Credit Agreement
or any payment default under any Secured Interest Rate Agreement continuing
after any applicable grace period), each Creditor is hereby authorized, at any
time or from time to time, without notice to any Guarantor or to any other
Person, any such notice being expressly waived, to set off and to appropriate
and apply any and all deposits (general or special) and any other indebtedness
at any time held or owing by such Creditor to or for the credit or the account
of any Guarantor, against and on account of the obligations and liabilities of
such Guarantor to such Creditor under this Guaranty, irrespective of whether or
not such Creditor shall have made any demand hereunder and although said
obligations, liabilities, deposits or claims, or any of them, shall be
contingent or unmatured.  Each Creditor agrees to promptly notify the relevant
Guarantor after any such set off and application, provided that the failure to
                                                  --------                    
give such notice shall not affect the validity of such set off and application.

          18.  All notices, requests, demands or other communications provided
for hereunder made in writing (including communications by facsimile
transmission) shall be deemed to have been duly given or made when delivered to
the Person to which such notice, request, demand or other communication is
required or permitted to be given or made under this Guaranty, addressed to such
party at (i) in the case of any Lender Creditor, as provided in the Credit
Agreement, (ii) in the case of each Guarantor, at its address set forth opposite
its signature below and (iii) in the case of any Interest Rate Creditor, at such
address as such Interest Rate Creditor shall have specified in writing to the
Guarantors; or in any case at such other address as any of the Persons listed
above may hereafter notify the others in writing.

                                      -8-
<PAGE>
 
          19.  If claim is ever made upon any Creditor for repayment or recovery
of any amount or amounts received in payment or on account of any of the
Guaranteed Obligations and any such Creditor repays all or part of said amount
by reason of (i) any judgment, decree or order of any court or administrative
body having jurisdiction over such Creditor or any of its property or (ii) any
settlement or compromise of any such claim effected by such Creditor with any
such claimant (including the Borrower), then and in such event each Guarantor
agrees that any such judgment, decree, order, settlement or compromise shall be
binding upon such Guarantor, notwithstanding any revocation hereof or other
instrument evidencing any liability of the Borrower, and each Guarantor shall be
and remain liable to such Creditor hereunder for the amount so repaid or
recovered to the same extent as if such amount had never originally been
received by any such Creditor.

          20.  (a)  THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE
CREDITORS AND OF THE UNDERSIGNED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAWS.  Any legal action or proceeding with respect to this Guaranty
or any other Credit Document may be brought in the courts of the State of New
York or of the United States of America for the Southern District of New York,
and, by execution and delivery of this Guaranty, each Guarantor hereby
irrevocably accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts.  Each Guarantor
hereby irrevocably designates, appoints and empowers CT Corporation System with
offices on the date hereof at 1633 Broadway, New York, NY 10019, as its
designee, appointee and agent to receive, accept and acknowledge for and on its
behalf, and in respect of its property, service of any and all legal process,
summons, notices and documents which may be served in any such action or
proceeding.  If for any reason such designee, appointee and agent shall cease to
be available to act as such, each Guarantor agrees to designate a new designee,
appointee and agent in New York City on the terms and for the purposes of this
provision satisfactory to the Administrative Agent under this Agreement.  Each
Guarantor further irrevocably consents to the service of process out of any of
the aforementioned courts in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to each
Guarantor at its address set forth opposite its signature below, such service to
become effective 30 days after such mailing.  Nothing herein shall affect the
right of any of the Creditors to serve process in any other manner permitted by
law or to commence legal proceedings or otherwise proceed against any Guarantor
in any other jurisdiction.

          (b)  Each Guarantor hereby irrevocably waives any objection which it
may now or hereafter have to the laying of venue of any of the aforesaid actions
or proceedings arising out of or in connection with this Guaranty or any other
Credit Document brought in the courts referred to in clause (a) above and hereby
further

                                      -9-
<PAGE>
 
irrevocably waives and agrees not to plead or claim in any such court that such
action or proceeding brought in any such court has been brought in an
inconvenient forum.

          (c)  Each Guarantor and each Creditor hereby irrevocably waive all
rights to a trial by jury in any action, proceeding or counterclaim arising out
of or relating to this Guaranty, the other Credit Documents or the transactions
contemplated hereby or thereby.

          21.  (a)  After the Termination Date (as defined below), this Guaranty
shall terminate (provided that all indemnities set forth herein shall survive
any such termination) and the Administrative Agent, at the request and expense
of the respective Guarantor, will execute and deliver to such Guarantor a proper
instrument or instruments acknowledging the satisfaction and termination of this
Guaranty as provided above.  As used in this Guaranty, "Termination Date" shall
mean the date upon which the Total Commitment and all Secured Interest Rate
Agreements have been terminated, no Note under the Credit Agreement is
outstanding (and all Loans have been paid in full) and all other Obligations (as
defined in the Credit Agreement) have been paid in full (other than arising from
indemnities for which no request has been made).

          (b)  In the event that (x) all of the capital stock of one or more
Guarantors is sold or otherwise disposed of (including by way of the merger or
consolidation of such Guarantor with or into another Person) or liquidated, in
any such case in compliance with the requirements of Section 7.02 of the Credit
Agreement (or such sale or other disposition or liquidation has been approved in
writing by the Required Lenders (or all Lenders if required by Section 11.12 of
the Credit Agreement)), and the proceeds of such sale, disposition or
liquidation are applied, to the extent applicable, in accordance with the
provisions of the Credit Agreement, such Guarantor shall be released from this
Guaranty and this Guaranty shall, as to each such Guarantor or Guarantors,
terminate, and have no further force or effect (it being understood and agreed
that the sale of one or more Persons that own, directly or indirectly, all of
the capital stock, partnership interests or other equity interests of any
Guarantor shall be deemed to be a sale of such Guarantor for the purposes of
this Section 21).

          22.  Each Guarantor, in addition to the subrogation rights it shall
have against the Borrower under applicable law as a result of any payment it
makes hereunder, shall also have a right of contribution against all other
Guarantors in respect of any such payment pro rata among same based on their
                                          --- ----                          
respective net fair values as enterprises, provided any such right of
                                           --------                  
contribution shall be subject and subordinate to the prior payment in full of
the Guaranteed Obligations (and such Guarantor's obligations in respect
thereof).  It is the desire and intent of each Guarantor and the Creditors that
this Guaranty shall be enforced to the full extent permissible under the
laws and public 

                                     -10-
<PAGE>
 
policies applied in each jurisdiction in which enforcement is sought. If and to
the extent that the obligations of any Guarantor under this Guaranty would, in
the absence of this sentence, be adjudicated to be invalid or unenforceable
because of any applicable state or federal law relating to fraudulent
conveyances or transfers, then the amount of such Guarantor's liability
hereunder in respect of the Guaranteed Obligations shall be deemed to
be reduced ab initio to that maximum amount which would be permitted without
           -- ------ 
causing such Guarantor's obligations hereunder to be so invalidated.

          23.  The Creditors agree that this Guaranty may be enforced only by
the action of the Administrative Agent or the Collateral Agent, in each case
acting upon the instructions of the Required Lenders and that no other Creditor
shall have any right individually to seek to enforce or to enforce this Guaranty
or to realize upon the security to be granted by the Pledge Agreement, it being
understood and agreed that such rights and remedies may be exercised by the
Administrative Agent or the Collateral Agent for the benefit of the Creditors
upon the terms of this Guaranty and the Pledge Agreement.  The Creditors further
agree that this Guaranty may not be enforced against any director, officer or
employee of any Guarantor.

          24.  This Guaranty may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument.  A set of counterparts executed by all
the parties hereto shall be lodged with the Borrower and the Administrative
Agent.

          25.  All payments made by any Guarantor hereunder will be made without
setoff, counterclaim or other defense.

          26.  It is understood and agreed that any Subsidiary of the Borrower
that is required to execute a counterpart of this Guaranty pursuant to the
Credit Agreement shall automatically become a Guarantor hereunder by executing a
counterpart hereof and delivering the same to the Administrative Agent.

                                     -11-
<PAGE>
 
       IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be
executed and delivered as of the date first above written.


c/o MJD COMMUNICATIONS, INC.       MJD HOLDINGS CORP.,
521 East Morehead Street            as a Guarantor
Suite 250
Charlotte, NC  28202               By /s/ Walter Leach
                                     ----------------------------------
                                     Title: Vice President, Secretary and
                                           Chief Financial Officer


c/o MJD COMMUNICATIONS, INC.       MJD VENTURES, INC.,
521 East Morehead Street            as a Guarantor
Suite 250
Charlotte, NC  28202
                                   By /s/ Walter Leach
                                     ----------------------------------
                                     Title: Vice President, Secretary and
                                           Chief Financial Officer


c/o MJD COMMUNICATIONS, INC.       MJD SERVICES CORP.,
521 East Morehead Street            as a Guarantor
Suite 250
Charlotte, NC  28202
                                   By /s/ Walter Leach
                                     ----------------------------------
                                     Title: Vice President, Secretary and
                                           Chief Financial Officer


c/o MJD COMMUNICATIONS, INC.       ST ENTERPRISES LTD.,
521 East Morehead Street            as a Guarantor
Suite 250
Charlotte, NC  28202
                                   By /s/ Walter Leach
                                     ----------------------------------
                                     Title: Vice President, Secretary and
                                           Chief Financial Officer

                                     -12-
<PAGE>
 
Accepted and Agreed to:


BANKERS TRUST COMPANY,
  as Administrative Agent for the Lenders



By /s/ G. Andrew Keith
  ------------------------------------
  Title: Vice President

                                     -13-
<PAGE>
 
                                                             EXHIBIT G CONFORMED
                                                                     AS EXECUTED
                                                                                
                                PLEDGE AGREEMENT
                                ----------------

          PLEDGE AGREEMENT, dated as of March 30, 1998 (as amended, amended and
restated, modified or supplemented from time to time, the "Agreement"), made by
each of the undersigned (each, a "Pledgor" and together with any other entity
that becomes a party hereto pursuant to Section 24 hereof, collectively, the
"Pledgors"), in favor of BANKERS TRUST COMPANY, as Collateral Agent (including
any successor collateral agent, the "Pledgee") for the benefit of the Secured
Creditors (as defined below).  Except as otherwise defined herein, terms used
herein and defined in the Credit Agreement (as defined below) shall be used
herein as therein defined.


                             W I T N E S S E T H :
                             - - - - - - - - - -  


          WHEREAS, MJD Communications, Inc. (the "Borrower"), the lenders from
time to time party thereto (the "Lenders"), NationsBank of Texas, N.A., as
Syndication Agent (the "Syndication Agent"), and Bankers Trust Company, as
Administrative Agent (the "Administrative Agent" and together with the Lenders,
the Syndication Agent, the Collateral Agent and the Pledgee, the "Lender
Creditors"), have entered into a Credit Agreement, dated as of March 30, 1998
(as amended, modified or supplemented from time to time, the "Credit
Agreement"), providing for the making of Loans as contemplated therein;

          WHEREAS, the Borrower may from time to time be a party to one or more
Interest Rate Agreements (each such Interest Rate Agreement with an Interest
Rate Creditor (as defined below), a "Secured Interest Rate Agreement") with
Bankers Trust Company, in its individual capacity ("BTCo"), any Lender or a
syndicate of financial institutions organized by BTCo or such Lender or an
affiliate of BTCo or such Lender (even if BTCo or any such Lender ceases to be a
Lender under the Credit Agreement for any reason), and any institution that
participates therein, and in each case their subsequent assigns (collectively,
the "Interest Rate Creditors," and together with the Lender Creditors,
collectively, the "Secured Creditors");


          WHEREAS, pursuant to the Subsidiary Guaranty, dated as of March 30,
1998 (as amended, modified or supplemented from time to time, the "Subsidiary
Guaranty"), each Pledgor that is a Subsidiary Guarantor has jointly and
severally
<PAGE>
 
guaranteed to the Secured Creditors the payment when due of the Guaranteed
Obligations (as defined in the Subsidiary Guaranty);

          WHEREAS, it is a condition precedent to the making of Loans under the
Credit Agreement that each Pledgor shall have executed and delivered to the
Pledgee this Agreement;

          WHEREAS, each Pledgor desires to execute this Agreement to satisfy the
conditions described in the preceding paragraph;


          NOW, THEREFORE, in consideration of the benefits accruing to each
Pledgor, the receipt and sufficiency of which are hereby acknowledged, each
Pledgor hereby makes the following representations and warranties to the Pledgee
and hereby covenants and agrees with the Pledgee as follows:

          1.  SECURITY FOR OBLIGATIONS.  This Agreement is made by each Pledgor
              ------------------------                                         
for the benefit of the Secured Creditors to secure:

          (i)  the full and prompt payment when due (whether at the stated
     maturity, by acceleration or otherwise) of all obligations (including
     obligations which, but for the automatic stay under Section 362(a) of the
     Bankruptcy Code, would become due) and liabilities of such Pledgor, now
     existing or hereafter incurred under, arising out of or in connection with
     any Credit Document to which such Pledgor is a party and the due
     performance of and compliance by such Pledgor with the terms of each such
     Credit Document by such Pledgor (all such obligations and liabilities under
     this clause (i), except to the extent consisting of obligations or
     indebtedness with respect to Secured Interest Rate Agreements, being herein
     collectively called the "Credit Document Obligations");

          (ii) the full and prompt payment when due (whether at the stated
     maturity, by acceleration or otherwise) of all obligations (including
     obligations which, but for the automatic stay under Section 362(a) of the
     Bankruptcy Code, would become due) and liabilities of such Pledgor, now
     existing or hereafter incurred under, arising out of or in connection with
     any Secured Interest Rate Agreement, including all obligations, if any, of
     such Pledgor under its Guaranty (if any) in respect of Secured Interest
     Rate Agreements (all such obligations and liabilities under this clause
     (ii) being herein collectively called the "Interest Rate Obligations");

                                      -2-
<PAGE>
 
          (iii)  any and all sums advanced by the Pledgee in order to preserve
     the Collateral (as hereinafter defined) and/or its security interest
     therein;

          (iv)   in the event of any proceeding for the collection of the
     Obligations (as defined below) or the enforcement of this Agreement, after
     an Event of Default (such term, as used in this Agreement, shall mean any
     Event of Default under the Credit Agreement or any payment default by the
     Borrower under any Secured Interest Rate Agreement after the expiration of
     any applicable grace period) shall have occurred and be continuing, the
     reasonable expenses of retaking, holding, preparing for sale or lease,
     selling or otherwise disposing of or realizing on the Collateral, or of any
     exercise by the Pledgee of its rights hereunder, together with reasonable
     attorneys' fees and court costs; and

          (v)    all amounts paid by any Secured Creditor as to which such
     Secured Creditor has the right to reimbursement under Section 11 of this
     Agreement;

all such obligations, liabilities, sums and expenses set forth in clauses (i)
through (v) of this Section 1 being herein collectively called the
"Obligations".

          2.  DEFINITION OF STOCK, NOTES, PARTNERSHIP INTERESTS, MEMBERSHIP
              -------------------------------------------------------------
INTERESTS, SECURITIES, ETC.  As used herein, (i) the term "Stock" shall mean (x)
- ---------------------------                                                     
all of the issued and outstanding shares of stock at any time owned by any
Pledgor of any corporation (other than (I) any Excluded Entity and (II) a
corporation that is not organized under the laws of the United States or any
State or territory thereof (a "Foreign Corporation")) and (y) with respect to a
Foreign Corporation that is a first-tier Subsidiary (other than any Excluded
Entity), all of the issued and outstanding shares of capital stock at any time
owned by any Pledgor of such Foreign Corporation, provided that such Pledgor
                                                  --------                  
shall not be required to pledge hereunder (and the term "Stock" shall not
include) more than 65% of the total combined voting power of all classes of
capital stock of any Exempted Foreign Corporation entitled to vote; (ii) the
term "Notes" shall mean all promissory notes at any time issued to, or held by,
any Pledgor; (iii) the term "Partnership Interest" shall mean the entire
partnership interest (whether general and/or limited partnership interests) at
any time owned by any Pledgor in any partnership (other than (I) an Excluded
Entity and (II) a partnership that is not organized under the laws of the United
States or any State or territory thereof (a "Foreign Partnership")) and (y) with
respect to a Foreign Partnership (other than an Excluded Entity), the entire
partnership interest at any time owned by any Pledgor in such Foreign
Partnership, provided that such Pledgor shall not be required to pledge
             --------                                                  
hereunder (and the term "Partnership Interest" shall not include) more than 65%
of the total voting power of all classes of partnership interests of any such
Foreign Partnership entitled to vote (with any partnership (other than an
Excluded Entity) in which any Pledgor owns a partnership interest being herein
called 

                                      -3-
<PAGE>
 
a "Pledged Partnership"); (iv) the term "Membership Interest" shall mean the
entire membership interest at any time owned by any Pledgor in any limited
liability company (other than (other than (I) an Excluded Entity and (II) a
limited liability company that is not organized under the laws of the United
States or any State or territory thereof (a "Foreign LLC")) and (y) with respect
to a Foreign LLC (other than an Excluded Entity), the entire membership interest
at any time owned by any Pledgor in such Foreign LLC, provided that such Pledgor
                                                      --------                  
shall not be required to pledge hereunder (and the term "Membership Interest"
shall not include) more than 65% of the total voting power of all classes of the
membership interests of any such Foreign LLC entitled to vote (with any limited
liability company (other than an Excluded Entity) in which any Pledgor owns a
membership interest being herein called a "Pledged LLC"); (v) the term
"Securities" shall mean all of the Stock, Notes, Partnership Interests and
Membership Interests; (vi) the term "Exempted Foreign Corporation" shall mean
any Foreign Corporation that is treated as a corporation or an association
taxable as a corporation for U.S. Federal income tax purposes and (vii) the term
"Excluded Entity" shall mean (w) any corporation, partnership, limited liability
company or association which is not a Parent Company, an Intermediary Holding
Company or a TelCo, (x) ST Enterprises, Ltd. to the extent (and only to the
extent) the Existing Warrants remain outstanding, (y) STE/NE Acquisition Corp.
(D/B/A Northland of Vermont), Big Sandy Telecom, Columbine Acquisition Corp. and
Sunflower Telephone Company, in each case to the extent (and only to the extent)
the relevant Pledgor has not obtained the appropriate regulatory approval to
pledge the capital stock of any such Person on the Closing Date and, thereafter,
in compliance with Section 6.11 of the Credit Agreement and (z) any TelCo
acquired or created pursuant to a Permitted Acquisition after the Closing Date
if (I) the relevant Pledgor has not obtained the appropriate regulatory approval
to pledge the capital stock or other equity interests of such Telco in
compliance with Section 6.11 of the Credit Agreement and (II) after giving
effect to the acquisition or creation of such TelCo, the Pro Forma EBITDA Test
is satisfied. Each Pledgor represents and warrants that on the date hereof: (a)
each Subsidiary of such Pledgor whose equity interest is required to be pledged
hereunder, and the direct ownership thereof, is listed on Annex A hereto; (b)
the Stock held by such Pledgor consists of the number and type of shares of the
stock of the corporations as described in Annex B hereto; (c) such Stock
constitutes that percentage of the issued and outstanding capital stock of the
issuing corporation as set forth in Annex B hereto; (d) the Notes held by such
Pledgor consist of the promissory notes described in Annex C hereto; (e) such
Pledgor is the holder of record and sole beneficial owner of the Stock and Notes
held by such Pledgor and there exists no options or preemption rights in respect
of any of the Stock; (f) the Partnership Interests and Membership Interests, as
the case may be, held by such Pledgor constitute that percentage of the entire
interest of the respective Pledged Partnership or Pledged LLC, as the case may
be, as is set forth under its name in Annex D hereto; and (g) on the date
hereof, such Pledgor owns or possesses no other Securities except as described
on Annexes B, C and D hereto.


                                      -4-
<PAGE>
 
            3.  PLEDGE OF SECURITIES, ETC.
                --------------------------

            3.1  Pledge.  To secure the Obligations and for the purposes set
                 ------                                                     
forth in Section 1, each Pledgor hereby:

                 (i)    grants and pledges to the Pledgee a security interest in
     all of the Collateral owned by such Pledgor;

                 (ii)   pledges and deposits as security with the Pledgee the
     Securities owned by such Pledgor on the date hereof, if any, and delivers
     to the Pledgee certificates or instruments therefor, duly endorsed in blank
     in the case of Notes and accompanied by undated stock or other powers duly
     executed in blank by such Pledgor in the case of Stock, Partnership
     Interests or Membership Interests, as the case may be, or such other
     instruments of transfer as are acceptable to the Pledgee;

                 (iii)  assigns, transfers, hypothecates, mortgages, charges and
     sets over to the Pledgee all of such Pledgor's right, title and interest in
     and to such Securities (and in and to all certificates or instruments
     evidencing such Securities), to be held by the Pledgee, upon the terms and
     conditions set forth in this Agreement;

                 (iv)   grants, pledges, assigns and transfers to the Pledgee
     all of such Pledgor's (x) Partnership Interest and all of such Pledgor's
     right, title and interest in each Pledged Partnership and (y) Membership
     Interest and all of such Pledgor's right, title and interest in each
     Pledged LLC, in each case including, without limitation:

                 (a)  all the capital thereof and its interest in all profits,
            losses and other distributions to which such Pledgor shall at any
            time be entitled in respect of such Partnership Interest and/or
            Membership Interest;

                 (b)  all other payments due or to become due to such Pledgor in
            respect of such Partnership Interest and/or Membership Interest,
            whether under any partnership agreement, limited liability company
            agreement or otherwise, whether as contractual obligations, damages,
            insurance proceeds or otherwise;

                 (c)  all of its claims, rights, powers, privileges, authority,
            options, security interest, liens and remedies, if any, under any
            partnership 

                                      -5-
<PAGE>
 
            agreement, limited liability company agreement or at law or
            otherwise in respect of such Partnership Interest and/or Membership
            Interest;

               (d)  all present and future claims, if any, of the Pledgor
            against any Pledged Partnership and any Pledged LLC for moneys
            loaned or advanced, for services rendered or otherwise;

               (e)  all of such Pledgor's rights under any partnership agreement
            or limited liability company agreement or at law to exercise and
            enforce every right, power, remedy, authority, option and privilege
            of such Pledgor relating to the Partnership Interest and/or
            Membership Interest, including any power to terminate, cancel or
            modify any partnership agreement or any limited liability company
            agreement, to execute any instruments and to take any and all other
            action on behalf of and in the name of such Pledgor in respect of
            any Partnership Interest or Membership Interest and any Pledged
            Partnership and any Pledged LLC to make determinations, to exercise
            any election (including, but not limited to, election of remedies)
            or option or to give or receive any notice, consent, amendment,
            waiver or approval, together with full power and authority to
            demand, receive, enforce, collect or receipt for any of the
            foregoing, to enforce or execute any checks, or other instruments or
            orders, to file any claims and to take any action in connection with
            any of the foregoing;

               (f)  all other property hereafter delivered in substitution for
            or in addition to any of the foregoing, all certificates and
            instruments representing or evidencing such other property and all
            cash, securities, interest, dividends, rights and other property at
            any time and from time to time received, receivable or otherwise
            distributed in respect of or in exchange for any or all thereof; and

               (g)  to the extent not otherwise included, all proceeds of any or
            all of the foregoing.

          3.2  Subsequently Acquired Securities.  If any Pledgor shall acquire
               --------------------------------                               
(by purchase, stock dividend or otherwise) any additional Securities at any time
or from time to time after the date hereof, such Pledgor will forthwith pledge
and deposit such Securities (or certificates or instruments representing such
Securities) as security with the Pledgee and deliver to the Pledgee certificates
or instruments thereof, duly endorsed in blank in the case of Notes and
accompanied by undated stock or other powers duly executed in blank by such
Pledgor (and accompanied by any transfer tax stamps required 

                                      -6-
<PAGE>
 
in connection with the pledge of such Securities) in the case of Stock,
Partnership Interests or Membership Interests, as the case may be, or such other
instruments of transfer as are acceptable to the Pledgee, and will promptly
thereafter deliver to the Pledgee a certificate executed by a principal
executive officer of such Pledgor describing such Securities and certifying that
the same have been duly pledged with the Pledgee hereunder. No Pledgor shall be
required at any time to pledge hereunder any Securities which constitute more
than 65% of the total combined voting power of all classes of ownership
interests of any Exempted Foreign Corporation, Foreign Partnership or Foreign
LLC, as the case may be, entitled to vote.

          3.3  Uncertificated Securities.  Notwithstanding anything to the
               -------------------------                                  
contrary contained in Sections 3.1 and 3.2, if any Securities (whether or not
now owned or hereafter acquired) are uncertificated securities, the respective
Pledgor shall promptly notify the Pledgee thereof, and shall promptly take all
actions required to perfect the security interest of the Pledgee under
applicable law (including, in any event, under Articles 8 and 9 of the New York
Uniform Commercial Code if applicable).  Each Pledgor further agrees to take
such actions as the Pledgee deems necessary or desirable to effect the foregoing
and to permit the Pledgee to exercise any of its rights and remedies hereunder,
and agrees to provide an opinion of counsel reasonably satisfactory to the
Pledgee with respect to any such pledge of uncertificated Securities promptly
upon request of the Pledgee.

          3.4  Definitions of Pledged Stock, Pledged Notes, Pledged Partnership
               ----------------------------------------------------------------
Interests, Pledged Membership Interests, Pledged Securities and Collateral.  All
- --------------------------------------------------------------------------      
Stock at any time pledged or required to be pledged hereunder is hereinafter
called the "Pledged Stock, all Notes at any time pledged or required to be
pledged hereunder are hereinafter called the "Pledged Notes", all Partnership
Interests at any time pledged or required to be pledged hereunder are
hereinafter called the "Pledged Partnership Interests," all Membership Interests
at any time pledged or required to be pledged hereunder are hereinafter called
the "Pledged Membership Interests", all Pledged Stock, Pledged Notes, Pledged
Partnership Interests and Pledged Membership Interests, together are called the
"Pledged Securities"; and the Pledged Securities, together with all proceeds
thereof, including any securities and moneys received and at the time held by
the Pledgee hereunder, are hereinafter called the "Collateral."

          4.  APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC.  The Pledgee shall
              ---------------------------------------------                   
have the right to appoint one or more sub-agents for the purpose of retaining
physical possession of the Pledged Securities, which may be held (in the
discretion of the Pledgee) in the name of the relevant Pledgor, endorsed or
assigned in blank or in favor of the Pledgee or any nominee or nominees of the
Pledgee or a sub-agent appointed by the Pledgee.


                                      -7-
<PAGE>
 
          5.  VOTING, ETC., WHILE NO EVENT OF DEFAULT.  Unless and until there
              ---------------------------------------                         
shall have occurred and be continuing an Event of Default, each Pledgor shall be
entitled to exercise all voting rights attaching to any and all Pledged
Securities owned by it, and to give consents, waivers or ratifications in
respect thereof, provided that no vote shall be cast or any consent, waiver or
                 --------
ratification given or any action taken which would violate, result in breach of
any covenant contained in, or be inconsistent with, any of the terms of this
Agreement, the Credit Agreement, any other Credit Document or any Secured
Interest Rate Agreement (collectively, the "Secured Debt Agreements"), or which
would have the effect of impairing the value of the Collateral or any part
thereof or the position or interests of the Pledgee or any other Secured
Creditor therein. All such rights of a Pledgor to vote and to give consents,
waivers and ratifications shall cease in case an Event of Default shall occur
and be continuing and Section 7 hereof shall become applicable.

          6.  DIVIDENDS AND OTHER DISTRIBUTIONS.  Unless and until an Event of
              ---------------------------------                               
Default shall have occurred and be continuing, all cash dividends, distributions
or other amounts payable in respect of the Pledged Securities shall be paid to
the respective Pledgor, provided that all dividends, distributions or other
                        --------                                           
amounts payable in respect of the Pledged Securities which are determined by the
Pledgee, in its absolute discretion, to represent in whole or in part an
extraordinary, liquidating or other distribution in return of capital not
permitted by the Credit Agreement shall be paid, to the extent so determined to
represent an extraordinary, liquidating or other distribution in return of
capital not permitted by the Credit Agreement, to the Pledgee and retained by it
as part of the Collateral (unless such cash dividends or distributions are
applied to repay the Obligations pursuant to Section 9 of this Agreement). The
Pledgee shall also be entitled to receive directly, and to retain as part of the
Collateral:

            (i)    all other or additional stock, or other securities or
    property (other than cash) paid or distributed by way of dividend or
    otherwise in respect of the Collateral;

            (ii)   all other or additional stock or other securities or property
    (including cash) paid or distributed in respect of the Collateral by way of
    stock-split, spin-off, split-up, reclassification, combination of shares or
    similar rearrangement; and

            (iii)  all other or additional stock or other securities or property
    (including cash) which may be paid in respect of the Collateral by reason of
    any consolidation, merger, exchange of stock, conveyance of assets,
    liquidation or similar corporate reorganization (other than the Net Cash
    Proceeds from any Asset Sale applied to repay Loans and/or reinvested in
    accordance with the relevant provisions of the Credit Agreement).

                                      -8-
<PAGE>
 
Nothing contained in this Section 6 shall limit or restrict in any way the
Pledgee's right to receive the proceeds of the Collateral in any form in
accordance with Section 3 of this Agreement. All dividends, distributions or
other payments which are received by the respective Pledgor contrary to the
provisions of this Section 6 or Section 7 shall be received in trust for the
benefit of the Pledgee, shall be segregated from other property or funds of such
Pledgor and shall be forthwith paid over to the Pledgee as Collateral in the
same form as so received (with any necessary endorsement).

          7.  REMEDIES IN CASE OF AN EVENT OF DEFAULT.  (a) In case an Event of
              ---------------------------------------                          
Default shall have occurred and be continuing, the Pledgee shall be entitled to
exercise all of the rights, powers and remedies (whether vested in it by this
Agreement or any other Secured Debt Agreement or by law) for the protection and
enforcement of its rights in respect of the Collateral, including, without
limitation, all the rights and remedies of a secured party upon default under
the Uniform Commercial Code of the State of New York, and the Pledgee shall be
entitled, without limitation, to exercise any or all of the following rights,
which each Pledgor hereby agrees to be com mercially reasonable:

            (i)    to receive all amounts payable in respect of the Collateral
    otherwise payable under Section 6 to such Pledgor;

            (ii)   to transfer all or any part of the Collateral into the
    Pledgee's name or the name of its nominee or nominees;

            (iii)  to accelerate any Pledged Note which may be accelerated in
    accordance with its terms, and take any other lawful action to collect upon
    any Pledged Note (including, without limitation, to make any demand for
    payment thereon);

            (iv)   to vote all or any part of the Pledged Stock, Pledged
    Partnership Interests and Pledged Membership Interests (whether or not
    transferred into the name of the Pledgee) and give all consents, waivers and
    ratifications in respect of the Collateral and otherwise act with respect
    thereto as though it were the out right owner thereof (each Pledgor hereby
    irrevocably constituting and appointing the Pledgee the proxy and attorney-
    in-fact of such Pledgor, with full power of substitution to do so); and

            (v)    at any time or from time to time to sell, assign and deliver,
    or grant options to purchase, all or any part of the Collateral, or any
    interest therein, at any public or private sale, without demand of
    performance, advertisement or notice of intention to sell or of the time or
    place of sale or adjournment thereof or to redeem
                                     
                                     -9-
<PAGE>
 
    or otherwise (all of which are hereby waived by each Pledgor), for cash, on
    credit or for other property, for immediate or future delivery without any
    assumption of credit risk, and for such price or prices and on such terms as
    the Pledgee in its absolute discretion may determine, provided that at least
                                                          --------  
    10 days' notice of the time and place of any such sale shall be given to
    such Pledgor. The Pledgee shall not be obligated to make such sale of
    Collateral regardless of whether any such notice of sale has theretofore
    been given. Each purchaser at any such sale shall hold the property so sold
    absolutely free from any claim or right on the part of any Pledgor, and each
    Pledgor hereby waives and releases to the fullest extent permitted by law
    any right or equity of redemption with respect to the Collateral, whether
    before or after sale hereunder, all rights, if any, of marshalling the
    Collateral and any other security for the Obligations or otherwise, and all
    rights, if any, of stay and/or appraisal which it now has or may at any time
    in the future have under rule of law or statute now existing or hereafter
    enacted. At any such sale, unless prohibited by applicable law, the Pledgee
    on behalf of all Secured Creditors (or certain of them) may bid for and
    purchase (by bidding in Obligations or otherwise) all or any part of the
    Collateral so sold free from any such right or equity of redemption. Neither
    the Pledgee nor any Secured Creditor shall be liable for failure to collect
    or realize upon any or all of the Collateral or for any delay in so doing
    nor shall it be under any obligation to take any action whatsoever with
    regard thereto.

          8.  REMEDIES, ETC., CUMULATIVE.  Each right, power and remedy of the
              --------------------------                                      
Pledgee provided for in this Agreement or any other Secured Debt Agreement, or
now or hereafter existing at law or in equity or by statute shall be cumulative
and concurrent and shall be in addition to every other such right, power or
remedy.  The exercise or beginning of the exercise by the Pledgee or any other
Secured Creditor of any one or more of the rights, powers or remedies provided
for in this Agreement or any other Secured Debt Agreement or now or hereafter
existing at law or in equity or by statute or otherwise shall not preclude the
simultaneous or later exercise by the Pledgee or any other Secured Creditor of
all such other rights, powers or remedies, and no failure or delay on the part
of the Pledgee or any other Secured Creditor to exercise any such right, power
or remedy shall operate as a waiver thereof.  Unless otherwise required by the
Credit Documents, no notice to or demand on any Pledgor in any case shall
entitle it to any other or further notice or demand in similar other
circumstances or constitute a waiver of any of the rights of the Pledgee or any
other Secured Creditor to any other further action in any circumstances without
demand or notice.  The Secured Creditors agree that this Agreement may be
enforced only by the action of the Administrative Agent or the Pledgee, in each
case acting upon the instructions of the Required Lenders (or, after the date on
which all Credit Document Obligations have been paid in full, the holders of at
least the majority of the outstanding Interest Rate Obligations) and that no
other Secured 

                                     -10-
<PAGE>
 
Creditor shall have any right individually to seek to enforce or to enforce this
Agreement or to realize upon the security to be granted hereby, it being
understood and agreed that such rights and remedies may be exercised by the
Administrative Agent or the Pledgee or the holders of at least a majority of the
outstanding Interest Rate Obligations, as the case may be, for the benefit of
the Secured Creditors upon the terms of this Agreement.

          9.  APPLICATION OF PROCEEDS.  (a)  All moneys collected by the Pledgee
              -----------------------                                           
or the Collateral Agent upon any sale or other disposition of the Collateral,
together with all other moneys received by the Pledgee or the Collateral Agent
hereunder, shall be applied as follows:

          (i)    first, to the payment of all Obligations owing to the Pledgee
     or the Collateral Agent of the type described in clauses (iii) and (iv) of
     the definition of "Obligations" contained in Section 1 hereof;

          (ii)   second, to the extent proceeds remain after the application
     pursuant to preceding clause (i), an amount equal to the outstanding
     Obligations to the Secured Creditors shall be paid to the Secured Creditors
     as provided in Section 9(c) with each Secured Creditor receiving an amount
     equal to its out standing Obligations or, if the proceeds are insufficient
     to pay in full all such Obligations, its Pro Rata Share of the amount
                                              --- ----                    
     remaining to be distributed to be applied, with respect to the Credit
     Document Obligations, firstly to the payment of interest in respect of the
     unpaid principal amount of Loans outstanding, secondly to the payment of
     principal of Loans outstanding, then to the other Credit Document
     Obligations; and

          (iii)  third, to the extent proceeds remain after the application
     pursuant to the preceding clauses (i) and (ii) and following the
     termination of this Agreement pursuant to Section 18 hereof, to the
     relevant Pledgor or, to the extent directed by such Pledgor or a court of
     competent jurisdiction, to whomever may be lawfully entitled to receive
     such surplus.

