MJD COMMUNICATIONS INC, 10-K/A, 1999-11-15

MJD COMMUNICATIONS INC
10-K/A, 1999-11-15
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A

(AMENDMENT NO. 1)

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 333-56365

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MJD COMMUNICATIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

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

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

As of March 24, 1999, the registrant had outstanding 1,810,146.80 shares of
common stock and no shares of the registrant's common stock were held by
non-affiliates.

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MJD COMMUNICATIONS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

PART I

1. Business.................................................... 3

2. Properties.................................................. 10

3. Legal Proceedings........................................... 11

4. Submission of Matters to a Vote of Security Holders......... 12

PART II

5. Market for Registrant's Common Equity and Related 13
Stockholder Matters.......................................

6. Selected Financial Data..................................... 14

7. Management's Discussion and Analysis of Financial Condition 16
and Results of Operations.................................

7A. Quantitative and Qualitative Disclosures about Market 23
Risk......................................................

8. Financial Statements and Supplementary Data................. 24

9. Changes in and Disagreements with Accountants on Accounting 25
and Financial Disclosure..................................

PART III

10. Directors and Executive Officers of the Registrant.......... 26

11. Executive Compensation...................................... 28

12. Security Ownership and Beneficial Management................ 31

13. Certain Relationships and Related Transactions.............. 33

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 35
8K........................................................

Independent Auditors Report and Schedule

Signatures.................................................. 36

Exhibit Index
</TABLE>

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PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

MJD Communications, Inc. ("MJD" or the "Company") is a provider of
telecommunications services to customers in rural communities offering a full
array of services which include local, intrastate and interstate access,
enhanced services, Internet services, cable television service and wireless
telephony. As of December 31, 1998, the Company believes that it was 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 companies.

The Company believes that the rural telecommunications market is an
attractive investment opportunity due to the limited competition, stable
economic and demographic characteristics 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. The Company's rural local exchange
carriers ("RLECs") which serve this market are characterized by stable operating
results and strong cash flow margins. As of December 31, 1998, the Company had
successfully completed the acquisition of seventeen RLECs located in ten states
(Colorado, Illinois, Kansas, Maine, New Hampshire, New York, South Dakota,
Washington, Oklahoma and Vermont) serving over 130,000 access lines. MJD's
strategy is to improve operating margins and reduce trailing acquisition
multiples by integrating many of the corporate and administrative functions of
the acquired companies and increasing revenues through 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. During 1998, the Company
launched its competitive access exchange carrier ("CLEC") subsidiary, FairPoint
Communications Corp. ("FairPoint"), a wholly owned subsidiary. Through
FairPoint, the Company is extending its service offering to markets adjacent to
its RLECs. For the year ended December 31, 1998, FairPoint had entered fourteen
markets and has provisioned approximately 7,000 access lines which brought total
access lines under MJD ownership or management to approximately 137,000.

The Company was formed in 1991 to seek consolidation opportunities in the
RLEC market. The Company's senior management team has significant industry
experience and a demonstrated track record of acquiring and integrating RLECs.
As of December 31, 1998, senior management owned 24.6% of the common stock of
the Company on a fully diluted basis. The Company's primary equity investors 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 37.7% of the common stock of the Company on a
fully diluted basis as of December 31, 1998. MJD benefits from the Equity
Investors' financial and management expertise and financial support. The Equity
Investors have invested a total of $47.8 million of equity capital in MJD
through December 31, 1998.

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ACQUISITION HISTORY

The following summarizes each RLEC the Company has acquired to date:

<TABLE>
<CAPTION>
ACCESS LINES PURCHASE
AS OF DECEMBER 31,
LOCATION OF DECEMBER 31, PRICE
RLEC ACQUIRED OPERATIONS 1998 DATE ACQUIRED (IN MILLIONS)
- ------------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Kansas/
Sunflower Telephone Company, Inc......... Colorado 4,901 May 1993 $19.7
Northland Telephone Company of Maine/New
Maine, Inc............................. Hampshire 21,486 August 1994 $39.7
STE/NE Acquisition Corp. d/b/a Northland
Telephone Company of Vermont........... Vermont 5,675 August 1994 $12.0
Sidney Telephone Company................. Maine 1,417 January 1996 $ 3.0
Big Sandy Telecom, Inc................... Colorado 934 June 1996 $ 3.1
Bluestem Telephone Company............... Kansas 1,008 August 1996 $ 3.9
Odin Telephone Exchange, Inc............. Illinois 1,147 August 1996 $ 5.0
Kadoka Telephone Co...................... South Dakota 572 January 1997 $ 2.9
Columbine Telephone Company, Inc......... Colorado 1,195 April 1997 $ 4.6
Chautauqua & Erie Telephone
Corporation............................ New York 11,715 July 1997 $22.0
C-R Communications, Inc.................. Illinois 936 October 1997 $ 4.0
Taconic Telephone Corp................... New York 26,602 March 1998 $67.5
Ellensburg Telephone Company............. Washington 25,660 April 1998 $91.2
Chouteau Telephone Company............... Oklahoma 3,542 June 1998 $18.6
Utilities, Inc........................... Maine 22,859 November 1998 $46.8
Ravenswood Communications, Inc........... Illinois 2,014 February 1999 $ 9.5
Columbus Grove Telephone Company......... Ohio 1,834 February 1999 $ 5.0
-------
Total:............................... 133,497
</TABLE>

INDUSTRY OVERVIEW

The local exchange carrier ("LEC") industry is composed of a few large
companies such as the regional bell operating companies ("RBOCs") and a very
large number of relatively small independent companies ("RLECs"). These small,
independent telephone companies provide telephone service to more than five
million residences and businesses in secondary and rural marketplaces.

According to USTA data, there are over 1,250 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 competitive access providers, cable television
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 privately held by
families or small groups of individuals. 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. Given these

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circumstances, the Company believes that it will continue to have numerous
opportunities to acquire RLECs and rural telephone operations currently owned by
the large telephone companies.

RURAL TELEPHONE INDUSTRY. RLECs typically exhibit 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.

Because RLECs serve primarily rural areas and small towns, they tend to have
unique characteristics that differentiate them from larger local exchange
carriers ("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 not generally faced with the threat of
competition, as compared to the RBOCs which often serve densely populated areas
where significant economies of scale are achievable.

REVENUE COMPONENTS. An RLEC generates revenue from: (i) the provision of
basic local telephone service to customers within its service areas; (ii) the
provision of network access to inter-exchange carriers ("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.

CAPITAL EXPENDITURES. Generally, RLECs' capital expenditures are (i)
capital expenditures for maintenance and (ii) expenditures for any expansions
required for growth within the RLEC's service area. Occasionally, 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
outside plant.

Due to the relatively high cost associated with serving rural telephone
properties, affordable 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.

SERVICES

The Company offers a broad portfolio of high-quality telecommunications
services for residential, business, government and carrier customers in each of
its markets. The Company believes it is able to efficiently and reliably provide
all of the telecommunications services required by its customers, thereby
enhancing the Company's ability to build upon its recognized market brand
identity within each of its markets. These services include dial tone for local,
intrastate and interstate access, and such other services as long distance,
Internet services, cable television services, entertainment and wireless
telephony.

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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.

The following chart summarizes each component of the Company's revenue
sources for the years ended December 31, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
% 1996 % 1997 % 1998
REVENUE SOURCE REVENUE REVENUE REVENUE DESCRIPTION
- -------------- -------- -------- -------- -----------
<S> <C> <C> <C> <C>
Basic Local Service......... 18.4% 16.0% 19.2% 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........... 32.0% 29.5% 26.3% 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........... 31.0% 27.7% 27.7% 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................ 10.4% 9.0% 5.2% 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.............. 8.2% 17.8% 21.6% The Company generates revenues from billing
and collection, local and 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. The amount that the Company can charge 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 to complete the call. Since toll calls are
generally billed to the customer originating the call, a mechanism is required
to compensate each company providing services to complete the call. The

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Company bills access charges to the other company involved in completing the
call 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.

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.

OTHER SERVICES

The Company seeks to leverage 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 in its select markets through resale agreements
with national IXCs. In addition, in late 1997, the Company began offering
wholesale long distance services to other independent telephone companies. As of
December 31, 1998, the Company's RLECs provided long distance service to 27,996
customers or approximately 37.7% of the Company's total access lines in selected
markets, and provided wholesale long distance service to seven independent
companies.

ENHANCED SERVICES. The Company's 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 December 31, 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. The Company resells cellular services in certain of its markets and
may expand this wireless reseller strategy to other markets.

CABLE AND DIRECT BROADCAST SATELLITE ("DBS") SERVICES. The Company
currently offers cable television services to customers in its New York,
Colorado and Oklahoma telephone markets. The

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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 or is an agent for a third-party Internet service provider. The
Company currently provides Internet services to over 4,048 customers in select
markets, representing an average penetration rate in such markets of 7.8%.

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.

CLEC SERVICES. The Company has extended its service offerings to markets
adjacent to its RLEC franchise areas. The Company is or 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. During 1998,
FairPoint entered and began offering telecommunications services in fourteen
markets and at December 31, 1998 had provisioned approximately 7,000 access
lines. The Company entered these markets on a resale basis and once reaching
meaningful market share will migrate its customers to its own facilities-based
services connected to the Company's RLEC network and switching facilities.
Following Fairpoint's initial success, the Company plans to continue providing
services to these existing markets and entering additional markets in 1999.

SALES AND MARKETING

The Company's marketing approach emphasizes locally-managed,
customer-oriented sales, marketing and service. The Company differentiates
itself from its competitors by providing superior product and customer support
services in its markets. As of December 31, 1998, the Company had 147 employees
engaged in sales, marketing and customer service (excluding CLEC (as defined)
and long distance employees).

Each of the Company's RLECs generally has a long history in the communities
it serves. It is the Company's policy to maintain and build upon its RLECs'
strong market identity as this is a significant competitive advantage. As the
Company markets new services and through its CLEC offers like services to out of
franchise rural communities, it will seek to capitalize on its market identity
to capture greater market recognition and market share.

The Company has two basic groups 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.

COMPETITION

The Company believes that the Telecommunications Act of 1996 (the
"Telecommunications Act") and other recent actions taken by the FCC and state
regulatory authorities promote competition in the provision of
telecommunications services; however, many of the competitive threats now
confronting

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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 have resulted in robust RLEC
telecommunications networks. All of the Company's telephone operating
subsidiaries currently qualify as RLECs as defined under the Telecommunications
Act.

In markets where the Company implements its CLEC strategy, the Company will
compete with incumbent local exchange carriers ("ILEC") and possibly other
CLECs.

The Company will be subject to competition for suitable acquisition
candidates from other competitors engaged in the acquisition of RLECs. There are
over 1,250 small independent companies that are potential acquisition
candidates. However, a continuing trend toward business combinations and
alliances in the telecommunications industry may increase competition for such
acquisition candidates.

NETWORK FACILITIES

As of December 31, 1998, (i) the Company's RLEC franchise areas included 92
exchanges serving approximately 130,000 access lines that were located across
approximately 12,146 square miles and (ii) the Company maintained over 12,200
miles of copper plant and 991 miles of fiber optic plant that interconnect the
Company's remote central offices with IXCs serving the Company's subscribers.
The Company's central office host and remote sites have advanced digital
switches manufactured by Nortel or Siemens and current generic software which
allows the Company to provide advanced calling features, products and services
to its 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's fiber optic transport systems are primarily synchronous
optical networks ("SONET"). This type of network allows the Company to build and
design more durable networks, while utilizing the less durable asynchronous
optical systems for limited local or specialized applications. The Company's
fiber optic transport system is capable of supporting increasing customer demand
for high bandwidth transport services and applications.

The Company has integrated numerous elements of its network to offer a
variety of services and applications that meet increasingly sophisticated rural
communications customers. These network elements include SS7 signaling networks,
voice messaging platforms, switch based large Meet-Me Conference Bridges,
switched 56Kb/sec digital data and ISDN lines, and numerous customer located key
and PBX systems. As the telecommunications industry is subject to rapid and
significant changes in technology, customer demand and competitive pressures,
the Company 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.