          (b)  For purposes of this Agreement, "Pro Rata Share" shall mean, when
                                                --- ----                        
calculating a Secured Creditor's portion of any distribution or amount, the
amount (expressed as a percentage) equal to a fraction the numerator of which is
the then outstanding amount of the relevant Obligations owed such Secured
Creditor and the denominator of which is the then outstanding amount of all
Obligations.

          (c)  All payments required to be made to the (i) Lender Creditors
hereunder shall be made to the Administrative Agent for the account of the
respective Lender Creditors and (ii) Interest Rate Creditors hereunder shall be
made to the paying 

                                     -11-
<PAGE>
 
agent under the applicable Secured Interest Rate Agreement or, in the case of
Secured Interest Rate Agreements without a paying agent, directly to the
applicable Interest Rate Creditor.

          (d)  For purposes of applying payments received in accordance with
this Section 9, the Pledgee and the Collateral Agent shall be entitled to rely
upon (i) the Administrative Agent for a determination (which the Administrative
Agent agrees to provide upon request to the Pledgee and the Collateral Agent) of
the outstanding Credit Document Obligations and (ii) any Interest Rate Creditor
for a determination (which each Interest Rate Creditor agrees to provide upon
request to the Pledgee and the Collateral Agent) of the outstanding Interest
Rate Obligations owed to such Interest Rate Creditor.  Unless it has actual
knowledge (including by way of written notice from a Secured Creditor) to the
contrary, the Administrative Agent under the Credit Agreement, in furnishing
information pursuant to the preceding sentence, and the Pledgee and the
Collateral Agent, in acting hereunder, shall be entitled to assume that (x) no
Credit Document Obligations other than principal, interest and regularly
accruing fees are owing to any Lender Creditor and (y) no Secured Interest Rate
Agreements or Interest Rate Obligations with respect thereto are in existence.

          (e)  It is understood that the Pledgors shall remain jointly and
severally liable to the extent of any deficiency between (x) the amount of the
Obligations for which it is liable directly or as a Guarantor that are satisfied
with proceeds of the Collateral and (y) the aggregate outstanding amount of the
Obligations.

          10.  PURCHASERS OF COLLATERAL.  Upon any sale of the Collateral by the
               ------------------------                                         
Pledgee hereunder (whether by virtue of the power of sale herein granted,
pursuant to judicial process or otherwise), the receipt of the Pledgee or the
officer making the sale shall be a sufficient discharge to the purchaser or
purchasers of the Collateral so sold, and such purchaser or purchasers shall not
be obligated to see to the application of any part of the purchase money paid
over to the Pledgee or such officer or be answerable in any way for the
misapplication or nonapplication thereof.

          11.  INDEMNITY.  Each Pledgor jointly and severally agrees (i) to
               ---------                                                   
indemnify and hold harmless the Pledgee and the other Secured Creditors from and
against any and all claims, demands, losses, judgments and liabilities
(including liabilities for penalties) of whatsoever kind or nature, and (ii) to
reimburse the Pledgee for all reasonable costs and expenses, including
reasonable attorneys' fees, arising in connection with any amendment, waiver or
modification to this Agreement and the Pledgee and the other Secured Creditors
for all reasonable costs and expenses (including reasonable attorney's fees)
growing out of or resulting from the exercise by the Pledgee of any right or
remedy granted to it hereunder or under any other Secured Debt Agreement except,

                                     -12-
<PAGE>
 
with respect to clauses (i) and (ii) above, for those arising from the Pledgee's
gross negligence or willful misconduct. In no event shall the Pledgee be liable,
in the absence of gross negligence or willful misconduct on its part, for any
matter or thing in connection with this Agreement other than to account for
moneys or other property actually received by it in accordance with the terms
hereof. If and to the extent that the obligations of any Pledgor under this
Section 11 are unenforceable for any reason, such Pledgor hereby agrees to make
the maximum contribution to the payment and satisfaction of such obligations
which is permissible under applicable law.

          12.  FURTHER ASSURANCES; POWER OF ATTORNEY.  (a)  Each Pledgor agrees
               -------------------------------------                           
that it will join with the Pledgee in executing and, at such Pledgor's own
expense, file and refile under the Uniform Commercial Code such financing
statements, continuation statements and other documents in such offices as the
Pledgee may deem necessary or appropriate and wherever required or permitted by
law in order to perfect and preserve the Pledgee's security interest in the
Collateral hereunder and hereby authorizes the Pledgee to file financing
statements and amendments thereto relative to all or any part of the Collateral
without the signature of such Pledgor where permitted by law, and agrees to do
such further acts and things and to execute and deliver to the Pledgee such
additional conveyances, assignments, agreements and instruments as the Pledgee
may reasonably require or deem advisable to carry into effect the purposes of
this Agreement or to further assure and confirm unto the Pledgee its rights,
powers and remedies hereunder or thereunder.

          (b)  Each Pledgor hereby appoints the Pledgee, such Pledgor's
attorney-in-fact, with full authority in the place and stead of such Pledgor and
in the name of such Pledgor or otherwise, from time to time after the occurrence
and during the continuance of an Event of Default, in the Pledgee's reasonable
discretion to take any action and to execute any instrument which the Pledgee
may reasonably deem necessary or advisable to accomplish the purposes of this
Agreement.

          13.  THE PLEDGEE AS COLLATERAL AGENT.  The Pledgee will hold in
               -------------------------------                           
accordance with this Agreement all items of the Collateral at any time received
under this Agreement.  It is expressly understood and agreed that the
obligations of the Pledgee as holder of the Collateral and interests therein and
with respect to the disposition thereof, and otherwise under this Agreement, are
only those expressly set forth in this Agreement.  The Pledgee shall act
hereunder on the terms and conditions set forth herein and in Section 11 of the
Credit Agreement.

          14.  TRANSFER BY THE PLEDGORS.  No Pledgor will sell or otherwise
               ------------------------                                    
dispose of, grant any option with respect to, or mortgage, pledge or otherwise


                                     -13-
<PAGE>
 
encumber any of the Collateral or any interest therein (except in accordance
with the terms of this Agreement and the other Secured Debt Agreements).

          15.  REPRESENTATIONS, WARRANTIES AND COVENANTS OF  THE PLEDGORS.  (a)
               ----------------------------------------------------------       
Each Pledgor represents, warrants and covenants that:

          (i)    it is, or at the time when pledged hereunder will be, the
     legal, beneficial and record owner of, and has (or will have) good and
     marketable title to, all Securities pledged by it hereunder, subject to no
     pledge, lien, mortgage, hypothecation, security interest, charge, option or
     other encumbrance whatsoever, except (x) the liens and security interests
     created by this Agreement and (y) liens permitted by Section 7.03(a) of the
     Credit Agreement;

          (ii)   it has full power, authority and legal right to pledge all the
     Securities pledged by it pursuant to this Agreement;

          (iii)  this Agreement has been duly authorized, executed and delivered
     by such Pledgor and constitutes a legal, valid and binding obligation of
     such Pledgor enforceable in accordance with its terms, except to the extent
     that the enforceability thereof may be limited by applicable bankruptcy,
     insolvency, reorganization, moratorium or other similar laws generally
     affecting creditors' rights and by equitable principles (regardless of
     whether enforcement is sought in equity or at law);

          (iv)   except to the extent already obtained or made, no consent of
     any other party (including, without limitation, any stockholder, limited or
     general partner, member or creditor of such Pledgor or any of its
     Subsidiaries) and no consent, license, permit, approval or authorization
     of, exemption by, notice or report to, or registration, filing or
     declaration with, any governmental authority is required to be obtained by
     such Pledgor in connection with (a) the execution, delivery or performance
     of this Agreement, (b) the validity or enforceability of this Agreement,
     (c) the perfection or enforceability of the Pledgee's security interest in
     the Collateral or (d) except for compliance with or as may be required by
     applicable securities laws, the exercise by the Pledgee of any of its
     rights or remedies provided herein;

          (v)    the execution, delivery and performance of this Agreement by
     such Pledgor will not violate any provision of any applicable law or
     regulation or of any order, judgment, writ, award or decree of any court,
     arbitrator or governmental authority, domestic or foreign, applicable to
     such Pledgor, or of the certificate of incorporation, certificate of
     formation, by-laws, certificate of limited

                                     -14-
<PAGE>
 
     partnership, partnership agreement or limited liability company agreement,
     as the case may be, of such Pledgor or of any securities issued by such
     Pledgor or any of its Subsidiaries, or of any mortgage, indenture, lease,
     loan agreement, credit agreement or other material contract, agreement or
     instrument or undertaking to which such Pledgor or any of its Subsidiaries
     is a party or which purports to be binding upon such Pledgor or any of its
     Subsidiaries or upon any of their respective assets and will not result in
     the creation or imposition of (or the obligation to create or impose) any
     lien or encumbrance on any of the assets of such Pledgor or any of its
     Subsidiaries except as contemplated by this Agreement;

          (vi)   all the shares of the Stock have been duly and validly issued,
     are fully paid and non-assessable and are subject to no options to purchase
     or similar rights;

          (vii)  each of the Pledged Notes constitutes, or when executed by the
     obligor thereof will constitute, the legal, valid and binding obligation of
     such obligor, enforceable in accordance with its terms, except to the
     extent that the enforceability thereof may be limited by applicable
     bankruptcy, insolvency, reorganization, moratorium or other similar laws
     generally affecting creditors' rights and by equitable principles
     (regardless of whether enforcement is sought in equity or at law);

          (viii) the pledge, assignment and delivery to the Pledgee of the
     Securities (other than uncertificated securities) pursuant to this
     Agreement creates a valid and, assuming such Securities are held in the
     continued possession of the Collateral Agent in the State of New York,
     perfected first priority Lien in the Securities and the proceeds thereof,
     subject to no other Lien or to any agreement purporting to grant to any
     third party a Lien on the property or assets of such Pledgor which would
     include the Securities (other than Liens permitted by Section 7.03(a) of
     the Credit Agreement);

          (ix)   it has the unqualified right to pledge and grant a security
     interest in the Partnership Interests and Membership Interests as herein
     provided without the consent of any other Person, firm, association or
     entity which has not been obtained;

          (x)    the Partnership Interests and the Membership Interests pledged
     by it pursuant to this Agreement have been validly acquired and are fully
     paid for and are duly and validly pledged hereunder;

          (xi)   it is not in default in the payment of any portion of any
     mandatory capital contribution, if any, required to be made under any
     partnership agreement 

                                      -15-
<PAGE>
 
     or limited liability company agreement to which such Pledgor is a party,
     and such Pledgor is not in violation of any other material provisions of
     any partnership agreement or limited liability company agreement to which
     such Pledgor is a party, or otherwise in default or violation thereunder,
     no Partnership Interest or Membership Interest is subject to any defense,
     offset or counterclaim, nor have any of the foregoing been asserted or
     alleged against such Pledgor by any Person with respect thereto and as of
     the Closing Date, there are no certificates, instruments, documents or
     other writings (other than the partnership agreements and certificates, if
     any, delivered to the Collateral Agent) which evidence any Partnership
     Interest or Membership Interest of such Pledgor;

          (xii)  the pledge and assignment of the Partnership Interests and the
     Membership Interests pursuant to this Agreement, together with the relevant
     filings, consents or recordings (which filings, consents and recordings
     have been made or obtained), creates a valid, perfected and continuing
     first security interest in such Partnership Interests and Membership
     Interest and the proceeds thereof, subject to no prior lien or encumbrance
     or to any agreement purporting to grant to any third party a lien or
     encumbrance on the property or assets of such Pledgor which would include
     the Collateral;

          (xiii) there are no currently effective financing statements under
     the UCC covering any property which is now or hereafter may be included in
     the Collateral and such Pledgor will not, without the prior written consent
     of the Pledgee, execute and, until the Termination Date (as hereinafter
     defined), there will not ever be on file in any public office, any
     enforceable financing statement or statements covering any or all of the
     Collateral, except financing statements filed or to be filed in favor of
     the Pledgee as secured party;

          (xiv)  it shall give the Pledgee prompt notice of any written claim
     relating to the Collateral and shall deliver to the Pledgee a copy of each
     other demand, notice or document received by it which may adversely affect
     the Pledgee's interest in the Collateral promptly upon, but in any event
     within 10 days after, such Pledgor's receipt thereof;

          (xv)   it shall not withdraw as a partner of any Pledged Partnership
     or member of any Pledged LLC, or file or pursue or take any action which
     may, directly or indirectly, cause a dissolution or liquidation of or with
     respect to any Pledged Partnership or Pledged LLC or seek a partition of
     any property of any Pledged Partnership or Pledged LLC, except as permitted
     by the Credit Agreement;

                                      -16-
<PAGE>
 
          (xvi)   a notice in the form set forth in Annex E attached hereto and
     by this reference made a part hereof (such notice, the "Pledge Notice"),
     appropriately completed, notifying each Pledged Partnership and Pledged LLC
     of the existence of this Agreement and attached thereto a copy of this
     Agreement have been delivered by such Pledgor to the relevant Pledged
     Partnership or Pledged LLC, and such Pledgor has received and delivered to
     the Pledgee an acknowledgment in the form set forth in Annex F attached
     hereto (such acknowledgement, the "Pledge Acknowledgement"), duly executed
     by the relevant Pledged Partnership or Pledged LLC;

          (xvii)  as of the date hereof, all of its Partnership Interests and
     Membership Interests are uncertificated and each Pledgor covenants and
     agrees that it will not approve of any action by any Pledged Partnership or
     Pledged LLC to convert such uncertificated interests into certificated
     interests; and

          (xviii) it will take no action which would violate or be inconsistent
     with any of the terms of any Secured Debt Agreement, or which would have
     the effect of impairing the position or interests of the Pledgee or any
     other Secured Creditor under any Secured Debt Agreement except as permitted
     by the Credit Agreement.

          16.  PLEDGORS' OBLIGATIONS ABSOLUTE, ETC.  The obligations of each
               ------------------------------------                         
Pledgor under this Agreement shall be absolute and unconditional and shall
remain in full force and effect without regard to, and shall not be released,
suspended, discharged, terminated or otherwise affected by, any circumstance or
occurrence whatsoever, including, without limitation:

          (i)     any renewal, extension, amendment or modification of, or
     addition or supplement to or deletion from any of the Secured Debt
     Agreements, or any other instrument or agreement referred to therein, or
     any assignment or transfer of any thereof;

          (ii)    any waiver, consent, extension, indulgence or other action or
     inaction under or in respect of any such agreement or instrument or this
     Agreement;

          (iii)   any furnishing of any additional security to the Pledgee or
     its assignee or any acceptance thereof or any release of any security by
     the Pledgee or its assignee;

          (iv)    any limitation on any party's liability or obligations under
     any such instrument or agreement or any invalidity or unenforceability, in
     whole or in part, of any such instrument or agreement or any term thereof;
     or

                                      -17-
<PAGE>
 
          (v)     any bankruptcy, insolvency, reorganization, composition,
     adjustment, dissolution, liquidation or other like proceeding relating to
     such Pledgor or any Subsidiary of such Pledgor, or any action taken with
     respect to this Agreement by any trustee or receiver, or by any court, in
     any such proceeding, whether or not such Pledgor shall have notice or
     knowledge of any of the foregoing.

          17.  REGISTRATION, ETC.  (a) If an Event of Default shall have
               ------------------                                       
occurred and be continuing and any Pledgor shall have received from the Pledgee
a written request or requests that such Pledgor cause any registration,
qualification or compliance under any Federal or state securities law or laws to
be effected with respect to all or any part of the Pledged Stock, such Pledgor
as soon as practicable and at its expense will use its best efforts to cause
such registration to be effected (and be kept effective) and will use its best
efforts to cause such qualification and compliance to be effected (and be kept
effective) as may be so requested and as would permit or facilitate the sale and
distribution of such Pledged Stock, including, without limitation, registration
under the Securities Act of 1933, as then in effect (or any similar statute then
in effect), appropriate qualifications under applicable blue sky or other state
securities laws and appropriate compliance with any other governmental
requirements, provided that the Pledgee shall furnish to such Pledgor such
              --------                                                    
information regarding the Pledgee as such Pledgor may request in writing and as
shall be required in connection with any such registration, qualification or
compliance.  Each Pledgor will cause the Pledgee to be kept reasonably advised
in writing as to the progress of each such registration, qualification or
compliance and as to the completion thereof, will furnish to the Pledgee such
number of prospectuses, offering circulars and other documents incident thereto
as the Pledgee from time to time may reasonably request, and will indemnify, to
the extent permitted by law, the Pledgee, each other Secured Creditor and all
others participating in the distribution of such Pledged Stock against all
claims, losses, damages or liabilities caused by any untrue statement (or
alleged untrue statement) of a material fact contained therein (or in any
related registration statement, notification or the like) or by any omission (or
alleged omission) to state therein (or in any related registration statement,
notification or the like) a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same may have been caused by an untrue statement or omission based upon
information furnished in writing to such Pledgor by the Pledgee or such other
Secured Creditor expressly for use therein.

          (b)  If at any time when the Pledgee shall determine to exercise its
right to sell all or any part of the Pledged Securities pursuant to Section 7,
and such Pledged Securities or the part thereof to be sold shall not, for any
reason whatsoever, be effectively registered under the Securities Act of 1933,
as then in effect, the Pledgee may, in its sole and absolute discretion, sell
such Pledged Securities or part thereof by private sale in such manner and under
such circumstances as the Pledgee may deem necessary or 

                                      -18-
<PAGE>
 
advisable in order that such sale may legally be effected without such
registration. Without limiting the generality of the foregoing, in any such
event the Pledgee, in its sole and absolute discretion, (i) may proceed to make
such private sale notwithstanding that a registration statement for the purpose
of registering such Pledged Securities or part thereof shall have been filed
under such Securities Act, (ii) may approach and negotiate with a single
possible purchaser to effect such sale and (iii) may restrict such sale to a
purchaser who will represent and agree that such purchaser is purchasing for its
own account, for investment, and not with a view to the distribution or sale of
such Pledged Securities or part thereof. In the event of any such sale, the
Pledgee shall incur no responsibility or liability for selling all or any part
of the Pledged Securities at a price which the Pledgee, in its sole and absolute
discretion, may in good faith deem reasonable under the circumstances,
notwithstanding the possibility that a substantially higher price might be
realized if the sale were deferred until the registration as aforesaid.

          18.  TERMINATION; RELEASE.  (a)  After the Termination Date (as
               --------------------                                      
defined below), this Agreement shall terminate (provided that all indemnities
set forth herein including, without limitation, in Section 11 hereof shall
survive any such termination) and the Pledgee, at the request and expense of the
respective Pledgor, will execute and deliver to such Pledgor a proper instrument
or instruments acknowledging the satisfaction and termination of this Agreement
as provided above, and will duly assign, transfer and deliver to such Pledgor
(without recourse and without any representation or warranty) such of the
Collateral as may be in the possession of the Pledgee and as has not theretofore
been sold or otherwise applied or released pursuant to this Agreement, together
with any moneys at the time held by the Pledgee hereunder.  As used in this
Agreement, "Termination Date" shall mean the date upon which the Total
Commitment and all Secured Interest Rate Agreements have been terminated, no
Note under the Credit Agreement is outstanding (and all Loans have been paid in
full) and all other Obligations have been paid in full (other than arising from
indemnities for which no request has been made).

          (b)  In the event that any part of the Collateral is sold or otherwise
disposed of in connection with a sale or other disposition permitted by Section
7.02 of the Credit Agreement or is otherwise released at the direction of the
Required Lenders (or all the Lenders if required by Section 11.12 of the Credit
Agreement), and the proceeds of such sale or other disposition or from such
release are applied in accordance with the terms of the Credit Agreement to the
extent required to be so applied, the Pledgee, at the request and expense of the
respective Pledgor, will release such Collateral from this Agreement, duly
assign, transfer and deliver to such Pledgor (without recourse and without any
representation or warranty) such of the Collateral as is then being (or has
been) so sold, disposed of or released and as may be in possession of the
Pledgee and has not theretofore been released pursuant to this Agreement.

                                      -19-
<PAGE>
 
          (c)  At any time that any Pledgor desires that Collateral be released
as provided in the foregoing Section 18(a) or (b), it shall deliver to the
Pledgee a certificate signed by a principal executive officer stating that the
release of the respective Collateral is permitted pursuant to Section 18(a) or
(b). The Pledgee shall have no liability whatsoever to any Secured Creditor as
the result of any release of Collateral by it as permitted by this Section 18.

          19.  NOTICES, ETC.  All notices and other communications hereunder
               -------------                                                
shall be in writing (including telegraphic, telex, telecopier, facsimile or
cable communication) and shall be delivered, telegraphed, telexed, telecopied,
faxed, cabled, or mailed (by first class mail, postage prepaid):

          (i)     if to any Pledgor, at its address set forth opposite its
signature below;

          (ii)    if to the Pledgee, at:

                  Bankers Trust Company
                  130 Liberty Street
                  New York, New York 10006
                  Attention:  Greg Shefrin
                  Tel:  (212) 250-7200
                  Fax:  (212) 250-7218

          (iii)   if to any Bank Creditor (other than the Pledgee), either (x)
    to the Administrative Agent, at the address of the Administrative Agent
    specified in the Credit Agreement or (y) at such address as such Bank
    Creditor shall have specified in the Credit Agreement;

          (iv)    if to any Interest Rate Creditor, at such address as such
    Interest Rate Creditor shall have specified in writing to the Pledgors and
    the Pledgee;

or at such other address as shall have been furnished in writing by any Person
described above to the party required to give notice hereunder.

          20.     WAIVER; AMENDMENT.  None of the terms and conditions of this
                  -----------------                                           
Agreement may be changed, waived, modified or varied in any manner whatsoever
unless in writing duly signed by the Pledgee (with the consent of the Required
Lenders or, to the extent required by Section 11.12 of the Credit Agreement, all
of the Lenders) and each Pledgor affected thereby, provided that (i) no such
                                                   --------                 
change, waiver, modification or 

                                      -20-
<PAGE>
 
variance shall be made to Section 9 hereof or this Section 20 without the
consent of each Secured Creditor adversely affected thereby and (ii) any change,
waiver, modification or variance affecting the rights and benefits of a single
Class (as defined below) of Secured Creditors (and not all Secured Creditors in
a like or similar manner) shall require the written consent of the Requisite
Creditors (as defined below) of such Class of Secured Creditors. For the purpose
of this Agreement, the term "Class" shall mean each class of Secured Creditors,
i.e., whether (x) the Lender Creditors as holders of the Credit Document 
- ----                                     
Obligations or (y) the Interest Rate Creditors as holders of the Interest Rate
Obligations. For the purpose of this Agreement, the term "Requisite Creditors"
of any Class shall mean each of (x) with respect to each of the Credit Document
Obligations, the Required Lenders and (y) with respect to the Interest Rate
Obligations, the holders of at least a majority of all obligations outstanding
from time to time under the Secured Interest Rate Agreements.

          21.  PLEDGEE NOT BOUND.  (a)  Nothing herein shall be construed to
               -----------------                                            
make the Pledgee or any other Secured Creditor liable as a general partner or
limited partner of any Pledged Partnership or a member of any Pledged LLC or a
shareholder of any corporation, and neither the Pledgee nor any Secured Creditor
by virtue of this Agreement or otherwise (except as referred to in the following
sentence) shall have any of the duties, obligations or liabilities of a general
partner or limited partner of any Pledged Partnership or a member of any Pledged
LLC or a stockholder of any corporation.  The parties hereto expressly agree
that, unless the Pledgee shall become the absolute owner of a Partnership
Interest, a Membership Interest or Stock pursuant hereto, this Agreement shall
not be construed as creating a partnership or joint venture or membership
agreement among the Pledgee, any other Secured Creditor and/or a Pledgor.

          (b)  Except as provided in the last sentence of paragraph (a) of this
Section 21, the Pledgee, by accepting this Agreement, did not intend to become a
general partner or limited partner of any Pledged Partnership or a member of any
Pledged LLC or a shareholder of any corporation or otherwise be deemed to be a
co-venturer with respect to any Pledgor or any Pledged Partnership or a member
of any Pledged LLC or a shareholder of any corporation either before or after an
Event of Default shall have occurred.  The Pledgee shall have only those powers
set forth herein and shall assume none of the duties, obligations or liabilities
of a general partner or limited partner of any Pledged Partnership or of a
member of any Pledged LLC or of a Pledgor.

          (c)  The Pledgee shall not be obligated to perform or discharge any
obligation of a Pledgor as a result of the collateral assignment hereby
effected.

          (d)  The acceptance by the Pledgee of this Agreement, with all the
rights, powers, privileges and authority so created, shall not at any time or in
any event obligate 

                                      -21-
<PAGE>
 
the Pledgee to appear in or defend any action or proceeding relating to the
Collateral to which it is not a party, or to take any action hereunder or
thereunder, or to expend any money or incur any expenses or perform or discharge
any obligation, duty or liability under the Collateral.

          22.  MISCELLANEOUS.  This Agreement shall create a continuing security
               -------------                                                    
interest in the Collateral and shall (i) remain in full force and effect,
subject to release and/or termination as set forth in Section 18, (ii) be
binding upon each Pledgor, its successors and assigns; provided that no Pledgor
                                                       --------                
shall assign any of its rights or obligations hereunder without the prior
written consent of the Pledgee (with the prior written consent of the Required
Lenders or to the extent required by Section 11.12 of the Credit Agreement, all
of the Lenders), and (iii) inure, together with the rights and remedies of the
Pledgee hereunder, to the benefit of the Pledgee, the other Secured Creditors
and their respective successors, transferees and assigns.  The headings of the
several sections and subsections in this Agreement are for purposes of reference
only and shall not limit or define the meaning hereof.  This Agreement may be
executed in any number of counterparts, each of which shall be an original, but
all of which together shall constitute one instrument.  In the event that any
provision of this Agreement shall prove to be invalid or unenforceable, such
provision shall be deemed to be severable from the other provisions of this
Agreement which shall remain binding on all parties hereto.

          23.  GOVERNING LAW, ETC.  (a)  THIS AGREEMENT AND THE RIGHTS AND
               ------------------                                         
OBLIGATIONS OF THE SECURED CREDITORS AND OF THE UNDERSIGNED HEREUNDER SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK
WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.  Any legal action or
proceeding with respect to this Agreement or any other Credit Document may be
brought in the courts of the State of New York or of the United States of
America for the Southern District of New York, and, by execution and delivery of
this Agreement, each Pledgor which is not a Subsidiary Guarantor (each, an "NSG
Pledgor") hereby irrevocably accepts for itself and in respect of its property,
generally and unconditionally, the jurisdiction of the aforesaid courts.  Each
NSG Pledgor hereby irrevocably designates, appoints and empowers CT Corporation
System with offices on the date hereof at 1633 Broadway, New York, NY 10019, as
its designee, appointee and agent to receive, accept and acknowledge for and on
its behalf, and in respect of its property, service of any and all legal
process, summons, notices and documents which may be served in any such action
or proceeding.  If for any reason such designee, appointee and agent shall cease
to be available to act as such, each NSG Pledgor agrees to designate a new
designee, appointee and agent in New York City on the terms and for the purposes
of this provision satisfactory to the Collateral Agent under this Agreement.
Each NSG Pledgor further irrevocably consents to the service of process out of
any of the aforementioned courts in any such action or proceeding by the mailing
of copies thereof by registered or certified mail, postage prepaid, to each NSG
Pledgor at its address set forth opposite its signature 

                                      -22-
<PAGE>
 
below, such service to become effective 30 days after such mailing. Nothing
herein shall affect the right of any of the Secured Creditors to serve process
in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against any Pledgor in any other jurisdiction.

          (b)  Each NSG Pledgor hereby irrevocably waives any objection which it
may now or hereafter have to the laying of venue of any of the aforesaid actions
or proceedings arising out of or in connection with this Agreement or any other
Credit Document brought in the courts referred to in clause (a) above and hereby
further irrevocably waives and agrees not to plead or claim in any such court
that such action or proceeding brought in any such court has been brought in an
inconvenient forum.

          (c)  Each Pledgor and the Pledgee hereby irrevocably waive all right
to a trial by jury in any action, proceeding or counterclaim arising out of or
relating to this Agreement, the other Credit Documents or the transactions
contemplated hereby or thereby.

          24.  ADDITIONAL PLEDGORS.  It is understood and agreed that any
               -------------------                                       
Subsidiary of the Borrower that is required to execute a counterpart of this
Agreement pursuant to the Credit Agreement shall become a Pledgor hereunder by
executing a counterpart hereof and delivering the same to the Pledgee and
Annexes A, B, C and D will be modified at such time in a manner acceptable to
the Pledgee to give effect to such additional Pledgor.

          25.  AUTHORIZATION AND DIRECTION.  Each Pledged Partnership and each
               ---------------------------                                    
Pledged LLC is hereby authorized and directed to register the respective
Pledgor's pledge to the Pledgee on behalf of the Secured Creditors of the
interest of such Pledgor on such entity's books.  Each Pledgor agrees to give
the respective Pledged Partnership or Pledged LLC, as the case may be, a Pledge
Notice, and to cause each such Pledged Partnership or Pledged LLC, as the case
may be, to acknowledge such notice with a Pledge Acknowledgement.



                            *          *          *

                                      -23-
<PAGE>
 
          IN WITNESS WHEREOF, each Pledgor and the Pledgee have caused this
Agreement to be executed and delivered by their duly authorized officers as of
the date first above written.


                            MJD COMMUNICATIONS, INC.,
                             as a Pledgor


                            By /s/ Walter Leach
                              -------------------------------------------
                              Title: Vice President, Secretary and
                                 Chief Financial Officer


                            ST ENTERPRISES, LTD.,
                             as a Pledgor


                            By /s/ Walter Leach
                              -------------------------------------------
                              Title: Vice President, Secretary and
                                 Chief Financial Officer


                            MJD HOLDINGS CORP.,
                             as a Pledgor


                            By /s/ Walter Leach
                              -------------------------------------------
                              Title: Vice President, Secretary and
                                 Chief Financial Officer


                            MJD SERVICES CORP.,
                             as a Pledgor

                                      -24-
<PAGE>
 
By /s/ Walter Leach
  -------------------------------------------

                              Title: Vice President, Secretary and
                     Chief Financial Officer




                            MJD VENTURES, INC.,
                             as a Pledgor


By /s/ Walter Leach
  -------------------------------------------
 
                               Title: Vice President, Secretary and
                               Chief Financial Officer


                            C-R COMMUNICATIONS, INC.,
                             as a Pledgor


By /s/ Walter Leach
  -------------------------------------------

                                   Title: Vice President, Secretary and
                                 Chief Financial Officer


BANKERS TRUST COMPANY,

     as Collateral Agent, as Pledgee


By /s/ Andrew Keith
  ---------------------------------------------

                                  Title: Vice President

                                      -25-
<PAGE>
 
                                                                         ANNEX A
                                                                         -------



                         LIST OF PLEDGED SUBSIDIARIES
                         ----------------------------


A.   [PLEDGOR]


     Name                     Jurisdiction of Incorporation
     ----                     -----------------------------


B.   [PLEDGOR]

     Name                     Jurisdiction of Incorporation
     ----                     -----------------------------
<PAGE>
 
                                                                         ANNEX B
                                                                         -------



                                 LIST OF STOCK
                                 -------------


A.   [PLEDGOR]


   Name of
   Issuing     Type of       Number of   Certificate  Percentage
  Corporation  Shares         Shares         No.        Owned
  -----------  -------       ---------   -----------  ----------



B.   [PLEDGOR]


   Name of
   Issuing     Type of     Number of   Certificate  Percentage
  Corporation  Shares        Shares        No.        Owned
  -----------  -------     ---------   -----------  ----------



                       [TO BE PROVIDED BY THE BORROWER]
<PAGE>
 
                                                                         ANNEX C
                                                                         -------



                                 LIST OF NOTES
                                 -------------



A.   [PLEDGOR]

     Obligor   Amount (if any)  Maturity Date (if any)
     -------   ---------------  ----------------------



B.   [PLEDGOR]

     Obligor   Amount (if any)  Maturity Date (if any)
     -------   ---------------  ----------------------



                       [TO BE PROVIDED BY THE BORROWER]
<PAGE>
 
                                                                         ANNEX D
                                                                         -------

PART I.
- ------ 

                         LIST OF PARTNERSHIP INTERESTS
                         -----------------------------

A.   [PLEDGOR]
      ------- 

                         Type of
     Pledged             Partnership
            Percentage 
     Entities            Interest   
     ---------           ------------
            Owned
            ----------

B.   [PLEDGOR]
      ------- 

                         Type of
     Pledged             Partnership 
            Percentage
     Entities            Interest                              
     ---------           ------------                          
            Owned    
            --------- 


PART II.
- ------- 

                         LIST OF MEMBERSHIP INTERESTS
                         ----------------------------

A.   [PLEDGOR]
      ------- 

                         Type of
     Pledged             Membership
            Percentage
     Entities            Interest                               
     ---------           ------------                           
            Owned    
            --------- 

B.   [PLEDGOR]
      ------- 
<PAGE>
 
                                                                         ANNEX D
                                                                          Page 2

                         Type of
     Pledged             Membership
            Percentage
     Entities            Interest                               
     ---------           ------------                           
            Owned    
            --------- 
<PAGE>
 
                                                                         ANNEX E
                                                                         -------



                             FORM OF PLEDGE NOTICE
                             ---------------------

                            [Letterhead of Pledgor]



                                                                          [Date]


TO:  [Name of Pledged Entity]

          Notice is hereby given that, pursuant to the Pledge Agreement (a true
and correct copy of which is attached hereto), dated as of March __, 1998 (as
amended, amended and restated, modified or supplemented from time to time in
accordance with the terms thereof, the "Pledge Agreement"), between [NAME OF
PLEDGOR] (the "Pledgor"), the other pledgors from time to time party thereto and
Bankers Trust Company (the "Pledgee") on behalf of the Secured Creditors
described therein, the Pledgor has pledged and assigned to the Pledgee for the
benefit of the Secured Creditors, and granted to the Pledgee for the benefit of
the Secured Creditors a continuing security interest in, all right, title and
interest of the Pledgor, whether now existing or hereafter arising or acquired,
as a [[limited] [general] partner] [member] in [NAME OF PLEDGED ENTITY] (the
["Partnership"] ["LLC"]), and in, to and under the [TITLE OF APPLICABLE
AGREEMENT] (the "[Partnership] [LLC] Agreement"), including, without limitation:

          (i)    all the capital of the [Partnership] [LLC] and the Pledgor's
     interest in all profits, losses, and other distributions to which the
     Pledgor shall at any time be entitled in respect of such interest;

          (ii)   all other payments due or to become due to the Pledgor in
     respect of such partnership interest, whether under the [Partnership] [LLC]
     Agreement or otherwise, whether as contractual obligations, damages,
     insurance proceeds or otherwise;

          (iii)  all of its claims, rights, powers, privileges, authority,
     options, security interest, liens and remedies, if any, under the
     [Partnership] [LLC] Agreement or at law or otherwise in respect of such
     interest;
<PAGE>
 
                                                                         ANNEX E
                                                                          Page 2

          (iv)  all present and future claims, if any, of the Pledgor against
     the [Partnership] [LLC] for moneys loaned or advanced, for services
     rendered or otherwise;

          (v)  all of the Pledgor's rights under the [Partnership] [LLC]
     Agreement or at law to exercise and enforce every right, power, remedy,
     authority, option and privilege of the Pledgor relating to the
     [Partnership] [Membership] Interest, including any power to terminate,
     cancel or modify the [Partnership] [LLC] Agreement, to execute any
     instruments and to take any and all other action on behalf of and in the
     name of the Pledgor in respect of the [Partnership] [Membership] Interest
     and the [Partnership] [LLC] to make determinations, to exercise any
     election (including, but not limited, election of remedies) or option or to
     give or receive any notice, consent, amendment, waiver or approval,
     together with full power and authority to demand, receive, enforce, collect
     or receipt for any of the foregoing, to enforce or execute any checks, or
     other instruments or orders, to file any claims and to take any action in
     connection with any of the foregoing;

          (vi)  all other property hereafter delivered in substitution for or in
     addition to any of the foregoing, all certificates and instruments
     representing or evidencing such other property and all cash, securities,
     interest, dividends, rights and other property at any time and from time to
     time received, receivable or otherwise distributed in respect of or in
     exchange for any or all thereof; and

          (vii)  to the extent not otherwise included, all proceeds of any or
     all of the foregoing.

          Pursuant to the Pledge Agreement, the [Partnership] [LLC] is hereby
authorized and directed to register the Pledgor's pledge to the Pledgee on
behalf of the Secured Creditors of the interest of the Pledgor on the
[Partnership's] [LLC's] books.
<PAGE>
 
                                                                         ANNEX E
                                                                          Page 3

          The Pledgor hereby requests the [Partnership] [LLC] to indicate the
[Partnership's] [LLC's] acceptance of this Notice and consent to and
confirmation of its terms and provisions by signing a copy hereof where
indicated on the attached page and returning the same to the Pledgee on behalf
of the Secured Creditors.


                              [NAME OF PLEDGOR]
 

                              By_________________________________
                                Title:
<PAGE>
 
                                                                         ANNEX F
                                                                         -------



                         FORM OF PLEDGE ACKNOWLEDGMENT
                         -----------------------------


          [NAME OF PLEDGED ENTITY] (the ["Partnership"] ["LLC"]) hereby
acknowledges receipt of a copy of the assignment by [NAME OF PLEDGOR]
("Pledgor") of its interest under the [TITLE OF APPLICABLE AGREEMENT] (the
"[Partnership] [LLC] Agreement") pursuant to the terms of the Pledge Agreement,
dated as of March  __, 1998, (as the same may be amended, amended and restated,
modified or supplemented) from time to time, between Pledgor, the other pledgors
from time to time party thereto, and Bankers Trust Company (the "Pledgee") on
behalf of the Secured Creditors described therein.  The undersigned hereby
further confirms the registration of the Pledgor's pledge of its interest to the
Pledgee on behalf of the Secured Creditors on the [Partnership's] [LLC's] books.


Dated: ______________ __, 199_


                               [NAME OF PLEDGED ENTITY]


                               By____________________________
                                 Title:
<PAGE>
 
                                                                       EXHIBIT H
                                                                       ---------
                        OFFICER'S SOLVENCY CERTIFICATE
                        ------------------------------

To the Agents and each of the Lenders party
to the Credit Agreement referred to below:


          I, the undersigned, the Chief Financial Officer of MJD Communications,
Inc., a Delaware corporation (the "Borrower"), do hereby certify that:

          1.   This Certificate is furnished to the Lenders pursuant to Section
4.01(j) of the Credit Agreement, dated as of March 30, 1998, among the Borrower,
the lenders from time to time party thereto (each, a "Lender" and, collectively,
the "Lenders"), NationsBank of Texas, N.A., as Syndication Agent, and Bankers
Trust Company, as Administrative Agent.  Unless otherwise defined herein,
capitalized terms used in this Certificate shall have the meanings set forth in
the Credit Agreement.

          2.   For purposes of this Certificate, the terms below shall have the
following definitions:

     (a)  "Fair Value"

          The amount at which the assets, in their entirety, of the Borrower and
          its Subsidiaries taken as whole would change hands between a willing
          buyer and a willing seller, within a commercially reasonable period of
          time, each having reasonable knowledge of the relevant facts, with
          neither being under any compulsion to act.

     (b)  "Present Fair Salable Value"

          The amount that could be obtained by an independent willing seller
          from an independent willing buyer if the assets of the Borrower and
          its Subsidiaries taken as a whole are sold with reasonable promptness
          in an arm's length transaction under present conditions for the sale
          of comparable business enterprises.
<PAGE>
 
                                                                       EXHIBIT H
                                                                          Page 2
     (c)  "New Financing"

          The Indebtedness incurred or to be incurred by the Borrower and its
          Subsidiaries under the Credit Documents (assuming the full utilization
          by the Borrower of the Commitments under the Credit Agreement) and all
          other financings contemplated by the Credit Documents and the
          Applicable Acquisition Documents, in each case after giving effect to
          the Transaction and the incurrence of all financings in connection
          therewith.

     (d)  "Stated Liabilities"

          The recorded liabilities (including contingent liabilities that would
          be recorded in accordance with generally accepted accounting
          principles ("GAAP")) of the Borrower and its Subsidiaries taken as a
          whole as of the date hereof after giving effect to the consummation of
          the Transaction, determined in accordance with GAAP consistently
          applied, together with the amount of all New Financing.

     (e)  "Identified Contingent Liabilities"

          The maximum estimated amount of liabilities reasonably likely to
          result from pending litigation, asserted claims and assessments,
          guaranties, uninsured risks and other contingent liabilities of the
          Borrower and its Subsidiaries taken as a whole after giving effect to
          the Transaction (including all fees and expenses related thereto but
          exclusive of such contingent liabilities to the extent reflected in
          Stated Liabilities), as identified and explained to me as the Chief
          Financial Officer in terms of their nature and estimated magnitude by
          responsible officers of the Borrower or that have been identified to
          me as the Chief Financial Officer as such by an officer of the
          Borrower.

     (f)  "Will be able to pay its Stated Liabilities, including Identified
          Contingent Liabilities, as they mature"

          For the period from the date hereof through the stated maturity of all
          New Financing, the Borrower and its Subsidiaries taken as a whole will
          have sufficient assets and cash flow to pay their respective Stated
          Liabilities and
<PAGE>
 
                                                                       EXHIBIT H
                                                                          Page 3

          Identified Contingent Liabilities as those liabilities mature or
          otherwise become payable.

     (g)  "Does not have Unreasonably Small Capital"

          For the period from the date hereof through the stated maturity of all
          New Financing, the Borrower and its Subsidiaries taken as a whole
          after consummation of the Transaction and all Indebtedness (including
          the Loans) being incurred or assumed and Liens created by the Borrower
          and its Subsidiaries in connection therewith, is a going concern and
          has sufficient capital to ensure that it will continue to be a going
          concern for such period and to remain a going concern.

          3.  For purposes of this Certificate, I, or senior officers of the
Borrower with whom I have consulted ("Designated Officers"), have performed the
following procedures as of and for the periods set forth below.

     (a)  I have reviewed the financial statements referred to in Section
          5.10(b) of the Credit Agreement.

     (b)  I and/or certain Designated Officers have made inquiries of certain
          officers of the Borrower and its Subsidiaries and the Acquired
          Companies who have responsibility for financial and accounting matters
          regarding the existence and amount of Identified Contingent
          Liabilities associated with the Borrower and its Subsidiaries and the
          Acquired Companies.

     (c)  I have knowledge of and have reviewed to my satisfaction the Credit
          Documents and the Applicable Acquisition Documents, and the respective
          Schedules and Exhibits thereto.

     (d)  With respect to Identified Contingent Liabilities, I and/or Designated
          Officers:

          1.  inquired of certain officers of each of the Borrower and its
              Subsidiaries and the Acquired Companies who have responsibility
              for legal, financial and accounting matters as to the existence
              and estimated liability with respect to all contingent liabilities
              associated
<PAGE>
 
                                                                       EXHIBIT H
                                                                          Page 4

              with each of the Borrower and its Subsidiaries and the
              Acquired Companies;

          2.  confirmed with officers of each of the Borrower and its
              Subsidiaries and the Acquired Companies that to such officers'
              knowledge, (i) all appropriate items were included in Stated
              Liabilities or Identified Contingent Liabilities and (ii) the
              amounts relating thereto were the maximum estimated amount of
              liabilities reasonably likely to result therefrom as of the date
              hereof; and

          3.  hereby certify that, to my knowledge, all material Identified
              Contingent Liabilities that may arise from any pending litigation,
              asserted claims and assessments, guarantees, uninsured risks and
              other Identified Contingent Liabilities of each of the Borrower
              and its Subsidiaries and the Acquired Companies (exclusive of such
              Identified Contingent Liabilities to the extent reflected in
              Stated Liabilities) have been considered (after giving effect to
              the consummation of the Transaction and the incurrence of all
              financings in connection therewith) in making the certification
              set forth in paragraph 4 below, and with respect to each such
              Identified Contingent Liability, the estimable maximum amount of
              liability with respect thereto was used in making such
              certification.

     (e)  I have had the projections relating to the Borrower and its
          Subsidiaries (the "Projections") which have been previously delivered
          to the Lenders, prepared under my direction, and have re-examined the
          Projections on the date hereof and considered the effect thereon of
          any changes since the date of the preparation thereof on the results
          projected therein.  After such review, I hereby certify that in my
          opinion the Projections are reasonable.

     (f)  I and/or Desiganted Officers have made inquiries of certain officers
          of each of the Borrower and its Subsidiaries and the Acquired
          Companies who have responsibility for financial reporting and
          accounting matters regarding whether they were aware of any events or
          conditions that, as of the date hereof, would cause the Borrower and
          its Subsidiaries taken as a whole, after giving effect to the
          consummation of the Transaction and the related financing transactions
          (including the incurrence of the New Financing), to (i) have assets
          with a Fair Value or Present Fair Salable
<PAGE>
 
                                                                       EXHIBIT H
                                                                          Page 5

          Value that are less than the sum of Stated Liabilities and Identified
          Contingent Liabilities; (ii) have Unreasonably Small Capital; or (iii)
          not be able to pay their respective Stated Liabilities and Identified
          Contingent Liabilities as they mature or otherwise become payable.

          4.  Based on and subject to the foregoing, I hereby certify on behalf
of the Borrower that, after giving effect to the consummation of the Transaction
and the related financing transactions (including the incurrence of the New
Financing), it is my opinion that (i) the Fair Value and Present Fair Salable
Value of the assets of the Borrower and its Subsidiaries taken as a whole exceed
their Stated Liabilities and Identified Contingent Liabilities taken as a whole;
(ii) the Borrower and its Subsidiaries taken as a whole do not have Unreasonably
Small Capital; and (iii) the Borrower and its Subsidiaries taken as a whole will
be able to pay their respective Stated Liabilities and Identified Contingent
Liabilities as they mature or otherwise become payable.
<PAGE>
 
                                                                       EXHIBIT H
                                                                          Page 6

IN WITNESS WHEREOF, I have hereto set my hand this ______ day of March, 1998.


                                          MJD COMMUNICATIONS, INC.


                                          ----------------------------------
                                          Name:
                                          Title:


     By accepting this certificate, the Administrative Agent acknowledges, on
its own behalf and on the behalf of the Lenders from time to time party to the
Credit Agreement, that (i) the foregoing certification is rendered solely in the
executing party's capacity as an officer of the Borrower and its Subsidiaries
and (ii) in the absence of fraud on the part of the executing party, no claim
shall be asserted against the executing party in its individual capacity in
connection with or arising out of this certificate or its execution or delivery.


ACKNOWLEDGED:

BANKERS TRUST COMPANY,
 as Administrative Agent
 on behalf of the Lenders



- ----------------------------------
Name:
Title:
<PAGE>
 
                        CAPITAL CONTRIBUTION AGREEMENT


                  CAPITAL CONTRIBUTION AGREEMENT, (the "Agreement"), dated as of
March 27, 1998, among Kelso Investment Associates V, L.P., a Delaware limited
partnership, and Kelso Equity Partners V, L.P., a Delaware limited partnership
(collectively, "Kelso"), Carousel Capital Partners, L.P., a Delaware limited
partnership ("Carousel"), MJD Communications, Inc., a Delaware corporation (the
"Borrower") and Bankers Trust Company, as Administrative Agent (the
"Administrative Agent") for the Lenders (as defined below).


                             W I T N E S S E T H:

                  WHEREAS, Kelso, Carousel and the Borrower desire that the
Lenders and the Administrative Agent enter into a Credit Agreement dated as of
March 27, 1998 (as amended, amended and restated, supplemented or modified from
time to time in accordance with the terms thereof, the "Credit Agreement") among
the Borrower, the lenders named therein (together with their respective
successors and assigns, the "Lenders"), the Administrative Agent and NationsBank
of Texas, N.A., as Syndication Agent ;

                  WHEREAS, Kelso and Carousel, as a result of their ownership of
capital stock of the Borrower, and the Borrower will derive substantial benefits
from the consummation of the transactions contemplated by the Credit Agreement
and the making of Loans thereunder, including the making of the Loans to effect
the Acquisitions; and

                  WHEREAS, the execution and delivery of this Agreement is a
condition precedent to the Lenders' obligation to make Loans (as defined in the
Credit Agreement).

                  NOW, THEREFORE, IT IS AGREED:

                  1. Definitions. All capitalized terms used herein and not
otherwise defined herein shall have the respective meanings ascribed to such
terms in the Credit Agreement.

                  2. Required Investments. (a) Subject to Section 2(b) hereof,
if as of June 30, 1999 the Senior Leverage Ratio, as evidenced in the Officer's
Certificate required pursuant to Section 6.01(e) of the Credit Agreement to be
delivered in respect of 
<PAGE>
 
the fiscal quarter ended June 30, 1999, is greater than 5.5 to 1, then each of
Kelso and Carousel shall purchase for cash in equal proportions (the "Required
Investment"), not later than the fifteenth Business Day after the date such
Officer's Certificate has been or should have been delivered pursuant to the
Credit Agreement (such earlier date, the "Notice Date"), additional shares of
Common Stock of the Borrower at a price per share of $342.51, and the Borrower
agrees to issue and sell such shares of Common Stock, for an amount which when
applied to outstanding indebtedness of the Borrower would cause the Senior
Leverage Ratio to be reduced to (but not below) 5.5 to 1 as of June 30, 1999.
Neither Kelso nor Carousel shall have any obligation under this Agreement to
make or cause to be made any investment in the Borrower other than the Required
Investment.

                  (b) Notwithstanding any provision herein to the contrary, (i)
neither Kelso nor Carousel shall be obligated to make any Required Investments
pursuant to Section 2(a) of this Agreement in an amount in excess of $7,500,000
and (ii) neither Kelso nor Carousel shall be obligated to make any Required
Investments pursuant to Section 2(a) of this Agreement in excess of the Required
Investments made by the other.

                  3.  Officers' Certificate. The Borrower will deliver to each
of Kelso and Carousel on the Notice Date (with a copy to the Administrative
Agent) an Officers' Certificate setting forth the calculations for determining
whether any Required Investments are required pursuant to Section 2(a) hereof
(the "Contribution Certificate"), which calculations shall be in substantially
similar detail as in a Compliance Certificate, and, if applicable, setting forth
the Required Investments to be made by Kelso and Carousel pursuant to the terms
of Section 2 hereof. If for any reason the Borrower shall fail to deliver the
Officer's Certificates required under this Section 3, the Administrative Agent
shall have the right to deliver any such notice or certificate (an "Agent's
Notice") which, if applicable, shall demand that Kelso and Carousel make a
Required Investment in accordance herewith.

                  4. Representations and Warranties. In order to induce the
Lenders to enter into the Credit Agreement and to make the Loans provided for
therein, each of Kelso, Carousel and the Borrower represents and warrants to the
Administrative Agent and the Lenders as follows (with respect to each Person, as
to itself only):

                  (i)  it is duly organized, validly existing and in good
         standing under the laws of the jurisdiction of its organization or
         incorporation, as the case may be, and has full power, authority and
         legal right to own its property and assets, and to transact the
         business in which it is engaged;

                  (ii) it has the full partnership or corporate power, authority
         and legal right to execute, deliver and perform each of its obligations
         under this Agreement and has taken all necessary partnership or
         corporate and other actions to authorize the execution, delivery and
         performance of each of its obligations under this

                                      -2-
<PAGE>
 
         Agreement and this Agreement constitutes the legal, valid and binding
         obligation of such Person, enforceable against such Person in
         accordance with its terms, except as such enforceability may be limited
         by bankruptcy, insolvency, reorganization, moratorium, fraudulent
         conveyance or similar laws relating to or limiting creditors' rights
         generally or by equitable principles relating to enforceability;

                  5.  No Guarantee of Indebtedness. Neither this Agreement, nor
anything herein contained, nor any obligation performed or to be performed
pursuant hereto by Kelso or Carousel shall be construed or deemed to constitute,
a direct or indirect guarantee by Kelso or Carousel to any person or entity of
the payment of the interest, principal or premium of any indebtedness, liability
or obligation whatsoever of the Borrower or any Subsidiary of the Borrower,
including without limitation the Loans.

                  6. Notices. Except as otherwise expressly provided herein, all
notices and other communications provided for hereunder shall be in writing and
mailed, faxed, sent by a nationally recognized express courier or delivered by
hand, if to Kelso at 320 Park Avenue, New York, New York, Attention: James J.
Connors, II, Vice-President & General Counsel; if to Carousel at 4201 Congress
Street, Suite 440, Charlotte, NC 28209, Attention: Reid G. Leggett; if to the
Borrower, at 521 East Morehead Place, Suite 250, Charlotte, NC 28202, Attention:
Walter E. Leach, Jr. (with a copy to Paul, Hastings, Janofsky & Walker LLP, 399
Park Avenue, New York, New York 10022, Attention: Neil A. Torpey); if to any
Lender or the Administrative Agent in the manner specified in the Credit
Agreement; or, at such other address as shall be designated by any party in a
written notice to the other parties hereto as provided in this Section 7. All
such notices and communications shall be effective at the earliest to occur of
receipt, three business days after deposit in the United States mail, one
Business Day after delivery to a nationally recognized express courier, delivery
to a telegraph or cable company and telephone confirmation of receipt of fax
communication; provided, however, that notices and communications to the
Administrative Agent shall not be effective until received by the Administrative
Agent.

                  7.  No Waiver; Remedies Cumulative. No failure or delay on the
part of any of the Lenders or the Administrative Agent in exercising any right,
power or privilege hereunder and no course of dealing between Kelso, Carousel or
the Borrower, on the one hand, and any of the Lenders or the Administrative
Agent, on the other, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power, or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege hereunder. The rights and remedies herein expressly provided are
cumulative and not exclusive of any rights or remedies which any of the Lenders
or the Administrative Agent would otherwise have. No notice to or demand on
Kelso, Carousel or the Borrower in any case shall entitle any of them to any
other or further notice or demand in similar or other circumstances or
constitute a waiver of the

                                      -3-
<PAGE>
 
rights of any of the Lenders or the Administrative Agent to any other or further
action in any circumstances without notice or demand.

                  8.  Counterparts. This Agreement may be executed in any number
of counterparts and by the different parties hereto on separate counterparts,
each of which when so executed and delivered shall be deemed an original, but
all of which shall together constitute one and the same instrument.

                  9.  Headings Descriptive. The headings of the several sections
of this Agreement are inserted for convenience only and shall not in any way
affect the meaning or construction of any provision of this Agreement.

                  10. Amendment or Waiver. Neither this Agreement nor any of the
terms hereof may be amended, modified, supplemented, waived, discharged or
terminated unless such amendment, modification, supplement, waiver, discharge or
termination is in writing signed by Kelso, Carousel, the Borrower and the
Administrative Agent. Any waiver or consent shall be effective only in the
specific instance or for the specific purpose for which it was given.

                  11. Successors and Assigns. This Agreement shall remain in
full force and effect and be binding in accordance with and to the extent of its
terms upon each of Kelso and Carousel and the successors and assigns thereof,
and shall inure to the benefit of the Lenders, and their respective successors
and assigns, notwithstanding that from time to time during the term of the
Credit Agreement there may be no obligations outstanding.

                  12. Survival. All agreements, representations and warranties
made herein shall survive the execution and delivery of this Agreement, the
making of the Loans and the execution and delivery of the Notes.

                  13. Termination. The obligations of Kelso and Carousel under
this Agreement shall terminate upon the earliest to occur of (i) payment in full
of all of the Loans and termination of the Commitments under the Credit
Agreement (ii) the closing of the proposed sale and issuance by the Borrower of
Senior Subordinated Notes due 2008 and Floating Interest Rate Senior
Subordinated Notes due 2008 to a group of initial purchasers led by Salomon
Smith Barney, BT Alex. Brown, NationsBanc, Montgomery Securities LLC and
Donaldson, Lufkin & Jenrette Securities Corporation, or (iii) the Senior
Leverage Ratio being, at any time after the date hereof, 4.0 to 1 or less.

                                      -4-
<PAGE>
 
                  IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this agreement to be duly executed and delivered as of the date
first above written .


                                            MJD COMMUNICATIONS, INC.


                                            By: ________________________________
                                                Name:
                                                Title:



                                            KELSO EQUITY PARTNERS V, L.P.


                                            By: ________________________________
                                                Name:
                                                Title:



                                            KELSO INVESTMENT ASSOCIATES V,
                                              L.P.

                                            By: Kelso Partners V, L.P., its
                                                 General Partner

                                                 -----------------------------
                                                 Name:
                                                 Title:


                                            BANKERS TRUST COMPANY,
                                              as Administrative Agent


                                            By: ________________________________
                                                Name:
                                                Title:

                                      -5-
<PAGE>
 
                                          CAROUSEL CAPITAL PARTNERS,
                                            L.P.


                                          By: Carousel Capital Company, L.L.C.,
                                              its General Partner


                                              --------------------------------
                                              Name:
                                              Title:

                                      -6-
<PAGE>
 
                                                                       EXHIBIT J
                                                                       ---------



                  [LETTERHEAD OF AGENT FOR SERVICE OF PROCESS]
                   ------------------------------------------ 



                                                                          [Date]


To the Administrative Agent
and the Lenders party to the Credit
Agreement referred to below,
the Administrative Agent under
the Subsidiary Guaranty referred
to below and the Collateral Agent
under the Pledge Agreement referred
to below:

Ladies and Gentlemen:

     Reference is made to (i) the Credit Agreement, dated as of March 30,  1998,
among MJD Communications, Inc. (the "Borrower"), the lenders from time to time
party thereto (the "Lenders"), NationsBank of Texas, N.A., as Syndication Agent,
and Bankers Trust Company, as Administrative Agent (the "Administrative Agent")
(as such Credit Agreement may be modified, supplemented, amended or amended and
restated from time to time, the "Credit Agreement"), (ii) the Subsidiary
Guaranty, dated as of March 30, 1998, made by each Subsidiary Guarantor (as such
Subsidiary Guaranty may be amended, amended and restated, modified or
supplemented from time to time, the "Subsidiary Guaranty") and (iii) the Pledge
Agreement, dated as of March 30, 1998, made by the Borrower and certain
Subsidiaries of the Borrower (as such Pledge Agreement may be amended, amended
and restated, modified or otherwise supplemented from time to time, the "Pledge
Agreement").  Unless otherwise defined herein, capitalized terms used in this
letter shall have the meanings set forth in the Credit Agreement.
<PAGE>
 
                                                                       EXHIBIT J
                                                                          Page 2


     Pursuant to (x) Section 11.08 of the Credit Agreement, the Borrower, (y)
Section 20 of the Subsidiary Guaranty, each Subsidiary Guarantor, and (z)
Section 23 of the Pledge Agreement, each Subsidiary party thereto that is not a
Subsidiary Guarantor (each, an "NSG Pledgor") has irrevocably designated,
appointed and empowered the undersigned, CT Corporation System, with offices
currently located at 1633 Broadway, New York, New York 10019, as its authorized
designee, appointee and agent to receive, accept and acknowledge for and on its
behalf, and in respect of its property, service of any and all legal process,
summons, notices and documents which may be served in any such action or
proceeding brought in the courts of the State of New York or of the United
States of America for the Southern District of New York with respect to (i) in
the case of the Borrower, the Credit Agreement and each other Credit Document to
which it is a party, (ii) in the case of any Subsidiary Guarantor, the
Subsidiary Guaranty and each other Credit Document to which it is a party and
(iii) in the case of any NSG Pledgor, the Pledge Agreement.

     The undersigned hereby informs you that it irrevocably accepts such
appointment as agent as set forth in Section 11.08 of the Credit Agreement,
Section 20 of the Subsidiary Guaranty and Section 23 of the Pledge Agreement and
agrees with you that the undersigned (i) shall inform the Administrative Agent
promptly in writing of any change of its address in New York City, (ii) shall
perform its obligations as such process agent in accordance with the provisions
of Section 11.08 of the Credit Agreement, Section 20 of the Subsidiary Guaranty
and Section 23 of the Pledge Agreement and (iii) shall forward promptly to the
Borrower, the relevant Subsidiary Guarantor or the relevant NSG Pledgor, as the
case may be, any legal process, summons, notices and documents received by the
undersigned in its capacity as process agent.

     As process agent, the undersigned, and its successor or successors, agree
to discharge the above-mentioned obligations and will not refuse fulfillment of
such obligations under Section 11.08 of the Credit Agreement, Section 20 of the
Subsidiary Guaranty or Section 23 of the Pledge Agreement, as the case may be.

                                   Very truly yours,

                                   CT CORPORATION SYSTEM


                                   By____________________________
                                     Title:
<PAGE>
 
                                                                       EXHIBIT J
                                                                          Page 3
<PAGE>
 
                                                                       EXHIBIT K
                                                                       ---------


                         FORM OF ASSIGNMENT AGREEMENT
                         ----------------------------


                                                              DATE: ________, __


     Reference is made to the Credit Agreement described in Item 2 of Annex I
annexed hereto (as such Credit Agreement may hereafter be amended, amended and
restated, modified or supplemented from time to time, the "Credit Agreement").
Unless defined in Annex I attached hereto, terms defined in the Credit Agreement
are used herein as therein defined.  _____________ (the "Assignor") and
______________ (the "Assignee") hereby agree as follows:

     1.  The Assignor hereby sells and assigns to the Assignee without recourse
and without representation or warranty (other than as expressly provided
herein), and the Assignee hereby purchases and assumes from the Assignor, that
interest in and to all of the Assignor's rights and obligations under the Credit
Agreement as of the date hereof which represents the percentage interest
specified in Item 4 of Annex I (the "Assigned Share") of all of the outstanding
rights and obligations under the Credit Agreement relating to the Facilities
indicated in Item 4 of Annex I, including, without limitation, [(u) in the case
of any assignment of all or any portion of the Total B Term Commitment, all
rights and obligations with respect to the Assigned Share of the Total B Term
Commitment,]/1/ (v) in the case of any assignment of outstanding B Term Loans,
all rights and obligations with respect to the Assigned Share of all then
outstanding B Term Loans, (w) in the case of any assignment of outstanding C
Term Loans-Floating Rate, all rights and obligations with respect to the
Assigned Share of all then outstanding C Term Loans, (x) in the case of any
assignment of outstanding C Term Loans-Fixed Rate, all rights and obligations
with respect to the Assigned Share of all then outstanding C Term Loans-Fixed
Rate, (y) in the case of any assignment of all or any portion of the Total
Revolving Commitment, all rights and obligations with respect to the Assigned
Share of the Total Revolving Commitment and of all then outstanding RF Loans and
(z) in the case of any assignment of all or any portion of the Total Acquisition
Commitment, all rights and obligations with respect to the Assigned Share of the
Total 



__________________________

/1/  Delete bracketed language in Assignment Agreements executed after the
termination of the Total B Term Commitment.
<PAGE>
 
                                                                       EXHIBIT K
                                                                          Page 2

Acquisition Commitment and of all then outstanding AF Loans.  After giving
effect to such sale and assignment, the Assignee's [B Term Commitment,]/2/
Revolving Commitment and Acquisition Commitment and the amount of the
outstanding B Term Loans, C Term Loans-Floating Rate and C Term Loans-Fixed Rate
owing to the Assignee will be as set forth in Item 4 of Annex I hereto.

     2.  The Assignor (i) represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any liens or security interests; (ii) makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Credit Agreement or the other Credit Documents or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Credit
Agreement or the other Credit Documents or any other instrument or document
furnished pursuant thereto; and (iii) makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the
Borrower or any of its Subsidiaries or the performance or observance by the
Borrower or any other Credit Party of any of its obligations under the Credit
Agreement or the other Credit Documents or any other instrument or document
furnished pursuant thereto.

     3.  The Assignee (i) represents and warrants that it is duly authorized to
enter into and perform the terms of this Assignment Agreement; (ii) confirms
that it has received a copy of the Credit Agreement and the other Credit
Documents, together with copies of the financial statements referred to therein
and such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into this Assignment Agreement;
(iii) agrees that it will, independently and without reliance upon the
Administrative Agent, the Syndication Agent, the Assignor or any other Lender
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under the Credit Agreement; (iv) appoints and authorizes the Administrative
Agent, the Syndication Agent and the Collateral Agent to take such action as
agent on its behalf and to exercise such powers under the Credit Agreement and
the other Credit Documents as are delegated to the Administrative Agent, the
Syndication Agent and the Collateral Agent by the terms thereof, together with
such powers as are reasonably incidental thereto; (v) makes the representations
and warranties required to be made by the Assignee under Section 11.04(b) of the
Credit Agreement; [and] (vi) agrees that it will perform in accordance with
their terms all of the obligations which by the 



__________________________

/2/  Delete bracketed language in Assignment Agreements executed after the
termination of the Total B Term Commitment.
<PAGE>
 
                                                                       EXHIBIT K
                                                                          Page 3

terms of the Credit Agreement are required to be performed by it as a Lender; 
and (viii) attaches the forms described in Section 11.04(b) of the Credit
Agreement]./3/

     4.  Following the execution of this Assignment Agreement by the Assignor
and the Assignee, an executed original hereof (together with all attachments)
will be delivered to the Administrative Agent.  The effective date of this
Assignment Agreement shall be (x) the date upon which all of the following
conditions have been satisfied:  (i) the execution hereof by the Assignor and
the Assignee, (ii) to the extent required by Section 11.04(b) of the Credit
Agreement, the consent hereto by the Administrative Agent and the Borrower
(which consent, in either case, shall not be unreasonably withheld), (iii) the
receipt by the Administrative Agent of the assignment fee referred to in Section
11.04(b) of the Credit Agreement and (iv) the recordation of the assignment
effected hereby by the Administrative Agent in the Lender Register as provided
in Section 11.16 of the Credit Agreement or (y) such later date as is otherwise
specified in Item 5 of Annex I hereto (the "Settlement Date").

     5.  Upon the delivery of a fully executed original hereof to the
Administrative Agent, as of the Settlement Date, (i) the Assignee shall be a
party to the Credit Agreement and, to the extent provided in this Assignment
Agreement, have the rights and obligations of a Lender thereunder and under the
other Credit Documents and (ii) the Assignor shall, to the extent provided in
this Assignment Agreement, relinquish its rights and be released from its
obligations under the Credit Agreement and the other Credit Documents.

     6.  It is agreed that upon the effectiveness hereof, the Assignee shall be
entitled to (w) all interest on the Assigned Share of the B Term Loans, C Term
Loans-Floating Rate, C Term Loans-Fixed Rate, RF Loans and/or AF Loans at the
rates specified in Item 6 of Annex I, (x) all TF Commitment Commission (if
applicable) on the Assigned Share of the Total B Term Commitment at the rate
specified in Item 7 of Annex I, (y) all RF Commitment Commission (if applicable)
on the Assigned Share of the Total Revolving Commitment at the rate specified in
Item 8 of Annex I and (z) all AF Commitment Commission (if applicable) on the
Assigned Share of the Total Acquisition Commitment at the rate specified in Item
9 of Annex I, which, in each case, accrue on and after the Settlement Date, such
interest and, if applicable, TF Commitment Commission, RF Commitment Commission
and/or AF Commitment Commission, to be paid by the Administrative Agent, upon
receipt thereof from the Borrower, directly to the Assignee.  It is further
agreed that all payments of principal made by the Borrower on the Assigned Share
of the B Term Loans, C Term Loans-Floating Rate, C Term Loans-Fixed Rate, RF
Loans 



________________________

/3/  If the Assignee is organized under the laws of a jurisdiction outside the 
United States.
<PAGE>
 
                                                                       EXHIBIT K
                                                                          Page 4

and/or AF Loans which occur on and after the Settlement Date will be paid
directly by the Administrative Agent to the Assignee. Upon the Settlement Date,
the Assignee shall pay to the Assignor an amount specified by the Assignor in
writing which represents the Assignee's Assigned Share of the principal amount
of the B Term Loans, C Term Loans-Floating Rate, C Term Loans-Fixed Rate, RF
Loans and/or AF Loans which are outstanding on the Settlement Date, net of any
closing costs. The Assignor and the Assignee shall make all appropriate
adjustments in payments under the Credit Agreement for periods prior to the
Settlement Date directly between themselves.

     7.  THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS.

                            *          *          *
<PAGE>
 
                                                                       EXHIBIT K
                                                                          Page 5


   IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement
to be executed by their respective officers thereunto duly authorized, as of the
                           date first above written.

                                        [NAME OF ASSIGNOR],
                                          as Assignor

                                        By____________________________
                                          Title:


                                        [NAME OF ASSIGNEE],
                                          as Assignee

                                        By____________________________
                                          Title:

Acknowledged and Agreed:


[BANKERS TRUST COMPANY
 as Administrative Agent


By____________________________
  Title:


MJD COMMUNICATIONS, INC.,
 as Borrower


By____________________________
  Title]:/4/


____________________

/4/  The consent of the Administrative Agent and, so long as no Default or Event
of Default is then in existence, the Borrower is required in connection with any
assignment to an Eligible Transferee pursuant to clause (y) of Section 11.04(b)
of the Credit 

                                                                  (continued...)
<PAGE>
 
                                                                         ANNEX I
                                                                         -------


                        ANNEX FOR ASSIGNMENT AGREEMENT

                                    ANNEX I


1.   The Borrower:       MJD Communications, Inc.

2.   Name and Date of Credit Agreement:

          Credit Agreement, dated as of March 30, 1998,
          among the Borrower, the lenders from time to time
          party thereto, NationsBank of Texas, N.A., as
          Syndication Agent, and Bankers Trust Company, as
          Administrative Agent.

3.   Date of Assignment Agreement:

          _________ ___, ___

4.   Amounts (as of date of item #3 above):

<TABLE>
<CAPTION>
                                                                        Outstanding
                                                      Outstanding       Principal of
                   Total           Outstanding        Principal of C    C Term          Total           Total
                   B Term          Principal of B     Term Loans-       Loans-          Revolving       Acquisition
                   Commitment      Term Loans         Floating Rate     Fixed Rate      Commitment      Commitment
                   -----------     ----------         -------------     ----------      ----------      ----------
<S>                <C>             <C>                <C>               <C>             <C>             <C>  
a.  Aggregate
Amount for all
Lenders            $_________      $_________         $____________     $__________     $___________    $___________
 
 
 
b.  Assigned
Share              __________%     __________%        _____________%    ___________%    ____________%   ____________%
 
c. Amount of
Assigned Share     $_________]/5/  $_________         $____________     $__________     $___________    $___________
</TABLE>

_________________________

/4/ (...continued)
Agreement (which consent, in either case, shall not be unreasonaly withheld).