The Company has been segmenting its rural copper plant network into Carrier
Serving Areas ("CSA's"), effectively multiplying embedded copper plant capacity
and enabling unencumbered service

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deployment throughout the Company's service areas. The Company's strategy is to
push the intelligence and unencumbered capabilities of host digital central
office switch and transport closer to its increasingly sophisticated rural
communications customers by deploying remote switches throughout the Company's
service areas.

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

EMPLOYEES

As of December 31, 1998, the Company employed a total of 706 full-time
employees, of whom 83 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 61 employees employed by its
Taconic Telephone Corp. subsidiary in New York. The contracts expire in February
1999, January 2000 and March 2000, respectively.

ITEM 2. 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.

ITEM 3. LEGAL PROCEEDINGS

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

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 ST Long Distance (a subsidiary of STE),
Siesta Telecom, Inc. ("Siesta"), which is a company controlled by Mr. May, and
ST Long Distance in the Circuit Court for the Twelfth Judicial Circuit, Sarasota
County, Florida. From March 1997 through early 1998, ST Long Distance provided
long distance services to Plaintiffs in connection with Plaintiffs' prepaid
telephone card distribution business. Plaintiffs have alleged, among other
things, that Mr. May, Siesta and ST Long Distance have engaged in fraud,
misappropriation of trade secrets, unfair competition, deceptive trade practices
and trade slander; and that Mr. May, Siesta and ST 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, as well as injunctive relief
relating to certain other matters. Despite the fact that LWC was unprofitable in
the year ended December 31, 1997 and without any substantiation by any third
party, on the basis of a three-month period in 1997 in which LWC claims it was
profitable, the Plaintiffs have also alleged that ST Long Distance is
responsible for lost

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profits of between $12 million and (assuming LWC's profits were to grow at a
rate of 20% annually) $38 million, which LWC would have generated in the 10-year
period after the cessation of the LWC/ST Long Distance business relationship.
The Company intends to vigorously contest all of the Plaintiffs' allegations,
and believes that it has no liability to the Plaintiffs. In particular, the
Company believes the Plaintiffs' claim for lost profits are entirely
speculative, frivolous and without merit. 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.

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

The following matters were submitted during the fourth quarter of the fiscal
year to a vote of the security holders of MJD:

1. Consent by and among the Stockholders of MJD Communications, Inc.
dated November 23, 1998 to an increase in the authorized capital stock of
MJD by amendment to the Certificate of Incorporation. The amendment was
unanimously approved by the Stockholders.

2. Waiver and Consent by and among the Stockholders of MJD
Communications, Inc. dated October 27, 1998 regarding the dissolution of MJD
Partners, L.P. ("Partners"), the distribution of the assets of Partners and
the waiver of certain restrictions under the Stockholders' Agreement dated
July 31, 1997. The Waiver and Consent was unanimously approved by the
Stockholders of MJD.

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PART II

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

(All share numbers and purchase price amounts have been
adjusted to give effect to the stock split which occurred
in November 1998.)

There is no established public market for the common equity of the Company.
Substantially all of the Company's equity securities are owned by Carousel
Capital Partners, L.P. ("Carousel"), Kelso Investment Associates V, L.P.
("KIAV"), Kelso Equity Partners V, L.P. ("KEPV," and together with KIAV,
"Kelso") and the Company's executive officers and directors.

There are 2,086,816 shares of common stock that are subject to outstanding
options or warrants to purchase, or securities convertible into, common equity
of MJD.

There are no shares of common stock that could be sold pursuant to Rule 144
under the Securities Act or that MJD has agreed to register under the Securities
Act for sale by the security holders.

There are no shares that are being, or have been publicly proposed to be,
publicly offered by MJD (unless such common equity is being offered pursuant to
an employee benefit plan or dividend reinvestment plan), the offering of which
could have a material effect on the market price of MJD's common equity.

The ability of the Company to pay dividends is governed by restrictive
covenants contained in the indenture governing its publicly held debt as well as
restrictive covenants in the Company's bank lending arrangement. The Company
currently has no intention of paying cash dividends on its equity securities for
the foreseeable future.

In March 1998, the Company sold 491,598.6 shares of Class A Voting Common
Stock to Kelso, Carousel and the Company's officers and directors for a purchase
price of $34.25 per share. The proceeds from the sale of these securities were
used by the Company to finance its acquisition of Taconic Telephone Corp. (See
Item 13, "Certain Relationships and Related Transactions--Purchase of Common
Stock by Management.")

In April 1998, the Company sold 437,944 shares of Class A Voting Common
Stock to Kelso and Carousel for a purchase price of $34.25 per share. The
proceeds from the sale of these securities were used by the Company to finance
its acquisition of Ellensburg Telephone Company.

ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands)

The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1998, are derived from the
consolidated financial statements of MJD Communications, Inc. and its
subsidiaries, which in the case of the consolidated financial statements for the
years ended December 31, 1995, 1996, 1997 and 1998 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The consolidated
financial statement data for the year ended December 31, 1994 are derived from
consolidated financial statements of the Company which

12
<PAGE>
were audited by other independent certified public accountants. Dollar amounts
are presented in thousands.

<TABLE>
<CAPTION>
ACTUAL
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Switched services.......................... $12,656 $22,763 $27,973 $ 39,257 $ 72,124
Other...................................... 1,369 1,986 2,383 8,506 19,883
------- ------- ------- -------- ---------
Total operating revenues..................... 14,025 24,749 30,356 47,763 92,007
------- ------- ------- -------- ---------
Operating expenses:
Plant operations........................... 1,886 3,746 4,181 6,857 14,293
Corporate and customer service............. 3,991 6,433 7,577 11,581 22,275
Depreciation and amortization.............. 3,099 5,757 6,644 8,777 20,089
Cost of services resold.................... -- -- 97 4,791 6,163
Other...................................... 1,081 1,407 1,658 3,318 12,625
------- ------- ------- -------- ---------
Total operating expenses..................... 10,057 17,343 20,157 35,324 75,445
------- ------- ------- -------- ---------
Income from operations....................... 3,968 7,406 10,198 12,439 16,562
------- ------- ------- -------- ---------
Other income (expense):
Net income (loss) on sale of investments
and other assets......................... 1,030 (30) (3) (19) 651
Interest income............................ 143 225 180 212 442
Dividend income............................ 553 664 667 1,182 1,119
Interest expense........................... (3,772) (7,267) (9,605) (9,293) (27,170)
Other nonoperating, net.................... 29 33 (15) 140 885
------- ------- ------- -------- ---------
Total other income (expense)................. (2,017) (6,375) (8,776) (7,778) (24,073)
------- ------- ------- -------- ---------
Earnings (loss) before income taxes and
extraordinary item......................... 1,951 1,031 1,423 4,661 (7,511)
Income tax (expense) benefit................. (940) (547) (1,462) (1,876) 2,112
------- ------- ------- -------- ---------
Earnings (loss) before extraordinary item and
minority interest.......................... 1,011 484 (39) 2,785 (5,399)
Extraordinary item........................... -- -- -- (3,611) (2,521)
------- ------- ------- -------- ---------
Earnings (loss) before minority interest..... 1,011 484 (39) (826) (7,920)
Minority interest income of subsidiaries..... (14) (6) (33) (62) (80)
------- ------- ------- -------- ---------
Net earnings (loss).......................... $ 997 $ 478 $ (72) $ (888) (8,000)
======= ======= ======= ======== =========
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 5,016 $ 3,672 $ 4,253 $ 6,822 $ 13,241
Working capital.............................. 1,406 1,026 596 108 9,557
Property, plant and equipment net............ 37,616 37,048 41,615 61,207 142,321
Total assets................................. 82,281 79,218 97,020 144,613 440,891
Long-term debt............................... 66,991 64,180 73,958 131,912 368,112
Redeemable preferred stock................... 6,618 6,701 10,689 130 --
Total stockholders' equity (deficit)......... (333) 103 (2,142) (10,939) 9,886
</TABLE>

13
<PAGE>

SUMMARY CASH FLOW DATA:
Net cash provided by operating activities.... $ 5,504 $ 6,039 $ 9,772 $ 9,839 $ 14,867
Net cash provided by (used in) investing
activities................................. (50,846) (4,481) (19,790) (38,967) (225,522)
Net cash provided by financing activities.... 49,937 (2,903) 10,599 31,697 217,074

OPERATING DATA:
Access lines in service...................... 28,205 28,737 34,017 48,731 129,649
</TABLE>

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

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

(2) 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. The Company had a deficiency of $7,511 to cover
fixed charges in 1998.

14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

GENERAL. MJD was founded in 1991 to participate in the consolidation
opportunities that exist in the highly fragmented, independent, largely
privately held and operated, rural segment of the telecommunications industry.
The Company is actively acquiring and operating rural local telephone carriers
("RLEC"). For the year ended December 31, 1998, the Company owned and operated
17 RLECs located in ten states. As of December 31, 1998, the Company believes
that it was the eighteenth largest telephone company in the United States, with
approximately 130,000 access lines, and the largest telephone company in the
United States that focuses primarily on acquiring and operating rural
telecommunications service companies. Also, during 1998 the Company launched its
competitive access exchange carrier ("CLEC"), FairPoint Communications Corp
("FairPoint"), a wholly owned subsidiary. By year end 1998, FairPoint was
providing telecommunications services in fourteen markets and provisioned
approximately 7,000 access lines. With the inclusion of FairPoint, total access
lines under management by the Company was 137,000 at December 31, 1998.

For the year ended December 31, 1998, the Company had revenue and adjusted
EBITDA of approximately $92.0 million and approximately $39.7 million,
respectively. The Company provided net cash of approximately $14.9 million from
operating activities, used net cash of approximately $225.5 million in investing
activities and provided net cash of approximately $217.1 million from financing
activities for the year ended December 31, 1998.

The Company's operations have been characterized by stable growth and cash
flow that typifies the stable economic and demographic characteristics of its
rural service areas. The primary reason for the growth in the Company's cash
flow has been the acquisition of additional RLECs. During 1998, the Company
acquired four RLECs that significantly contributed to the Company's growth for
the year ended December 31, 1998. As a result of these four acquisitions, the
Company acquired approximately 78,700 access lines and various cable television,
Internet and wireless assets. See Note 2 to Consolidated Financial Statements
for additional information.

TOTAL MINUTES OF USE GROWTH UNDER MJD OWNERSHIP

The following chart illustrates Minutes of Use ("MOU") growth experienced by
the Company:

<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------------ ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Sunflower-Kansas........ 50,895,394 51,274,642 52,393,074 60,791,553 69,506,448
Sunflower-Colorado...... 5,122,171 4,998,707 5,338,954 5,474,730 5,511,144
Northland-Maine......... 91,695,162* 227,850,913 245,268,456 291,489,937 349,727,547
Northland-Vermont....... 23,123,900* 55,819,538 63,293,970 68,263,915 79,443,225
Sidney.................. 21,169,908 23,411,177 24,808,248
Big Sandy............... 8,018,156* 17,149,198 18,502,564
Bluestem................ 2,657,899* 7,308,376 12,709,165
Odin.................... 6,775,410* 17,128,665 17,568,669
Kadoka.................. 6,686,692 6,476,420
Columbine............... 13,165,980* 20,348,139
Chautauqua & Erie....... 76,854,224* 161,719,750
C-R..................... 4,443,983* 18,881,863
Taconic................. 307,410,445*
Ellensburg.............. 252,951,181*
Chouteau................ 32,206,913*
Utilities............... 46,998,323*
------------ ----------- ------------ ------------ --------------
Total............... 170,836,627 339,943,800 404,915,827 592,168,430 1,424,770,044
============ =========== ============ ============ ==============
</TABLE>

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

* Period includes less than 12 months.