/5/  To be included in an Assignment Agreement entered into prior to the
termination of the Total B Term Commitment.
<PAGE>
 
                                                                         ANNEX I
                                                                          Page 2

 
5.   Settlement Date:
 
     _________ ___, ___
 
6.   Rate of Interest    As set forth in Section 1.08 of the Credit Agreement
     to the Assignee:    (unless otherwise agreed to by the Assignor and the
                         Assignee)./6/

7.   TF Commitment       As set forth in Section 2.01(a) of the Credit
     Commission to the   Agreement (unless otherwise agreed to by the Assignor
     Assignee:           and the Assignee)./7/

8.   RF Commitment       As set forth in Section 2.01(b) of the Credit Agreement
     Commission to the   (unless otherwise agreed to by the Assignor and the
     Assignee:           Assignee)./8/

9.   AF Commitment       As set forth in Section 2.01(c) of the Credit Agreement
     Commission to the   (unless otherwise agreed to by the Assignor and the


______________________

/6/  The Borrower and the Administrative Agent shall direct the entire amount 
of the interest to the Assignee at the rate set forth in Section 1.08 of the
Credit Agreement, with the Assignor and the Assignee effecting any agreed upon
sharing of interest through payments by the Assignee to the Assignor.

/7/  Insert "Not Applicable" in lieu of text if no portion of the Total B Term
Commitment is being assigned.  Otherwise, the Borrower and the Administrative
Agent shall direct the entire amount of the TF Commitment Commission to the
Assignee at the rate set forth in Section 2.01(a) of the Credit Agreement, with
the Assignor and the Assignee effecting any agreed upon sharing of the TF
Commitment Commission through payment by the Assignee to the Assignor.

/8/  Insert "Not Applicable" in lieu of text if no portion of the Total
Revolving Commitment is being assigned.  Otherwise, the Borrower and the
Administrative Agent shall direct the entire amount of the RF Commitment
Commission to the Assignee at the rate set forth in Section 2.01(b) of the
Credit Agreement, with the Assignor and the Assignee effecting any agreed upon
sharing of the RF Commitment Commission through payment by the Assignee to the
Assignor.
<PAGE>
 
                                                                         ANNEX I
                                                                          Page 3

     Assignee:           Assignee)./9/


10.  Notices:

     ASSIGNOR:

          ___________________
          ___________________
          ___________________
          ___________________
          Attention:
          Telephone No.:
          Facsimile No.:
          Reference:

     ASSIGNEE:

          ___________________
          ___________________
          ___________________
          ___________________
          Attention:
          Telephone No.:
          Facsimile No.:
          Reference:

11.  Payment Instructions:




_____________________

/9/  Insert "Not Applicable" in lieu of text if no portion of the Total
Acquisition Commitment is being assigned.  Otherwise, the Borrower and the
Administrative Agent shall direct the entire amount of the AF Commitment
Commission to the Assignee at the rate set forth in Section 2.01(c) of the
Credit Agreement, with the Assignor and the Assignee effecting any agreed upon
sharing of the AF Commitment Commission through payment by the Assignee to the
Assignor.
<PAGE>
 
                                                                         ANNEX I
                                                                          Page 4

     ASSIGNOR:

          ___________________
          ___________________
          ___________________
          ___________________
          ABA No.:
          Account No.:
          Reference:
          Attention:


      ASSIGNEE:

          ___________________
          ___________________
          ___________________
          ___________________
          ABA No.:
          Account No.:
          Reference:
          Attention:
<PAGE>
 
                                                                         ANNEX I
                                                                          Page 5

  Accepted and Agreed:

     [NAME OF ASSIGNEE]                 [NAME OF ASSIGNOR]         
                                                                   
                                                                   
     By: ________________________       By: ________________________
       Name:                              Name:                    
       Title:                             Title:                    

<PAGE>
 
                                                                   EXHIBIT 10.10


                            STOCKHOLDERS' AGREEMENT

          STOCKHOLDERS' AGREEMENT, dated as of July 31, 1997, among MJD
Communications, Inc., a Delaware corporation (the "Company"); Carousel Capital
                                                   -------                    
Partners, L.P., a Delaware limited partnership ("Carousel"); Kelso Investment
                                                 --------                    
Associates V, L.P., a Delaware limited partnership ("KIA V"), and Kelso Equity
                                                     -----                    
Partners V, L.P., a Delaware limited partnership ("KEP V", together with KIA V,
                                                   -----                       
"Kelso");  MJD Partners, L.P., a Delaware limited partnership ("MJD Partners");
 -----                                                          ------------   
MJD Partners, Inc., a Delaware corporation ("MJD Inc."); Bugger Associates,
                                             --------                      
Inc., a Delaware corporation ("Bugger"), Daniel G. Bergstein ("Bergstein"),
                               ------                          ---------   
Meyer Haberman, Eugene B. Johnson ("Johnson") and Jack H. Thomas ("Thomas",
                                    -------                        ------  
collectively, the "MJD Principals"); Joel Bergstein, Michael Bergstein and Lindy
                   --------------                                               
Sobel Bergstein; and those employees of the Company listed on Schedule A
attached hereto (collectively, the "Management Stockholders").  Schedule A shall
                                    -----------------------                     
be updated from time to time to include each Management Stockholder who becomes
a party to this Agreement after the date hereof pursuant to Section 14.
Carousel and Kelso are hereinafter referred to collectively as the "Investor
                                                                    --------
Stockholders".  For purposes of this Agreement, KIA V and KEP shall be deemed to
- ------------                                                                    
be a single Investor Stockholder.  The Investor Stockholders, MJD Partners,
Bugger, Johnson, Thomas and the Management Stockholders are hereinafter referred
to collectively as the "Stockholders".
                        ------------  

          Capitalized terms used herein without definition are defined in
Section 16.

          NOW, THEREFORE, in consideration of the mutual covenants and
obligations set forth in this Agreement, the parties hereto agree as follows:

          1.  Restrictions on Transfer of Common Stock.   1.1  Restrictions on
              ----------------------------------------         ---------------
Transfers by Kelso.  (a)  Prior to the fourth anniversary of the date hereof, no
- ------------------                                                              
shares of Common Stock or any interest therein now or hereafter owned by Kelso
may be Transferred, except for any (i) involuntary Transfer to a third party
                                    -                                       
permitted under Section 5, (ii) sale to one or more third parties pursuant to
                            --                                               
Section 1.1(b), Section 3.3 ("Tag-Along Rights"), Section 3.4 ("Drag-Along
Rights") or Section 6 ("Auction Sale Procedure") or (iii) Transfer to a Kelso
                                                     ---                     
Permitted Assignee that agrees to be bound by the terms of this Agreement
pursuant to Section 15.4.

          (b)  At any time after a Board Event (other than as a result of the
operation of clause (iii) or (v) of the definition thereof), Kelso may sell any
shares of Common Stock held by it to one or more third parties, provided that
                                                                --------     
Carousel consents 

<PAGE>
 
in writing to such sale and such sale is made in compliance with the provisions
of Section 3.2 ("Right of First Offer") and Section 3.3 ("Tag-Along Rights").

          1.2. Restrictions on Transfers by Carousel.  (a)  Prior to the fourth
               -------------------------------------                           
anniversary of the date hereof, no shares of Common Stock or any interest
therein now or hereafter owned by Carousel may be Transferred, except for any
(i) involuntary Transfer to a third party permitted under Section 5, (ii) sale
 -                                                                    --      
to one or more third parties pursuant to Section 1.2(b), Section 3.3 ("Tag-Along
Rights"), Section 3.4 ("Drag-Along Rights") or Section 6 ("Auction Sale
Procedure") or (iii) Transfer to a Carousel Permitted Assignee that agrees to be
                ---                                                             
bound by the terms of this Agreement pursuant to Section 15.4.

          (b)  At any time after a Board Event (other than as a result of the
operation of clause (iii) or (v) of the definition thereof), Carousel may sell
any shares of Common Stock held by it to one or more third parties, provided
                                                                    --------
that Kelso consents in writing to such sale and such sale is made in compliance
with the provisions of Section 3.2 ("Right of First Offer") and Section 3.3
("Tag-Along Rights").

          1.3. Restrictions on Transfers by MJD Partners and Bugger.  (a)  Prior
               ----------------------------------------------------             
to the fourth anniversary of the date hereof, no shares of Common Stock or any
interest therein now or hereafter owned by MJD Partners or Bugger may be
Transferred, except for any (i) involuntary Transfer to a third party permitted
                             -                                                 
under Section 5, (ii) sale to one or more third parties pursuant to Section 3.3
                  --                                                           
("Tag-Along Rights"), Section 3.4 ("Drag-Along Rights") or Section 6 ("Auction
Sale Procedure") or (iii) sale pursuant to Section 1.5 ("De Minimis Transfer").
                     ---                                                       

          (b)  If the Investor Stockholders collectively increase their
investment in the Company by $10 million or more in accordance with Section 8
prior to the fourth anniversary of the date hereof, then, after the restrictions
set forth in Section 1.3(a) lapse, no shares of Common Stock or any interest
therein now or hereafter owned by MJD Partners may be Transferred until such
time as the Investor Stockholders (and their respective Permitted Assignees)
collectively own less than 50% of the greatest number of shares of Common Stock
owned by the Investor Stockholders at any time prior to the fourth anniversary
of the date hereof (the "50% Condition"), except for any (i) involuntary
                         -------------                    -             
Transfer to a third party permitted under Section 5, (ii) Transfer, authorized
                                                      --                      
by the prior written approval (not to be unreasonably withheld) of the Board
(excluding members who are designees of MJD Partners), to an Affiliate of MJD
Partners that agrees to be bound by the terms of this Agreement pursuant to 
Section 15.4, (iii) sale to one or more third parties pursuant to Section 3.3
               ---                                                           
("Tag-Along Rights"), Section 3.4 ("Drag-Along Rights") or Section 6 ("Auction
Sale Procedure"), 

                                       2
<PAGE>
 
(iv) sale pursuant to a Registration in accordance with the Registration Rights
 --
Agreement or (v) sale pursuant to Section 1.5 ("De Minimis Transfer").
              -

          1.4. Restrictions on Transfers by MJD Principals.  (a)  Until such
               --------------------------------------------                 
time as the 50% Condition shall have been satisfied, no interest in MJD Partners
now or hereafter owned by any MJD Principal may be Transferred, except, subject
to Section 15.4, for (i) any Transfer pursuant to Section 1.5 ("De Minimis
                      -                                                   
Transfer"), (ii) any Transfer from one MJD Principal to another MJD Principal or
             --                                                                 
to a Management Stockholder, provided that, in the case of a Transfer by Johnson
                             --------                                           
or Thomas, such Transfer must be authorized by the prior written approval of the
Board (excluding members who are designees of MJD Partners), and in the case of
a Transfer by any other MJD Principal, such Transfer must not be consummated
until after receipt by the Company of reasonable prior written notice thereof,
(iii) any Transfer for estate-planning purposes of such MJD Principal, provided
 ---                                                                   --------
that such Transfer must be authorized by the prior written approval (not to be
unreasonably withheld) of the Board (excluding members who are designees of MJD
Partners) (other than a Transfer by a Founder after receipt by the Company of
reasonable prior written notice of the material terms of such Transfer), to (A)
                                                                             - 
a trust under which the distribution of such interest in MJD Partners may be
made only to beneficiaries who are such MJD Principal, his spouse, his parents,
members of his immediate family or his lineal descendants, (B) a charitable
                                                            -              
remainder trust, the income from which will be paid to such MJD Principal during
his life, (C) a corporation, the stockholders of which are only such MJD
           -                                                            
Principal, his spouse, his parents, members of his immediate family or his
lineal descendants or (D) a partnership or limited liability company, the
                       -                                                 
partners or members of which are only such MJD Principal, his spouse, his
parents, members of his immediate family or his lineal descendants or (iv) any
                                                                       --     
Transfer, in case of his death, by will or by the laws of intestate succession,
to his executors, administrators, testamentary trustees, legatees or
beneficiaries.  Any transferee pursuant to clause (ii) above shall be deemed to
be a "MJD Principal" for all purposes of this Agreement.

          (b)  Until such time as the 50% Condition shall have been satisfied,
no interest in MJD Inc. now or hereafter owned by any MJD Principal may be
Transferred, except, subject to Section 15.4, for (i) any Transfer from one MJD
                                                   -                           
Principal to another MJD Principal, provided that, in the case of a Transfer by
                                    --------                                   
Johnson or Thomas, such Transfer must be authorized by the prior written
approval of the Board (excluding members who are designees of MJD Partners), and
in the case of a Transfer by any other MJD Principal, such Transfer may not be
consummated until after receipt by the Company of reasonable prior written
notice thereof, (ii) any Transfer for estate-planning purposes of such MJD
                 --                                                       
Principal, authorized by the prior written approval (not to be unreasonably
withheld) of the Board (excluding members who are designees of MJD Partners)
(other than a Transfer by a Founder after receipt 

                                       3
<PAGE>
 
by the Company of reasonable prior written notice of the material terms of such
Transfer), to (A) a trust under which the distribution of such interest in MJD
               -
Inc. may be made only to beneficiaries who are such MJD Principal, his spouse,
his parents, members of his immediate family or his lineal descendants, (B) a
                                                                         - 
charitable remainder trust, the income from which will be paid to such MJD
Principal during his life, (C) a corporation, the stockholders of which are only
                            -
such MJD Principal, his spouse, his parents, members of his immediate family or
his lineal descendants or (D) a partnership or limited liability company, the
                           -
partners or members of which are only such MJD Principal, his spouse, his
parents, members of his immediate family or his lineal descendants or (iii) any
                                                                       ---
Transfer, in case of his death, by will or by the laws of intestate succession,
to his executors, administrators, testamentary trustees, legatees or
beneficiaries.

          (c)  So long as this Agreement shall remain in full force and effect,
no interest in MJD Partners now or hereafter owned by MJD Inc. may be
Transferred.

          1.5  De Minimis Transfers.  MJD Partners and the Founders may Transfer
               --------------------                                             
shares of Common Stock owned directly by them and the Founders may Transfer
limited partnership interests in MJD Partners, in either case, to one or more
third parties, provided that, in the aggregate (considering all Transfers by MJD
               --------                                                         
Partners and the Founders), the sum of all such Transferred shares of Common
Stock and Indirect Shares of Common Stock (as defined below) constitute no more
than the lesser of (a) shares of Common Stock with a Fair Market Value (as
                    -                                                     
defined in Section 4.7) of $5 million and (b) 20% of the aggregate number of
                                           -                                
shares of Common Stock owned by the Founders and MJD Partners on the Closing
Date.  "Indirect Shares of Common Stock" shall mean the number of shares of
Common Stock indirectly represented by the limited partnership interests in MJD
Partners Transferred pursuant to this Section 1.5.

          1.6  Restrictions on Transfers by Management Stockholders.  Until such
               ----------------------------------------------------             
time as the 50% Condition shall have been satisfied, no Management Stockholder
may Transfer any shares of Common Stock or any interest therein now or hereafter
owned by such Management Stockholder except, subject to Section 15.4, (a) for
                                                                       -     
any (i) Transfer from a Management Stockholder to MJD Partners or to any MJD
     -                                                                      
Principal, provided that such Transfer must be authorized by the prior written
           --------                                                           
approval (not to be unreasonably withheld) of the Board (excluding members who
are designees of MJD Partners), (ii) involuntary Transfer to a third party
                                 --                                       
permitted under Section 5, (iii) sale to one or more third parties pursuant to
                            ---                                               
Section 3.3 ("Tag-Along Rights"), Section 3.4 ("Drag-Along Rights") or Section 6
("Auction Sale Procedure") or (iv) sale pursuant to a Registration in accordance
                               --                                               
with the Registration Rights Agreement, (b) for any Transfer for estate-planning
                                         -                                      
purposes of such Management Stockholder, 

                                       4
<PAGE>
 
authorized by the prior written approval (not to be unreasonably withheld) of
the Board (excluding such Management Stockholder and other members of the Board
who are designees of MJD Partners), to (i) a trust under which the distribution
                                        -
of the shares of Common Stock may be made only to beneficiaries who are such
Management Stockholder, his or her spouse, his or her parents, members of his or
her immediate family or his or her lineal descendants, (ii) a charitable
                                                        --
remainder trust, the income from which will be paid to such Management
Stockholder during his or her life, (iii) a corporation, the stockholders of
                                     ---
which are only such Management Stockholder, his or her spouse, his or her
parents, members of his or her immediate family or his or her lineal descendants
or (iv) a partnership or limited liability company, the partners or members of
    --
which are only such Management Stockholder, his or her spouse, his or her
parents, members of his or her immediate family or his or her lineal descendants
or (c) for any Transfer in case of his or her death, by will or by the laws of
    -
intestate succession, to his or her executors, administrators, testamentary
trustees, legatees or beneficiaries.

          1.7. Treatment of Certain Bergstein Family Members.  Each of Joel
               ---------------------------------------------               
Bergstein, Michael Bergstein and Lindy Sobel Bergstein hereby acknowledges that
all shares of Common Stock and all interests therein now or hereafter owned by
such Person shall for all purposes of this Agreement be treated as if such
shares and interests were owned by Bugger and each such Person has as of the
date hereof granted Bugger an irrevocable power of attorney directing Bugger to
exercise all rights and perform all obligations hereunder and under the
Registration Rights Agreement in respect of such Person's shares and interests
so long as this Agreement shall remain in full force and effect.

          2.  Sales by MJD Partners to Third Parties.   2.1  General.  (a)  At
              --------------------------------------         -------          
any time after the restrictions on Transfers set forth in Section 1.3 are no
longer applicable, MJD Partners may sell any shares of Common Stock held by it
to one or more third parties, provided that such sale is made in compliance with
                              --------                                          
the provisions of Section 2.2 ("Right of First Refusal") and Section 2.3 ("Tag-
Along Rights").  For purposes of this Section 2, a sale to a third party shall
not include a Transfer by MJD Partners (i) pursuant to a Registration in
                                        -                               
accordance with the Registration Rights Agreement or (ii) pursuant to Section
                                                      --                     
1.5 ("De Minimis Transfer"), Section 3.3 ("Tag-Along Rights"), Section 3.4
("Drag-Along Rights"), Section 5 ("Involuntary Transfers") or Section 6
("Auction Sale Procedure").

          (b)  Notwithstanding the foregoing provisions of Section 2.1(a), in
the event that the 50% Condition shall have been satisfied at the time the
restrictions on Transfers set forth in Section 1.3 are no longer applicable,
then MJD Partners shall not be required to comply with the provisions of Section
2.2 and may sell any shares of 

                                       5
<PAGE>
 
Common Stock held by it to one or more third parties, provided that such sale is
                                                      --------
made in compliance with Section 2.3 ("Tag-Along Rights") and Section 15.4.

          2.2. Right of First Refusal.  (a)  Procedure.  Subject to Section
               ----------------------        ---------                     
2.1(b), if at any time after the restrictions on Transfers set forth in Section
1.3 are no longer applicable MJD Partners shall have received a bona fide offer
                                                                ---- ----      
or offers from a third party or parties to purchase any shares of Common Stock,
then prior to selling such shares of Common Stock to such third party or parties
MJD Partners shall deliver to the Company and the Investor Stockholders a letter
signed by it setting forth:

          (i)   the name(s) of such third party or parties;

          (ii)  the purchase price per share of Common Stock offered by such
     third party or parties;

          (iii) all material terms and conditions contained in the offer of the
     third party or parties;

          (iv)  MJD Partners' offer (irrevocable by its terms for 30 days
     following receipt) to sell to the Company all (but not less than all) of
     the shares of Common Stock covered by the offer of the third party or
     parties, for a purchase price per share and on other terms and conditions
     not less favorable to the Company than those contained in the offer of the
     third party or parties (the "Offer"); and
                                  -----       

          (v)   closing arrangements and a closing date not less than 60 nor
     more than 90 days following the delivery of such letter (or such later date
     as is necessary to obtain all requisite governmental and regulatory
     approvals and consents, provided MJD Partners covenants to use commercially
                             --------
     reasonable efforts to obtain such approvals and consents) for any purchase
     and sale that may be effected by the Company.

          (b)  Effecting Sales.  Subject to Sections 2.2(c) and (d), if, upon
               ---------------                                               
the expiration of 30 days following receipt by the Company and the Investor
Stockholders of the letter described in Section 2.2(a), neither the Company nor
any Permitted Assignee as provided in Sections 2.2(c) and (d) shall have
accepted the Offer, MJD Partners shall have the right, subject to Section 2.3,
to sell to such third party or parties all (but not less than all) of the shares
of Common Stock covered by the Offer, for a purchase price and on other terms
and conditions no less favorable to MJD Partners than those contained in the
Offer.  If MJD Partners has not signed a binding purchase agreement (subject to
customary closing conditions) with such third party or 

                                       6
<PAGE>
 
parties within 45 days of the expiration of such 30 day period or if such sale
has not been completed within 120 days (or such later date as is necessary to
obtain all requisite governmental and regulatory approvals and consents) from
the expiration of such 30 day period, the shares of Common Stock covered by such
Offer may not thereafter be sold by MJD Partners unless the procedures set forth
in this Section 2.2 shall have again been complied with. If the Company or any
Permitted Assignee shall have accepted the Offer, the closing of the purchase
and sale pursuant to such acceptance shall take place as set forth in MJD
Partners' letter to the Company and the Investor Stockholders.

          (c)  Right of Investor Stockholders to Purchase.  In the event that
               ------------------------------------------                    
neither Investor Stockholder shall have Transferred any shares of Common Stock
or any interest therein now or hereafter owned by it to any Person (other than
to a Permitted Assignee) at the time of the Offer and the Company shall not have
exercised its right to accept the Offer within 20 days of receipt by the Company
and the Investor Stockholders of the letter giving rise to such right, then the
Investor Stockholders shall have the right to require the Company to assign such
right to them or one or more Permitted Assignees and the Investor Stockholders
or such Permitted Assignees, as the case may be, shall have the right to
purchase that portion of the shares covered by the Offer equal to their pro rata
                                                                        --- ----
interest in the Company (based on the percentage of outstanding shares of Common
Stock owned by each of them on the date of such Offer) or such other portion of
such shares as the Investor Stockholders may agree upon, provided that such
                                                         --------          
right must be exercised prior to the expiration of 30 days following receipt by
the Company and the Investor Stockholders of the letter described in Section
2.2(a).

          (d)  Right of One Investor Stockholder to Purchase.  In the event that
               ---------------------------------------------                    
only one Investor Stockholder shall have Transferred any shares of Common Stock
or any interest therein now or hereafter owned by it to any Person (other than
to a Permitted Assignee) at the time of the Offer and the Company shall not have
exercised its right to accept the Offer within 20 days of receipt by the Company
and the Investor Stockholders of the letter giving rise to such right, then the
Investor Stockholder which has not Transferred any shares of Common Stock or any
interest therein now or hereafter owned by it to any Person (other than to a
Permitted Assignee) shall have the right to require the Company to assign such
right to it or its Permitted Assignees and such Investor Stockholder or its
Permitted Assignees, as the case may be, shall have the right to purchase the
shares covered by the Offer, provided that such right must be exercised prior to
                             --------                                           
the expiration of 30 days following receipt by the Company and the Investor
Stockholders of the letter described in Section 2.2(a).  Such Investor
Stockholder may, with the consent of the other Investor Stockholder, assign its
right to purchase all or a portion of the shares covered by the Offer to the
other Investor 

                                       7
<PAGE>
 
Stockholder or its Permitted Assignees, provided that such right must be
                                        --------
exercised prior to the expiration of 30 days following receipt by the Company
and the Investor Stockholders of the letter described in Section 2.2(a).

          2.3. Tag-Along Rights.  If neither the Company nor any Permitted
               ----------------                                           
Assignee shall have accepted the Offer pursuant to Section 2.2 or if Section
2.1(b) is applicable and MJD Partners shall have agreed to sell to a third party
or parties the shares of Common Stock covered by the Offer or otherwise if
Section 2.1(b) is applicable and such shares represent more than 50% of the
aggregate number of shares of Common Stock owned by MJD Partners on the Closing
Date, then MJD Partners must offer each Stockholder a pro rata right to
                                                      --- ----         
participate in such sale with respect to such Stockholder's shares of Common
Stock, for a purchase price per share of Common Stock equal to the purchase
price per share of Common Stock being paid for MJD Partners' shares and on other
terms and conditions not less favorable to such Stockholder than those
applicable to MJD Partners.

          3.  Sales by Investor Stockholders to Third Parties.   3.1  General.
              -----------------------------------------------         -------  
At any time after the fourth anniversary of the date hereof, Carousel and Kelso
may each sell any shares of Common Stock held by it to one or more third
parties, provided that such sale is made in compliance with the provisions of
         --------                                                            
Section 3.2 ("Right of First Offer") and Section 3.3 ("Tag-Along Rights").  For
purposes of this Section 3, a sale to a third party shall not include a Transfer
by either Investor Stockholder (a) to any Permitted Assignee, (b) pursuant to
                                -                              -             
Section 2.3 ("Tag-Along Rights"), (c) pursuant to a Registration in accordance
                                   -                                          
with the Registration Rights Agreement or (d) pursuant to Section 5
                                           -                       
("Involuntary Transfers") or Section 6 ("Auction Sale Procedure").

          3.2. Right of First Offer.  (a)  Procedure.  Subject to Section 3.1,
               --------------------        ---------                          
if at any time after the date hereof, (i) either Investor Stockholder desires to
                                       -                                        
sell any of the shares of Common Stock held by it (the "Offering Investor
                                                        -----------------
Stockholder") and (ii) MJD Partners continues to own at least 20% of the
- -----------        --                                                   
aggregate number of shares of Common Stock owned by MJD Partners on the Closing
Date, then prior to selling such shares of Common Stock to any third party or
parties, the Offering Investor Stockholder shall deliver to the other Investor
Stockholder and MJD Partners a letter signed by it setting forth the number of
shares of Common Stock the Offering Investor Stockholder desires to sell (the
"Sale Notice").  Within 30 days of receipt of the Sale Notice, the other
 -----------                                                            
Investor Stockholder and MJD Partners may make an offer to purchase (i) the
                                                                     -     
portion of such shares of Common Stock offered by the Offering Investor
Stockholder equal to their pro rata interest in the Company (based on the
                           --- ----                                      
percentage of outstanding shares of Common Stock owned by each of them on the
date of the Sale Notice), (ii) such other portion of such shares as the other
                           --                                                
Investor Stockholder and MJD Partners may agree upon or (iii), in the event
                                                         ---               
either the other Investor Stockholder or MJD Partners does 

                                       8
<PAGE>
 
not exercise such right, all shares of Common Stock offered by the Offering
Investor Stockholder, by delivering written notice to the Offering Investor
Stockholder setting forth:

          (i)    the number of shares of Common Stock to be purchased and the
     prospective purchase price per share of Common Stock;

          (ii)   any other material terms and conditions to such purchase;

          (iii)  evidence reasonably satisfactory to such Investor Stockholder
     for the financing of such purchase; and

          (iv)   closing arrangements and a closing date not less than 30 nor 
     more than 90 days following the delivery of such notice (or such later date
     as is necessary to obtain all requisite governmental and regulatory
     approvals and consents).

          (b)   Effecting Sales.  If, upon the expiration of 30 days following
                ---------------                                               
receipt by the other Investor Stockholder and MJD Partners of the Sale Notice,
neither the other Investor Stockholder nor MJD Partners shall have made an offer
to purchase the shares of Common Stock covered by the Sale Notice, the Offering
Investor Stockholder may sell to a third party or parties any of the shares of
Common Stock covered by the Sale Notice for whatever price and upon whatever
other terms and conditions the Offering Investor Stockholder may agree to,
provided that the Offering Investor Stockholder and the third party execute a
- --------                                                                     
binding purchase agreement (subject to customary closing conditions) within 120
days after the expiration of such 30 day period and consummate the closing
thereunder within 120 days (or such later date as is necessary to obtain all
requisite governmental and regulatory approvals and consents) from the execution
of the binding purchase agreement.  If the other Investor Stockholder and/or MJD
Partners shall have made an offer to purchase the shares of Common Stock covered
by the Sale Notice, then the Offering Investor Stockholder may either (i) accept
                                                                       -        
such offer and the sale of such shares of Common Stock shall be consummated as
soon as practicable after the delivery of a notice of acceptance by the Offering
Investor Stockholder, but in any event within 90 days of the delivery of the
Sale Notice (or such later date as is necessary to obtain all requisite
governmental and regulatory approvals and consents), or (ii) reject such offer,
                                                         --                    
by written notice delivered to the other Investor Stockholder and MJD Partners
within 20 days of the delivery to the Offering Investor Stockholder of such
offer, in which case the Offering Stockholder shall have the right to sell to a
third party or parties all (but not less than all) of the shares of Common Stock
covered by the Sale Notice, for a purchase price and on other terms and
conditions no less favorable to the Offering Investor Stockholder than those

                                       9
<PAGE>
 
contained in the other Investor Stockholder's and/or MJD Partners' offer,
provided that the Offering Investor Stockholder and the third party purchaser
- --------                                                                     
execute a binding purchase agreement (subject to customary closing conditions)
within 120 days of the other Investor Stockholder's and/or MJD Partners' offer
and consummate the closing thereunder within 120 days (or such later date as is
necessary to obtain all requisite governmental and regulatory approvals and
consents) from the execution of the binding purchase agreement.  If the Offering
Investor Stockholder and a third party purchaser do not execute such a purchase
agreement or close such transaction within the time periods set forth in the
proviso of the preceding sentence, then the shares of Common Stock covered by
such Sale Notice may not thereafter be sold by the Offering Investor Stockholder
unless the procedures set forth in this Section 3.2 shall have again been
complied with.  Any offer by the other Investor Stockholder or MJD Partners
pursuant to this Section 3.2(b) shall not preclude either of them from making
additional offers for such shares or participating in any auction relating to
the sale of any such shares.

          (c)  Sale of Assets.  The provisions of Sections 3.2(a) and (b) shall
               --------------                                                  
apply, mutatis mutandis, in the event of a proposed sale of all or substantially
       ------- --------                                                         
all of the assets of the Company and its subsidiaries.

          3.3. Tag-Along Rights.  If at any time after the fourth anniversary of
               ----------------                                                 
the date hereof or as otherwise permitted by Section 1.1(b) or 1.2(b), as the
case may be, either Carousel or Kelso shall have agreed to sell to one or more
third parties any shares of Common Stock owned by such Investor Stockholder (the
"Selling Investor Stockholder"), which together with all shares of Common Stock
 ----------------------------                                                  
previously sold by the Selling Investor Stockholder, represent more than 50% of
the aggregate number of shares of Common Stock owned by the Selling Investor
Stockholder on the Closing Date, then the Selling Investor Stockholder must
offer the other Stockholders a pro rata right to participate in such sale with
                               --- ----                                       
respect to the other Stockholders' shares of Common Stock, for a purchase price
per share of Common Stock equal to the purchase price per share of Common Stock
being paid for the Selling Investor Stockholder's shares and on other terms and
conditions not less favorable to the other Stockholders than those applicable to
the Selling Investor Stockholder.

          3.4. Drag-Along Rights.  (a)  If at any time after the fourth
               -----------------                                       
anniversary of the date hereof or as otherwise permitted by Section 1.1(b) or
1.2(b), Carousel or Kelso, as the case may be, proposes to sell to one or more
third parties all of the shares of Common Stock then owned by it, then, if
requested by Carousel or Kelso, as the case may be, the other Stockholders so
requested shall be required to join Carousel or Kelso, as the case may be, in
such sale on a pro rata basis for a purchase price per share of Common Stock and
               --- ----                                                         
on other terms and conditions not less favorable to the 

                                       10
<PAGE>
 
other Stockholders so requested than those applicable to Carousel or Kelso, as
the case may be.

          (b)  If at any time after the fourth anniversary of the date hereof
(i) MJD Partners owns at least 50% of the aggregate number of shares owned by
 -                                                                           
MJD Partners and the Founders on the Closing Date and (ii) Carousel and Kelso
                                                       --                    
collectively own less than 10% of the issued and outstanding shares of Common
Stock, then, if MJD Partners proposes to sell to one or more third parties all
of the shares of Common Stock then owned by it, then, if requested by MJD
Partners, the other Stockholders so requested shall be required to join MJD
Partners in such sale on a pro rata basis for a purchase price per share of
                           --- ----                                        
Common Stock and on other terms and conditions not less favorable to the other
Stockholders so requested than those applicable to MJD Partners.

          4.  Management Stockholders.   4.1.  Sale by Management Stockholders 
              -----------------------         --------------------------------
to the Company.  Subject to all subsections of this Section 4 and Section 7, 
- --------------                                                              
each of the Management Stockholders shall have the right to sell to the Company,
and the Company shall have the obligation to purchase from such Management
Stockholder, all (but not less than all) of such Management Stockholder's shares
of Common Stock at their Fair Market Value (as defined in Section 4.7) if the
employment of such Management Stockholder with the Company or any of its
subsidiaries is terminated by the Company or any such subsidiary without Cause
or terminates as a result of (i) the death or Disability of such Management
                              -                                            
Stockholder, (ii) the resignation of such Management Stockholder for Good Reason
              --                                                                
or (iii) the retirement of such Management Stockholder upon or after reaching
    ---                                                                      
the age of 65 ("Retirement").
                ----------   

          4.2. Notice to the Company.  If any Management Stockholder desires to
               ---------------------                                           
sell shares of Common Stock to the Company pursuant to Section 4.1, he or she
(or his or her estate, trust, corporation or partnership, as the case may be)
shall notify the Company not more than 60 days after the occurrence of the event
giving rise to such Management Stockholder's right to sell his or her shares of
Common Stock and shall specify the number of shares of Common Stock such
Management Stockholder owns.

          4.3. Right of the Company to Purchase.  Subject to all subsections of
               --------------------------------                                
this Section 4 and Section 7, the Company shall have the right to purchase from
a Management Stockholder, and such Management Stockholder shall have the
obligation to sell to the Company, all (but not less than all) of such
Management Stockholder's shares of Common Stock:

          (a)  at the Fair Market Value of the shares of Common Stock to be
     purchased if such Management Stockholder's employment with the Company or
     any of its subsidiaries is terminated as a result of (i) the termination by
                                                           -                    
     the

                                       11
<PAGE>
 
     Company or any such subsidiary of such employment without Cause, (ii)
                                                                       -- 
     the death or Disability of such Management Stockholder, (iii) the
                                                              ---     
     resignation of such Management Stockholder for Good Reason or (iv) the
                                                                    --     
     Retirement of such Management Stockholder;

          (b)  at the lesser of the Fair Market Value and the Carrying Value of
     the shares of Common Stock to be purchased if such Management Stockholder's
     employment with the Company or any of its subsidiaries is terminated by the
     Company or any such subsidiary for Cause; or

          (c)  at the Fair Market Value or the Carrying Value of the shares of
     Common Stock to be purchased, in the sole discretion of the Board
     (excluding members who are designees of MJD Partners), if such Management
     Stockholder's employment with the Company or any of its subsidiaries is
     terminated for any reason other than as a result of an event described in
     subparagraph (a)(i), (a)(ii), (a)(iii) or (a)(iv) or in paragraph (b) of
     this Section 4.3;

provided that, in the case of (i) shares of Common Stock owned by John P. Duda
- --------                       -                                              
and Walter E. Leach, Jr. on the Closing Date and (ii) shares of Common Stock
                                                  --                        
underlying options and warrants granted to John P. Duda and Walter E. Leach, Jr.
by the Company prior to the date hereof to purchase shares of Common Stock to be
purchased if such Management Stockholder's employment with the Company or any of
its subsidiaries is terminated for any reason, at the Fair Market Value of such
shares, and in the case of such options, less the exercise price of such
options.

          4.4. Notice to Management Stockholders.  If the Company desires to
               ---------------------------------                            
purchase shares of Common Stock from a Management Stockholder pursuant to
Section 4.3, it shall notify such Management Stockholder (or his or her estate,
as the case may be) not more than 60 days after the occurrence of the event
giving rise to the Company's right to acquire such Management Stockholder's
shares of Common Stock.

          4.5. Payment.  (a)  Subject to Section 7, payment for shares of Common
               -------                                                          
Stock sold by a Management Stockholder pursuant to Section 4.1 shall be made on
the date 30 days (or the first business day thereafter if the 30th day is not a
business day) following the date of the receipt by the Company of such
Management Stockholder's notice; provided, however, that if such payment is
                                 --------  -------                         
being made pursuant to Section 4.7(c), then such payment shall be made on the
date that is 30 days (or the first business day thereafter if the 30th day is
not a business day) following the date of the determination of Fair Market
Value.

                                       12
<PAGE>
 
          Any payments based on Fair Market Value required to be made by the
Company under this Section 4.5(a) shall accrue simple interest at a rate per
annum of 8% from the date of termination of employment of the relevant
Management Stockholder to the date the Company has paid in full for all of the
shares of Common Stock.  All payments of interest accrued hereunder shall be
paid only at the date of payment by the Company for the shares of Common Stock
being purchased.

          (b)  Subject to Section 7, payment for shares of Common Stock
purchased by the Company pursuant to Section 4.3(a) shall be made on the date 30
days (or the first business day thereafter if the 30th day is not a business
day) following the date of the receipt by a Management Stockholder of the
Company's notice pursuant to Section 4.4; provided, however, that if such
                                          --------  -------              
payment is being made pursuant to Section 4.7(c), then such payment shall be
made on the date that is 30 days (or the first business day thereafter if the
30th day is not a business day) following the date of the determination of Fair
Market Value.

          Subject to Section 7 and in the sole discretion of the Board
(excluding members who are designees of MJD Partners), payment for shares of
Common Stock purchased by the Company pursuant to Section 4.3(b) or 4.3(c) shall
be made as follows (or on a more accelerated schedule if the Board (excluding
members who are designees of MJD Partners) so elects):

          (i)   if the date of termination occurs prior to the third anniversary
     of the Closing Date, then one-third of the purchase price of the purchased
     shares shall be paid within 30 days following each of the third, fourth and
     fifth anniversaries of the Closing Date;

          (ii)  if the date of termination occurs on or after the third
     anniversary of the Closing Date and prior to the fourth anniversary of the
     Closing Date, then (A) two-thirds of the purchase price of the purchased
                         -                                                   
     shares shall be paid within 30 days following such fourth anniversary and
                                                                              
     (B) one-third of the purchase price of the purchased shares shall be paid
     --                                                                       
     within 30 days following the fifth anniversary of the Closing Date;

          (iii) if the date of termination occurs on or after the fourth
     anniversary of the Closing Date and prior to the fifth anniversary of the
     Closing Date, then the purchase price of the purchased shares shall be paid
     within 30 days following such fifth anniversary; and

          (iv)  if the date of termination occurs on or after the fifth
     anniversary of the Closing Date, then the purchase price of the purchased
     shares shall be paid 

                                       13
<PAGE>
 
     contemporaneously with the surrender of the certificates representing the 
     purchased shares.

          Any payments based on Fair Market Value required to be made by the
Company under this Section 4.5(b) shall accrue simple interest at a rate per
annum of 8% on the amounts not paid from the date of termination of employment
to the date the Company makes such payments.  All payments of interest accrued
hereunder shall be paid only at the date or dates of payment by the Company for
the shares of Common Stock being purchased.

          4.6. Appraisal.  The Company shall engage, from time to time, but not
               ---------                                                       
less often than within 90 days after every Fiscal Year, commencing with the
Fiscal Year ending on December 31, 1997, Houlihan Lokey Howard & Zukin or such
other recognized independent valuation consultant or appraiser of national
standing reasonably satisfactory to the Investor Stockholders and MJD Partners
(the "Appraiser") to appraise the Fair Market Value of the Company and the
      ---------                                                           
shares of Common Stock as of the last day of the Fiscal Year then most recently
ended or, at the request of the Company, as of any more recent date (the
"Appraisal Date") and to prepare and deliver a report to the Company describing
- ---------------                                                                
the results of such appraisal (the "Appraisal").  The Company shall bear the
                                    ---------                               
fees and expenses of each Appraisal.

          4.7. Fair Market Value.  (a)  The "Fair Market Value" of any share of
               -----------------             -----------------                 
Common Stock being purchased by or sold to the Company (or to any Permitted
Assignee if the right to purchase has been assigned to any Permitted Assignee)
pursuant to this Section 4 shall be (i) the fair market value of the entire
                                     -                                     
Common Stock equity interest of the Company taken as a whole, without additional
premiums for control or discounts for minority interests or restrictions on
transfer, divided by (ii) the number of outstanding shares of Common Stock,
                      --                                                   
calculated on a fully-diluted basis.  Except as set forth in subsections (b) and
(c) of this Section 4.7, the Fair Market Value of any share of Common Stock
shall be calculated with reference to the most recent Appraisal and as of the
most recent Appraisal Date prior to termination of the relevant Management
Stockholder's employment (or as of the first Appraisal and the first Appraisal
Date in the event that such termination occurs prior to December 31, 1997).

          (b)  For the purposes of Section 5 ("Involuntary Transfers"), the Fair
Market Value of any share of Common Stock shall be calculated with reference to
the most recent Appraisal and as of the most recent Appraisal Date prior to the
date of the Involuntary Transfer (or as of the first Appraisal and the first
Appraisal Date in the event that such Involuntary Transfer occurs prior to
December 31, 1997).

                                       14
<PAGE>
 
          (c)  Beginning with the Fiscal Year commencing January 1, 1998, if the
applicable date of termination of the relevant Management Stockholder's
employment is on or after the first day of the seventh month of any Fiscal Year,
the Fair Market Value of any share of Common Stock shall be calculated with
reference to the most recent Appraisal and as of the most recent Appraisal Date
prior to such date of termination of employment, plus (or minus) the product of
(i) the increase (decrease) in the Fair Market Value of any share to be so
 -                                                                        
purchased from such Appraisal Date prior to the date of termination of
employment to the Appraisal Date next following such date of termination of
employment hereunder and (ii) a fraction, the denominator of which is the number
                          --                                                    
of days in the period between the Appraisal Dates preceding and following the
date of termination of employment hereunder and the numerator of which is the
number of days elapsed from the Appraisal Date at the beginning of such period
through such date of termination of employment.

          4.8. Notice to Stockholders.  Promptly after receipt of each
               ----------------------                                 
Appraisal, the Company shall deliver to each Stockholder a copy of the
Appraisal.

          4.9. Acknowledgment of Status.  Each of Johnson and Thomas hereby
               ------------------------                                    
acknowledges that he shall be deemed a "Management Stockholder" for all purposes
of this Agreement with respect to all shares of Common Stock now or hereafter
owned directly by him.

          5.  Involuntary Transfers.  Any transfer of title or beneficial
              ---------------------                                      
ownership of shares of Common Stock upon default, foreclosure, forfeit, court
order, or otherwise than by a voluntary decision on the part of a Stockholder
(an "Involuntary Transfer") shall be void unless such Stockholder complies with
     --------------------                                                      
this Section 5 and enables the Company to exercise in full its rights hereunder.
Upon any Involuntary Transfer, the Company shall have the right to purchase such
shares of Common Stock pursuant to this Section 5 and the Person to whom such
shares have been transferred (the "Involuntary Transferee") shall have the
                                   ----------------------                 
obligation to sell such shares in accordance with this Section 5.  Upon the
Involuntary Transfer of any shares of Common Stock, such Stockholder shall
promptly (but in no event later than five business days after such Involuntary
Transfer) furnish written notice to the Company, the Investor Stockholders and
MJD Partners indicating that the Involuntary Transfer has occurred, specifying
the name of the Involuntary Transferee, giving a detailed description of the
circumstances giving rise to, and stating the legal basis for, the Involuntary
Transfer.  Upon the receipt of such notice, and for 60 days thereafter, the
Company shall have the right to purchase, and the Involuntary Transferee shall
have the obligation to sell, all (but not less than all) of the shares of Common
Stock acquired by the Involuntary Transferee for a purchase price equal to the
lesser of (a) the Fair Market Value of such shares of Common Stock and (b) the
           -                                                            -     
amount of the indebtedness or other liability that gave rise 

                                       15
<PAGE>
 
to the Involuntary Transfer plus the excess, if any, of the Carrying Value of
such shares of Common Stock over the amount of such indebtedness or other
liability that gave rise to the Involuntary Transfer.

          6.  Auction Sale Procedure.   6.1. General.  (a)  At any time after
              ----------------------         -------                         
the fourth anniversary of the date hereof, (i) either Investor Stockholder shall
                                            -                                   
be entitled to initiate the procedure for the public sale of the Company,
provided that it and its Permitted Assignees continue to own, in the aggregate,
- --------                                                                       
at least 50% as many shares of Common Stock as owned by such Investor
Stockholder on the Closing Date, and (ii) MJD Partners shall also be entitled to
                                      --                                        
initiate such procedure, provided that it and its assignees permitted by this
                         --------                                            
Agreement own at least the same percentage of the issued and outstanding shares
of Common Stock as owned by MJD Partners on the Closing Date.  The public sale
procedure (the "Auction Sale Procedure") set forth in this Section 6 shall be
                ----------------------                                       
initiated by a Stockholder authorized pursuant to this Section 6.1(a) or the
Investor Stockholders authorized pursuant to Section 6.1(b), in either case, by
delivering to the Company and the Remaining Stockholders (as defined below) a
written notice that such Stockholder(s) has elected to initiate the Auction Sale
Procedure.  For purposes of this Section 6, "Supervising Stockholder" shall mean
                                             -----------------------            
the Investor Stockholder, if any, which has an unrealized investment in the
Company representing at least 20% more cash in the Company than the other
Investor Stockholder, or, in accordance with Section 6.1(b), the Investor
Stockholders; and "Remaining Stockholders" shall mean all of the Stockholders
                   ----------------------                                    
except the Management Stockholders and the Stockholder(s) that initiated the
Auction Sale Procedure.

          (b)  At any time after a Board Event (other than as a result of the
operation of clause (iii) or (v) of the definition thereof), the Investor
Stockholders shall jointly be entitled to initiate the Auction Sale Procedure.

          (c)  Once the Auction Sale Procedure has been initiated pursuant to
this Section 6.1 by either or both of the Investor Stockholders, the provisions
of Section 3.2 shall also apply.  The Auction Sale Procedure shall continue
until such time, if ever, that an offer to purchase the shares of Common Stock
covered by the Sale Notice is accepted by the Offering Investor Stockholder
pursuant to Section 3.2 and the closing of such purchase is consummated.

          6.2. Retention of Investment Bank.  Within 45 days after the
               ----------------------------                           
initiation of the Auction Sale Procedure, the Supervising Stockholder, or, if
there is no Supervising Stockholder, the Investor Stockholders, shall in good
faith select an investment banking firm (the "Investment Bank") to assist the
                                              ---------------                
Company and the Stockholders in connection with the Auction Sale Procedure.
Notwithstanding the foregoing, the Stockholders (other than the Management
Stockholders and the 

                                       16
<PAGE>
 
Stockholder(s) selecting the Investment Bank pursuant to the preceding sentence
of this Section 6.2) collectively shall have the right to veto, for any reason,
two, but only two, investment banks selected by the Supervising Stockholder or
the Investor Stockholders, as the case may be. All fees and expenses of the
Investment Bank shall be borne by the Company.

          6.3. Preparation of Confidential Memorandum.  As soon as practicable
               --------------------------------------                         
following the selection of the Investment Bank, the Investment Bank shall
prepare a confidential offering memorandum (the "Confidential Memorandum") for
                                                 -----------------------      
the purpose of soliciting prospective purchasers of all of the Common Stock.
The Company and each Stockholder shall provide all such assistance and
cooperation with respect to the preparation of the Confidential Memorandum as
the Investment Bank or any other Stockholder may reasonably request.

          6.4. Auction Procedures.  If requested by the Supervising Stockholder,
               ------------------                                               
or, if there is no Supervising Stockholder, the Investor Stockholders, the
Investment Bank shall develop procedures for conducting the auction of the
Company, such procedures to be reasonably acceptable to the Supervising
Stockholder or the Investor Stockholders, as the case may be, and no more
onerous to prospective purchasers than procedures that are customary in the
market place at the time of the initiation of the Auction Sale Procedure.

          6.5. Selection of Bid.  The Confidential Memorandum and auction
               ----------------                                          
procedures shall solicit prospective purchasers of all of the Common Stock.
Based on the advice of the Investment Bank, the Supervising Stockholder, or, if
there is no Supervising Stockholder, the Investor Stockholders, shall in good
faith select the best bid or bids.  So long as the bidders selected are not
Affiliates of the Supervising Stockholder, or, if there is no Supervising
Stockholder, the Investor Stockholders, any Remaining Stockholder may object to
the bidder or bidders selected only if they can demonstrate that any Stockholder
selecting the bidder or bidders was grossly negligent or engaged in willful
misconduct in connection with such selection or selections.

          6.6. Negotiation of Sale Agreement.  The Supervising Stockholder and
               -----------------------------                                  
its counsel, or, if there is no Supervising Stockholder, the Investor
Stockholders and their counsel, shall be entitled to negotiate the sale
agreement or agreements on behalf of the Company with the prospective purchaser
or purchasers.  The Remaining Stockholders and their counsel shall be entitled
to participate in such negotiations and the Supervising Stockholder or the
Investor Stockholders, as the case may be, shall consider in good faith the
Remaining Stockholders' comments.  Without the Remaining Stockholders' consent,
which consent may be withheld for any reason, the Supervising Stockholder, or,
if there is no Supervising Stockholder, the Investor Stockholders, shall 

                                       17
<PAGE>
 
not agree to any term in any sale agreement that is more favorable to the
Supervising Stockholder or any of its Affiliates, or, if there is no Supervising
Stockholder, the Investor Stockholders or any of their respective Affiliates
than to the Remaining Stockholders.

          6.7. Information Regarding Auction.  The Supervising Stockholder, or
               -----------------------------                                  
if there is no Supervising Stockholder, the Investor Stockholders, shall keep
MJD Partners and the other Investor Stockholder, if applicable, reasonably
informed as to the current status of the auction of the Company.

          6.8. Right of Remaining Stockholders to Bid.  If the Auction Sale 
               --------------------------------------                          
Procedure has been initiated pursuant to Section 6.1, then any Remaining
Stockholder may retain the right to make one or more bids to purchase all of the
Common Stock by delivering written notice, within 30 days after the initiation
of the Auction Sale Procedure, to the Company, the Supervising Stockholder, if
any, and the other Remaining Stockholders expressing such intention.  Delivery
of such notice by or on behalf of any Remaining Stockholder shall act as a
waiver by such Remaining Stockholder of its rights under this Section 6 to
participate in the Auction Sale Procedure, including, but not limited to, its
right to participate in the selection of an investment bank, its right to
participate in the selection of bids and its right to participate in the
negotiation of any sale agreement.  In the event that any Remaining Stockholder
shall not deliver such notice within such 30 day period, then no bids by such
Remaining Stockholder or its Affiliates to purchase all of the Common Stock will
be accepted by the Investment Bank, the Company or the Supervising Stockholder,
or, if there is no Supervising Stockholder, the Investor Stockholders.

          6.9. Cooperation.  Each Stockholder shall cooperate in all respects in
               -----------                                                      
order to carry out the intent and accomplish the purposes of this Section 6.
The provisions of Section 17.5 ("Further Assurances") are specifically
incorporated herein by reference and the Stockholders' obligations thereunder,
insofar as they relate to this Section 6, shall include, without limitation, the
obligation to deliver stock certificates representing shares of Common Stock, in
a form suitable for transfer, duly endorsed in blank, and the obligation to
execute and deliver any stock purchase agreement or approve any merger agreement
or agreements negotiated pursuant to Section 6.6.  Each Stockholder agrees that
its failure to strictly comply with the provisions of this Section 6 and Section
17.5, insofar as it relates to this Section 6, shall be deemed a material breach
of this Agreement and shall entitle the aggrieved Stockholder to institute and
prosecute proceedings in any court of competent jurisdiction to enforce specific
performance or to enjoin the continuing breach of this Agreement.  Such remedies
shall be cumulative and not exclusive, and shall be in addition to any other
remedies which such Stockholder may have.

                                      18
<PAGE>
 
          7.  Prohibited Purchases.  Notwithstanding anything to the contrary
              --------------------                                           
herein, the Company shall not be permitted or obligated to purchase any shares
of Common Stock hereunder to the extent (a) the Company is prohibited from
                                         -                                
purchasing such shares by applicable law or by any debt instruments or
agreements, including any amendment, renewal, extension, substitution,
refinancing, replacement or other modification thereof (the "Financing
                                                             ---------
Documents") entered into by the Company or any of its subsidiaries, (b) a
- ---------                                                            -   
default has occurred under any Financing Document and is continuing, (c) the
                                                                      -     
purchase of such shares of Common Stock would, or in the reasonable opinion of
the Board might, result in the occurrence of an event of default under any
Financing Document or create a condition which would or might, with notice or
lapse of time or both, result in such an event of default, or (d) the purchase
                                                               -              
of such shares of Common Stock would, in the reasonable opinion of the Board, be
imprudent in view of the financial condition (present or projected) of the
Company or any of its subsidiaries or the anticipated impact of the purchase of
such shares on the Company's or any of its subsidiaries' ability to meet their
respective obligations under any Financing Document.  If shares of Common Stock
that the Company has the right or obligation to purchase on any date exceed the
total amount permitted to be purchased on such date pursuant to the preceding
sentence (the "Maximum Amount"), the Company shall purchase on such date only
               --------------                                                
that number of shares of Common Stock up to the Maximum Amount (and shall not be
required to purchase more than the Maximum Amount) in such amounts as the Board
shall in good faith determine, applying the following order of priority:

          (a) First, the shares of Common Stock of all Management Stockholders
     whose shares of Common Stock are being purchased by the Company by reason
     of termination of employment due to death or Disability and, to the extent
     that the number of shares of Common Stock that the Company is obligated to
     purchase from such Management Stockholders (but for this Section 7) exceeds
     the Maximum Amount, such shares of Common Stock pro rata among such
                                                     --- ----           
     Management Stockholders on the basis of the number of shares of Common
     Stock held by each of such Management Stockholders that the Company is
     obligated or has the right to purchase, and

          (b) Second, to the extent that the Maximum Amount is in excess of the
     amount the Company purchases pursuant to clause (a) above, the shares of
     Common Stock of all Management Stockholders whose shares of Common Stock
     are being purchased by the Company by reason of termination of employment
     without Cause or due to Retirement or resignation for Good Reason up to the
     Maximum Amount and, to the extent that the number of shares of Common Stock
     that the Company is obligated to purchase from such Management Stockholders
     (but for this Section 7) exceeds the Maximum 

                                       19
<PAGE>
 
     Amount, such shares of Common Stock pro rata among such Management
                                         --- ----
     Stockholders on the basis of the number of shares of Common Stock held by
     each of such Management Stockholders that the Company is obligated or has
     the right to purchase, and

          (c) Third, to the extent the Maximum Amount is in excess of the
     amounts the Company purchases pursuant to clauses (a) and (b) above, the
     shares of Common Stock of all other Management Stockholders whose shares of
     Common Stock are being purchased by the Company up to the Maximum Amount
     and, to the extent that the number of shares of Common Stock that the
     Company is obligated to purchase from such Management Stockholders (but for
     this Section 7) exceeds the Maximum Amount, the shares of Common Stock of
     such Management Stockholders in such order of priority and in such amounts
     as the Board (excluding members who are designees of MJD Partners) in its
     sole discretion shall in good faith determine to be appropriate under the
     circumstances.

Notwithstanding anything to the contrary contained in this Agreement, if the
Company is unable to make any payment when due under this Agreement by reason of
this Section 7, the Company shall make such payment at the earliest practicable
date permitted under this Section 7 and any such payment shall accrue simple
interest (or if such payment is accruing interest at such time, shall continue
to accrue interest) at a rate per annum of 8% from the date such payment is due
and owing to the date such payment is made.  All payments of interest accrued
hereunder shall be paid only at the date of payment by the Company for the
shares of Common Stock being purchased.

          8.  Issuance of Additional Shares of Common Stock.   8.1  Preemptive
              ---------------------------------------------         ----------
Rights of the Investor Stockholders and MJD Partners.  In the case of the
- ----------------------------------------------------                     
proposed sale or issuance of, or the proposed granting by the Company of, any
equity securities of the Company to any Person (other than any Excluded Shares)
following the date hereof, then the Investor Stockholders and MJD Partners shall
have the right, exercisable within 20 days after the Company has given notice to
the Investor Stockholders and MJD Partners of such proposed sale, issuance or
grant, to purchase all of the equity securities proposed to be issued or granted
on the terms set forth in Sections 8.2, 8.3 and 8.4.

          8.2. Investments made before the end of the First Investment Period.
               -------------------------------------------------------------- 
Subject to Section 8.4, if the Company proposes to sell, issue or grant any
equity securities of the Company as provided in Section 8.1 before the end of
the First Investment Period, then each Investor Stockholder and, subject to
Section 8.4(c), MJD Partners shall, in its sole discretion, be entitled to make
one or more purchases of 

                                       20
<PAGE>
 
additional shares of Common Stock for a purchase price per share equal to
$342.51 and the Company shall be obligated to sell to the Investor Stockholders
and MJD Partners additional shares of Common Stock at such purchase price per
share at the closing of such purchase, such closing to occur within the First
Investment Period. The notice referred to in Section 8.1 shall state the number
of shares of Common Stock to be offered to each Investor Stockholder and MJD
Partners, the aggregate consideration to be paid for such shares of Common Stock
by each Investor Stockholder and MJD Partners and the proposed date, time and
location of the closing of such purchase (which shall not be earlier than 45
days or later than 120 days after the date of such notice). At the closing of
each such additional purchase, the Company shall issue and deliver to each
Investor Stockholder and MJD Partners stock certificates representing that
number of fully paid and nonassessable shares of Common Stock that each such
Investor Stockholder and MJD Partners have agreed to purchase pursuant to this
Section 8.2 and each such Investor Stockholder and MJD Partners shall pay to the
Company by wire transfer of immediately available funds the aggregate
consideration for such shares.

          8.3  Investments made after the end of the First Investment Period.
               ------------------------------------------------------------- 
Subject to Section 8.4, if the Company proposes to sell, issue or grant any
equity securities of the Company as provided in Section 8.1 after the end of the
First Investment Period, then each Investor Stockholder and, subject to Section
8.4(c), MJD Partners shall, in its sole discretion, be entitled to make one or
more purchases of additional shares of Common Stock for a purchase price per
share agreed upon by the Investor Stockholders, MJD Partners and the Company.
The notice referred to in Section 8.1 shall state the number of shares of Common
Stock to be offered to each Investor Stockholder and MJD Partners, the aggregate
consideration to be paid for such shares of Common Stock by each Investor
Stockholder and MJD Partners and the proposed date, time and location of the
closing of such purchase (which shall not be earlier than 45 days or later than
120 days after the date of such notice).  At the closing of each such additional
purchase, the Company shall issue and deliver to each Investor Stockholder and
MJD Partners stock certificates representing that number of fully paid and
nonassessable shares of Common Stock that each such Investor Stockholder and MJD
Partners have agreed to purchase pursuant to this Section 8.3 and each such
Investor Stockholder and MJD Partners shall pay to the Company by wire transfer
of immediately available funds the aggregate consideration for such shares.

          8.4  Participation by Carousel, Kelso and MJD Partners.  (a)  Subject
               -------------------------------------------------               
to all subsections of this Section 8.4, (i) each of Carousel, Kelso and MJD
                                         -                                 
Partners shall be entitled to purchase that portion of the shares of Common
Stock covered by the notice referred to in Section 8.1 equal to its pro rata
                                                                    --- ----
interest in the Company (based on the percentage of outstanding shares of Common
Stock owned by each of them on the 

                                       21
<PAGE>
 
date of such notice) and (ii) if any of Carousel, Kelso or MJD Partners does not
                          --
exercise its right to purchase its pro rata portion of shares of Common Stock
                                   --- ----
that the Company proposes to issue and sell pursuant to Section 8.1, then the
others shall have the right to purchase their respective pro rata portion of
                                                         --- ---- 
such shares of Common Stock not elected to be so purchased by Carousel, Kelso or
MJD Partners, as the case may be, that the Company proposes to issue and sell.

          (b)  Notwithstanding subsection (a) of this Section 8.4, Carousel, on
the one hand, and Kelso, on the other hand, shall each be entitled to purchase
50% of any shares of Common Stock proposed to be sold to them pursuant to
Section 8.2 or 8.3 until such time as the Investor Stockholders shall have
invested an aggregate of $50 million in the Company (the calculation of such $50
million shall include the investments made by the Investor Stockholders on the
Closing Date pursuant to the Stock Purchase Agreement).  Thereafter, Carousel,
on the one hand, and Kelso, on the other hand, shall be entitled to purchase 30%
and 70%, respectively, of any shares of Common Stock proposed to be sold to them
pursuant to Section 8.2 or 8.3 until such time as the Investor Stockholders
shall have invested an aggregate of $100 million in the Company (the calculation
of such $100 million shall include the investments contemplated by the preceding
sentence).  Notwithstanding the foregoing, Carousel and Kelso may agree to any
allocation of any additional shares of Common Stock proposed to be sold to them
pursuant to Section 8.2 or 8.3 and, in any event, either Investor Stockholder
may purchase shares not purchased by the other.

          (c)  Any purchase by MJD Partners of any additional shares of Common
Stock pursuant to this Section 8 may only be financed by borrowings made
directly by the Founders or MJD Partners, provided that such financing
                                          --------                    
arrangements must be authorized by the prior written approval (not to be
unreasonably withheld) of the Board (excluding members who are designees of MJD
Partners) and no funds may be provided by any third party investor.

          (d)  If Carousel and Kelso do not purchase 100% of the equity
securities of the Company offered to them pursuant to Section 8.1, then the
Company may, subject to Section 10, raise additional equity financing as
authorized by the Board.  All references to the Investor Stockholders in this
Section 8 shall include their respective Permitted Assignees.

          8.5. New Investments.  The Investor Stockholders shall consider in
               ---------------                                              
good faith additional investments proposed by the Company from time to time with
reference to the investment guidelines attached hereto as Exhibit A.  Such
investment guidelines are not rules and no particular guideline is intended to
take precedence over any other guideline.

                                       22
<PAGE>
 
          9.  Election of Directors.   9.1  Initial Board Make-Up of the
              ---------------------         ----------------------------
Company. Until a Board Event, each Stockholder agrees that it will nominate and
- -------
elect and will vote all of the shares of Common Stock owned or held of record by
it to elect and, thereafter, for such period, to continue in office a Board
consisting of seven members, (a) two of whom will be designated for nomination
                              -                                               
and election by Carousel, (b) one of whom will be designated for nomination and
                           -                                                   
election by Kelso and (c) four of whom will be designated for nomination and
                       -                                                    
election by MJD Partners.  The individuals designated for nomination and
election by Carousel, Kelso or MJD Partners, as the case may be, pursuant to
this Section 9.1 may be changed from time to time by Carousel, Kelso or MJD
Partners, as the case may be.

          9.2  Board Make-Up of the Company following a Board Event.  At any
               ----------------------------------------------------         
time following the occurrence of a Board Event, each Stockholder agrees that,
upon written notice by either Investor Stockholder, it will nominate and elect
and will vote all of the shares of Common Stock owned or held of record by it to
elect and, thereafter, to continue in office a Board consisting of nine members,
(a) two of whom will be designated for nomination and election by Carousel, (b)
 -                                                                           - 
three of whom will be designated for nomination and election by Kelso and (c)
                                                                           - 
four of whom will be designated for nomination and election by MJD Partners.
The individuals designated for nomination and election by Carousel, Kelso or MJD
Partners, as the case may be, pursuant to this Section 9.2 may be changed from
time to time by Carousel, Kelso or MJD Partners, as the case may be.

          9.3  Five Year Plan and Annual Business Plan.  Attached hereto as
               ---------------------------------------                     
Exhibit B are the capital and operating budgets, together with the EBITDA
performance targets, for the Company and its subsidiaries for the five year
period ending December 31, 2001 (the "Five Year Plan").  The EBITDA performance
                                      --------------                           
targets included in the Five Year Plan shall, subject to Section 10, be adjusted
in connection with the Board's authorization of each acquisition or disposition
of material properties by the Company or any of its subsidiaries by adding
thereto or subtracting therefrom projected EBITDA performance targets in respect
of such acquisition or disposition, as the case may be.  Commencing with the
budget for the 1998 Fiscal Year, MJD Partners shall prepare and submit to the
Board for its approval at least 30 days prior to the first day of each Fiscal
Year proposed capital and operating budgets for the Company and its subsidiaries
for the forthcoming Fiscal Year.  As revised and approved by the Board, such
proposed capital and operating budgets shall become the "Annual Business Plan"
                                                         -------------------- 
for the Company and its subsidiaries.

          9.4  Records and Reports, etc.  (a)  The Company shall furnish or
               -------------------------                                   
cause to be furnished to the Investor Stockholders and MJD Partners:

                                       23
<PAGE>
 
          (i)   within 120 days following of the end of each Fiscal Year,
     audited consolidated financial statements of the Company and its
     subsidiaries, together with unaudited consolidating financial statements of
     the Company and its subsidiaries for such Fiscal Year;

          (ii)  within 45 days following of the end of each fiscal quarter,
     unaudited consolidated and consolidating financial statements of the
     Company and its subsidiaries;

          (iii) monthly financial statements, together with a management
     overview and report with respect to the Company's and its subsidiaries'
     performance for such month; and

          (iv)  such other information or reports as either of the Investor
     Stockholders or MJD Partners may reasonably request.

          (b)   The Investor Stockholders and MJD Partners shall each, upon
reasonable notice, and using their best efforts to minimize any interruption of
the Company's and its subsidiaries' business, be entitled to inspect and audit
the books, records and accounts of the Company and its subsidiaries during
normal business hours and make copies thereof.

          (c)   The Company shall deliver prompt written notice to each Investor
Stockholder of the occurrence of any of the following:

          (i)   the actual or threatened commencement of any suit, action or
     other legal or administrative proceeding affecting the Company or any of
     its subsidiaries which, if adversely determined, would involve in excess of
     $100,000;

          (ii)  any event of default under any Financing Document, whether or
     not any requirement for the giving of notice, the lapse of time, or both,
     or any other condition, has been satisfied; or

          (iii) any other event that could reasonably be expected to have a
     material adverse effect on the business, assets, properties, liabilities,
     revenues, costs and expenses, operations, prospects or condition, financial
     or otherwise, of Company or any of its subsidiaries.

                                       24
<PAGE>
 
          9.5  Board Meetings, Committees, etc.  (a)  There shall be regular
               --------------------------------                             
meetings of the Board held at least once per calendar quarter, at such times and
in such places as the Board shall determine.

          (b)  At its first meeting, the Board shall designate a Compensation
Committee (the "Compensation Committee") consisting of three members of the
                ----------------------                                     
Board, one of whom shall be the Company's chief executive officer, one of whom
shall be designated by Carousel and one of whom shall be designated by Kelso.
The Compensation Committee shall act by a majority of its members and its
powers, subject to Section 10, shall include the power to review and approve the
salaries and other compensation of the executive officers of the Company and its
subsidiaries, including incentive compensation, deferred compensation and stock
plans, the power to administer the Stock Option Plan and the Management
Agreement and the power, subject to Section 9.3, to update the EBITDA
performance targets included in the Five Year Plan (with the consent of MJD
Partners, such consent not to be unreasonably withheld or delayed), and such
other powers as may be delegated to it by the Board. The Board may designate an
Executive Committee (the "Executive Committee") consisting of three members of
                          -------------------                                 
the Board, one of whom shall be the Company's chief executive officer, one of
whom shall be designated by Carousel and one of whom shall be designated by
Kelso.  The Executive Committee shall act by a majority of its members and
shall, subject to Section 10 and the Delaware General Corporation Law, have such
powers as may be delegated to it by the Board.

          (c)  Members of the Board shall not be entitled to receive
compensation for their service as such, except (i) for members of the Board who
                                                -                              
are not affiliated with any Stockholder or (ii) as may be provided in the
                                            --                           
Financial Advisory Agreements. Members of the Board shall be entitled to
reimbursement for their reasonable out-of-pocket expenses incurred in connection
with their service as such.

          9.6  Board Make-Up of the Company's Subsidiaries.  The Board shall
               -------------------------------------------                  
establish a policy and procedures with respect to the composition and election
of the Board of Directors of each of the Company's subsidiaries.

          9.7  Irrevocable Proxy.  In order to effectuate Section 9 and, in
               -----------------                                           
addition to and not in lieu of Section 9, each Stockholder hereby grants to the
Secretary of the Company an irrevocable proxy solely for the purpose of voting
all of the shares of Common Stock owned by the grantor of the proxy for the
election of directors nominated in accordance with Section 9.

          10.  Actions Requiring Approval of the Investor Stockholders.   10.1.
               -------------------------------------------------------       
General.  Subject to Section 10.2, as long as the Investor Stockholders
- -------                                                                
collectively own 

                                       25
<PAGE>
 
at least 10% of the issued and outstanding shares of Common Stock, no
Stockholder shall cause the Company or any of its subsidiaries to take, and the
Company shall not take and shall cause its subsidiaries not to take, any of the
following actions without the prior written approval of each of the Investor
Stockholders or their designees on the Board:

          (a) any issuance, sale, delivery, or any entry into an agreement to
     issue, sell or deliver, any capital stock, warrants, options or similar
     rights, other securities convertible into any capital stock or other
     securities which contain any voting or equity participation rights of which
     the Company or any of its subsidiaries is the issuer or grantor, or any
     grant or issuance, or any agreement to grant or issue, any options,
     warrants, incentive awards or similar rights calling for the issuance of
     such securities;

          (b) any repurchase or redemption of any shares of capital stock of the
     Company or any of its subsidiaries, including pursuant to Section 2.2 and
     Section 4;

          (c) (i) any merger or consolidation with or into any other Person
               -                                                           
     (whether or not the Company or any of its subsidiaries survives such merger
     or consolidation) or (ii) any conveyance, sale, lease or other disposal, in
                           --                                                   
     any transaction or related series of transactions, of 25% or more of the
     property, business or assets of the Company (including the capital stock or
     assets of any of the Company's subsidiaries);

          (d) any recapitalization of the capital stock of the Company or its
     subsidiaries or any amendment, whether by merger, consolidation or
     otherwise, to the articles of incorporation or the by-laws of the Company
     or any of its subsidiaries;

          (e) any liquidation or dissolution of the Company or any of its
     subsidiaries;

          (f) entry into any business not substantially similar or reasonably
     related to the business of the Company and its subsidiaries as of the date
     hereof;

          (g) establishment of or material change to any incentive or bonus
     program of the Company or any of its subsidiaries, including the Stock
     Option Plan;

                                       26
<PAGE>
 
          (h) any change to the EBITDA performance targets included in the Five
     Year Plan or approval of or material change to the Annual Business Plan;

          (i) incurrence or guarantee by the Company or any of its subsidiaries
     of indebtedness in excess of $5 million in the aggregate;

          (j) declaration or payment of dividends or other distributions in
     respect of the capital stock of the Company or any of its subsidiaries;

          (k) enter into any transaction or modify any existing arrangement
     between the Company or any of its subsidiaries, on the one hand, and MJD
     Partners, MJD Inc. or any MJD Principal or any of their respective
     Affiliates, on the other hand; or

          (l) selection or replacement of  the Company's and its subsidiaries'
     independent public accountants.

In the event of a Board Event caused as a result of the operation of clause
(iii) of the definition thereof, the Investor Stockholders may, in their sole
discretion, modify the terms of the Management Agreement.