15
<PAGE>
ACCESS LINE GROWTH UNDER MJD OWNERSHIP

The following chart illustrates access lines at the individual RLECs for the
fiscal year indicated:

<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sunflower--Kansas.................................. 4,097 4,140 4,232 4,343 4,553
Sunflower--Colorado................................ 302 305 326 332 348
Northland of Maine................................. 18,629 18,978 19,728 20,493 21,486
Northland of Vermont............................... 5,177 5,314 5,409 5,510 5,675
Sidney............................................. 1,295 1,359 1,417
Big Sandy.......................................... 865 893 934
Bluestem........................................... 1,018 992 1,008
Odin............................................... 1,144 1,164 1,147
Kadoka............................................. 580 572
Columbine.......................................... 1,085 1,195
C&E................................................ 11,070 11,715
C-R................................................ 910 936
Taconic............................................ 26,602
Ellensburg......................................... 25,660
Chouteau........................................... 3,542
Utilities.......................................... 22,859
------ ------ ------ ------ -------
Total.......................................... 28,205 28,737 34,017 48,731 129,649
====== ====== ====== ====== =======
</TABLE>

Note: Data is as of December 31 of the relevant year.

The 1998 acquisitions represented 78,700 access lines or 60.6% of the total
access lines at December 31, 1998. For the RLECs acquired prior to 1998, access
lines were 50,986, an increase of 4.6% compared to prior year, 1997.

REVENUES: The Company generates revenue primarily through: (i) the
provision of basic local telephone service to customers within its service areas
(including federal USSF revenues, which accounted for approximately 5.2% for the
year ended December 31, 1998); (ii) the provision of network access to Inter
Exchange Carriers ("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, customer
premises equipment sales and FairPoint. The revenues listed in clauses (i) and
(ii) above are classified by the Company as "Switched Services." The revenues
listed in clause (iii) above are classified by the Company as "Other revenue."

<TABLE>
<CAPTION>
% OF REVENUE
--------------------------------------
REVENUE SOURCE 1996 1997 1998
- -------------- -------- -------- --------
<S> <C> <C> <C>
Basic Local Service......................................... 18.4% 16.0% 19.2%
Interstate and Intrastate Access............................ 63.0% 57.2% 54.0%
USSF........................................................ 10.4% 9.0% 5.2%
Other Services.............................................. 8.2% 17.8% 21.6%
</TABLE>

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. Universal Service Support Fund ("USSF") revenues are a support payment
paid to the Company to support the high cost of its operations in rural markets.
Access revenues are generated by providing IXCs access to

16
<PAGE>
the Company's local network and its customers. Other revenue is generated from
the ancillary services described above.

The Company's RLECs have two basic groups 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 National Exchange Carrier Association
("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, depreciation and amortization,
cost of services resold and other general and administrative expenses. Year to
year changes in such expenses are 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. Cost of services resold are the expenses incurred to
provide long distance resale by the Company's long distance subsidiary, ST Long
Distance ("STLD") and local and long distance resale by FairPoint. Other general
and administrative expenses are expenses such as property taxes, operating
expenses at STLD and FairPoint and other miscellaneous expenses.

OTHER (INCOME) EXPENSES: The Company's other 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

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

OPERATING REVENUE. Net revenue increased $44.2 million or 92.6% to $92.0
million in the year ended December 31, 1998 from $47.8 million in the year ended
December 31, 1997. The acquisition in 1998 of Taconic Telephone Corp.,
Ellensburg Telephone Company, Chouteau Telephone Company, and Utilities, Inc.
(collectively, the "1998 Acquisitions") as well as the full year results for the
RLECs acquired by the Company in 1997 (collectively, the "1997 Acquisitions"),
provided for 87.6% of the increase. The Company's CLEC, FairPoint, reported
first year revenues of $1.1 million or 2.5% of the increase in revenues reported
in 1998. For the RLECs owned and operated for a comparable period in 1998 and
1997, net revenue improved approximately $1.0 million or 2.3% to $43.9 million
in 1998 from $42.9 million in 1997.

Basic local service revenue increased $10.1 million to $17.7 million for the
year ended December 31, 1998 from $7.6 million for the year ended December 31,
1997. This revenue increase is primarily attributable to an increase in access
lines. The Company's access lines increased to 129,649 access lines from 48,731
access lines at December 31, 1998 and 1997, respectively. The inclusion of
access lines from the RLECs acquired by the Company during 1998 provided an
increase of approximately 78,700 access lines and internal growth by RLECs owned
and operated by the Company at December 31, 1997 provided an increase of
approximately 2,300 access lines. Revenue contribution from the RLECs acquired
in 1998 and 1997 provided $9.6 million of the increase in basic local service
revenue for the year ended December 31, 1998. For the RLECs owned and operated
for a comparable period by the Company, basic local service revenue increased by
$0.4 million to $6.9 million for the year ended December 31, 1997 from $6.5
million for the year ended December 31, 1997.

17
<PAGE>
USSF revenue increased $0.4 million to $4.7 million for the year ended
December 31, 1998 from $4.3 million for the year ended December 31, 1997. For
the RLECs owned and operated for a comparable period by the Company, USSF
revenues decreased by $0.3 million to $3.7 million dollars for the year ended
December 31, 1998 from $4.0 million for the year ended December 31, 1997.

Interstate and intrastate revenues increased $22.4 million to $49.7 million
for the year ended December 31, 1998 from $27.3 million for the year ended
December 31, 1997. 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 1998 and 1997 provided $17.2
million and $4.3 million, respectively, of the increase in interstate and
intrastate revenue for the year ended December 31, 1998. For the RLECs owned and
operated for a comparable period by the Company, interstate and intrastate
revenues increased by $0.9 million to $26.0 million for the year ended December
31, 1998 from $25.1 million for the year ended December 31, 1997.

Other revenues increased $11.4 million to $19.9 million for the year ended
December 31, 1998 from $8.5 million for the year ended December 31, 1997.
Revenue contribution from the RLECs acquired by the Company during 1998 and 199
provided $6.8 million and $2.4 million, respectively, of the increase in other
revenue for the year ended December 31, 1998. FairPoint reported first year
revenue of $1.1 million. For the RLECs owned and operated for a comparable
period by the Company, other revenues increased by $1.0 million to $8.4 million
for the year ended December 31, 1998 from $7.4 million for the year ended
December 31, 1997.

OPERATING EXPENSES. Operating expenses, which include plant operations,
corporate and customer service, depreciation and amortization, cost of services
resold and other general and administrative expenses increased $40.1 million or
113.6% to $75.4 million in the year ended December 31, 1998 from $35.3 million
during the year ended December 31, 1997. The increase was primarily attributable
to the operating expenses incurred by the 1998 Acquisitions and the 1997
Acquisitions, which contributed an aggregate of $31.6 million of the increase.
Expenses associated with the start up and operation of FairPoint were $5.8
million or 14.5% of the expense increase in 1998. For RLECs owned and operated
for a comparable period in 1998 and 1997, operating expense increased
approximately $2.6 million or 8.3% to $34.0 million in 1998 from $31.4 million
in 1997. This increase can be attributed to a $3.0 million increase in corporate
and customer service expenses associated with the dramatic growth experienced by
the Company in 1998.

INCOME FROM OPERATIONS. As a result of the factors described above, income
from operations increased $4.1 million or 33.1% to $16.6 million in the year
ended December 31, 1998 from $12.4 million in the year ended December 31, 1997.
As a percentage of revenues, the income from operations was 18.0% in 1998 as
compared to 26.0% in 1997. The income from operations decline in 1998 is
primarily attributed to the expenses associated with the launch of FairPoint.
For RLECs owned and operated for comparable periods in 1998 and 1997, the income
from operations decreased $1.8 million to $9.7 million in 1998 from $11.5
million in 1997 and the income from operations margin decreased to 22.4% from
26.9%. The decrease was attributed to an increase in corporate and customer
services expenses.

OTHER INCOME (EXPENSE). Net other expense increased $16.3 million or 209.5%
to $24.1 million in the year ended December 31, 1998 from $7.8 million during
the year ended December 31, 1997. The increase was due to primarily interest
expense associated with the additional debt incurred to complete the 1998
Acquisitions. The increase in other expenses was partially offset by a net gain
from sale of assets of $0.7 million and an increase of $0.2 million in dividend
and interest income from the Company's investments.

18
<PAGE>
EXTRAORDINARY ITEM. For the year ended December 31, 1998, the Company
recognized an extraordinary loss of $2.5 million (net of taxes) related to the
early retirement of debt.

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

OPERATING REVENUE. Net revenue increased $17.4 million or 57.3% to $47.8
million in the year ended December 31, 1997 from $30.4 million in the year ended
December 31, 1996. Revenue from the acquisitions 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 46.4% of the increase. The company's long
distance resale subsidiary, STLD, reported first year revenues of $4.0 million
or 23.0% of the increase in total revenues reported in 1997. For RLECs owned and
operated for a comparable period in 1997 and 1996, net revenue increased
approximately $5.3 million or 19.2% to $32.9 million in 1997 from $27.6 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 primarily 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 by 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 $6.5 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. 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 revenues increased $6.1 million to $8.5 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 $1.2 million, respectively, of the increase in other
services revenues for the year ended December 31, 1997. The Company's long
distance resale subsidiary, STLD, reported first year revenues of $4.0 million
or 65.6% of the increase in total revenues reported in 1997. For the RLECs owned
and operated for a comparable period by the Company, other revenues increased by
$0.6 million to $3.1 million for the year ended December 31, 1997 from $2.5
million for the year ended December 31, 1996.

19
<PAGE>
$20.1 million during the year ended December 31, 1996. The increase was
primarily attributable to the operating expenses incurred by the acquisitions of
businesses in 1997 and 1996, which contributed an aggregate of $6.3 million to
the increase. Expenses allocated with the start up and operations of STLD were
$5.4 million or 35.5% of the total expense increase in 1997. For RLECs owned and
operated for a comparable period in 1997 and 1996, operating expense increased
approximately $3.6 million or 19.4% to $22.2 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 and an increase in toll costs related to new ISP
activity.

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.
As a percentage of revenues, income from operations margin was 26.0% in 1997 as
compared to 33.6% in 1996. For RLECs owned and operated for comparable periods
in 1997 and 1996, the income from operations increased $1.8 million or 20.2% to
$10.7 million in 1997 from $8.9 million in 1996 and the income from operations
margin increased to 32.5% from 32.4%.

OTHER INCOME (EXPENSE). Net 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 improvement was because there was a decrease
in interest expense of approximately $0.3 million and an increase of $0.5
million in dividend and interest income from the company's investments.

EXTRAORDINARY ITEM. For the year ended December 31, 1997, the Company
recognized an extraordinary loss of $3.6 million (net of taxes) related to the
early retirement of debt.

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.

On March 30, 1998, the Company closed a $315.0 million senior secured credit
facility (the "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. All
obligations of the Company under the Credit Facility are guaranteed by four of
the intermediary subsidiaries of the Company; ST Enterprises, Ltd., 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. The Company is obligated to comply with certain
financial ratios and tests, including the following (which ratios became less
restrictive as a result of the Company achieving a ratio of senior debt to
annualized EBITDA ratio of less than 4.0 to 1.0): (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 4.0 to 1.0. The
Company is currently in compliance with all covenants under the Credit Facility.
See Note 5 to Consolidated Financial Statements for additional information.

On May 5, 1998, the Company consummated its debt offering consisting of
$125.0 million in aggregate principal amount of 9 1/2% Senior Subordinated Notes
due 2008 (the "Fixed Rate Notes"), and $75.0 million in aggregate principal
amount of Floating Rate Callable Securities due 2008 (the "Floating Rate Notes")
(together with the Fixed Rate Notes, "the Notes"). Proceeds were used to reduce
the tranche A and tranche B debt outstanding under the Credit Facility. The
Notes are general

20
<PAGE>
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior debt (as defined in the indenture relating to the
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. Interest on 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 (as defined in the Indenture)
plus 418.75 basis points. On November 2, 1998, the Company consummated an
exchange offer pursuant to a Registration Statement on Form S-4 filed with the
Securities and Exchange Commission (File #333-56365, declared effective October
1, 1998 by exchanging 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") which have been registered
under the Securities Act of 1933, as amended, for like principal amounts of the
Fixed Rate Notes and the Floating Rate Notes, respectively. The Company is
currently in compliance with all covenants under the Credit Facility. See Note 5
to Consolidated Financial Statements for additional information.