          10.2. After Additional Investments.  At any time after either Carousel
                ----------------------------                                    
or Kelso shall have an unrealized investment in the Company representing at
least 100% more cash in the Company than the other, then the Investor
Stockholder with the smaller investment in the Company shall lose all of its
rights of approval set forth in Section 10.1, except with respect to any of the
actions referred to in clauses (b), (c), (d) and (e) of Section 10.1 relating to
the Company only.  All references to Carousel or Kelso in this Section 10.2
shall include their respective Permitted Assignees.

          11.   Exit Payments.   11.1. General.  If after the fourth anniversary
                -------------          -------                                  
of the date hereof, Carousel, Kelso or MJD Partners becomes entitled to cash
payments as a result of the Sale of the Company (any such payment being referred
to herein as an "Exit Payment"), then, subject to Sections 11.4 and 15.4, the
                 ------------                                                
Exit Payment will be allocated among Carousel, Kelso and MJD Partners as
follows:

          (a)   The Exit Payment shall be allocated among Carousel, Kelso and
     MJD Partners, based on the percentage of outstanding shares of Common Stock
     owned by each of them on the date of any Exit Payment, until each of
     Carousel and Kelso has received an internal rate of return equal to 30% per
     annum, compounded annually, on the aggregate amount of capital invested in
     the Company by it.

                                       27
<PAGE>
 
          (b)  Once an Investor Stockholder has realized an internal rate of
     return of 30% as provided in Section 11.1(a), the amount of the Exit
     Payment, if any, in excess of such rate of return that would otherwise be
     allocated to such Investor Stockholder on the basis of the percentage of
     outstanding shares of Common Stock owned by such Investor Stockholder on
     the date of any Exit Payment, shall be allocated (i) 50% to such Investor
                                                       -                      
     Stockholder and (ii) 50% to MJD Partners.
                      --                      

For purposes of this Section 11.1, internal rates of return shall be calculated
by taking into account (i) the date or dates of the investments of capital by
                        -                                                    
the Investor Stockholders in the Company, (ii) the date or dates of any Exit
                                           --                               
Payment and all other amounts received in respect of such Investor Stockholder's
shares of Common Stock pursuant to prior sales of shares or dividends or
distributions in respect thereof and (iii) the amounts of such investments, Exit
                                      ---                                       
Payment and other payments in respect of shares of Common Stock, provided that
                                                                 --------     
any taxes of such Investor Stockholder, its partners or its investors shall not
be taken into account when calculating internal rates of return.

          11.2. Equitable Allocations.  In the event any of Carousel, Kelso or
                ---------------------                                         
MJD Partners becomes entitled to a cash payment in respect of any shares of
Common Stock, but in connection with a transaction (a) occurring prior to the
                                                    -                        
fourth anniversary of the date hereof or (b) not constituting a Sale of the
                                          -                                
Company, then Carousel, Kelso and MJD Partners shall negotiate in good faith an
equitable allocation of such cash payments which reflects the economic
objectives set forth in Section 11.1 taking into account the limitations set
forth in Section 11.4 and the proviso to Section 15.4.

          11.3. Procedures for Payment; Characterization of Exit Payments; Tax
                --------------------------------------------------------------
Reporting.  Carousel, Kelso and MJD Partners shall use reasonable efforts to
- ---------                                                                   
arrange for any amounts allocated to Carousel, Kelso and MJD Partners pursuant
to Section 11.1 or 11.2 to be paid directly to each such Stockholder by the
relevant third party purchaser or the Company, as the case may be.  In the event
that Carousel, Kelso and MJD Partners are unable to make such arrangements, each
such Stockholder shall pay any amounts allocated to the other Stockholders
pursuant to Section 11.1 or 11.2 promptly following receipt of such amounts.

          Consistent with the intent of the parties, Carousel, Kelso, MJD
Partners and the Company agree (and agree to cause their Affiliates), except to
the extent prohibited by applicable law, (a) to treat, for income tax purposes,
                                          -                                    
the payment to, and receipt by, any Stockholder of its allocable share of any
Exit Payment under this Section 11 as a payment in exchange for the sale of such
Stockholder's Common Stock, 

                                       28
<PAGE>
 
and (b) to report the payment and receipt of such amounts in accordance with
     -
such treatment on all relevant tax returns filed with any relevant taxing
authority.

          11.4. Limitation.  (a)  In the event (i) any Founder Transfers,
                ----------                      -                        
directly or indirectly, any interest in MJD Partners or MJD Inc. now or
hereafter owned by such Founder (other than a Transfer by one Founder to another
Founder or as permitted by Section 1.4(a)(iii) or (iv) or Section 1.4(b)(ii) or
(iii) or with the prior written consent of each Investor Stockholder) or (ii)
                                                                          -- 
MJD Inc. Transfers any interest in MJD Partners now or hereafter owned by MJD
Inc., the Exit Payment allocable to MJD Partners pursuant to Section 11.1 shall
be reduced proportionately to reflect (x) such Founder's former direct and
                                       -                                  
indirect interests in MJD Partners or MJD Inc., as the case may be, or (y) MJD
                                                                        -     
Inc.'s former interest in MJD Partners.

          (b)   In the event Johnson or Thomas resigns other than for Good
Reason or his employment with the Company or any of its subsidiaries is
terminated by the Company or any such subsidiary for Cause, the Exit Payment
allocable to MJD Partners pursuant to Section 11.1 shall be reduced
proportionately to reflect such Person's direct and indirect interests
(including any interest Transferred in accordance with Section 1.4(a) or Section
1.4(b)) in MJD Partners and MJD Inc.

          11.   Permitted Assignees.  All references to the Investor 
                -------------------
Stockholders in this Section 11 shall include any of their respective Permitted
Assignees.

          12.   Stock Certificate Legends.  A copy of this Agreement shall be
                -------------------------                                    
filed with the Secretary of the Company and kept with the records of the
Company.  Each certificate representing shares of Common Stock owned by the
Stockholders shall bear upon its face the following legends, as appropriate:

     (a)  "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
          INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
          1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, ASSIGNED,
          PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL
          REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR
          UNLESS, IN THE OPINION OF COUNSEL TO THE STOCKHOLDER, WHICH COUNSEL
          MUST BE, AND THE FORM AND SUBSTANCE OF WHICH OPINION ARE, SATISFACTORY
          TO THE ISSUER, SUCH OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION,
          TRANSFER OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR IS
          OTHERWISE IN 

                                       29
<PAGE>
 
          COMPLIANCE WITH THE ACT, SUCH LAWS AND THE STOCKHOLDERS' AGREEMENT OF
          THE ISSUER, DATED AS OF JULY 31, 1997 (THE "STOCKHOLDERS'
          AGREEMENT")."

     (b)  "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
          RESTRICTIONS ON TRANSFER AND OTHER CONDITIONS, AS SPECIFIED IN THE
          STOCKHOLDERS' AGREEMENT, COPIES OF WHICH ARE ON FILE AT THE OFFICE OF
          THE ISSUER AND WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF SUCH
          SHARES UPON WRITTEN REQUEST."

In addition, each certificate representing shares of Common Stock owned by MJD
Partners shall bear upon its face the following legends until such time as MJD
Partners' indemnification obligation under the Stock Purchase Agreement shall
have ended:

     (c)  "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
          CANCELLATION IN ACCORDANCE WITH ARTICLE XI OF THE STOCK PURCHASE
          AGREEMENT, DATED AS OF MARCH 6, 1997, COPIES OF WHICH ARE ON FILE AT
          THE OFFICE OF THE ISSUER AND WILL BE FURNISHED WITHOUT CHARGE TO THE
          HOLDER OF SUCH SHARES UPON WRITTEN REQUEST."

In addition, certificates representing shares of Common Stock owned by any
permitted transferees who are residents of certain states shall bear any legends
required by the laws of such states.

          Each Stockholder shall be bound by the requirements of such legends.
Upon a Registration of any shares of Common Stock, the certificate representing
the registered shares shall be replaced, at the expense of the Company, with
certificates not bearing the legends required by Sections 12(a), 12(b) and
12(c).

          13.  Absence of Other Arrangements.  Each of the parties hereto hereby
               -----------------------------                                    
represents and warrants to each other party hereto that it has not entered into
or agreed to be bound by any other arrangements or agreements of any kind with
any other Person with respect to the shares of Common Stock, including, but not
limited to, arrangements or agreements with respect to the acquisition,
disposition or voting of shares of Common Stock or any interest therein (whether
or not such arrangements or agreements are with the Company, Carousel, Kelso,
MJD Partners, any MJD Principal 

                                       30
<PAGE>
 
or any holder of Common Stock that is not party to this Agreement), except for
(a) the Stock Purchase Agreement and (b) the Registration Rights Agreement.
 -                                    -

          14.  New Management Stockholders.  The Company and each of the
               ---------------------------                              
Stockholders hereby agrees that any employee of the Company or any of its
subsidiaries who after the date of this Agreement is offered shares of Common
Stock or holds stock options exercisable into shares of Common Stock shall, as a
condition precedent to the acquisition of such shares of Common Stock or the
exercise of such stock options, as the case may be, (a) become a party to this
                                                     -                        
Agreement by executing the same and (b) if such employee is a resident of a
                                     -                                     
state with a community property system, cause his or her spouse to execute a
Spousal Waiver in the form of Exhibit C attached hereto and deliver such
Agreement and Spousal Waiver, if applicable, to the Company at its address
specified in Section 17.9.  Upon such execution and delivery, such employee
shall be a Management Stockholder for all purposes of this Agreement.

          15.  Parties.   15.1. Assignment by the Company.  The Company shall
               -------          -------------------------                    
have the right to assign to one or more Permitted Assignees, and/or the right to
cause one or more Permitted Assignees to assume, all or any portion of its
rights and obligations under Section 4 ("Management Stockholders") and Section 5
("Involuntary Transfers"), provided that any such assignment or assumption is
                           --------                                          
accepted by the proposed assignee or assignees.  If the Company has not
exercised its right to purchase shares of Common Stock pursuant to any such
Section within 20 days of receipt by the Company of the letter or notice giving
rise to such right, then the Investor Stockholders shall have the right to
require the Company to assign such right to one or more Permitted Assignees.  If
such right to purchase is assigned to a Permitted Assignee or Permitted
Assignees pursuant to this Section 15.1, such Permitted Assignee or Permitted
Assignees shall be deemed to be the Company for purposes of any such purchases
and the seller shall be obligated to sell to such Permitted Assignee or
Permitted Assignees.  If the Company shall fail to promptly record the
cancellation of any shares of Common Stock owned by MJD Partners on the books
and records of the Company as a result of MJD Partners' indemnification
obligation under Article XI of the Stock Purchase Agreement, then each Investor
Stockholder shall have the right to record the cancellation of such shares on
the books and records of the Company and such shares shall be deemed cancelled
under the law of the State of Delaware and for all purposes of this Agreement.

          15.2. Assignment Generally.  The provisions of this Agreement shall be
                --------------------                                            
binding upon and inure to the benefit of the parties hereto and their respective
heirs, legal representatives, permitted successors and assigns, provided that
                                                                --------     
neither MJD Partners nor any MJD Principal nor any Management Stockholder shall
be permitted to assign any of its rights or cause a third party to assume any of
its obligations under this 

                                       31
<PAGE>
 
Agreement, unless such assignment or assumption is in connection with a Transfer
explicitly permitted by this Agreement and, prior to such assignment or
assumption, such assignee complies with the requirements of Section 15.4.

          15.3. Termination.  (a)  Any party to, or Person who is subject to,
                -----------                                                  
this Agreement which ceases to own any shares of Common Stock or any interest
therein shall cease to be a party to, or Person who is subject to, this
Agreement and thereafter shall have no rights or obligations hereunder;
                                                                       
provided, however, that a Transfer of shares of Common Stock not explicitly
- --------  -------                                                          
permitted under this Agreement shall not relieve any Stockholder of any of its
obligations hereunder.  Notwithstanding the foregoing, in connection with a
Transfer to an Affiliate explicitly permitted by this Agreement, prior to any
such Person ceasing to be an Affiliate of the Stockholder from whom such Person
acquired its shares of Common Stock, such Person shall be obligated to transfer
such shares of Common Stock back to such original Stockholder and such original
Stockholder shall thereupon be subject to this Agreement again.

          (b)  All rights and obligations pursuant to Sections 1, 2, 3, 4, 5, 6,
8, 9, 10, 13, 14, 15.4 and 17.2 shall terminate upon an IPO.  In the event that
the Investor Stockholders cease to own collectively at least 10% of the issued
and outstanding shares of Common Stock, all rights of the Investor Stockholders
pursuant to Sections 3.4, 6, 8, 9, 10 and 17.2 shall terminate.

          15.4. Agreements to Be Bound. Notwithstanding anything to the contrary
                ----------------------
contained in this Agreement, any Transfer of shares by a Stockholder (other than
pursuant to a Registration) shall be permitted under the terms of this Agreement
only if (a), in the case of a Management Stockholder, such Management
         -
Stockholder shall cause the transferee of such shares of Common Stock to execute
the Spousal Waiver in the form attached hereto as Exhibit C, if such transferee
is an individual who resides in a state with a community property system, and
(b) the transferee of such shares of Common Stock shall agree in writing to be
 -                                                                            
bound by the terms and conditions of this Agreement pursuant to an instrument of
assignment and assumption reasonably satisfactory in substance and form, (i) in
                                                                          -    
the case of a Transfer by an MJD Principal, to the Investor Stockholders, (ii)
                                                                           -- 
in the case of a Transfer by a Management Stockholder, to the Company, (iii) in
                                                                        ---    
the case of a Transfer by an Investor Stockholder, to the other Investor
Stockholder and MJD Partners, and (iv) in the case of a Transfer by MJD
                                   --                                  
Partners, to the Investor Stockholders.  Upon the execution of the Spousal
Waiver and the instrument of assignment and assumption by such transferee, as
the case may be, such transferee shall be deemed to be the relevant Stockholder,
as the case may be, for all purposes of this Agreement, including, in the case
of a Transfer by a Management Stockholder, the provisions of Section 4;
provided, however, that Section 11 ("Exit Payments") shall not apply to any
- --------  -------                                                          
transferee of MJD Partners, including a third party 

                                       32
<PAGE>
 
transferee which has acquired MJD Partners' shares of Common Stock in accordance
with Section 2.2 ("Right of First Refusal"), and the portion of any Exit Payment
otherwise allocable to MJD Partners under Section 11 shall be reduced, on a pro
                                                                            ---
rata basis, by the amount of such Exit Payment attributable to the shares of
- ----
Common Stock so Transferred.

           16.  Defined Terms.  As used in this Agreement, the following terms
                -------------                                                 
shall have the meanings ascribed to them below:

          "Affiliate":  A Person that directly, or indirectly through one or
           ---------                                                        
more intermediaries, controls, or is controlled by, or is under common control
with, the Person specified.

          "Board":  The Board of Directors of the Company.
           -----                                          

          "Board Event":  The earliest of (i) any failure of the Company in any
           -----------                     -                                   
Fiscal Year to achieve at least 80% of the EBITDA performance targets set forth
in the Five Year Plan, as amended, for such Fiscal Year, (ii) any Management
                                                          --                
Change, (iii) any Transfer by an MJD Principal in violation of this Agreement,
         ---                                                                  
which violation is not cured within 30 days after written notice to the Company
from either Investor Stockholder describing in reasonable detail such violation
and stating that failure to effect such cure within such time period will result
in a "Board Event", (iv) the increase in the Investor Stockholders' percentage
                     --                                                       
ownership of shares of Common Stock as a result of the cancellation of shares of
Common Stock owned by MJD Partners with a Fair Market Value in excess of $5
million in accordance with Article XI of the Stock Purchase Agreement or the
payment to the Investor Stockholders of an aggregate amount in excess of $5
million in accordance with Article XI of the Stock Purchase Agreement or any
combination of the foregoing actions resulting in aggregate indemnity payments
in excess of $5 million, (v) the aggregate investment in the Company and its
                          -                                                 
subsidiaries by the Investor Stockholders of at least $25 million (the
calculation of such $25 million shall include the investments made by the
Investor Stockholders on the Closing Date pursuant to the Stock Purchase
Agreement), (vi) any default by the Company or any of its subsidiaries under any
             --                                                                 
provision of any Financing Document, which default is not cured within 60 days
after written notice to the Company from the Investor Stockholders describing in
reasonable detail such default and stating that failure to effect such cure
within such time period will result in a "Board Event" and (vii) the Transfer by
                                                            ---                 
MJD Partners of 25% or more of the shares of Common Stock owned by MJD Partners
on the Closing Date.

          "Carousel Permitted Assignee":  Carousel and any Affiliate of
           ---------------------------                                 
Carousel.

                                       33
<PAGE>
 
          "Carrying Value":  The price paid or fair market value of property
           --------------                                                   
contributed by a Stockholder for any share of Common Stock together with simple
interest at a rate of 8% per annum from the date of the purchase of such share
by such Stockholder through the date of the purchase by the Company less any
distributions made to such Stockholder in respect of any such share (to the
extent that the amount of such distributions do not exceed such simple
interest), provided that the fair market value of any share of Common Stock
           --------                                                        
owned on the Closing Date shall be $342.51 on the Closing Date.

          "Cause":  A termination of a Management Stockholder's employment by
           -----                                                             
the Company or any of its subsidiaries due to (i) the refusal or neglect of the
                                               -                               
Management Stockholder to perform substantially his or her lawful employment-
related duties, following written notice from the Company describing in
reasonable detail such refusal or neglect and an opportunity for 30 days to cure
the condition which is the subject of such notice, (ii) the Management
                                                    --                
Stockholder's personal dishonesty, willful misconduct or breach of fiduciary
duty, (iii) the Management Stockholder's conviction of or entering a plea of
       ---                                                                  
guilty or nolo contendere to a crime constituting a felony or his or her willful
          ---- ----------                                                       
violation of any law, rule, or regulation (other than a traffic violation or
similar offense or violation which in no way adversely affects the Company or
its reputation or the ability of the Management Stockholder to perform his or
her employment-related duties or to represent the Company) or (iv) the breach by
                                                               --               
the Management Stockholder of any written covenant or agreement with the Company
or any of its subsidiaries not to disclose any material information pertaining
to the Company or such subsidiary or not to compete or interfere with the
Company or such subsidiary.

          "Closing Date":  The date on which the closing under the Stock
           ------------                                                 
Purchase Agreement occurs.

          "Common Stock":  The Company's Class A Voting common stock, par value
           ------------                                                        
$.01 per share.

          "Disability":  The termination of the employment of any Management
           ----------                                                       
Stockholder by the Company or any of its subsidiaries shall be deemed to be by
reason of a "Disability" if, as a result of such Management Stockholder's
incapacity due to reasonably documented physical or mental illness, such
Management Stockholder shall have been unable for more than six months within
any 12-month period to perform his or her duties with the Company or such
subsidiary on a full-time basis and within 90 days after written notice of
termination has been given to such Management Stockholder, such Management
Stockholder shall not have returned to the full time performance of his or her
duties.  The date of termination in the case of a termination 

                                       34
<PAGE>
 
for "Disability" shall be deemed to be the last day of the aforementioned 90-day
period.

          "Excluded Shares":  Any shares of Common Stock issued or issuable (i)
           ---------------                                                   - 
in connection with an IPO or public offering of debt securities by the Company
or (ii) to any employee of the Company or any of its subsidiaries in connection
    --                                                                         
with the Stock Option Plan or any other employee incentive or bonus program duly
authorized pursuant to this Agreement and by the Board.

          "50% Condition":  As defined in Section 1.3(b).
           -------------                                 

          "Financial Advisory Agreements":  The Financial Advisory Agreements,
           -----------------------------                                      
each dated as of the date hereof, as the same shall be amended from time to
time, between the Company and each of Carousel and Kelso and Company, L.P.

          "First Investment Period":  The period commencing on the date hereof
           -----------------------                                            
and ending 18 months thereafter.

          "Fiscal Year":  A year beginning on January 1 of one calendar year and
           -----------                                                          
ending on December 31 of the same calendar year, or such other fiscal year as
the Board may hereafter determine; provided, however, that the term "Fiscal
                                   --------  -------                       
Year" shall mean with respect to the Company's first period of operations the
period commencing on the Closing Date and ending on December 31 of the same
calendar year.

          "Founders":  Bergstein, Bugger, Meyer Haberman, Johnson and Thomas.
           --------                                                          

          "Good Reason":  A termination of a Management Stockholder's employment
           -----------                                                          
with the Company or any of its subsidiaries shall be for "Good Reason" if such
Management Stockholder voluntarily terminates his employment with the Company or
any of its subsidiaries as a result of either of the following:

          (i) without the Management Stockholder's prior written consent, a
     significant reduction by the Company or such subsidiary of his or her
     current salary, other than any such reduction which is part of a general
     salary reduction or other concessionary arrangement affecting all employees
     or affecting the group of employees of which the Management Stockholder is
     a member (after receipt by the Company of written notice and a 20 day cure
     period), or a significant reduction in the level of authority theretofore
     exercised by the Management Stockholder, provided that the degree of
                                              --------                   
     acquisition activity by the 

                                       35
<PAGE>
 
     Company and its subsidiaries shall not be taken into consideration when
     determining the Management Stockholder's level of authority; or

          (ii)  the taking of any action by the Company or such subsidiary that
     would substantially diminish the aggregate value of the benefits provided
     him or her under the Company's or any of its subsidiaries' accident,
     disability, life insurance and any other employee benefit plans in which he
     or she was participating on the date of his or her execution of this
     Agreement, other than any such reduction which is (A) required by law, (B)
                                                        -                    - 
     implemented in connection with a general concessionary arrangement
     affecting all employees or affecting the group of employees of which the
     Management Stockholder is a member or (C) generally applicable to all
                                            -                             
     beneficiaries of such plans.

          "IPO":  A Registration that covers (together with any prior effective
           ---                                                                 
Registrations) (i) 50% or more of the aggregate number of shares of Common Stock
                -                                                               
then outstanding or (ii) shares of Common Stock that, after the closing of such
                     --                                                        
Registration, will be traded on the New York Stock Exchange, the American Stock
Exchange or the National Association of Securities Dealers Automated Quotation
System.

          "Kelso Permitted Assignee":  KIA V, KEP V, any Affiliate of KIA V, any
           ------------------------                                             
Affiliate of KEP V, any KIA V Designee and any Affiliate of a KIA V Designee.

          "KIA V Designee":  Any of the following individuals: Louis and
           --------------                                               
Patricia Kelso Trust, John Rutledge, U. Bertram Ellis, Jr. and each of the
members of the board of directors of Kelso & Companies, Inc. and any permitted
transferee of any such person under their respective stockholders agreement with
Kelso.

          "Management Agreement":  The Management Services Agreement, dated as
           --------------------                                               
of January 1, 1997, as amended and restated as of the Closing Date in the form
attached hereto as Exhibit D, and as the same shall be further amended from time
to time pursuant to the terms of this Agreement, by and between MJD Partners,
Inc. and the Company.

          "Management Change":  Failure for any reason of Johnson or Thomas to
           -----------------                                                  
devote a substantial amount of his respective time to the management and
operation of the Company's and its subsidiaries' rural telephone business,
unless within 60 days of such Person ceasing to devote such time to the
management and operation of such business an individual has been designated to
replace such Person by MJD Partners and such individual has been agreed to by
the Investor Stockholders in their sole discretion.

                                       36
<PAGE>
 
          "Permitted Assignee":  Any Carousel Permitted Assignee, any Kelso
           ------------------                                              
Permitted Assignee or any third party reasonably acceptable to the Investor
Stockholder which has not arranged with such third party for the acquisition by
it of shares of Common Stock.

          "Person":  An individual, corporation, limited liability company,
           ------                                                          
partnership, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.

          "Registration":  The closing of a public offering pursuant to an
           ------------                                                   
effective registration statement under the Securities Act of 1933, as amended,
and the rules and regulations thereunder.

          "Registration Rights Agreement":  The Registration Rights Agreement,
           -----------------------------                                      
dated as of the date hereof, as the same shall be amended from time to time,
among the Company, Carousel, KIA V, KEP V and MJD Partners.

          "Sale of the Company":  Either (i) a sale by Carousel and/or Kelso of
           -------------------            -                                    
all of the shares of Common Stock owned by them to one or more third parties or
(ii) a sale of all or substantially all of the Company's and its subsidiaries'
 --                                                                           
assets.

          "Stock Option Plan":  A stock option plan of the Company which,
           -----------------                                             
subject to Section 10 and the approval by the Board or the Compensation
Committee, (i) will cover up to 5% of the Company's capital stock and (ii) will
            -                                                          --      
be established upon the recommendation of the chief executive officer.

          "Stock Purchase Agreement":  The Stock Purchase Agreement, dated as of
           ------------------------                                             
March 6, 1997, as the same shall be amended from time to time, among the
Company, MJD Partners, Carousel, KIA V and KEP V.

          "Transfer (or any variation thereof used herein)": Any direct or
           -----------------------------------------------                
indirect sale, assignment, mortgage, transfer, pledge, hypothecation or other
disposal or any arrangement or agreement with respect to any of the foregoing.

          17.  Miscellaneous.   17.1. Recapitalizations, Exchanges, etc.
               -------------          ----------------------------------
Affecting the Common Stock.  Except as otherwise provided herein, the provisions
- --------------------------                                                      
of this Agreement shall apply to the full extent set forth herein with respect
to (a) the shares of Common Stock and (b) any and all shares of capital stock of
    -                                  -                                        
the Company or any successor or assign of the Company (whether by merger,
consolidation, sale of assets or otherwise) which may be issued in respect of,
in exchange for, or in substitution for 

                                       37
<PAGE>
 
the shares of Common Stock, by reason of any stock dividend, split, reverse
split, combination, recapitalization, reclassification, merger, consolidation or
otherwise.

          17.2. Non-Competition Agreement.  In order to induce the Investor
                -------------------------                                  
Stockholders to enter into the Stock Purchase Agreement and this Agreement and
in consideration of the contemplated purchase by the Company of each Management
Stockholder's shares of Common Stock in accordance with Section 4, Eugene B.
Johnson, Jack H. Thomas, John P. Duda and Walter E. Leach, Jr. agrees that from
the date of the termination of his or her employment with the Company or any of
its subsidiaries for any reason until the second anniversary of such
termination, such Person will not become, directly or indirectly, associated in
any way with any Person, whether as principal, owner, partner, consultant,
advisor, agent, employee, director, independent contractor, member, stockholder
or otherwise (other than a holder of less than 5% of the outstanding shares of
any class of equity securities of a public company), that is actively engaged in
the ownership, management or operation of any telephone company, other access
provider or other Person, any of which competes or has any plans to compete with
the Company or any of its subsidiaries in regard to the activities of the
Company or any of its subsidiaries being conducted at the time of such
termination or which are planned at the time of such termination.

          17.3. No Third Party Beneficiaries.  Except as otherwise provided
                ----------------------------                               
herein, this Agreement is not intended to confer upon any Person, except for the
parties hereto, any rights or remedies hereunder.

          17.4. Mechanics of Payment.  If at any time the Company purchases any
                --------------------                                           
shares of Common Stock pursuant to this Agreement, the Company may pay the
purchase price determined under this Agreement for the shares of Common Stock it
purchases by wire transfer of funds or company check in the amount of the
purchase price, and upon receipt of payment of such purchase price or, pursuant
to Section 7, any portion thereof, the seller shall deliver the certificates
representing the number of shares of Common Stock being purchased in a form
suitable for transfer, duly endorsed in blank, and free and clear of any lien,
claim or encumbrance.  Notwithstanding anything in this Agreement to the
contrary, the Company shall not be required to make any payment for shares of
Common Stock purchased hereunder until delivery to it of the certificates
representing such shares or evidence or an affidavit, in either case in form and
substance reasonably satisfactory to the Company of loss, theft or destruction
of such certificates.  If the Company is purchasing less than all the shares of
Common Stock represented by a single certificate, the Company shall deliver to
the seller a certificate for any unpurchased shares of Common Stock.

                                       38
<PAGE>
 
          17.5.  Further Assurances.  Each party hereto or Person subject hereto
                 ------------------                                             
shall do and perform or cause to be done and performed all such further acts and
things and shall execute and deliver all such other agreements, certificates,
instruments and documents as any other party hereto or Person subject hereto may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.

          17.6.  Amendment and Modification.  This Agreement may be amended,
                 --------------------------                                 
modified or supplemented only by the written agreement of the Company, Carousel,
Kelso and MJD Partners.  Notwithstanding the foregoing, this Agreement may not
be amended, modified or supplemented without the prior written consent of a
majority in interest of the Management Stockholders (based on the number of
shares of Common Stock owned by each Management Stockholder at the time of such
amendment, modification or supplement) if such amendment, modification or
supplement could reasonably be expected to adversely affect the Management
Stockholders.

          17.7.  Governing Law.  This Agreement and the rights and obligations
                 -------------
of the parties hereunder and the persons subject hereto shall be governed by,
and construed and interpreted in accordance with, the law of the State of
Delaware, without giving effect to the choice of law principles thereof.

          17.8.  Invalidity of Provision.  The invalidity or unenforceability of
                 -----------------------                                        
any provision of this Agreement in any jurisdiction shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of this Agreement, including that
provision, in any other jurisdiction.

          17.9.  Notices.  All notices, requests, demands, letters, waivers and
                 -------                                                       
other communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (a) delivered
                                                                    -           
personally, (b) mailed, certified or registered mail with postage prepaid, (c)
             -                                                              - 
sent by next-day or overnight mail or delivery or (d) sent by fax, as follows:
                                                   -                          

(i)  If to the Company, to it at:

          MJD Communications, Inc.
          521 East Morehead Street, Suite 250
          Charlotte, North Carolina  28202
          Attention:  Mr. Eugene B. Johnson
          Phone:  (704) 344-8150
          Fax:  (704) 344-8121

                                       39
<PAGE>
 
          with a copy to:

          Carousel Capital Partners, L.P.
          4201 Congress Street, Suite 440
          Charlotte, North Carolina  28209
          Attention:  Mr. Nelson Schwab, III
                      Mr. Reid G. Leggett
          Phone:  (704) 643-3333
          Fax:  (704) 643-6403

          Kelso & Company
          320 Park Avenue, 24th Floor
          New York, New York  10022
          Attention:  James J. Connors, II, Esq.
          Phone:  (212) 751-3939
          Fax:  (212) 223-2379

 (ii)     If to Carousel, to it at:

          Carousel Capital Partners, L.P.
          4201 Congress Street, Suite 440
          Charlotte, North Carolina  28209
          Attention:  Mr. Nelson Schwab, III
                      Mr. Reid G. Leggett
          Phone:  (704) 643-3333
          Fax:  (704) 643-6403

          with a copy to:

          Kennedy Covington Lobdell & Hickman, L.L.P.
          NationsBank Corporate Center
          100 North Tryon Street, Suite 4200
          Charlotte, North Carolina  28202-4006
          Attention:  Stephen K. Rhyne, Esq.
          Phone:  (704) 331-7400
          Fax:  (704) 331-7598

                                       40
<PAGE>
 
 (iii)  If to KIA V or KEP V, to it at:

          Kelso & Company
          320 Park Avenue, 24th Floor
          New York, New York  10022
          Attention:  James J. Connors, II, Esq.
          Phone:  (212) 751-3939
          Fax:  (212) 223-2379

          with a copy to:

          Debevoise & Plimpton
          875 Third Avenue
          New York, New York  10022
          Attention:  Richard D. Bohm, Esq.
          Phone:  (212) 909-6226
          Fax:    (212) 909-6836

(iv)    If to MJD Partners or MJD Inc., to it at:

          MJD Partners, L.P.
          521 East Morehead Street, Suite 250
          Charlotte, North Carolina  28202
          Attention:  Mr. Eugene B. Johnson
          Phone:  (704) 344-8150
          Fax:  (704) 344-8121

          with a copy to:

          Paul, Hastings, Janofsky & Walker LLP
          399 Park Avenue
          New York, New York  10022
          Attention:  Neil A. Torpey, Esq.
          Phone:  (212) 318-6034
          Fax:    (212) 319-4090

                                       41
<PAGE>
 
(v)     If to any of the MJD Principals, to him at:

          MJD Partners, L.P.
          521 East Morehead Street, Suite 250
          Charlotte, North Carolina  28202
          Attention:  Mr. Eugene B. Johnson
          Phone:  (704) 344-8150
          Fax:  (704) 344-8121

          with a copy to:

          Paul, Hastings, Janofsky & Walker LLP
          399 Park Avenue
          New York, New York  10022
          Attention:  Neil A. Torpey, Esq.
          Phone:  (212) 318-6034
          Fax:    (212) 319-4090

(vi)    If to a Management Stockholder, to him or her, as listed below his or
        her name on the signature pages hereto.

or to such other Person or address as any party shall specify by notice in
writing to the Company and the other parties hereto.  All such notices,
requests, demands, letters, waivers and other communications shall be deemed to
have been received (w) if by personal delivery on the day after such delivery,
                    -                                                         
(x) if by certified or registered mail, on the fifth business day after the
 -                                                                         
mailing thereof, (y) if by next-day or overnight mail or delivery, on the day
                  -                                                          
delivered or (z) if by fax, on the next day following the day on which such fax
              -                                                                
was sent, provided that a copy is also sent by certified or registered mail.
          --------                                                          

          17.10.  Headings; Execution in Counterparts.  The headings and
                  -----------------------------------
captions contained herein are for convenience and shall not control or affect
the meaning or construction of any provision hereof. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original and which together shall constitute one and the same instrument.

          17.11.  Injunctive Relief.  The shares of Common Stock cannot readily
                  -----------------
be purchased or sold in the open market, and for that reason, among others, the
parties hereto would be irreparably damaged in the event this Agreement is not
specifically enforced. Each of the parties therefore agrees that in the event of
a breach of any provision of this Agreement, the aggrieved party may elect to
institute and prosecute 

                                       42
<PAGE>
 
proceedings in any court of competent jurisdiction to enforce specific
performance or to enjoin the continuing breach of this Agreement. Such remedies
shall, however, be cumulative and not exclusive, and shall be in addition to any
other remedy which any such party may have.

          17.12.  Entire Agreement.  This Agreement, together with the Stock
                  ----------------                                          
Purchase Agreement and the Registration Rights Agreement, embodies the entire
agreement and understanding of the parties hereto in respect of the subject
matter contained herein.  There are no restrictions, promises, representations,
warranties, covenants or undertakings relating to the shares of Common Stock,
other than those expressly set forth or referred to herein or as set forth in
the Stock Purchase Agreement or the Registration Rights Agreement.  This
Agreement supersedes all prior agreements and understandings among the parties
with respect to such subject matter.

                                       43
<PAGE>
 
          IN WITNESS WHEREOF, this Agreement has been signed by each of the
parties hereto, effective as of the date first above written.


                               MJD COMMUNICATIONS, INC.
                             
                             
                               By:
                                  --------------------------------
                                  Name:
                                  Title:

                             
                             
                               CAROUSEL CAPITAL PARTNERS, L.P.
                             
                               By: Carousel Capital Company, L.L.C.,
                                   its General Partner
                             
                             
                               By:
                                  --------------------------------
                                  Name:
                                  Title:


                             
                               KELSO INVESTMENT ASSOCIATES V, L.P.
                             
                               By: Kelso Partners V, L.P., its General Partner
                             
                             
                               By:
                                  --------------------------------
                                  Name:
                                  Title:


 
                               KELSO EQUITY PARTNERS V, L.P.


                               By:
                                  --------------------------------
                                  Name:
                                  Title:

                                       44
<PAGE>
 
                               MJD PARTNERS, L.P.

                               By:  MJD Partners, Inc., its General Partner


                               By:
                                  --------------------------------
                                  Name:
                                  Title:


 
                               MJD PARTNERS, INC.


                               By:
                                  --------------------------------
                                  Name:
                                  Title:



                               BUGGER ASSOCIATES, INC.


                               By:
                                  --------------------------------
                                  Name:
                                  Title:



                               -----------------------------------
                               Daniel G. Bergstein



                               -----------------------------------
                               John P. Duda
                               6733 N. Baltusrol Lane
                               Charlotte, NC 28210



                               -----------------------------------
                               Meyer Haberman

                                       45
<PAGE>
 
                               -----------------------------------
                               Lisa R. Hood
                               P.O. Box 486
                               Bucklin, KS 67834



                               -----------------------------------
                               Eugene B. Johnson



                               -----------------------------------
                               Walter E. Leach, Jr.
                               6419 Sharon Hills Road
                               Charlotte, NC 28210



                               -----------------------------------
                               Peter G. Nixon
                               P.O. Box 302
                               Westfield, NY 14787



                               -----------------------------------
                               Michael J. Stein
                               3016 Toalson
                               Dodge City, KS 67801



                               -----------------------------------
                               Jack H. Thomas



                               -----------------------------------
                               Joel Bergstein



                               -----------------------------------
                               Michael Bergstein

                                       46
<PAGE>
 
                               -----------------------------------
                               Lindy Sobel Bergstein

                                       47
<PAGE>
 
                               TABLE OF CONTENTS


                                                                           Page


1.  Restrictions on Transfer of Common Stock...............................   1
        1.1.  Restrictions on Transfers by Kelso...........................   1
        1.2.  Restrictions on Transfers by Carousel........................   2
        1.3.  Restrictions on Transfers by MJD Partners and Bugger.........   2
        1.4.  Restrictions on Transfers by MJD Principals..................   3
        1.5.  De Minimis Transfers.........................................   4
        1.6.  Restrictions on Transfers by Management Stockholders.........   4
        1.7.  Treatment of Certain Bergstein Family Members................   5

2.  Sales by MJD Partners to Third Parties.................................   5
        2.1.  General......................................................   5
        2.2.  Right of First Refusal.......................................   6
        2.3.  Tag-Along Rights.............................................   8

3.  Sales by Investor Stockholders to Third Parties........................   8
        3.1.  General......................................................   8
        3.2.  Right of First Offer.........................................   8
        3.3.  Tag-Along Rights.............................................  10
        3.4.  Drag-Along Rights............................................  10

4.  Management Stockholders................................................  11
        4.1.  Sale by Management Stockholders to the Company...............  11
        4.2.  Notice to the Company........................................  11
        4.3.  Right of the Company to Purchase.............................  11
        4.4.  Notice to Management Stockholders............................  12
        4.5.  Payment......................................................  12
        4.6.  Appraisal....................................................  14
        4.7.  Fair Market Value............................................  14
        4.8.  Notice to Stockholders.......................................  15
        4.9.  Acknowledgment of Status.....................................  15

5.  Involuntary Transfers..................................................  15

<PAGE>
 
6.  Auction Sale Procedure................................................... 16
       6.1.  General......................................................... 16
       6.2.  Retention of Investment Bank.................................... 16
       6.3.  Preparation of Confidential Memorandum.......................... 17
       6.4.  Auction Procedures.............................................. 17
       6.5.  Selection of Bid................................................ 17
       6.6.  Negotiation of Sale Agreement................................... 17
       6.7.  Information Regarding Auction................................... 18
       6.8.  Right of Remaining Stockholders to Bid.......................... 18
       6.9.  Cooperation..................................................... 18

7.  Prohibited Purchases..................................................... 19

8.  Issuance of Additional Shares of Common Stock............................ 20
       8.1.  Preemptive Rights of the Investor Stockholders and MJD
         Partners............................................................ 20
       8.2.  Investments made before the end of the First Investment
         Period.............................................................. 20
       8.3.  Investments made after the end of the First Investment
         Period.............................................................. 21
       8.4.  Participation by Carousel, Kelso and MJD Partners............... 21
       8.5.  New Investments................................................. 22

9.  Election of Directors.................................................... 23
       9.1.  Initial Board Make-Up of the Company............................ 23
       9.2.  Board Make-Up of the Company following a Board Event............ 23
       9.3.  Five Year Plan and Annual Business Plan......................... 23
       9.4.  Records and Reports, etc........................................ 23
       9.5.  Board Meetings, Committees, etc................................. 25
       9.6.  Board Make-Up of the Company's Subsidiaries..................... 25
       9.7.  Irrevocable Proxy............................................... 25

10.  Actions Requiring Approval of the Investor Stockholders................. 25
       10.1.  General........................................................ 25
       10.2.  After Additional Investments................................... 27

11.  Exit Payments........................................................... 27
       11.1.  General........................................................ 27
       11.2.  Equitable Allocations.......................................... 28
       11.3.  Procedures for Payment; Characterization of Exit Payments;
          Tax Reporting...................................................... 28
       11.4.  Limitation..................................................... 29
       11.5.  Permitted Assignees............................................ 29

                                      ii
<PAGE>
 
12.  Stock Certificate Legends............................................... 29

13.  Absence of Other Arrangements........................................... 30

14.  New Management Stockholders............................................. 31

15.  Parties................................................................. 31
       15.1.  Assignment by the Company...................................... 31
       15.2.  Assignment Generally........................................... 31
       15.3.  Termination.................................................... 32
       15.4.  Agreements to Be Bound......................................... 32

16.  Defined Terms........................................................... 33

17.  Miscellaneous........................................................... 37
       17.1.  Recapitalizations, Exchanges, etc. Affecting the Common
          Stock.............................................................. 37
       17.2.  Non-Competition Agreement...................................... 38
       17.3.  No Third Party Beneficiaries................................... 38
       17.4.  Mechanics of Payment........................................... 38
       17.5.  Further Assurances............................................. 39
       17.6.  Amendment and Modification..................................... 39
       17.7.  Governing Law.................................................. 39
       17.8.  Invalidity of Provision........................................ 39
       17.9.  Notices........................................................ 39
       17.10.  Headings; Execution in Counterparts........................... 42
       17.11.  Injunctive Relief............................................. 42
       17.12.  Entire Agreement.............................................. 43


                                      iii
<PAGE>
 
SCHEDULES

Schedule A      Management Stockholders


EXHIBITS

Exhibit A       Investment Guidelines
Exhibit B       Five Year Plan
Exhibit C       Spousal Waiver
Exhibit D       Amended and Restated Management Agreement


                                      iv
<PAGE>
 
================================================================================




                            STOCKHOLDERS' AGREEMENT


                                       OF


                            MJD COMMUNICATIONS, INC.









                           Dated as of July 31, 1997



================================================================================
<PAGE>
 
                                                                      Schedule A



                            Management Stockholders
                            -----------------------


     John P. Duda
     Lisa R. Hood
     Eugene B. Johnson
     Walter E. Leach, Jr.
     Peter G. Nixon
     Michael J. Stein
     Jack H. Thomas
<PAGE>
 
                                                                       Exhibit A



                             Investment Guidelines
                             ---------------------

1.   The proposed investment shall be an investment in a rural local exchange
     carrier.

2.   The projected pre-tax internal rate of return for the proposed investment
     shall be 30% or more based on projections presented to and accepted by the
     Investor Stockholders.

3.   The proposed investment shall be recommended by Johnson and Thomas.
<PAGE>
 
                                                                       Exhibit B



                                 Five Year Plan
                                 --------------


                                 See attached.
<PAGE>
 
                                                              Exhibit B
                                                           Five Year Plan

                                                      MJD - EXISTING PROPERTIES
                                                        Financial Projections

<TABLE>
<CAPTION>
                               As of Recap         7/1/97-12/31/97              1998                1999
                               -----------         ---------------              ----                ----
<S>                            <C>                 <C>                        <C>                 <C> 
Operating Revenues                                      20,902,164            44,119,699          45,852,920

Operating Expenses
   Cash Operating Expenses
    (management fee elim.)                               9,838,927            20,205,319          20,773,048
   Depreciation                                          3,916,230             8,035,373           8,127,624
                                                 -----------------------------------------------------------
       Total Operating Expenses                         13,755,157            28,240,692          28,900,672
                                                 -----------------------------------------------------------

Operating Income                                         7,147,008            15,879,007          16,952,248
                                                 -----------------------------------------------------------

Other Income and Expense
   Annual Monitoring Fee
    (Kelso/Carousel)                                      (50,000)             (100,000)           (100,000)
   Amortization Expense                                (1,042,105)           (2,084,207)         (2,084,207)
   Other Non-Oper. Inc./Exp.                               272,200               282,683             283,546
   Interest and Dividend Income                            479,424               798,734             820,725
   Interest Expense                                    (5,559,917)          (10,797,358)        (10,305,676)
                                                 -----------------------------------------------------------
       Total Other Income and Expense                  (5,900,398)          (11,900,148)        (11,385,612)
                                                 -----------------------------------------------------------

Net Income Before Taxes                                  1,246,609             3,978,859           5,566,636

   Income Tax (Expense) Benefit*                           246,655           (1,994,260)         (2,598,202)

Net Income                                               1,493,264             1,984,599           2,968,435
                                                 ===========================================================

Retained Earnings - Beginning of Period               (28,794,796)          (27,301,532)        (25,316,933)
Dividends Paid                                                   0                     0                   0
                                                 -----------------------------------------------------------

Retained Earnings - End of Period                     (27,301,532)          (25,316,933)        (22,348,499)
                                                 ===========================================================

EBITDA                                                  11,063,238            23,914,380          25,079,872
Growth in EBITDA                                                                                       4.87%

</TABLE>


<TABLE>
<CAPTION>
                                                       2000                2001                 2002
                                                       ----                ----                 ----
<S>                                                 <C>                 <C>                  <C> 
Operating Revenues                                  47,667,506          49,520,763           51,403,345

Operating Expenses
   Cash Operating Expenses
    (management fee elim.)                          21,350,846          21,949,142           22,548,161
   Depreciation                                      8,223,472           8,325,070            8,432,275
                                                  -----------------------------------------------------
       Total Operating Expenses                     29,574,318          30,274,212           30,980,436
                                                  -----------------------------------------------------

Operating Income                                    18,093,188          19,246,551           20,422,909
                                                  -----------------------------------------------------

Other Income and Expense
   Annual Monitoring Fee
    (Kelso/Carousel)                                 (100,000)           (100,000)            (100,000)
   Amortization Expense                            (2,084,207)         (2,084,207)          (1,955,212)
   Other Non-Oper. Inc./Exp.                           284,434             285,346              286,284
   Interest and Dividend Income                        769,187             687,572              585,463
   Interest Expense                                (9,701,990)         (8,985,603)          (7,940,254)
                                                  -----------------------------------------------------
       Total Other Income and Expense             (10,832,577)        (10,196,892)          (9,123,719)
                                                  -----------------------------------------------------

Net Income Before Taxes                              7,260,611           9,049,659           11,299,190

   Income Tax (Expense) Benefit*                   (3,245,738)         (3,926,798)          (4,741,678)

Net Income                                           4,014,873           5,122,861            6,557,512
                                                  =====================================================

Retained Earnings - Beginning of Period           (22,348,499)        (18,333,626)         (13,210,765)
Dividends Paid                                               0                   0                    0
                                                  -----------------------------------------------------

Retained Earnings - End of Period                 (18,333,626)        (13,210,765)          (6,653,253)
                                                  =====================================================

EBITDA                                              26,316,660          27,571,620           28,855,184
Growth in EBITDA                                         4.93%               4.77%                4.66%

</TABLE>

* Year 1 Income Tax Expense includes the effect of the subordinated debt
  extinguishment.

Includes all properties and subsidiaries of MJD Communications, Inc. and its
subsidiaries through July 31, 1997 (including without limitation the acquisition
of Chautauqua Erie Telephone Corporation) but not other pending acquisitions
(including without limitation C-R Communications, Inc. and Taconic Telephone
Corp.)




<PAGE>
 
                                                                       Exhibit C



                                 Spousal Waiver
                                 --------------



       _________________ [insert name of spouse] hereby waives and releases any
and all equitable or legal claims and rights, actual, inchoate or contingent,
which ___________ [insert he or she] may acquire with respect to the
disposition, voting or control of the shares of Common Stock subject to the
Stockholders' Agreement of MJD Communications, Inc., dated as of July 31, 1997,
as the same shall be amended from time to time, except for rights in respect of
the proceeds of any disposition of such Common Stock.


                         -------------------------
                         [signature of spouse]
<PAGE>
 
                                                                       EXHIBIT D

              AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT
                                    BETWEEN
                           MJD COMMUNICATIONS, INC.
                                      AND
                              MJD PARTNERS, INC.


          AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT (the "Agreement"),
                                                                   ---------   
dated as of July 31, 1997, between MJD PARTNERS, INC. ("Partners"), a Delaware
                                                        --------              
corporation and general partner of MJD Partners, L.P., and MJD COMMUNICATIONS,
INC. ("MJD"), a Delaware corporation.
       ---                           

          WHEREAS, MJD and Partners are party to a Management Services
Agreement, dated as of January 1, 1997 (the "Original Management Services
                                             ----------------------------
Agreement");
- ---------   

          WHEREAS, MJD requires certain management services, as further
specified in this Agreement, in order that it may provide said services to its
subsidiaries in order that such subsidiaries may provide telecommunications
services which are safe, reasonable and adequate, at rates which are just and
reasonable;

          WHEREAS, Partners has access to the necessary experienced personnel to
provide the management services under this Agreement which MJD requires, and MJD
desires that Partners provide such services pursuant to the terms of this
Agreement;
<PAGE>
 
          WHEREAS, the parties hereto desire to amend and restate the Original
Management Agreement as herein provided;

          NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained, MJD and Partners agree as follows:

          1.  Operation.  MJD hereby appoints and engages Partners to provide
              ---------                                                      
certain management services and Partners hereby agrees to be accessible to MJD
and undertake management services, including, but not limited to, the following
services ("Management Services"), for and on behalf of MJD and its subsidiaries,
           -------------------                                                  
to the extent requested by MJD, it being understood by the parties hereto that
the services to be provided under this Agreement are primarily with regard to
administrative, financing, strategic planning, merger and acquisition activity,
tax planning and similar services, subject to the limitations set forth herein
and in accordance with policies established by the Board of Directors of MJD
(the "Board"):
      -----   

          (a) oversee, maintain and supervise the engineering and operations of
MJD and its subsidiaries in accordance with usual and customary standards of
efficient operation and maintenance;

                                       2
<PAGE>
 
          (b) monitor payment of all expenses and capital expenditures arising
from or in connection with the operation, maintenance or repair of MJD's and its
subsidiaries' operations;

          (c) supervise the maintenance of proper records and books of account
to insure full and true entries in accordance with good accounting practice and,
in accordance with the applicable system of accounts, as prescribed by all
applicable regulatory bodies, of all the dealings, business and affairs of MJD
and its subsidiaries, which records and books of account shall be kept separate
from the records and books of account of Partners.  Both parties, through
authorized representatives, shall at all times during reasonable business hours
have access to and the right to inspect and make copies of any or all such
books, records and accounts;

          (d) advise and assist MJD and its subsidiaries regarding corporate and
financial structure and regarding obtaining financing for operations and long-
term corporate strategies of MJD and its subsidiaries, including, but not
limited to, securing Financing and negotiating and structuring the terms of such
financing;

          (e) advise and assist MJD and its subsidiaries regarding human
resources and benefits matters;

                                       3
<PAGE>
 
          (f) advise and assist MJD and its subsidiaries regarding cost studies,
settlement and administration;

          (g) develop and monitor comprehensive management systems for MJD and
its subsidiaries;

          (h) maintain and monitor, on behalf of MJD and its subsidiaries,
compliance with all federal, state and local governmental and regulatory
regulations, including, but not limited to, preparation and filing of all
materials with appropriate federal, state and local regulatory agencies and
departments; and

          (i) perform the services herein specified, as well as any other
management services incidental to the foregoing or any management services
requested by MJD in a faithful, diligent and able manner and render such reports
to the Board from time-to-time as such shall be called for by the Board.

          Partners shall not be liable for any loss or injury resulting directly
or indirectly from Management Services rendered under this Agreement, except for
any such loss or injury resulting from the gross negligence or willful
misconduct of Partners.  In performing its duties hereunder, Partners shall
comply with all applicable laws and regulatory requirements now or

                                       4
<PAGE>
 
hereafter in force, and all franchises or other governmental authorizations now
or hereafter granted with respect to MJD and its subsidiaries.

          2.  Payment.  On or before the 14th day after the close of each month,
              -------                                                           
Partners shall bill MJD $75,000 as the cost for rendering Management Services
for such month (the "Management Fee").  Such $75,000 payment shall be solely to
                     --------------                                            
compensate the stockholders of Partners for their time and effort expended in
rendering Management Services.  All reasonable travel expenses incurred by Jack
H. Thomas ("Thomas") or Eugene B. Johnson ("Johnson") on behalf of Partners in
            ------                          -------                           
providing Management Services shall be paid directly by MJD.

          3.  Division and Distribution of the Management Fee.  Each of the
              -----------------------------------------------              
stockholders of Partners shall be entitled, on an annual basis, to receive the
following portion of the Management Fee:  Thomas shall be entitled to an annual
salary of $300,000, plus welfare benefits and perquisites comparable to those in
effect on the date hereof; Johnson shall be entitled to an annual salary of
$240,000, plus welfare benefits and perquisites comparable to those in effect on
the date hereof; Bugger Associates, Inc. ("Bugger") shall be entitled to
                                           ------                       
$120,000 pursuant to the terms of the Consulting Agreement, dated as of July 31,
1997, between Bugger and Partners, substantially in the form attached hereto as
Exhibit A; and Meyer Haberman ("Haberman") shall be entitled to $40,000.  Bugger
                                --------                                        
and Haberman shall each be entitled to receive its portion of the Management Fee
in any combination of the following: (i) benefits, including coverage under
health, disability, retirement or life insurance plans

                                       5
<PAGE>
 
maintained by MJD or any of its subsidiaries, (ii) cash and (iii) other
perquisites.  Any remaining portion of the Management Fee shall be divided among
the stockholders of Partners as agreed to by such stockholders.  Any increase in
the Management Fee above $900,000 per annum shall be paid or distributed to the
stockholders of Partners as directed by the Board with the prior written consent
of Kelso Investment Associates V, L.P. ("KIA V") and Carousel Capital Partners,
                                         -----                                 
L.P. ("Carousel").
       --------   

          4.  Independent Contractor.  Partners is, and at all times shall be,
              ----------------------                                          
an independent contractor and not a co-venturer, employee, representative or
agent of MJD. Partners shall be liable for, and shall pay, all employment income
and other taxes associated with the rendering of Management Services hereunder.
Without limiting the effect of Section 17.2 of the Stockholders' Agreement,
dated as of July 31, 1997, as the same shall be amended from time to time (the
"Stockholders' Agreement"), among MJD, Carousel, KIA V, Kelso Equity Partners V,
 -----------------------                                                        
L.P., Partners, MJD Partners, Inc., Bugger, Daniel G. Bergstein, Haberman,
Johnson, Thomas and the other stockholders of MJD, neither Partners nor the
stockholders of Partners may, directly or indirectly, engage in other businesses
or services which (a) directly compete with MJD and its subsidiaries or (b)
involve the ownership (other than as a holder of not in excess of 2% of the
outstanding voting shares of any publicly traded company), operation or
management of local exchange carriers or related or competitive businesses;
provided, however, that Bugger, Daniel G. Bergstein and Haberman may each engage
- --------  -------                                                               
in any of the foregoing as long as Bugger, Daniel G. Bergstein or Haberman, as
the case may be, has first provided MJD with a

                                       6
<PAGE>
 
reasonable opportunity to acquire such business or service and MJD has declined
such opportunity.

          5.  Indemnity.  MJD hereby agrees to indemnify and hold harmless
              ---------                                                   
Partners against any and all losses, claims, damages or liability, including
costs of defense and reasonable attorneys' fees, that arise as a result of the
rendering of Management Services hereunder and shall reimburse Partners for any
legal or other expenses reasonably incurred in connection with investigating or
defending against any such loss, damage, liability or action, except for any
such loss, claim, damage or liability resulting from the gross negligence or
willful misconduct of Partners.  MJD hereby agrees, as promptly as possible
after receipt of written notice of the commencement of any action against it
with respect to Management Services, to notify Partners in writing of the
commencement of such action.

          6.  Amendment.  This Agreement may only be amended in accordance with
              ---------
Section 10.1 of the Stockholders' Agreement.

          7.  Assignment.  Neither party shall have the right to assign this
              ----------                                                    
Agreement without the consent in writing of the other party.

          8.  Successors.  This Agreement shall be binding upon the parties
              ----------                                                   
hereto, their legal representatives, successors and assigns.

                                       7
<PAGE>
 
          9.  Governing Law.  It is understood and agreed that the construction
              -------------                                                    
and interpretation of this Agreement shall at all times and in all respects be
governed by the laws of the State of North Carolina, without considering its
laws or rules related to choice of law.

          10. Severability.  The provisions of this Agreement shall be deemed
              ------------                                                   
severable, and the invalidity or unenforceability of any one or more of the
provisions hereof shall not affect the validity and enforceability of the other
provisions hereof.

          11. Term.  This Agreement shall be effective on July 31, 1997, and
              ----                                                          
shall remain in force until January 1, 2002.  Thereafter, the Agreement shall be
automatically renewed on the same terms and conditions for successive one-year
terms, provided that either party may terminate this Agreement on the expiration
of the original term or any renewal term upon three months prior written notice
to the other party.

                                       8
<PAGE>
 
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.

                                             MJD PARTNERS, INC.

                                             By: /s/ Eugene Johnson   
                                                -------------------------
                                                Name:  Eugene Johnson   
                                                Title: Senior VP


                                             MJD COMMUNICATIONS, INC.

                                             By: /s/ Eugene Johnson   
                                                --------------------------
                                                Name:  Eugene Johnson   
                                                Title: Senior VP

                                       9
<PAGE>
 
        EXHIBIT A TO AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT*

                             CONSULTING AGREEMENT


          This CONSULTING AGREEMENT (the "AGREEMENT") is made and entered into
as of this 31st day of July, 1997 by and between MJD PARTNERS, INC., a Delaware
corporation (the "COMPANY"), and BUGGER ASSOCIATES, INC., a Delaware corporation
(the "CONSULTING COMPANY").  In consideration of the terms and conditions of
this Agreement, the parties hereto agree as follows:

          1.   ENGAGEMENT.  The Company agrees to retain the services of the
               ----------                                                   
Consulting Company as provided for in this Agreement, and the Consulting Company
agrees to make available the services of Daniel G. Bergstein (the "CONSULTANT")
for such purpose, on a non-exclusive basis upon the terms and conditions as set
forth in this Agreement.

          2.   TERM OF AGREEMENT.  The term of this Agreement shall commence as
               -----------------                                               
of July 31, 1997, and shall continue in effect until July 30, 1998 (the "INITIAL
TERM"), and shall automatically be extended for successive periods of one year
each thereafter (each, a "RENEWAL PERIOD"), unless terminated pursuant to
Section 6 hereof (the "TERM"); provided, however, that at the option of either
                               --------  -------                              
the Company or the Consulting Company, the Term shall not be extended for a
successive Renewal Period and this Agreement shall terminate at the expiration
of the Initial Term or the then current Renewal Period, as applicable, upon
written notice to the other party delivered no less than three (3) calendar
months prior to such scheduled expiration.

          3.   DUTIES.  The Consulting Company agrees to provide the services of
               ------                                                           
the Consultant for general consulting services and advice to the Company.  The
Consulting Company agrees to provide the services of the Consultant as
reasonably requested from time to time by the Company.

          4.   COMPENSATION.  The Company shall pay an annual consulting fee for
               ------------                                                     
the consulting services provided hereunder in the amount of $120,000 for the
Initial Term and for each Renewal Period (the "ANNUAL CONSULTING FEE"), payable
monthly in installments of $10,000 each.  Subject to the provisions of Section
6, the monthly installments of the Annual Consulting Fee shall be paid on or
before the 14th day after the close of each month.

- -----------
* This document is Exhibit A to the Amended and Restated Management Services 
Agreement, which Amended and Restated Management Services Agreement is Exhibit D
to Exhibit 10.10 to the Registration Statement.
<PAGE>
 
          5.   EXPENSES.  The Company agrees to pay for or reimburse the
               --------                                                 
Consulting Company for out-of-pocket business costs or expenses incurred by the
Consultant in connection with the performance of his duties under this
Agreement.  It is anticipated that such expenses will not exceed $30,000 during
the Initial Term or any Renewal Period; provided, further, that the Company
                                        --------  -------                  
shall not be obligated to reimburse the Consulting Company for any costs or
expenses which cannot be deducted from the Company's income for purposes of
calculating its U.S. income tax.  Reimbursement for expenses shall be made only
once each month within a reasonable time after the submission of an expense
report by the Consulting Company or the Consultant to the Company, including
appropriate vouchers and receipts evidencing expenses for which reimbursement is
requested.

          6.   TERMINATION.
               ----------- 

          This Agreement and the Term shall terminate automatically (i) on the
last day of the month in which the Consultant dies; (ii) upon the termination of
the Management Services Agreement dated as of July 31, 1997, by and between MJD
Communications, Inc. and the Company; and (iii) in the event the Consultant
shall not be able to perform his duties hereunder for a period of 12 consecutive
months.

          7.   INDEMNIFICATION.  The Company agrees to indemnify the Consulting
               ---------------                                                 
Company and the Consultant for all liability resulting from acts or omissions of
the Consulting Company or the Consultant related to this Agreement to the
fullest extent permitted by law (including reasonable attorneys' fees and
expenses), other than any liability resulting from the gross negligence or
willful misconduct of the Consulting Company or the Consultant.   Any payments
to be made by the Company under this paragraph shall be made as the expenses are
incurred.

          8.   GOVERNING LAW AND JURISDICTION.  This Agreement shall be governed
               ------------------------------                                   
by the substantive laws of the State of New York (without giving effect to its
conflict of law rules).

          9.   ENTIRE AGREEMENT.  The parties hereto acknowledge and agree that
               ----------------                                                
this Agreement constitutes the complete agreement between them and that no oral
modification of this Agreement is permissible.  The parties hereto acknowledge
and agree that in executing this Agreement they do not rely and have not relied
on any representation or statement not contained in this Agreement.

                                      -2-
<PAGE>
 
          10.  SAVINGS CLAUSE.  In the event that any provision of this
               --------------                                          
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions and portions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.

                                      -3-
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have signed this Agreement on
the day and year written above.


                              MJD PARTNERS, INC.


                              By:________________________
                                 Name:
                                 Title:



                              BUGGER ASSOCIATES, INC.


                              By:________________________
                                 Name:
                                 Title

<PAGE>
 
                                                                   EXHIBIT 10.23


                          DRAFT FORM DATED 9/30/98 OF
                 PURCHASE AGREEMENT AND SUBORDINATION AGREEMENT
                 ----------------------------------------------


          This Purchase Agreement and Subordination Agreement (this "Agreement")
                                                                     ---------  
made as of the ____ day of September, 1998 by MJD Communications, Inc., a
Delaware corporation, ("MJD") and Bankers Trust Company, a New York banking
                        ---                                                
corporation ("BT")
              --  


                              W I T N E S S E T H
                              = = = = = = = = = =

          WHEREAS, BT has made a loan (the "Bergstein Loan") to Daniel G.
                                            --------------               
Bergstein ("Bergstein") in the principal amount of up to $2,000,000 pursuant to
            ---------                                                          
four (4) separate Time Promissory Notes each dated as of the date hereof and
each evidencing the principal amount of $500,000 (as same may be amended or
extended, the "Bergstein Notes"); and
               ---------------       
 
          WHEREAS, BT has also made a loan (the "Haberman Loan"; the Bergstein
                                                 -------------                
Loan and the Haberman Loan herein, collectively, the "Loans") to Meyer Haberman
                                                      -----                    
("Haberman"; Bergstein, Haberman and JED (hereinafter defined) herein,
  --------                                                            
collectively, the "Obligors") in the aggregate principal amount of up to
                   --------                                             
$1,000,000 pursuant to two (2) separate Time Promissory Notes each dated as of
the date hereof and each evidencing the principal amount of $500,000 (as same
may be amended or extended, the "Haberman Notes"; the Bergstein Notes and the
                                 --------------                              
Haberman Notes herein, collectively, the "Notes"); and
                                          -----       
 
          WHEREAS, the collateral pledged to BT as security for the Bergstein
Loan pursuant to four (4) separate Pledge Agreements dated as of the date hereof
made by JED Communications Associates, Inc. ("JED") to BT (as same may be
                                              ---                        
amended, the "Bergstein Pledge Agreements") consists of shares of stock in MJD,
              ---------------------------                                      
and the collateral pledged to BT as security for the Haberman Loan pursuant to
two (2) separate Pledge Agreements dated as of the date hereof made by Haberman
to BT (as same may be amended, the "Haberman Pledge Agreements"; the Bergstein
                                    --------------------------                
Pledge Agreements and the Haberman Pledge Agreements herein, collectively, the
"Pledge Agreements") consists of shares of stock in MJD (all shares of stock of
- ------------------                                                             
MJD pledged to BT pursuant to the Pledge Agreements is herein referred to as the
"MJD Stock", and together with any other collateral which may be pledged by
 ---------                                                                 
Obligors as security for the Loans, the "Collateral"); and
                                         ----------       

          WHEREAS, MJD desires to have the rights granted pursuant hereto with
respect to the MJD Stock in the event of foreclosure by BT thereon and BT
desires to assure some liquidity of the MJD Stock in the event of such a
foreclosure,

          NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and legal sufficiency of which is hereby
acknowledged, MJD hereby covenants and agrees with BT as follows:
<PAGE>
 
          1.   (a)  BT and MJD agree that, subject to the terms and conditions
hereof, BT, prior to foreclosure on MJD Stock after the occurrence of an Event
of Default under any Note (as defined in such Note), shall, and shall be
obligated to, sell and assign to MJD (without recourse, warranty or
representation, express or implied, except for such warranties and
representations as are expressly contained in this Agreement) and MJD, on the
date and as otherwise hereinafter provided, shall, and shall be obligated to,
purchase BT's right, title and interest in such Note or Notes, the Pledge
Agreement or Pledge Agreements related thereto, the Collateral pledged under
such Pledge Agreement or Pledge Agreements and all other instruments and
documents, if any, relating, thereto (collectively, the "Purchase Documents").
                                                         ------------------    
The purchase of the Purchase Documents shall occur on the date specified in a
written notice from BT to MJD (the "Purchase Notice") which date shall be no
                                    ---------------                         
earlier than thirty (30) days after the date of the Purchase Notice (such date,
the "Purchase Date").  If, prior to the Purchase Date, the Note or Notes to be
     -------------                                                            
sold to MJD are "indefeasibly paid" (hereinafter defined) in full, the
obligation to purchase the Purchase Documents relating thereto shall cease and
terminate and neither party shall have any further rights or obligations
hereunder with respect to such Note or Notes but each party's rights and
obligations with respect to any other unpaid Notes shall remain in effect until
this Agreement shall terminate as provided in Paragraph 14 hereof.  In no event
shall BT be under any obligation to sell any Purchase Documents to MJD if MJD
shall fail to purchase such Purchase Documents on the Purchase Date in
accordance herewith nor shall BT have any obligation thereafter to sell any
other Note (and related Purchase Documents and Collateral) to MJD in the event
of any such default by MJD.  The foregoing provisions of this Paragraph 1(a)
shall be applicable upon each and every occurrence prior to BT's foreclosure on
MJD Stock as a result of an Event of Default under any Note. The terms
"indefeasibly paid" as used in this Paragraph 1(a) and "indefeasible repayment"
as used in Paragraph 14 mean that one (1) year has elapsed after such payment
with no intervening bankruptcy or like proceeding having occurred with respect
to the Obligor making such payment.

          (b)  The purchase price ("Purchase Price") for any Purchase Documents
                                   --------------                             
shall be the lesser of (A) (i) one hundred percent (100%) of the then
outstanding principal amount of the Note or Notes to be sold to MJD plus (ii)
                                                                    ----     
accrued and unpaid interest payable in respect thereof to the date on which the
Purchase Price is paid to BT as provided in subparagraph (d) hereof plus (iii)
                                                                    ----      
all other obligations which are then owing to BT with respect to the Purchase
Documents related thereto or (B) an aggregate of $2,000,000 in the case of the
Bergstein Loan and all Purchase Documents related thereto, plus an aggregate of
$1,000,000, in the case of the Haberman Loan and all Purchase Documents related
thereto.

          (c)  Anything herein to the contrary notwithstanding in no event shall
MJD be obligated to pay more than an aggregate of $1,000,000 on account of the
Purchase Price for Purchase Documents or, as provided in clause (g) below, the
MJD Stock in any calendar year, it being understood and agreed that BT shall
have the continuing right (and, prior to foreclosing on any MJD Stock, the
obligation) at the beginning of any subsequent calendar year to require MJD to
purchase any Note or Notes (and the related Purchase Documents) under which an
Event of Default has occurred and is continuing or, as provided in clause (g)
below, the MJD Stock subject to the foregoing $1,000,000 limitation for each
such subsequent calendar year and the other terms and provisions hereof.  BT
shall have the sole right to select which of the Notes or, as provided in clause
(g) below, the MJD Stock to sell to MJD in the event there is an Event of
Default under Notes having an aggregate Purchase Price in excess of $1,000,000
in any one 

                                       2
<PAGE>
 
calendar year. If BT shall continue to hold any of the Notes at the same time
that MJD is also holding a Note, then the provisions of Paragraph 8 below shall
be applicable. At such time as MJD is no longer restricted from purchasing
Purchase Documents or MJD Stock, as the case may be, having an aggregate
Purchase Price exceeding $1,000,000 (as such restriction is more fully described
in Paragraph 13(f) hereof), then this Paragraph 1(c) shall no longer be of any
force or effect.

          (d)  Payment of any Purchase Price shall be made on the Purchase Date,
in immediately available funds at BT's office at 280 Park Avenue, New York, New
York 10017, Attention: The Private Bank.

          (e)  Upon payment of the Purchase Price for Purchase Documents, BT
will sell and assign to MJD, all of BT's right, title and interest in and to
such Purchase Documents (including the Collateral related thereto) and BT will
deliver to MJD the original of the applicable Note or Notes to be sold (or, if
necessary, an Affidavit of Lost Note reasonably acceptable to MJD) and originals
or certified copies of such other Purchase Documents relating thereto then in
BT's possession. Notwithstanding anything to the contrary in this Agreement, the
obligation of MJD to purchase the Purchase Documents or, as provided in clause
(g) below, the MJD Stock shall be conditioned upon delivery to MJD of not fewer
than (x) 5840 shares of MJD Stock issued to JED in the event MJD purchases
all of the Bergstein Notes and related Purchase Documents (or a pro rata share
                                                                --- ----      
thereof if MJD purchases less than all of the Bergstein Notes) and (y) 2920
shares of MJD Stock issued to Haberman in the event MJD purchases both of the
Haberman Notes and related Purchase Documents (or 1460 shares thereof if MJD
purchases only one of the Haberman Notes), together with, in any case, the blank
stock power or powers for the MJD Stock being delivered to MJD executed by the
applicable Obligor at the time of the making of the applicable Loan.  Any sale
and assignment of Purchase Documents shall be pursuant to an endorsement of the
applicable Note or Notes, an assignment of the applicable Pledge Agreement or
Pledge Agreements and any other related Purchase Document then in effect (if
any) and delivery of such MJD Stock and blank stock powers as and to the extent
set forth above together with such other Collateral as may then be in BT's
possession which secures the Note or Notes being sold to MJD.  The sale and
assignment of any Purchase Documents shall be without any recourse,
representation or warranty expressed or implied by BT, except that BT shall
represent and warrant the unpaid principal amount evidenced by the applicable
Note or Notes, and that it has not sold or assigned or encumbered the related
Purchase Documents (including the MJD Stock being delivered and other
Collateral, if any), or any interest therein.