Certain funds managed by Kelso & Company and certain funds managed by
Carousel Capital Corp. (collectively the "Equity Investors") invested an
additional $16.3 million on March 30, 1998 to finance the acquisition of Taconic
Telephone Corp. and an additional $15.0 million on April 30, 1998 to finance the
acquisition of Ellensburg Telephone Company, resulting in a total of $47.8
million of equity capital invested in MJD by the Equity Investors through
December 31, 1998.

In addition to debt service, the Company's principal liquidity requirements
are generally expected to be for general corporate purposes, capital
expenditures and to finance the Company's pending acquisition activities. The
Company believes that the proceeds from the Credit Facility, the Notes and the
sale of non-core assets during 1999 provide sufficient resources to fund the
pending acquisitions that will close in the first half of 1999. The Company's
annual capital expenditures for existing operations have historically been
significant. Because existing regulations allow the Company to recover its
operating 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 1998 and 1997 and 1996, the Company spent approximately $12.4
million, $8.3 million and $8.4 million, respectively, on capital expenditures.

The Company's entry into additional markets as a CLEC is expected to result
in the Company's incurring initial operating losses. The Company invested
approximately $5.0 million in 1998 and it expects to invest approximately $15.0
million in 1999, to expand into ten additional markets bringing its total
markets to 24 by the end of 1999. In addition, FairPoint plans to build
facilities to migrate its customers to the Company's existing networks, which
will require substantial capital expenditures in 1999 and 2000. The 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
FairPoint's expansion. If FairPoint's plan proves to be successful, the Company
believes it will be able to raise separate financing for FairPoint's future
capital requirements as permitted under the Credit Facility and the Indenture
for the Notes.

Net cash provided by operating activities was $14.9 million and $9.8 million
for the years ended December 31, 1998 and 1997, respectively. Net cash used in
investing activities was $225.5 million and $39.0 million for the year ended
December 31, 1998 and 1997, respectively. These cash flows primarily reflect
expenditures relating to acquisitions of RLECs of $217.1 million and $30.8
million for the years ended December 31, 1998 and 1997, respectively and capital
expenditures of $12.4 and $8.3 for the years ended December 31, 1998 and 1997,
respectively. Net cash provided by financing activities was $217.1 and $31.7
million for the years ended December 31, 1998 and 1997, respectively. These cash

21
<PAGE>
flows primarily represent borrowings, the proceeds of which were $510.6 in 1998
and $71.1 in 1997, and from the proceeds of the issuance of common stock of
$31.8 million and $15.9 million in 1998 and 1997, respectively. A majority of
the 1998 proceeds were used to repay long-term debt of $307.8 and to complete
the 1998 acquisitions. 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. See Note 9 to Consolidated Financial
Statements for additional information.

Net cash provided by operating activities was $9.8 million for each of the
years ended December 31, 1997 and 1996. Net cash used in investing activities
was $39.0 million and $19.8 million for the years ended December 31, 1997 and
1996, 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 capital expenditures
of $8.3 million and $8.4 million for the years ended December 31, 1997 and 1996,
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.
These cash flows primarily represent borrowings, the proceeds of which were
$71.1 million and proceeds from the issuance of common stock of $15.9 million in
1997. 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. On July 31, 1997, a recapitalization (the
"Recapitalization") of the Company was completed. For additional information,
see Note 9 to the Consolidated Financial Statements.

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

Adjusted EBITDA increased 75.0% to $39.7 million for the twelve months ended
December 31, 1998 from $22.7 million in the year ended December 31, 1997.
Adjusted EBITDA reported by the RLECs was $44.8 million, by STLD was $(0.5)
million and by FairPoint was $(4.6) million for the year ended December 31,
1998. 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 reported by the RLECs was $24.1 million and by STLD was $(1.4) million
for the year ended December 31, 1997. Adjusted EBITDA reported by the RLECs was
$17.6 million for the year ended December 31, 1996.

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.

22
<PAGE>
NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 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 consolidated
financial statements.

INFLATION

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

YEAR 2000

The Year 2000 issue concerns the inability of computer systems and certain
other equipment to properly recognize and process data that uses two digits
rather than four to designate particular years. The Company has initiated a Year
2000 Project Plan ("the Plan") to assess whether its systems that process date
sensitive information will perform satisfactorily leading up to and beyond
January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000,
any Year 2000-related problem with critical systems, the failure of which could
have a material adverse effect on the Company's operations. The Plan includes
steps to (i) identify each critical system element that requires date code
remediation, (ii) establish a plan to remediate such systems, (iii) implement
all required remediations and (iv) selectively test the remediated systems.

Thus far, the identification phase has identified Year 2000 issues in the
following critical Company-owned systems; (i) switching and transmission
hardware and software used by the Company to route and deliver telephone calls;
(ii) network support systems, including customer services systems and (iii)
billing and collection systems used by the Company to invoice and process most
of its customer payments. In addition, the Company (i) receives critical
services from providers of utilities and other services to facilities that house
employees and switching, transmission and other equipment and (ii) is dependent
upon outside vendors for, among other things, the provision of critical network
components. The Company is also critically reliant upon the systems of other
telecommunication carriers with which the Company's systems interconnect for the
routing and delivery of telephone calls. The Company has also identified
potential Year 2000 related liability with respect to the telephone equipment
manufactured by unaffiliated parties that the Company has sold or leased to its
customers. The identification, planning and remediation phases of the Plan are
materially complete as they relate to Company-owned systems.

Based on work completed under the Plan to date, the Company currently
intends to take the following additional steps under its Plan with respect to
Company-owned systems, third-party vendors and other telecommunications
carriers:

- The Company generally plans to remediate Company-owned switching,
transmission, billing and collection and other critical systems through
the revision or replacement of current system components. Necessary
changes to Company-owned systems are in process and are expected to be
completed by mid-year 1999. The selective testing and verification of such
changes are expected to be completed during 1999. Due to the large number
of system components requiring remediation, the Company does not intend to
test every remediated system but will rely upon the results of selective
testing to determine the effectiveness of remediation efforts.

23
<PAGE>
- With respect to critical services provided by utilities and other third
parties, the Company is in the process of contacting all such suppliers
and plans to have contacted all such suppliers before the end of first
quarter 1999. Thus far, a majority of those suppliers contacted have
responded that their systems and service delivery mechanisms are Year 2000
compliant or can be made so through currently available modifications. The
Company plans to continue monitoring all third-party remediation efforts
and to make contingency plans for the delivery of such services as
necessary.

- The Year 2000 compliance status of other telecommunications carriers with
which the Company's switching systems interconnect is not yet known. The
Company is making inquiries with these carriers to determine their
compliance status and expects to obtain the results of compliance tests
during second quarter 1999, although there can be no assurance that
carriers will supply this information.

While the Company currently believes that it will be able to remediate and
selectively test Company-owned systems in time to minimize any detrimental
effect on its operations, there can be no assurance that such steps will be
successful. Failure by the Company to timely and effectively remediate its
systems, or the failure of critical vendors and suppliers and other
telecommunications carriers to remediate affected systems, could have a material
adverse impact on the Company's business, financial condition, results of
operations and prospects. Because the impact of Year 2000 issues on the Company
is materially dependent on the mitigation efforts of parties outside the
Company's control, the Company cannot assess with certainty the magnitude of any
such potential adverse impact. However, based upon risk assessment work
conducted thus far, the Company believes that the most reasonably likely worst
case scenario of the failure by the Company, its suppliers or other
telecommunications carriers with which the Company interconnects to resolve Year
2000 issues would be an inability by the Company (i) to provide
telecommunications services to the Company's customers, (ii) to route and
deliver telephone calls originating from or terminating with other
telecommunications carriers, (iii) to timely and accurately process service
requests and (iv) to timely and accurately bill its customers. In addition to
lost earnings, these failures could also result in loss of customers due to
service interruptions and billing errors, substantial claims by customers and
increased expenses associated with Year 2000 litigation, stabilization of
operations and executing mitigation and contingency plans.

Contingency planning to maintain and restore services in the event of
natural disasters, power failures and systems-related problems is a routine part
of the Company's operations. The Company believes that such contingency plans
will assist the Company in responding to the failure by outside service
providers to successfully address Year 2000 issues. In addition, the Company is
currently identifying and considering various Year 2000-specific contingency
plans, including identification of alternate vendors and service providers and
manual alternatives to system operations. These Year 2000-specific contingency
plans are expected to be materially completed during the first quarter of 1999,
but their review and development will continue into 1999.

Although the total costs to implement the Plan cannot be precisely
estimated, the Company anticipates spending approximately of $1.0 million. The
costs incurred to date and estimated remaining costs are for outside
consultants, software and hardware applications. These costs will be expensed as
incurred, unless new systems are purchased that should be capitalized in
accordance with generally accepted accounting principles. The Company does not
separately track the internal costs incurred for the Year 2000 project, and such
cost are principally the related payroll costs for its information systems
group. Some of the costs represent ongoing investment in systems upgrades, the
timing of which is being accelerated in order to facilitate Year 2000
compliance. In some instances, such upgrades will position the Company to
provide more and better-quality services to its customers than they currently
receive. The Company expects to fund these costs with cash provided by
operations. Cost estimates and statements of the Company's plans discussed above
are forward-looking statements that are derived using numerous assumptions of
future events, many of which are outside the Company's control,

24
<PAGE>
including the availability and future cost of trained personnel and various
other resources, third party modification plans, the absence of systems
requiring remediation that have not yet been discovered, and other factors.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt as approximately 82%
of the Company's debt is at fixed rates or effectively at fixed rates through
the use of interest rate swaps. At December 31, 1998, 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, 1998, the Company had
long-term debt with a carrying value of approximately $368.1 million and
estimated fair value of approximately $370.0 million. The market risk is
estimated as the potential decrease in fair value of the Company's long-term
debt resulting from a hypothetical increase of 91.6 basis points in interest
rates (ten percent of the rates currently offered to the Company). An increase
in interest rates would result in approximately a $0.7 million decrease in fair
value of the Company's long-term debt.

During 1998, the Company entered into interest rate swaps to manage its
exposure to fluctuations in interest rates of its variable rate debt. The fair
value of these swaps was approximately $(1.7) million at December 31, 1998. The
negative fair value indicates an estimated amount the Company would have to pay
to cancel the contracts or transfer them to other parties. Pertaining to its
Credit Facility, the Company used an interest rate swap agreement with a
notational amount of $25 million to effectively convert a portion of its
variable interest rate exposure to a fixed rate of 9.91%. The swap agreement
expires on September 29, 2000. As to its Floating Rate Notes, the Company used
two interest rate swap agreements, with notational amounts of $50 million and
$25 million, respectively, to effectively convert its variable interest rate
exposure to a fixed rate of 10.01% and 9.95%, respectively. Both swap agreements
expire on November 1, 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(With Independent Auditors' Report Thereon)

25
<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, 1998 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, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MJD
Communications, Inc. and subsidiaries as of December 31, 1998 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, 1998, in conformity with generally accepted
accounting principles.