          (f)  Except as set forth in Paragraph 1(e), BT shall make no
representations or warranties, express or implied, to MJD.  In no event shall BT
have any responsibility in respect of the genuineness, validity or
enforceability of the Purchase Documents or any of the instruments or documents
referred to therein or herein, or any obligation to make any inquiry in respect
of any thereof, as to all of which MJD shall have satisfied itself.  MJD has
reviewed the Purchase Documents which consist, as of the date hereof, of the
Notes, the Pledge Agreements, the MJD Stock and blank stock powers.

          (g)  (A) At MJD's option to be exercised by written notice to BT no
later than ten (10) days after the date of any Purchase Notice, MJD may elect
not to purchase the Purchase Documents which it is otherwise obligated to
purchase but instead elect to purchase the 

                                       3
<PAGE>
 
MJD Stock securing such Purchase Documents in which event BT agrees, subject to
clause (g)(C) below, to exercise BT's remedies under such Purchase Documents to
foreclose on the MJD Stock delivered to secure such Purchase Documents subject
to the following conditions:

                (i)   BT shall have, and at all times during any such
foreclosure shall continue to have, the right to exercise its remedies under
such Purchase Documents and applicable law;

                (ii)  MJD shall pay all costs and expenses incurred by BT in
connection with any such foreclosure and exercise by BT of its remedies under
the Purchase Documents and indemnify and hold BT harmless from and against any
loss, liability, cost, damage or claim arising by reason of the exercise of such
remedies unless due to BT's gross negligence or willful misconduct; and

                (iii) without limiting clause (ii) above, any interest on the
Note or Notes then being foreclosed at the rate in effect prior to a default
thereunder which is not paid to BT (or if paid on other than the scheduled
payment date under the Note or Notes, interest on such interest (to the extent
permitted by law) at such rate until the date of payment) shall be paid by MJD
to BT except that MJD shall not be obligated to pay any interest accruing from
the date of the Purchase Notice to the date which is thirty (30) days
thereafter.

          (B)  At any foreclosure sale BT agrees to "bid in" the amount of the
principal, interest and other amounts owed to it under the Note or Notes and
related Purchase Documents being foreclosed. If BT shall be the successful
bidder at any such foreclosure sale, BT agrees to sell its interest in the MJD
Stock so foreclosed upon to MJD (without any representation or recourse
whatsoever, express or implied) for the Purchase Price applicable to such
Purchase Documents and related MJD Stock plus such additional amounts for which
MJD is obligated to pay pursuant to clauses (ii) and (iii) above. The limitation
set forth in Paragraph 1(c) shall be applicable to the Purchase Price (but not
the amounts owed under clause (ii) and (iii)) which MJD is obligated to pay
under this Paragraph 1(g). BT shall have the sole right to select which Note or
Notes and related Purchase Documents are to be foreclosed upon in the event
there is an Event of Default under Notes having an aggregate Purchase Price in
excess of $1,000,000 and shall also have the sole right to direct and control
the foreclosure proceeding and other remedial action but BT agrees to act in a
commercially reasonable manner with respect thereto. In any event and regardless
of whether MJD shall have the right to require BT to exercise its remedies as
set forth in this Paragraph 1(g), BT shall give notice to MJD of any foreclosure
on MJD Stock at the same time that BT is required to give such notice to the
applicable Obligor. If MJD shall default in its obligations under this Paragraph
1(g), then the rights of MJD under this Paragraph 1(g) shall no longer be
applicable. MJD hereby releases BT from any claim, loss, cost or damage,
including any right to purchase the affected Note or Notes, Purchase Documents
and related Collateral thereunder, if (A) BT is not the successful bidder at any
such foreclosure sale, and (B) as a result of any of the conditions,
limitations, circumstances or events set forth in Paragraphs 1(f), 2, 3 or 4
hereof, BT fails or is unable to foreclose on any MJD Stock.

          (C)  In lieu of foreclosing on MJD Stock Purchase as set forth above
in clause (B) of this Paragraph 1(g), BT shall have the right in its sole and
absolute discretion to require the applicable Obligor to sell such MJD Stock to
MJD at a per share price of $342.50, the proceeds 

                                       4
<PAGE>
 
of which shall be applied, and accepted, as payment in full in respect of the
principal and interest due under the applicable Note or Notes secured by such
MJD Stock. The Obligors so agree to sell and MJD so agrees to buy such MJD
Stock. At the time of receipt of such payment by BT, BT shall release its lien
on the MJD Stock so sold. BT agrees to exercise this right by written notice to
MJD and the applicable Obligor within thirty (30) days after BT's receipt of the
notice from MJD referred to in the first sentence of this Paragraph 1(g).


               (h)  The obligations of MJD under this Paragraph 1 are herein
called the "Obligations".
            -----------  

          2.   No irregularity, invalidity or unenforceability of all or any
part of any Purchase Document or any of the other instruments or documents
referred to therein or herein shall affect, impair or be a defense to MJD's
Obligations hereunder. Except as otherwise provided in this Agreement, MJD's
Obligations shall be absolute and unconditional, without regard (i) to the
regularity, validity or unenforceability of any Purchase Document, or the
instruments or documents referred to therein or herein or any other
circumstance, similar or dissimilar, including, without limitation, liens,
charges, encumbrances, taxes, assessments, agreements, violations of law, or
similar or dissimilar circumstances affecting any Purchase Document or any
Collateral; (ii) to the existence or good standing or priority of any lien or
security interest securing any Note, any failure or defect in recording any such
lien or security interest or any assignment of lien or security interest or
perfecting such lien or security interest; (iii) to any default by any Obligor
under any Purchase Document, this Agreement or any of the instruments or
documents referred to herein or therein, or any insolvency event related to or
the disaffirmance of any of such person's or entity's obligations in connection
therewith, or any failure by BT to enforce or require compliance with the
obligations of any Obligor or any other person under any Purchase Document or
any of the instruments or documents referred to herein or therein, or any
failure by BT to take any action permitted or required to be taken by it under
any Purchase Document, or any setoff, counterclaim, deduction or other right
which, for any reason whatsoever, MJD or any other person may have against BT,
or any act or circumstance that may constitute failure of consideration,
commercial frustration of purpose or impossibility of performance of this
Agreement or any other circumstance or cause whatsoever.

          3.   MJD hereby consents that from time to time, before or after any
default by any Obligor, with or without notice to or assent from MJD:

               (a)  any security (including the Collateral) at any time held by
or available to BT for any obligation of any Obligor under the Purchase
Documents, or any security at any time held by or available to BT for any
obligation of any other person or party primarily, secondarily or otherwise
liable for all or any portion of the indebtedness evidenced by any Note and/or
any other obligations of any Obligor or any other person or party, other than
BT, under any of the Purchase Documents, may be accelerated, settled, exchanged,
surrendered or released and BT may fail to set off and may release, in whole or
in part, any balance of any deposit account or credit on its books in favor of
any Obligor, or of any such other person or party;

               (b)  any obligation of the Obligors under the Purchase Documents,
or of any such other person or party, may be changed, altered, renewed,
extended, continued, 

                                       5
<PAGE>
 
accelerated, surrendered, compromised, settled, waived or released in whole or
in part, or any default with respect thereto waived; and

               (c)  BT may extend further credit in any manner whatsoever to the
Obligors, and generally deal with the Obligors or any of the above-mentioned
security (including the Collateral), deposit account, credit on its books or the
Obligors as BT may see fit;

and MJD shall remain bound in all respects under this Agreement, without any
loss of any rights by BT and without affecting the Obligations, notwithstanding
any such exchange, surrender, release, change, alteration, renewal, extension,
continuance, compromise, waiver, inaction, extension of further credit or other
dealing.  Notwithstanding anything herein to the contrary, BT shall not, without
the prior written consent of MJD, agree to any waiver or amendment of the
Purchase Documents that would (i) reduce the interest rate payable with respect
to the Notes, or (ii) release shares of the MJD Stock below the amount required
to be delivered by BT to MJD pursuant to Paragraph 1(e) hereof or (iii) extend
the maturity date set forth in any of the Notes for final repayment thereof.

          4.   MJD confirms that its decision to enter into this Agreement is
based on its own investigation and judgment with respect to (i) the
creditworthiness of the Obligors and any other person or entity, (ii) the
economic value of the Collateral, (iii) the value, extent and adequacy of the
Collateral, (iv) the adequacy and enforceability of the Purchase Documents, (v)
the desirability of purchasing the Purchase Documents, and (vi) all other
aspects of the transaction contemplated under the Purchase Documents and
hereunder. MJD agrees and confirms that the Obligations shall be and are
irrevocable and unconditional and there are no conditions which must be
satisfied, or documents which must be executed or delivered prior to MJD's
obligation to purchase any Purchase Documents as provided herein, except as
otherwise provided in this Agreement.

          5.   MJD acknowledges and confirms to BT that MJD has not been induced
to execute and deliver this Agreement as a result of, and is not relying upon,
any representations, warranties, agreements or conditions, whether express or
implied or written or oral, by BT, or any other person or entity. Without
limiting the generality of the foregoing or any other provisions of this
Agreement, insofar as MJD is concerned:

               (a)  BT is not obligated to give or to continue any financial
accommodations to the Obligors or any other person or entity or to change or
extend the time of payment of, or renew or alter, any liability of the Obligors
or any other person or entity, any security therefor or any liability incurred
directly or indirectly in respect thereof;

               (b)  no person or entity, including, without limitation, BT, has
made any representations to MJD as to any matter which may affect or in any way
relate to the financial condition, relationships or transactions of the Obligors
or any other person, including, without limitation, the business, assets
liabilities, type or value of any security therefor, financial condition,
management or control of the Obligors or any other person or entity;

               (c)  BT is not obligated to notify MJD or any other person or
entity of any change in the business, assets, liabilities, type or value of any
security therefor, financial 

                                       6
<PAGE>
 
condition, management or control the Obligors of any other person or entity, and
none of such changes shall release or otherwise impair any of the rights of BT
against MJD;

               (d)  no failure by BT to obtain, perfect, protect, insure or
realize upon any security for any of the liabilities of the Obligors or of any
other person or entity and no other act or failure to act by BT shall release or
otherwise impair any of the obligations of MJD hereunder.

          6.   MJD shall reimburse and save BT harmless against liability for
the payment of all costs and expenses arising in connection with the enforcement
of or preservation of any of BT's rights under this Agreement, including,
without limitation, the reasonable fees and expenses of BT's counsel.

          7.   MJD hereby waives notice of acceptance of this Agreement and of
the making of the Loan or any advance thereof by BT to any Obligor and any
demand under this Agreement, except as specifically provided herein. MJD further
waives any right to require that any action be brought against any Obligor or
any other person or party or to require that resort be had to any security,
Collateral or to any balance of any deposit account or credit on the books of BT
in favor of either Obligor or any other person or party prior to a demand of MJD
hereunder.

          8.   (a)  So long as BT shall continue to hold any Note while MJD
shall also hold any Note (any such Note, the Purchase Documents related thereto
and the portion of the Loans, all interest thereon and all other amounts owed in
connection therewith which are held by MJD, the "Subordinate Loan"), each
                                                 ----------------        
Obligor and MJD hereby agree that the Subordinate Loan and all terms and
provisions thereof and the rights of MJD to the Collateral securing the
Subordinate Loan (the "Subordinate Collateral") are expressly subordinate and
                       ----------------------                                
junior in right of payment (as defined in clause (b) below) to the Loans and to
the terms and provisions thereof and the rights of BT to the Collateral.

               (b)  "Subordinate and junior in right of payment" shall mean
that:

                        (i)  MJD shall not, without the express prior written
consent of BT in each instance which may be given or withheld in the sole
discretion of BT, take, demand or receive from any Obligor, and, anything in any
document or instrument evidencing, or agreement with respect to, the Subordinate
Loan to the contrary notwithstanding, no Obligor will make, give or permit,
directly or indirectly, by set-off, redemption, purchase or in any other manner,
any payment, prepayment or security for the whole or any part of the Subordinate
Loan (including, without limitation, the scheduled repayments set forth in
Section 2.3 of each Note), unless and until this Agreement shall terminate as
provided in Paragraph 14 hereof; and

                        (ii)  MJD shall not enforce or take any action to
enforce or collect the Subordinate Loan or make any claim whatsoever against the
Subordinate Collateral or any portion thereof, accelerate the scheduled
maturities of any amount owing under the Subordinate Loan and/or enforce any
lien or security interest securing the Subordinate Loan, and/or exercise any of
its claims, rights, remedies or powers, for payment of money or otherwise with
respect to the Subordinate Loan and/or exercise any other right or remedy MJD
may have, without the prior written consent of BT in each instance which may be
given or withheld in the sole discretion of BT.

                                       7
<PAGE>
 
               (c)  In furtherance of the foregoing subordination, MJD hereby
assigns to BT all payments of principal, interest, fees, expenses and other
amounts ("Proceeds") that may become due and payable to MJD in respect of the
          --------
Subordinate Loan or the Subordinate Collateral. In the event that any Proceeds
are made payable to MJD in violation of clauses (a) and (b) above despite such
direction, MJD hereby irrevocably appoints BT as its attorney-in-fact to endorse
the name of MJD on any check or other instrument representing Proceeds that may
be payable to MJD.

               (d)  MJD will not, without the prior written consent of BT in
each instance, which may be given or withheld in the sole discretion of BT,
transfer, sell or assign the Subordinate Loan or any interest therein, whether
absolutely or as collateral security.

               (e)  MJD hereby covenants that it will not commence, or join with
any other creditor in commencing, any bankruptcy, reorganization, readjustment
of debt or any dissolution, receivership, liquidation or insolvency proceedings
with respect to any Obligor prior to payment in full of the applicable Loan. In
the event of any dissolution, winding up, liquidation, readjustment,
reorganization or other similar proceedings relating to any Obligor or to their
property (whether voluntary or involuntary, partial or complete, and whether in
bankruptcy, insolvency or receivership, or upon an assignment for the benefit of
creditors, or any other marshalling of the assets and liabilities of any
Obligor, or any sale of all or substantially all of the assets of any Obligor,
or otherwise), (x) the Loan shall first be paid in full before MJD shall be
entitled to receive or retain any payment or distribution in respect of the
Subordinate Loan of any kind or character, whether in cash, property or
securities and (y) MJD authorizes BT in the name of MJD or otherwise, to demand,
sue for, collect, receive and give receipt for any and all payments or
distributions of any kind or character, whether in cash, property or securities,
in respect of the Subordinate Loan to which MJD would be entitled if the
Subordinate Loan were not subordinated pursuant to this Agreement, and file all
claims, proofs of debt, petitions and other documents in the form required in
such statutory or nonstatutory proceedings for the full outstanding amount of
the Subordinate Loan and prove, and vote or consent in any such proceedings with
respect to, any and all such claims of MJD relating to the Subordinate Loan as
BT may deem advisable. Under the circumstances set forth in this Paragraph, MJD
agrees duly and promptly to take such action as may be requested at any time and
from time to time by BT, to file appropriate proofs of claim in respect of the
Subordinate Loan, and to execute and deliver such powers of attorney,
assignments or proofs of claim or other instruments as may be requested by BT,
in order to enable BT to enforce any and all claims upon or in respect of the
Subordinate Loan and to collect and receive any and all payments or
distributions which may be payable or deliverable at any time upon or in respect
of the Subordinate Loan.

          9.   Each reference herein to BT shall be deemed to include its
successors and assigns, who shall be bound by and in whose favor the provisions
of this Agreement shall also inure.  Each reference herein to MJD shall be
deemed to include the successors and assigns of MJD, each of whom shall be bound
by and in whose favor the provisions of this Agreement shall also inure,
provided, however, that MJD shall in no event nor under any circumstance have
the right, without obtaining the prior written consent of BT, to assign or
transfer MJD's obligations and liabilities under this Agreement, in whole or in
part, to any other person, party or entity.  Without limiting the foregoing, the
agreements and obligations on the part of MJD herein contained shall remain in
force and application notwithstanding the merger, consolidation, 

                                       8
<PAGE>
 
reorganization or absorption thereof, and the term "MJD" shall include such new
entity, but the old entity shall not thereby be released from any obligations or
liabilities hereunder.

          10.  No delay on the part of BT in exercising any right or remedy
under this Agreement or failure to exercise the same shall operate as a waiver
in whole or in part of any such right or remedy. No notice to or demand on MJD
shall be deemed to be a waiver of the obligations of MJD or of the right of BT
to take further action without notice or demand as provided in this Agreement.
No course of dealing between MJD and BT shall change, modify or discharge, in
whole or in part, this Agreement or any obligations of MJD hereunder.

          11.  This Agreement may only be modified, amended, changed or
terminated by an agreement in writing signed by the party to be charged
therewith. No waiver of any term, covenant or provision of this Agreement shall
be effective unless given in writing by the party entitled to the benefit of
such term, covenant or provision and if so given shall only be effective in the
specific instance in which given.

          12.  This Agreement sets forth the entire agreement and understanding
of BT and MJD with respect to the matters covered by this Agreement and MJD and
BT acknowledge that no oral or other agreements, understandings, representations
or warranties exist with respect to this Agreement or with respect to the
obligations of MJD or BT under this Agreement, except those specifically set
forth in this Agreement.

          13.  (a)  Each of MJD and BT represents and warrants to the other (as
applicable) that:


                (i)   this Agreement constitutes the legal, valid and biding
obligation of MJD or BT, as the case may be, enforceable against such party in
accordance with its terms except as such enforcement may be limited by
bankruptcy, insolvency or other similar laws and subject to general principles
of equity;

                (ii)  MJD is duly organized, validly existing and in good
standing as a corporation under the law of the State of Delaware;

                (iii) BT is duly organized, validly existing and in good
standing as a corporation under the laws of the State of New York;

                (iv)  neither the execution or delivery of this Agreement nor
the consummation by MJD or BT, as the case may be, of the transactions
contemplated hereby nor compliance with the terms and provisions hereof by such
party will violate, contravene or cause a default under its constituent
documents or any applicable provision of law or any applicable regulation or
other manifestation of governmental action or any agreement or document to which
such party may be bound;

                (v)   all necessary approvals, consents, licenses, registrations
and validations of any governmental regulatory body, including, without
limitation, approvals required to permit MJD or BT, as the case may be, to
execute and carry out the provisions of this Agreement, for the validity of the
obligations of such party hereunder and for the making of any 

                                       9
<PAGE>
 
payment or remittance of any funds required to be made by such party under this
Agreement, have been obtained and are in full force and effect;

                (vi)  MJD represents and warrants to BT that pursuant to a loan
agreement to which it is subject, MJD is, and pursuant to an indenture to which
it is subject MJD may be, required to limit its aggregate Purchase Price for MJD
Stock in any calendar year to $1,000,000 and MJD shall promptly advise BT at
such time as MJD is no longer so restricted; and

                (vii) MJD and each Obligor represents and warrants to BT that
there is no restriction or limitation on the assignment of the MJD Stock to BT
pursuant to the Pledge Agreements, or to any foreclosure thereon or subsequent
sale thereof, which has not been waived arising by reason of the constituent
documents of MJD or any agreement to which MJD or any Obligor is a party
(including under the stockholders' agreement among, inter alia, the parties) or
                                                    ----- ----
to which any of such parties is bound or to which any of such parties otherwise
has knowledge and, in confirmation thereof, MJD hereby irrevocably waives any
right of first refusal, right of first offer or other rights it may have under
the stockholder' agreement referred to above.

          (b)  MJD and the Obligors agree that:


               (i)  Upon notice to MJD that an Event of Default has occurred
under any Note that BT shall be entitled to exercise the voting and other rights
of the applicable Obligor with respect to the MJD Stock securing such Note as
and to the extent set forth in 5(a) of the Pledge Agreements;

               (ii) All dividends, distributions and other payments on the MJD
Stock, and copies of all notices, communications and other information with
respect to the MJD Stock otherwise forwarded to the record holder thereof shall
also be forwarded to BT at:

                    Bankers Trust Company
                    One Bankers Trust Plaza, 14/th/ Floor
                    Loan Center Mail Stop 2144
                    New York, New York 10006
                    Attn:  Errol Harris, Vice President

          14.   So long as BT has made no demand on MJD hereunder at such time,
this Agreement and MJD's Obligations shall terminate six (6) months after the
final, indefeasible repayment of all Loans and other amounts owed to BT in
connection therewith and the termination of any right of any Obligor to borrow
under their respective Notes. In the event any Loan is not paid when due, BT
agrees to use commercially reasonable efforts to obtain such payment so long as
MJD is not in default of its obligations hereunder.

          15.   Any notice, request or demand given or made under this Agreement
shall be in writing and shall be hand delivered or sent by Federal Express or
other reputable courier service or by postage prepaid registered or certified
mail, return receipt requested or by facsimile, and shall be deemed given (a)
when received at the following addresses if hand delivered or if sent by Federal
Express or other reputable courier service, and (b) three (3) business days
after being 

                                       10
<PAGE>
 
postmarked and addressed as follows if sent by registered or certified mail,
return receipt requested and (c) when sent if by facsimile at the number set
forth below:


          If to BT:

               Bankers Trust Company
               280 Park Avenue, 6 West
               New York, New York  10017
               Attn: The Private Bank
                    Ned Kane, Principal
               Fax No.  (212) 454-4740

          If to MJD:

               MJD Communications Inc.
               521 E. Morehead Street, Suite 250
               Charlotte, NC 28202
               Attn:  Walter E. Leach, Jr.
               Fax No. (704) 344-8121

          With a copy of any demand for payment or notice of default to:

               Paul, Hastings, Janofsky & Walker LLP
               319 Park Avenue
               New York, New York 10022
               Attn:  Neil A. Torpey, Esq.
               Fax No. (212) 319-4090

Each party to this Agreement may designate a change of address by notice given,
as herein provided, to the other party fifteen (15) days prior to the date such
change of address is to become effective.

          16.   THIS AGREEMENT IS, AND SHALL BE DEEMED TO BE, A CONTRACT ENTERED
INTO UNDER AND PURSUANT TO THE LAWS OF THE STATE OF NEW YORK AND SHALL BE IN ALL
RESPECTS GOVERNED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.

          17.   Each party hereto agrees to submit to personal jurisdiction in
the State of New York in any action or proceeding arising out of this Agreement.
In furtherance of such agreement, each party hereto agrees and consents that
without limiting other methods of obtaining jurisdiction, personal jurisdiction
over such party in any such action or proceeding may be obtained within or
without the jurisdiction of any court located in New York and that any process
or notice of motion or other application to any such court in connection with
any such action or proceeding may be served upon such party by registered or
certified mail to, or by 

                                       11
<PAGE>
 
personal service at, the last known address of such party, whether such address
be within or without the jurisdiction of any such court.

          18.  MJD acknowledges that this Agreement and the Obligations are and
shall at all times continue to be absolute, irrevocable and unconditional in all
respects except as otherwise specifically provided herein, and shall at all
times be valid and enforceable irrespective of any other agreements or
circumstances of any nature whatsoever which might otherwise constitute a
defense to this Agreement, the Obligations or the obligations of any other
person or party relating to this Agreement or with respect to the indebtedness
evidenced by any Note, including, but not limited to, a foreclosure of any
security interest in the Collateral, or the filing of a petition under Title 11
of the United States Code with regard any Obligor, and MJD absolutely,
unconditionally and irrevocably waives any and all right to assert or interpose
any defense, setoff, counterclaim or crossclaim of any nature whatsoever with
respect to this Agreement or the Obligations (provided, however, that the
foregoing shall not be deemed a waiver of the right of MJD to raise any defense
or assert any compulsory counterclaim maintained in a court of the United
States, or of the State of New York if such defense is inextricably linked to
the subject action or if such counterclaim is compelled under local law or rule
of procedure, nor shall the foregoing be deemed a waiver of the right of MJD to
bring any separate action or proceeding asserting any claim of any nature
whatsoever against BT which would otherwise have constituted a defense, setoff,
counterclaim or crossclaim, other than a defense, setoff, counterclaim or
crossclaim existing on or before the date hereof all of which having been
irrevocably waived).

          19.  This Agreement may be executed in one or more counterparts by
some or all of the parties hereto, each of which counterparts shall be an
original and all of which together shall constitute a single agreement. The
failure of any party listed below to execute this Agreement, or any counterpart
hereof, or the ineffectiveness for any reason of any such execution, shall not
relieve the other signatories from their obligations hereunder.

          20.  MJD HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, AND BT BY ITS
ACCEPTANCE OF THIS AGREEMENT IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE
EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT
OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THIS
AGREEMENT.

                                       12
<PAGE>
 
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement the day
and year first above set forth.

                                    MJD COMMUNICATIONS, INC.


                                    By:_______________________
                                    Name:
                                    Title


AGREED AND CONSENTED TO:

BANKERS TRUST COMPANY


By:__________________________
   Name
   Title:

ACKNOWLEDGED AND AGREED TO:


_____________________________
Meyer Haberman


JED COMMUNICATIONS ASSOCIATES, INC.


By: _________________________
    Name:
    Title:


_____________________________ 
Daniel G. Bergstein
<PAGE>
 
STATE OF
                    )  ss.:
COUNTY OF

     On the ____ day of September, 1998, before me personally came
__________________ , to me known, who, being by me duly sworn, did depose and
say: that he resides at _______________________________________________  that he
is the ______________ [title] of MJD Communications, Inc., the corporation
described in the foregoing instrument; and that he signed his name thereto by
order of the board of directors of said corporation.


                                    _________________________________
                                             Notary Public


STATE OF
                    )  ss.:
COUNTY OF

     On the ____ day of September, 1998, before me personally came
__________________ , to me known, who, being by me duly sworn, did depose and
say: that he resides at _______________________________________________  that he
is the ______________ [title] of JED Communications Associates, Inc., the
corporation described in the foregoing instrument; and that he signed his name
thereto by order of the board of directors of said corporation.


                                    _________________________________
                                             Notary Public
  

STATE OF _____________              )
                    )  ss.:
COUNTY OF ___________               )

          On the _______ day of September, 1998 before me personally came Meyer
Haberman, to me known and known to me to be the individual described in and who
executed the foregoing instrument and acknowledged to me that he executed the
same.


                                    _________________________
                                    Notary Public
<PAGE>
 
STATE OF _____________              )
                    )  ss.:
COUNTY OF ___________               )


          On the _______ day of September, 1998 before me personally came Daniel
G. Bergstein, to me known and known to me to be the individual described in and
who executed the foregoing instrument and acknowledged to me that he executed
the same.


                                    _________________________
                                    Notary Public

<PAGE>
 
                                                                      EXHIBIT 12

                                    Sheet 1

                            MJD Communications, Inc

               Computation of Ratio of Earnings to Fixed Charges

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                           ----------------------------------------------------------------------------------

                                                1993             1994             1995             1996             1997
                                           --------------  ---------------  ---------------  ---------------  ---------------
<S>                                            <C>              <C>              <C>              <C>              <C>
INCOME FROM CONTINUING
    OPERATIONS BEFORE TAXES                    1,235,115        1,951,149        1,030,846        1,422,181        4,661,050
PLUS: FIXED CHARGES                              800,392        3,812,248        7,455,477        9,822,754        9,602,786
                                           --------------  ---------------  ---------------  ---------------  ---------------

EARNINGS (AS DEFINED)                          2,035,507        5,763,397        8,486,323       11,244,935       14,263,836
                                           ==============  ===============  ===============  ===============  ===============

INTEREST EXPENSE                                 791,365        3,771,606        7,267,372        9,605,063        9,293,104
RENT EXPENSE (INTEREST PORTION)                    9,027           40,642          164,657          186,741          257,341
CAPITALIZED INTEREST                                   -                -           23,448           30,950           52,341
                                           --------------  ---------------  ---------------  ---------------  ---------------

       TOTAL FIXED CHARGES                       800,392        3,812,248        7,455,477        9,822,754        9,602,786
                                           ==============  ===============  ===============  ===============  ===============

"EARNINGS" DIVIDED BY FIXED CHARGES                  2.5              1.5              1.1              1.1              1.5
                                           ==============  ===============  ===============  ===============  ===============
<CAPTION>
                                                   Six  Months                                Pro Forma
                                                      Ended                 -----------------------------------------------
                                                     June 30,                        Year Ended December 31, 1997
                                         --------------------------------   -----------------------------------------------
                                                                                   Completed
                                                                               Acquisitions, New
                                                                                Credit Facility            As Adjusted
                                               1997             1998              and Offering            for Utilities
                                         ---------------  ---------------   ------------------------  ---------------------
<S>                                           <C>             <C>                        <C>                    <C>
INCOME FROM CONTINUING
    OPERATIONS BEFORE TAXES                   1,916,457          594,557                 (5,395,599)            (7,556,475)
PLUS: FIXED CHARGES                           4,127,054        9,915,591                 30,187,909             36,232,321
                                         ---------------  ---------------   ------------------------  ---------------------

EARNINGS (AS DEFINED)                         6,043,511       10,510,148                 24,792,310             28,675,846
                                         ===============  ===============   ========================  =====================

INTEREST EXPENSE                              3,998,383        9,706,729                 29,704,427             35,646,252
RENT EXPENSE (INTEREST PORTION)                 128,671          184,733                    394,632                485,487
CAPITALIZED INTEREST                                  -           24,129                     88,850                100,582
                                         ---------------  ---------------   ------------------------  ---------------------

       TOTAL FIXED CHARGES                    4,127,054        9,915,591                 30,187,909             36,232,321
                                         ===============  ===============   ========================  =====================

"EARNINGS" DIVIDED BY FIXED CHARGES                 1.5              1.1                        0.8                    0.8
                                         ===============  ===============   ========================  =====================
<CAPTION>
                                                              Pro Forma
                                                    ------------------------------
                                                    Six Months Ended June 30, 1998
                                                    ------------------------------
                                                            As Adjusted
                                                           for Utilities
                                                      -------------------------
<S>                                                                 <C>
INCOME FROM CONTINUING                                
    OPERATIONS BEFORE TAXES                                         (5,954,821)
PLUS: FIXED CHARGES                                                 18,449,253
                                                      -------------------------
                                                      
EARNINGS (AS DEFINED)                                               12,494,432
                                                      =========================
                                                      
INTEREST EXPENSE                                                    18,043,798
RENT EXPENSE (INTEREST PORTION)                                        366,177
CAPITALIZED INTEREST                                                    39,278
                                                      -------------------------
                                                      
       TOTAL FIXED CHARGES                                          18,449,253
                                                      =========================
                                                      
"EARNINGS" DIVIDED BY FIXED CHARGES                                        0.7
                                                      =========================
</TABLE>

                                    Page 1

<PAGE>
 
                                                                    EXHIBIT 23.2
 
                       CONSENT OF INDEPENDENT ACCOUNTANTS
   
  We consent to the application of our report dated February 11, 1998 on the
financial statements of Ellensburg Telephone Company for purposes of inclusion
in Amendment No. 3 to the Registration Statement on Form S-4 of MJD
Communications, Inc. We also consent to the reference to our firm as experts.
    
                                          Moss Adams LLP
 
Seattle, Washington
   
September 28, 1998     

<PAGE>
 
                                                                   EXHIBIT 23.3
 
                        CONSENT OF INDEPENDENT AUDITORS
   
  We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 24, 1997, with respect to the financial
statements of Chautauqua & Erie Telephone Corporation included in Amendment
No. 3 to the Registration Statement and related prospectus of MJD
Communications, Inc. for the registration of $200 million of its Senior
Subordinated Notes.     
 
                                          /s/ Ernst & Young LLP
   
September 28, 1997     
Buffalo, New York

<PAGE>
 
                                                                   EXHIBIT 23.4
 
              CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
   
  We hereby consent to the use in this Amendment No. 3 to the Registration
Statement of MJD Communications, Inc. on Form S-4 of our report on the audit
of the financial statements of Big Sandy Telecommunications, Inc. dated
February 6, 1996 and to the reference to our Firm under the caption "Experts"
in such Registration Statement.     
 
/s/ Kiesling Associates LLP
 
Madison, Wisconsin
   
September 28, 1998     

<PAGE>
 
                                                                   EXHIBIT 23.5
 
                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
   
  We have issued our report dated February 12, 1998 (except for Notes 3, 13
and 14, which are dated May 17, 1998, July 31, 1998 and March 27, 1998,
respectively) on our audits of the consolidated financial statements of
Utilities, Inc. and Subsidiaries contained in Amendment No. 3 to the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in Amendment No. 3 to the Registration Statement and
Prospectus, and to the use of our name as it appears under the caption
"Experts."     
 
/s/ Berry, Dunn, McNeil & Parker
 
Portland, Maine
   
September 28, 1998     

<PAGE>
 
                                                                   EXHIBIT 23.6
 
                             ACCOUNTANTS' CONSENT
 
The Board of Directors
Taconic Telephone Corp.:
   
  We consent to the inclusion of our report dated March 6, 1998 on the
consolidated financial statements of Taconic Telephone and subsidiaries, as of
December 31, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997 in Amendment No. 3 to the Offering Memorandum for
$200,000,000 Senior Subordinated Notes (due 2008) of MJD Communications, Inc.,
dated September 30, 1998.     
 
/s/ KPMG Peat Marwick LLP
 
Albany, New York
   
September 28, 1998     
<PAGE>
 
                                                                   EXHIBIT 23.6
 
                             ACCOUNTANTS' CONSENT
 
The Board of Directors
MJD Communications, Inc.:
   
  We consent to the use of our reports included herein and to reference to our
Firm under the headings "Summary Consolidated Financial and Operating Data,"
"Selected Consolidated Financial and Operating Data" and "Experts" in
Amendment No. 3 to the Registration Statement on Form S-4.     
 
/s/ KPMG Peat Marwick LLP
 
Lincoln, Nebraska
   
September 28, 1998     

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 5
       
<S>                             <C>                     <C>
<PERIOD-TYPE>                   YEAR                    6-MOS
<FISCAL-YEAR-END>                          DEC-31-1997             DEC-31-1998
<PERIOD-START>                             JAN-01-1997             JAN-01-1998
<PERIOD-END>                               DEC-31-1997             JUN-30-1998
<CASH>                                       6,822,462              14,045,260
<SECURITIES>                                         0                       0
<RECEIVABLES>                                8,361,982              23,647,667
<ALLOWANCES>                                    49,204                 443,592
<INVENTORY>                                    736,509               1,519,494
<CURRENT-ASSETS>                            17,140,868              44,406,115
<PP&E>                                     130,494,110             254,753,602
<DEPRECIATION>                              69,287,220             132,163,415
<TOTAL-ASSETS>                             144,612,779             370,714,076
<CURRENT-LIABILITIES>                       17,033,168              25,639,929
<BONDS>                                              0                       0
                          130,164                       0
                                          0                       0
<COMMON>                                           881                   1,811
<OTHER-SE>                                (10,939,659)              18,781,612
<TOTAL-LIABILITY-AND-EQUITY>               144,612,779             370,714,076
<SALES>                                     42,972,318              35,261,844
<TOTAL-REVENUES>                            42,972,318              35,261,844
<CGS>                                                0                       0
<TOTAL-COSTS>                               30,533,066              25,719,820
<OTHER-EXPENSES>                                19,299                       0
<LOSS-PROVISION>                                     0                       0
<INTEREST-EXPENSE>                           9,293,104               9,706,729
<INCOME-PRETAX>                              4,661,050                 594,557
<INCOME-TAX>                                 1,875,634                 389,152
<INCOME-CONTINUING>                          2,785,416                 205,405
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                              3,611,624               2,520,943
<CHANGES>                                            0                       0
<NET-INCOME>                                 (887,843)             (2,352,061)
<EPS-PRIMARY>                                     0.00                    0.00
<EPS-DILUTED>                                     0.00                    0.00
        

</TABLE>


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