/s/ KPMG LLP

February 19, 1999
Lincoln, Nebraska

26
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 13,241 6,822
Accounts receivable, net of allowance for doubtful
accounts of $369 in 1998 and $49 in 1997................ 19,112 8,313
Prepaid and other assets.................................. 3,283 1,249
Income taxes recoverable.................................. -- 757
-------- --------
Total current assets................................ 35,636 17,141
-------- --------
Property, plant, and equipment, net......................... 142,321 61,207
-------- --------

OTHER ASSETS:
Investments............................................... 37,894 11,424
Goodwill, net of accumulated amortization................. 203,867 50,433
Debt issue costs, net of accumulated amortization......... 16,121 2,981
Covenants not to compete, net of accumulated
amortization............................................ 2,938 988
Other..................................................... 2,114 439
-------- --------
Total other assets.................................. 262,934 66,265
-------- --------
Total assets........................................ $440,891 144,613
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

27
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILTIES:
Accounts payable.......................................... $ 10,153 5,055
Current portion of long-term debt......................... 3,502 5,409
Demand notes payable...................................... 754 879
Current portion of obligation for covenants not to
compete................................................. 881 256
Accrued interest payable.................................. 3,947 2,819
Accrued property taxes.................................... 1,847 1,171
Other accrued liabilities................................. 4,407 1,444
Income taxes payable...................................... 588 --
-------- --------
Total current liabilities........................... 26,079 17,033
-------- --------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion.................... 364,610 126,503
Put warrant obligation.................................... 4,169 3,456
Unamortized investment tax credits........................ 632 199
Obligation for covenants not to compete, net of current
portion................................................. 2,162 756
Deferred income taxes..................................... 26,729 6,983
Other liabilities......................................... 3,189 132
-------- --------
Total long-term liabilities......................... 401,491 138,029
-------- --------
Minority interest........................................... 435 360
-------- --------
Redeemable preferred stock.................................. -- 130
-------- --------
Common stock subject to put option, 87,600 shares in 1998... 3,000 --
-------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock:
Class A voting, par value $.01 per share, authorized
3,000,000 shares, issued and outstanding 1,722,547 and
880,600 shares in 1998 and 1997, respectively......... 17 9
Additional paid-in capital.............................. 45,735 16,906
Accumulated deficit..................................... (35,866) (27,854)
-------- --------
Total stockholders' equity (deficit)................ 9,886 (10,939)
-------- --------
Total liabilities and stockholders' equity........ $440,891 144,613
======== ========
</TABLE>

28
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues:
Switched services......................................... $ 72,124 39,257 27,973
Other..................................................... 19,883 8,506 2,383
-------- ------- -------
Total operating revenues............................ 92,007 47,763 30,356
-------- ------- -------
Operating expenses:
Plant operations.......................................... 14,293 6,857 4,181
Corporate and customer service............................ 22,275 11,581 7,577
Depreciation and amortization............................. 20,089 8,777 6,644
Cost of services resold................................... 6,163 4,791 97
Other general and administrative.......................... 12,625 3,318 1,658
-------- ------- -------
Total operating expenses............................ 75,445 35,324 20,157
-------- ------- -------
Income from operations.............................. 16,562 12,439 10,199
-------- ------- -------
Other income (expense):
Net gain (loss) on sale of investments and other assets... 651 (19) (3)
Interest income........................................... 442 212 180
Dividend income........................................... 1,119 1,182 667
Interest expense.......................................... (27,170) (9,293) (9,605)
Other nonoperating, net................................... 885 140 (15)
-------- ------- -------
Total other expense................................. (24,073) (7,778) (8,776)
-------- ------- -------
Earnings (loss) before income taxes and
extraordinary item................................ (7,511) 4,661 1,423
Income tax (expense) benefit................................ 2,112 (1,876) (1,462)
-------- ------- -------
Earnings (loss) before extraordinary item........... (5,399) 2,785 (39)
Extraordinary item--loss on early retirement of debt, net of
income tax benefit of $1,755 in 1998 and $2,296 in 1997... (2,521) (3,611) --
-------- ------- -------
Loss before minority interest..................... (7,920) (826) (39)
Minority interest in income of subsidiaries................. (80) (62) (33)
-------- ------- -------
Net loss.......................................... $ (8,000) (888) (72)
======== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

29
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
TOTAL
CLASS A ADDITIONAL RETAINED STOCKHOLDERS'
COMMON PAID-IN EARNINGS EQUITY
STOCK CAPITAL (DEFICIT) (DEFICIT)
-------- ---------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Balance, December 31, 1995......................... $ 4 146 (47) 103
Net loss........................................... -- -- (72) (72)
Accretion of redeemable preferred stock............ -- (146) (2,027) (2,173)
--- ------ -------- -------
Balance, December 31, 1996......................... 4 -- (2,146) (2,142)
Net loss........................................... -- -- (888) (888)
Issuance of 487,580 shares of common stock......... 5 15,870 -- 15,875
Conversion of redeemable preferred stock........... -- 112 -- 112
Capital contribution............................... -- 924 -- 924
Repurchase of redeemable preferred stock........... -- -- (24,541) (24,541)
Redeemable preferred stock dividends............... -- -- (279) (279)
--- ------ -------- -------
Balance, December 31, 1997......................... 9 16,906 (27,854) (10,939)
Net loss........................................... -- -- (8,000) (8,000)
Preferred stock dividends.......................... -- -- (12) (12)
Issuance of 929,540 shares of common stock......... 9 31,828 -- 31,837
Reclassification of 87,600 shares of common stock
subject to put option............................ (1) (2,999) -- (3,000)
--- ------ -------- -------
Balance, December 31, 1998......................... $17 45,735 (35,866) 9,886
=== ====== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

30
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (8,000) (888) (72)
--------- ---------- ----------
Adjustments to reconcile net loss to net cash.............
provided by operating activities:
Depreciation and amortization......................... 21,534 9,093 6,914
Provision for uncollectible revenue................... 303 -- 5
Deferred income taxes................................. (1,653) 207 429
Income from equity method investments................. (931) -- --
Deferred patronage dividends.......................... (265) (585) (304)
Minority interest in income of subsidiaries........... 80 62 33
Increase (decrease) in put warrant obligation......... 714 (295) 2,072
Net (gain) loss on sale of investments and other
assets.............................................. (630) 17 3
Loss on early retirement of debt...................... 2,897 1,864 --
Amortization of investment tax credits................ (131) (31) (16)
Changes in assets and liabilities arising from
operations, net of acquisitions:
Accounts receivable............................... 6,075 (1,563) (465)
Prepaid and other assets.......................... 253 (106) (19)
Accounts payable.................................. (1,398) 1,664 773
Accrued interest payable.......................... 1,128 720 105
Accrued liabilities............................... 689 636 338
Income taxes recoverable/payable.................. (5,798) (956) (24)
--------- ---------- ----------
Total adjustments............................... 22,867 10,727 9,844
--------- ---------- ----------
Net cash provided by operating activities....... 14,867 9,839 9,772
--------- ---------- ----------
Cash flows from investing activities:
Acquisitions of telephone properties, net of cash
acquired................................................ (217,080) (30,845) (11,262)
Acquisition of property, plant, and equipment............. (12,433) (8,262) (8,439)
Proceeds from sale of property, plant, and equipment...... 107 121 70
Organizational costs...................................... (158) -- --
Distributions from investments............................ 118 63 9
Payment on covenant not to compete........................ (219) (94) (19)
Acquisition of investments................................ (8) (241) (149)
Proceeds from sale of investments......................... 4,088 403 --
Payments received on direct financing leases.............. -- 249 --
Increase (decrease) in other assets/liabilities, net...... 63 (361) --
--------- ---------- ----------
Net cash used in investing activities........... $(225,522) (38,967) (19,790)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. $ 510,583 71,134 12,824
Repayment of long-term debt............................... (307,763) (22,104) (3,673)
Net proceeds from issuance of preferred stock............. -- -- 1,816
Repurchase of preferred stock and warrants................ (175) (31,487) --
Dividends paid to preferred stockholders.................. (12) (279) --
Net proceeds from the issuance of common stock............ 31,837 15,875 --
Loan origination costs.................................... (17,345) (1,949) (326)
Payment of early retirement benefits...................... -- (25) (21)
Dividends paid to minority stockholders................... (6) (4) (4)
Release of restricted funds............................... -- 561 --
Repayment of capital lease obligation..................... (45) (25) (17)
--------- ---------- ----------
Net cash provided by financing activities....... 217,074 31,697 10,599
--------- ---------- ----------
Net increase in cash and cash equivalents....... 6,419 2,569 581
Cash and cash equivalents, beginning of year................ 6,822 4,253 3,672
--------- ---------- ----------
Cash and cash equivalents, end of year...................... $ 13,241 6,822 4,253
========= ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

31
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998, 1997, AND 1996

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

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

STE's wholly-owned subsidiaries include Sunflower Telephone Company
(Sunflower); Northland Telephone Company of Maine, Inc. and Northland Telephone
Company of Vermont, Inc. (The Northland Companies); S T Communications, Inc.; S
T Paging, Inc.; and S T Long Distance, Inc. (S T Long Distance), Venture's
wholly-owned subsidiaries include Sidney Telephone Company (Sidney), C-R
Communications, Inc. (C-R), Taconic Telephone Corp. (Taconic), Ellensburg
Telephone Company (Ellensburg), Chouteau Telephone Company (Chouteau),
Utilities, Inc. (Utilities) and Telephone Services Company (TSC). 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 (SFAS) No. 71,
ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION. This accounting
recognizes the economic effects of rate regulation by recording costs and a
return on investment, as such amounts are recovered through rates authorized by
regulatory authorities. Accordingly, SFAS No. 71 requires the Company's
telephone subsidiaries to depreciate telephone plant over useful lives that
would otherwise be determined by management. SFAS No. 71 also requires deferral
of certain costs and obligations based upon approvals received from regulators
to permit recovery of such amounts in future years. The Company's telephone
subsidiaries periodically review the applicability of SFAS No. 71 based on the
developments in their current regulatory and competitive environments.

REVENUE RECOGNITION FROM TELEPHONE OPERATIONS

Revenues are recognized as services are rendered and are primarily derived
from the usage of the Company's networks and facilities or under revenue sharing
arrangements with other telecommunications carriers. Revenues are derived from
primarily three sources: access, pooling, and

32
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
miscellaneous. Local access charges are billed to local end users under tariffs
approved by each state's Public Utilities Commission. Access revenues are
derived on the intrastate jurisdiction by billing access charges to
interexchange carriers and to regional bell operating companies. These charges
are billed based on toll or access tariffs approved by the local state's Public
Utilities Commission. Access charges for the interstate jurisdiction are billed
in accordance with tariffs filed by the National Exchange Carrier Association
(NECA) or by the individual company and approved by the Federal Communications
Commission.

Revenues are determined on a bill and keep basis or a pooling basis. If on a
bill and keep basis, the Company bills the charges to either the access provider
or the end user and keeps the revenue. If the Company participates in a pooling
environment (interstate or intrastate), the toll or access billed are
contributed to a revenue pool. The revenue is then distributed to individual
companies based on their company-specific revenue requirement. This distribution
is based on individual state Public Utilities Commission'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.

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

CREDIT RISK

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

CASH AND CASH EQUIVALENTS

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

INVESTMENTS

Investments consist of stock in CoBank, ACB (CoBank), Rural Telephone Bank
(RTB), the Rural Telephone Finance Cooperative (RTFC), and various cellular
companies and partnerships and other minority equity investments in nonregulated
entities. For the investments in partnerships, the equity

33
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
method of accounting is used. All other investments are stated at cost. To
determine if an impairment of an investment exists, the Company monitors and
evaluates the financial performance of the business in which it invests and
compares the carrying value of the investee to the fair values of similar
investments, which in certain instances, is based on traditional valuation
models utilizing multiples of cash flows. When circumstances indicate that a
decline in the fair value of the investment has occurred and the decline is
other than temporary, the Company records the decline in value as a realized
loss and a reduction in the cost of the security. The Company did not incur any
losses from other than temporary declines in fair value in 1998, 1997, and 1996.

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

PROPERTY, PLANT, AND EQUIPMENT

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

DEBT ISSUE COSTS

Debt issue costs are being amortized over the life of the related debt,
ranging from eight to ten years. Accumulated amortization of loan origination
costs was $1,255,730 and $664,753 at December 31, 1998 and 1997, respectively.

INTANGIBLE ASSETS

The covenants not to compete are being amortized over their useful life of
five years. Accumulated amortization of covenants not to compete was $437,500
and $137,500 at December 31, 1998 and 1997, respectively.

Goodwill consists of the difference between the purchase price incurred in
acquisitions using the purchase method of accounting and the fair value of net
assets acquired. Goodwill is being amortized using the straight-line method over
an estimated useful life of forty years. Accumulated amortization of goodwill
was approximately $6.9 million and $3.6 million at December 31, 1998 and 1997,
respectively.

The Company reviews its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an

34
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

INCOME TAXES

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

PENSION AND OTHER POSTRETIREMENT PLANS

Two of the Company's subsidiaries sponsor defined benefit plans covering
substantially all of their employees. The benefits are based on years of service
and the employee's compensation levels prior to retirement. Benefits under these
plans were frozen in connection with the Company's acquisition of the companies.
Two of the Company's subsidiaries also sponsor other postretirement health care
benefits for substantially all retirees. The Company measures the cost of its
obligations based on its best estimate. The net periodic costs of pension and
other postretirement benefit plans are recognized as employees render the
services necessary to earn the postretirement benefits.

DERIVATIVE FINANCIAL INSTRUMENTS

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

COMPREHENSIVE INCOME

The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, effective
January 1, 1998, which establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. 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.
The Company does not have any elements of comprehensive income other than the
elements currently recognized in the consolidated statements of operations.

RECLASSIFICATIONS

Certain amounts previously reported in 1997 and 1996 for cost of services
resold have been reclassified to conform to the current period presentation in
the accompanying consolidated statements of operations. The reclassifications
had no effect on operating income as previously reported.

35
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES

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

(2) ACQUISITIONS

Certain subsidiaries of MJD acquired telephone properties through a number
of acquisitions in 1997 and 1998.

On January 1, 1997, the Company acquired 100% of the outstanding common
stock of Kadoka for approximately $2.9 million. On April 18, 1997, the Company
acquired certain telephone exchanges of Columbine Telephone Company, Inc.
through the purchase of certain assets for approximately $4.6 million. On July
31, 1997, the Company acquired 100% of the outstanding common stock of C&E
including its wholly-owned subsidiaries for approximately $22.0 million. On
October 15, 1997, the Company acquired 100% of the outstanding common stock of
C-R for $4.0 million.

On March 30, 1998, the Company acquired 100% of the outstanding common stock
of Taconic for approximately $67.5 million. On April 30, 1998, the Company
acquired 100% of the common stock of Ellensburg for approximately $91.2 million.
On June 1, 1998, the Company acquired 100% of the common stock of Chouteau for
$18.6 million. On November 6, 1998, the Company acquired all of the common stock
of Utilities for $46.8 million.

Acquisition costs were approximately $1.2 million and $.6 million in 1998
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 approximately $156.5
million and $17.3 million and has been recognized as goodwill in 1998 and 1997,
respectively. Certain of the Company's allocations of purchase price for 1998
acquisitions are preliminary because the Company has not been able to obtain all
of the data required to complete the allocations for recently acquired
businesses.

The allocation of the total net purchase price for the 1998 and 1997
acquisitions are shown on the table below:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $ 27,539 5,947
Property, plant, and equipment.............................. 85,161 18,906
Excess cost over fair value of net assets acquired.......... 156,540 17,338
Other assets................................................ 30,577 3,569
Current liabilities......................................... (15,967) (1,093)
Noncurrent liabilities...................................... (58,606) (10,454)
-------- -------
Total net purchase price................................ $225,244 34,213
======== =======
</TABLE>

36
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(2) ACQUISITIONS (CONTINUED)

The Company has entered into agreements to acquire six additional rural
local exchange carriers in 1999. The aggregate purchase price for the
acquisitions is expected to approximate $27.3 million and will be financed
through existing debt facilities.

The following unaudited pro forma information presents the combined results
of operations of the Company as though the acquisitions in 1998 and 1997 and
those acquisitions completed or that are probable of completion in 1999 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 or which may be
attained in the future.

<TABLE>
<CAPTION>
PRO FORMA YEARS
ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $119,797 104,576
Earnings (loss) before extraordinary item................... (11,689) (4,593)
Net loss.................................................... (14,291) (6,480)
</TABLE>

(3) PROPERTY, PLANT, AND EQUIPMENT

A summary of property, plant, and equipment as of December 31, 1998 and 1997
is shown on the table below:

<TABLE>
<CAPTION>
ESTIMATED
LIFE (IN YEARS) 1998 1997
--------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Land........................................................ -- $ 1,442 879
Buildings................................................... 3 - 40 19,101 8,649
Telephone equipment......................................... 5 - 50 263,029 112,357
Cable equipment............................................. 3 - 15 5,332 398
Furniture and equipment..................................... 4 - 48 9,333 3,196
Vehicles and equipment...................................... 4 - 20 10,610 4,769
Computer software........................................... 3 - 5 365 246
-------- -------
Total property, plant, and equipment.................... 309,212 130,494
Accumulated depreciation.................................... (166,891) (69,287)
-------- -------
Net property, plant, and equipment...................... $142,321 61,207
======== =======
</TABLE>

The composite depreciation rate for property and equipment was 7.39% in
1998, 6.66% in 1997, and 6.74% in 1996. Construction expenditures for 1999 are
expected to approximate $22 million. The Company anticipates funding
construction from operations.

37
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(4) INVESTMENTS

The investments consist of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Investment in cellular companies and partnerships........... $27,047 4,552
RTB stock................................................... 6,934 2,365
CoBank stock and unpaid deferred CoBank patronage........... 1,958 1,690
RTFC secured certificates and unpaid deferred RTFC
patronage................................................. 1,055 373
Other nonmarketable minority equity investments............. 900 2,444
------- ------
Total investments....................................... $37,894 11,424
======= ======
</TABLE>

(5) LONG-TERM DEBT

Long-term debt consists of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Senior secured notes payable, variable rates ranging from
8.00% to 9.86% at December 31, 1998, due 2006............. $141,841 --
Senior subordinated notes due 2008:
Fixed rate, 9.50%......................................... 125,000 --
Variable rate, 9.10% at December 31, 1998................. 75,000 --
Senior notes payable to CoBank, paid March 30, 1998......... -- 120,930
Senior notes payable to RTFC:
Fixed rates ranging from 8.80% to 9.20%, due 2008......... 4,918 1,399
Variable rates ranging from 6.65% to 8.80% at December 31,
1998, due 2008 to 2012.................................. 7,362 5,687
Subordinated promissory notes payable, 7.00%, due 2005...... 7,000 --
First mortgage notes payable to Rural Utilities Service,
fixed rates ranging from 8.72% to 10.78%, due 2009 to
2016...................................................... 6,679 --
Subordinated promissory notes, paid March 30, 1998.......... -- 3,500
Other debt, 5.75% to 9.50%, due 1999 to 2002................ 312 396
-------- -------
Total outstanding long-term debt........................ 368,112 131,912
Less current portion........................................ (3,502) (5,409)
-------- -------
Total long-term debt, net of current portion............ $364,610 126,503
======== =======
</TABLE>

38
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(5) LONG-TERM DEBT (CONTINUED)
The approximate aggregate maturities of long-term debt for each of the five
years subsequent to December 31, 1998 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR (DOLLARS IN THOUSANDS)
- ----------- ----------------------
<S> <C>
1999..................................................... $ 3,502
2000..................................................... 3,867
2001..................................................... 4,216
2002..................................................... 4,521
2003..................................................... 4,690
Thereafter............................................... 347,316
--------
$368,112
========
</TABLE>

On March 30, 1998, the Company closed a $315 million senior secured credit
facility (the "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. Approximately $142 million senior secured
notes payable were outstanding under the Credit Facility at December 31, 1998.
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 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 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 1/2 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. The
Company used an interest rate swap agreement, with a notional amount of $25
million, to effectively convert a portion of its variable interest rate exposure
to a fixed rate of 9.91%. The swap agreement expires on September 29, 2000.

The Credit Facility contains various restrictions, including those relating
to payment of dividends by the Company. In management's opinion, the Company has
complied with all such requirements. At December 31, 1998, there were no
retained earnings available for payment of cash dividends under the most
restrictive provisions of such agreement.

On May 5, 1998, the Company consummated a debt offering consisting of $125
million in aggregate principal amount of Senior Subordinated Notes due 2008 (the
"Fixed Rate Notes"), and $75 million in aggregate principal amount of Floating
Rate Callable Securities due 2008 (the "Floating Rate Notes"). The notes are
unsecured obligations of the Company and are subordinated to all existing and
future senior indebtedness. Interest on the notes is payable semiannually.
Interest on the Fixed Rate Notes is 9.5% and interest on the Floating Rate Notes
is equal to a rate per annum at LIBOR plus 418.75 basis points. As to the
Floating Rate Notes, the Company used two interest rate swap agreements, with
notional amounts of $50 million and $25 million, respectively, to effectively
convert its variable interest rate exposure to a fixed rate of 10.01% and 9.95%,
respectively. The swap agreements expire on November 1, 2001 and November 1,
2000, respectively.

39
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(5) LONG-TERM DEBT (CONTINUED)
The Fixed Rate Notes are redeemable, in whole or in part, at the option of
the Company, at any time on or after May 1, 2003 at redemption prices (expressed
as a percentage of the principal amount) declining annually from 104.75
beginning May 1, 2003 to 100% beginning May 1, 2006 and thereafter, together
with accrued interest to the redemption date and subject to certain conditions.
Not withstanding the foregoing, on or prior to May 1, 2001, the Company may
redeem up to 35% of the aggregate principal amount of the Fixed Rate Notes at a
redemption price of 109.5% of the principal amount thereof plus accrued and
unpaid interest, if any, to the redemption date, with the proceeds of an equity
offering.

The Floating Rate Notes are redeemable, in whole or in part, at any time at
the option of the Company, at redemption prices (expressed as a percentage of
the principal amount) declining annually from 105.00% beginning May 1, 1998 to
100% beginning May 1, 2003 and thereafter, together with accrued interest to the
redemption date and subject to certain conditions.

The notes indenture places certain restrictions on the ability of the
Company to (i) incur additional indebtedness, (ii) make restricted payments
(dividends, redemptions, and certain other payments), (iii) incur liens,
(iv) issue and sell stock of a subsidiary, (v) sell or otherwise dispose of
property, business, or assets, (vi) enter into sale and leaseback transactions,
(vii) engage in business other than the telecommunications business, and
(viii) engage in transactions with affiliates. In management's opinion, the
Company has complied with all such requirements. At December 31, 1998, there
were no retained earnings available for payment of cash dividends under the most
restrictive provisions of the indenture.

The debt agreements of certain of the Company's consolidated subsidiaries
include restrictive covenants that limit the amount of dividends that may be
paid by the subsidiary to its parent, MJD. Those covenants most restrictive to
the subsidiaries' ability to transfer cash to MJD include the maintenance of a
minimum debt to equity ratio. At December 31, 1998, the subsidiaries represented
approximately $4.1 million of consolidated net assets of the Company, of which
approximately $0.2 million was restricted as to the payment of dividends to MJD.

The Company is exposed to credit losses in the event of nonperformance by
the counterparties to its interest rate swap agreements. The Company
anticipates, however, that the counterparties will be able to fully satisfy
their obligations under the contracts.

The Company also has $754,000 unsecured demand notes payable to various
individuals and entities with interest payable at 5.75%.

The Company has available two lines of credit, with a total maximum limit of
$1,500,000, expiring in 1999. No borrowings have been made under these two lines
of credit at December 31, 1998.

Substantially all assets of the Company are collateralized to secure the
Credit Facility.

(6) EMPLOYEE BENEFIT PLANS

The Company sponsors a voluntary 401(k) savings plan (the Plan) that covers
substantially 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, 1998, 1997, and 1996, the
Company matched 100% of each employee's contribution up to 3% of

40
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(6) EMPLOYEE BENEFIT PLANS (CONTINUED)
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 $1,163,906, $422,069, and $324,873
for the years ended December 31, 1998, 1997, and 1996, respectively.

C&E and Taconic also sponsor defined contribution 401(k) retirement savings
plans for union employees. C&E and Taconic match contributions to these plans
based upon a percentage of pay of all qualified personnel and make certain
profit sharing contributions. Contributions to the plans were approximately
$154,000 in 1998.

Two of the Company's subsidiaries, which were acquired in 1998, have a
defined benefit pension plan covering substantially all of their employees. The
benefits are based on years of service and the employee's compensation before
retirement. The plans' benefits were frozen in 1998 in connection with the
Company's acquisition of the subsidiaries. There is no additional minimum
pension liability required to be recognized. There are also two of the Company's
subsidiaries, which were acquired in 1998 that sponsor health care plans that
provide postretirement medical benefits and other benefits to employees who meet
minimum age and service requirements upon retirement. The liabilities for both
the defined benefit pension plans and the postretirement medical benefits plans
were not material to the consolidated financial statements at December 31, 1998.

(7) INCOME TAXES

Income tax (expense) benefit before extraordinary item consists of the
following components:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $ 346 (1,426) (913)
State..................................................... (17) (274) (136)
------ ------ ------
Total current income tax (expense) benefit.............. 329 (1,700) (1,049)
------ ------ ------
Investment tax credits...................................... 130 31 16
------ ------ ------
Deferred:
Federal................................................... 1,047 (130) (338)
State..................................................... 606 (77) (91)
------ ------ ------
Total deferred income tax (expense) benefit............. 1,653 (207) (429)
------ ------ ------
Total income tax (expense) benefit...................... $2,112 (1,876) (1,462)
====== ====== ======
</TABLE>

41
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(7) INCOME TAXES (CONTINUED)
Total income tax (expense) benefit in 1998, 1997, and 1996 was different
than that computed by applying U. S. federal income tax rates to earnings before
income taxes. The reasons for the differences are shown on the following page.

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax (expense) benefit................... $2,553 (1,585) (484)
State income tax (expense) benefit, net of federal income
tax benefit............................................... 389 (232) (149)
Amortization of investment tax credits...................... 130 31 16
Goodwill amortization....................................... (887) (186) (104)
Change in fair value of put warrant obligation.............. (242) 100 (704)
Other....................................................... 169 (4) (37)
------ ------ ------
Total income tax (expense) benefit...................... $2,112 (1,876) (1,462)
====== ====== ======
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Federal and state tax loss carryforwards.................. $ 1,032 123
Employee benefits......................................... 1,010 14
Allowance for doubtful accounts........................... 211 --
Alternative minimum tax credits........................... 1,296 721
Warrants issued in connection with early retirement of
debt.................................................... 291 291
------- -----
Total gross deferred tax assets......................... 3,840 1,149
Less, valuation allowance................................... -- --
------- -----
Net deferred tax assets................................. 3,840 1,149
------- -----
Deferred tax liabilities:
Property, plant, and equipment, principally due to
depreciation differences................................ 17,242 4,287
Goodwill, due to amortization differences................. 1,903 1,172
Basis in investments...................................... 11,424 2,673
------- -----
Total gross deferred tax liabilities.................... 30,569 8,132
------- -----
Net deferred tax liabilities............................ $26,729 6,983
======= =====
</TABLE>

The Company has federal net operating loss carryforwards of approximately
$2.0 million expiring in 2018 and minimum tax credits of approximately $1.3
million which may be carried forward indefinitely. Management has concluded that
no valuation allowance is required because the full benefit of the deferred tax
assets will be realized through the future reversals of the deferred tax
liabilities.

42
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(8) WARRANTS

In connection with the issuance of subordinated notes in 1994, the Company
issued 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. 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, 1998
and 1997, the estimated fair value of the obligation for the warrants. As
determined by management, was approximately $4.2 million and $3.5 million,
respectively. During 1998, the Company notified the STE warrant holders of its
intention to exercise its call option in 1999. The STE warrant holders have
disputed the Company's right to call the warrants prior to July 31, 1999, as
well as the Company's valuation of the warrants. As a consequence, the Company
has offered to engage a mutually agreeable third party to perform an independent
appraisal. Management is unable to anticipate the effects, if any, such an
appraisal would have on the valuation of the warrants in the accompanying
consolidated financial statements.

In addition, the Company previously issued warrants to purchase 7.69 shares,
representing 7.14% of Sidney's common stock. The Company estimated the fair
value of the warrants at the date of issuance and included the fair value in the
initial allocation of purchase price for Sidney's common stock, with the related
value of the warrants issued to minority shareholders included in the obligation
for minority interests. The warrants are currently exercisable and have no
expiration date. 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 442,340 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

43
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(9) STOCKHOLDERS' EQUITY AND RECAPITALIZATION (CONTINUED)
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.

During 1997, a shareholder of MJD contributed the net assets of Holdings,
totaling $150,000, in consideration for 1,450 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, an additional 43,794 shares of Class A common stock were
issued for proceeds of $1.5 million.

On March 30, 1998 and April 30, 1998, the Company issued a total of 929,540
shares of its Class A common stock to unrelated third parties and members of
management for proceeds of approximately $31.8 million. These proceeds were used
to finance the acquisition of Taconic and Ellensburg.

On November 24, 1998, the Company effected a ten-for-one stock split, which
has been given retroactive effect in the accompanying consolidated financial
statements. The stock split resulted in a reclassification of $4,473 from
additional paid-in capital to common stock. In conjunction with the stock split,
the Company amended and restated its Articles of Incorporation to authorize the
issuance of 3,000,000 shares of Class A common stock. At December 31, 1998, the
Company is authorized to issue up to 290,000 shares of Series C (14% cumulative,
redeemable, and nonvoting) preferred stock.

The Company sponsors a stock option plan (the 1995 Plan) that covers
officers, directors, and employees of the Company. The Company may issue
qualified or nonqualified stock options to purchase up to 56,840 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 during
years five through ten. In 1995, the Company granted options to purchase 42,640
shares at $5 per share. There were no options granted since 1995. 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 consolidated 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 1998, 1997, and 1996 would not have been 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 five years. Because the Company was
nonpublic on the date of grant, no assumption as to the volatility of the stock
price was made.

44
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(9) STOCKHOLDERS' EQUITY AND RECAPITALIZATION (CONTINUED)

Stock option activity for 1998, 1997, and 1996 under the plan is summarized
as follows:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Outstanding at January 1.................................... 42,640 42,640 42,640
Granted................................................... -- -- --
Exercised................................................. -- -- --
Canceled.................................................. -- -- --
------ ------ ------
Outstanding at December 31.................................. 42,640 42,640 42,640
====== ====== ======
Exercisable at December 31.................................. 39,086 30,558 22,030
====== ====== ======
</TABLE>

In August 1998, the Company adopted the MJD Communications, Inc. Stock
Incentive Plan (the 1998 Plan). The 1998 Plan provides for grants of up to
256,220 nonqualified stock options to executives and members of management, at
the discretion of the compensation committee of the Board of Directors. Options
vest in 25% increments on the second, third, fourth, and fifth anniversaries of
an individual grant. In the event of a change in control, outstanding options
will vest immediately. In October 1998, the compensation committee of the Board
of Directors approved a grant of 233,200 options at an exercise price of $34.25
per share. Pursuant to the terms of the grant, options become exercisable only
in the event that the Company is sold, an initial public offering of the
Company's common stock occurs, or other changes in control, as defined, occur.
The number of options that may become ultimately exercisable also depends upon
the extent to which the price per share obtained in the sale of the Company
would exceed a minimum selling price of $85.63 per share. Options have a term of
ten years from an effective grant date of May 1998. The Company will accrue for
compensation expense for the excess of the estimated fair value of its common
stock over the exercise price of the options when and if a sale of the Company,
at the prices necessary to result in exercisable options under the grant,
becomes imminent or likely.

In December 1998, the Company adopted the FairPoint Communications Corp.
Stock Incentive Plan (the FairPoint Plan) for employees of its subsidiary,
FairPoint. Under the FairPoint Plan, participating employees may be granted
options to purchase common stock of FairPoint at exercise prices not less than
the fair value of FairPoint common stock at the date of the grant. Shares issued
to employees under the FairPoint Plan are subject to a call option by FairPoint.
Under the call option, FairPoint may repurchase those shares held by terminating
employees at fair value if the shares were held by the employee for a minimum
holding period of not less than six months. The FairPoint Plan also provides for
the reacquisition of common shares by FairPoint in the event of death or
disability of the option-holder. No options were granted under the FairPoint
Plan in 1998.

45
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(10) REDEEMABLE PREFERRED STOCK

The following is a summary of the Company's preferred stock:

<TABLE>
<CAPTION>
SERIES B
SERIES A PREFERRED PREFERRED SERIES C PREFERRED
------------------- ------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995............ 69,100 $ 6,615 900 $ 86 -- $ --
Conversion of preferred stock........... 900 86 (900) (86) -- --
Issuance of preferred stock to an
unrelated third party and members of
management............................ -- -- -- -- 183,060 1,816
Accretion of preferred stock............ -- 2,037 -- -- -- 136
-------- ------- ----- ----- --------- -------
Balance at December 31, 1996............ 70,000 8,738 -- -- 183,060 1,952
Conversion of preferred stock........... (900) (112) -- -- -- --
Repurchase of preferred stock........... (69,100) (8,626) -- -- (170,044) (1,822)
-------- ------- ----- ----- --------- -------
Balance at December 31, 1997............ -- -- -- -- 13,016 130
Repurchase of preferred stock........... -- -- -- -- (13,016) (130)
-------- ------- ----- ----- --------- -------
Balance at December 31, 1998............ -- $ -- -- $ -- $ --
======== ======= ===== ===== ========= =======
</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). The Series C preferred stock
owned by management was purchased and retired in 1998.

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.

In conjunction with the issuance of the Series C preferred stock in 1996,
the Company issued warrants to purchase 11,689.9 shares of the Company's
Class A common stock. In association with the recapitalization, the Company
repurchased warrants to purchase 10,860.5 shares and contingent warrants to
purchase 6,480 shares. There are no contingent warrants outstanding at December
31, 1997 and 1998. The remaining warrants for 829.4 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.

(11) RELATED PARTY TRANSACTIONS

During 1998, certain major shareholders of the Company pledged 87,600 shares
of the Company's common stock as collateral under various loan agreements. Under
the terms of the loan agreements, the Company is required, in the event of
default by the shareholders, to repurchase the pledged shares for the lesser of
(i) 100% of outstanding indebtedness plus accrued and unpaid interest, or
(ii) $3.0 million. The Company has classified $3.0 million of equity as
temporary equity for the value of common stock issued and subject to put options
under these arrangements.

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

46
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(11) RELATED PARTY TRANSACTIONS (CONTINUED)
and acquisition services to the Company. Partners was paid $1,020,000 under this
agreement and this expense was classified with corporate expenses in 1997. This
agreement was terminated on March 31, 1998, at which time $225,000 had been paid
to Partners during 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 to the equity investors on a quarterly basis until December 31,
2007. During 1998, due to additional equity investment in the Company, the
annual fees were increased from $100,000 to $400,000 per year. During 1998 and
1997, the Company paid $250,000 and $45,833, respectively, in such fees to the
equity investors and this expense was classified with corporate expenses. The
agreements also provide that the Company will reimburse the equity investors for
travel relating to the Company's Board of Directors meetings. During 1998, the
Company reimbursed the equity investors $117,204 for travel and other expenses.
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. The Company incurred expenses of
$103,306 in 1998 related to this consulting agreement. The agreement was paid by
MJD Partners during 1997 and through March of 1998.

In 1996, a law firm, in which a partner of such law firm is also a partner
in Partners, was paid a total of $321,251, of which ($138,368) was for general
counsel services, which have been classified with corporate expenses, 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 of which ($38,872) was for general counsel services, which have
been classified with corporate expenses, ($819,361) for services related to
financings, which have been recorded as debt issue costs and equity issue costs,
and ($211,899) for new acquisitions, which have been capitalized as direct costs
of acquisitions of subsidiaries. In 1998, this same law firm was paid
$2,307,900, of which ($289,156) was for general counsel, which are classified
with corporate expenses, ($1,228,902) for services related to financings, which
have been recorded as debt issue costs, and ($789,842) new acquisitions, which
have been capitalized as direct costs of acquisitions of subsidiaries.

(12) SUPPLEMENTAL CASH FLOW INFORMATION

For the years ended December 31, 1998, 1997, and 1996, the Company paid
interest of $24,111,997, $8,301,646, and $7,204,795, respectively.

For the years ended December 31, 1998, 1997, and 1996, the Company paid
income taxes of $3,585,977, $529,352, and $1,084,766, respectively.

47
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(12) SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
In conjunction with the recapitalization in 1997, the Company issued
subordinated promissory notes for $3.5 million for the repurchase of the
Series A and Series C preferred stock. These subordinated promissory notes were
paid during 1998.

(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998:
Revenue....................................... $14,555 23,079 25,642 28,731 92,007
Earnings (loss) before extraordinary item
minority interest........................... 634 (428) (1,517) (4,088) (5,399)
Net loss...................................... (1,912) (440) (1,548) (4,100) (8,000)
======= ======= ======= ======= =======

1997:
Revenue....................................... 8,901 9,474 13,118 16,270 47,763
Earnings before extraordinary item and
minority interest........................... 689 535 836 725 2,785
Net earnings (loss)........................... 667 535 (2,778) 688 (888)
======= ======= ======= ======= =======
</TABLE>

During the first quarter of 1998, the Company recognized a loss on the early
retirement of debt of $4,276,159. During the third quarter of 1997, the Company
recognized a loss on early retirement of debt of $5,908,104. The losses had the
effect of reducing net earnings by $2,520,943 and $3,611,624 in 1998 and 1997,
respectively.

(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, 1998, the Company had
investments with a carrying value of approximately $37.9 million and estimated
fair value of approximately $47.2 million.

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

48
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(14) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
comparable maturities. At December 31, 1998, the Company had long-term debt with
a carrying value of approximately $368.1 million and estimated fair value of
approximately $370.0 million.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company entered into interest rate swaps to manage its exposure to
fluctuations in interest rates of its variable rate debt in 1998. The fair value
of these swaps was approximately $(1.7) million at December 31, 1998. The
negative fair value indicates an estimated amount the Company would have to pay
to cancel the contracts or transfer them to other parties.

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 assumption could significantly affect the estimates.

(15) MAJOR CUSTOMERS

Compensation for interstate access services is based on reimbursement of
costs and an allowed rate of return. This compensation is received from the NECA
in the form of monthly settlements. Such compensation amounted to 27.3%, 30.0%,
and 30.8% of revenues in 1998, 1997, and 1996, respectively. The Company also
derives significant revenues from Bell Atlantic, principally from network access
and billing and collecting service. Such compensation amounted to 10.4%, 16.3%,
and 20.1% of revenues in 1998, 1997, and 1996, respectively.

(16) LEGAL PROCEEDINGS

On April 6, 1998, Latin World Communications, Inc., ("LWC") and Debra A.
Boudrot, LWCs 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, as well as injunctive relief
relating to certain other matters. Despite the fact that LWC was unprofitable in
the year ended December 31, 1997 and without any substantiation by any third
party, on the basis of a three-month period in 1997 in which LWC claims it was
profitable, the Plaintiffs have also alleged that S T Long Distance is
responsible for lost profits of between $12 million

49
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(16) LEGAL PROCEEDINGS (CONTINUED)
and (assuming LWC's profits were to grow at a rate of 20% annually) $38 million,
which LWC would have generated in the 10-year period after the cessation of the
LWC/S T Long Distance business relationship. The Company intends to vigorously
contest all of the Plaintiffs' allegations, and believes that it has no
liability to the Plaintiffs. In particular, the Company believes the Plaintiff's
claim for lost profits are entirely speculative, frivolous and without merit.
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.

(17) REPORTABLE SEGMENTS

The Company has two reportable segments: incumbent local exchange carrier
(ILEC) operations and competitive local exchange carrier (CLEC) operations. The
ILEC operations provide local, long distance and other telecommunications
services to customers in rural communities in which competition currently does
not exist for local telecommunications services. The CLEC operations provide
local and long distance telecommunications services to customers in markets
outside of the Company's ILEC markets. The Company began its CLEC operations
during 1998, therefore, prior to 1998, the Company's business consisted of one
reportable segment.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on EBITDA. The Company generally accounts for intersegment
sales and transfers as if the sales or transfers were to third parties, that is,
at current market prices.

The Company's reportable segments are strategic business units that offer
similar telecommunications related products and services in different markets.
They are managed separately because each segment requires different marketing
and operational strategies related to the providing of local and long distance
telecommunications services.

The Company utilizes the following information for purposes of making
decisions about allocating resources to a segment and assessing a segment's
performance:

<TABLE>
<CAPTION>
ILEC CLEC
OPERATIONS OPERATIONS TOTAL
---------- ---------- --------
<S> <C> <C> <C>
Year ended December 31, 1998:
Revenues from external customers.......................... $ 88,946 3,061 92,007
Intersegment revenues..................................... -- 516 516
Interest expense.......................................... 27,170 -- 27,170
Depreciation and amortization............................. 20,034 55 20,089
Income tax benefit........................................ 267 1,845 2,112
EBITDA.................................................... 42,099 (4,952) 37,147
Segment assets............................................ 435,617 5,576 441,193
Expenditures for segment assets........................... 10,914 1,521 12,435
</TABLE>

A reconciliation of reportable segment amounts to the Company's consolidated
balances for the year ended December 31, 1998 is as follows:

50
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997, AND 1996

(17) REPORTABLE SEGMENTS (CONTINUED)
<TABLE>
<S> <C>
Revenues:
Total revenue for reportable segments..................... $ 92,523
Elimination of intersegment revenue....................... (516)
--------
Total consolidated revenue............................ $ 92,007
========

EBITDA to net loss:
EBITDA.................................................... $ 37,147
Other components of EBITDA:
Depreciation and amortization........................... (20,089)
Interest expense........................................ (27,170)
Income tax expense...................................... 2,112
--------
Net loss.............................................. $ (8,000)
========
Assets:
Total assets for reportable segments...................... $441,193
Consolidating and eliminating adjustments................. (302)
--------
Consolidated total.................................... $440,891
========
</TABLE>

51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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....................... 55 Co-Founder, Director

Meyer Haberman............................ 57 Co-Founder, Director

Jack H. Thomas............................ 57 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....................... 47 Senior Vice President, Chief Financial
Officer and Secretary

John P. Duda.............................. 51 President and Chief Executive Officer--
Telecom Group

G. Brady Buckley.......................... 39 President and Chief Executive Officer of
FairPoint Communications Corp.

Timothy W. Henry.......................... 43 Vice President of Finance and Treasurer

George E. Matelich........................ 42 Director

Reid G. Leggett........................... 43 Director

Nelson Schwab, III........................ 54 Director

Frank K. Bynum, Jr........................ 36 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. He 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

52
<PAGE>
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 during the 1976-1982 period.

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 a 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").

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
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 Midsize Company committees. He
also serves on OPASTCO's Separations and Access Committee.

G. BRADY BUCKLEY. Mr. Buckley has served as President and Chief Executive
Officer of FairPoint Communications Corp. since July 1998. From 1996 to 1998,
Mr. Buckley served as President of American Telco, Inc., a Houston, Texas based
telecommunications firm that was the first company to provide combined local and
long distance phone service in Texas. From 1992 to 1996, Mr. Buckley was Vice
President of Worldcom and responsible for all New England operations including
sales, marketing, finance, operations, and administration. From 1988 to 1992,
Mr. Buckley was Vice President of First Phone of New England, a start-up company
that provided long distance telecommunications service to business firms in the
Northeast. From 1982 to 1987, Mr. Buckley served in several sales and management
positions at Sprint.

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.

53
<PAGE>
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.

54
<PAGE>
ITEM 11. 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, 1998,
by the Chief Executive Officer and each of the other executive officers of the
Company employed as of December 31, 1998 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
NUMBER OF
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
- --------------------------- -------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jack H. Thomas............. 1998 $309,000 $150,000 $86,851 65,000 --
Chief Executive Officer 1997 300,000 82,500 69,128 -- --
and President 1996 260,000 70,000 68,528 -- --

Eugene B. Johnson.......... 1998 $240,000 $120,000 $52,525 59,750 --
Executive Vice President 1997 240,000 62,000 29,535 -- --
and Assistant Secretary 1996 182,000 56,000 31,990 -- --

John P. Duda............... 1998 $140,000 $ 49,000 $41,775 20,500 --
President and Chief 1997 131,000 31,000 24,018 -- --
Executive Officer-- 1996 123,000 35,000 22,188 -- --
Telecom Group

Walter E. Leach, Jr........ 1998 $130,000 $ 62,942 $34,255 32,500 --
Senior Vice President, 1997 108,000 32,400 15,598 -- --
Chief Financial Officer 1996 100,000 27,000 13,372 -- --
and Secretary

G. Brady Buckley........... 1998* $125,000 $ 90,000 $ 0 -- --
CEO and President-- 1997 -- --
FairPoint 1996 -- --
Communications, Inc
</TABLE>

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

* Represents six months of compensation.

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 56,840 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

55
<PAGE>
conditions as may be determined by the Board of Directors. As of December 31,
1998, the Board of Directors had granted options to purchase at $5 per share a
total of 42,640 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.

1998 STOCK INCENTIVE PLAN

In August 1998, the Company adopted the MJD Communications, Inc. Stock
Incentive Plan (the "1998 Plan"). The 1998 Plan provides for grants of up to
256,220 nonqualified stock options to executives and members of management, at
the discretion of the compensation committee of the Board of Directors. Options
vest in 25% increments on the second, third, fourth, and fifth anniversaries of
an individual grant. In the event of a change in control, outstanding options
will vest immediately. In October 1998, the compensation committee of the Board
of Directors approved a grant of 233,200 options at an exercise price of $34.25
per share. Pursuant to the terms of the grant, options become exercisable only
in the event that the Company is sold, an initial public offering of the
Company's common stock occurs, or other changes in control, as defined, occur.
The number of options that may ultimately become exercisable also depends upon
the extent to which the price per share obtained in the sale of the Company
would exceed a minimum selling price of $85.63 per share. Options have a term of
ten years from an effective grant date of May 1998. The Company will accrue as a
compensation expense for the excess of the estimated fair value of its common
stock over the exercise price of the options when and if a sale of the Company,
at the prices necessary to result in exercisable options under the grant,
becomes imminent or likely.

In December 1998, FairPoint Communications Corp. ("FairPoint") adopted the
FairPoint Communications Corp. Stock Incentive Plan (the "FairPoint Plan") for
its employees. Under the FairPoint Plan, participating employees may be granted
options to purchase common stock of FairPoint at exercise prices not less than
the fair value of FairPoint common stock at the date of the grant. Shares issued
to employees under the FairPoint Plan are subject to a call option by FairPoint.
Under the call option, FairPoint may repurchase those shares held by terminating
employees at fair value if the shares were held by the employee for a minimum
holding period of not less than six months. The FairPoint Plan also provides for
the reacquisition of common shares by FairPoint in the event of death or
disability of the option-holder. No options were granted under the FairPoint
Plan during fiscal year 1998.

WARRANTS

Certain members of management were issued warrants pursuant to their
purchases of Series C Preferred Stock of the Company in 1996. The Series C
Preferred Stock has since been redeemed by the Company. The warrants are
exercisable into 829 shares of Common Stock at an exercise price of $0.01 per
share.

56
<PAGE>
WARRANTS ISSUED TO MANAGEMENT

<TABLE>
<CAPTION>
ISSUED TO SHARES DATE OF ISSUE EXPIRATION
- --------- -------- ------------- ----------
<S> <C> <C> <C>
Jack H. Thomas................................. 37.0 6/7/96 7/16/16
Jack H. Thomas................................. 66.3 8/1/96 7/16/16
Eugene B. Johnson.............................. 73.9 6/7/96 7/16/16
Eugene B. Johnson.............................. 132.5 8/1/96 7/16/16
John P. Duda................................... 59.1 6/7/96 7/16/16
John P. Duda................................... 106.0 8/1/96 7/16/16
Walter E. Leach, Jr............................ 53.1 6/7/96 7/16/16
Walter E. Leach, Jr............................ 95.1 8/1/96 7/16/16
Daniel Bergstein/JED Communications
Assoc., Inc.................................. 73.9 6/7/96 7/16/16
Daniel Bergstein/JED Communications
Assoc., Inc.................................. 132.5 8/1/96 7/16/16
-----
Total...................................... 829.4
</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 1998,
the number of securities underlying options at the 1998 year end and the year
end value of all unexercised in-the-money options held by such individuals.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT FISCAL
ACQUIRED ON VALUE REALIZED FISCAL YEAR-END (#) YEAR-END ($)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---- ------------ -------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Jack H. Thomas........... -- -- 14,210/0 $706,947.50
Eugene B. Johnson........ -- -- 10,660/0 530,335.00
Walter E. Leach, Jr...... -- -- 5,688/1,422 282,978.00
John P. Duda............. -- -- 10,660/0 530,335.00
</TABLE>

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

(1) Represents the difference between the exercise price and the fair market
value of the Company's common stock at December 31, 1998.

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

57
<PAGE>
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.

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

1/ Please provide information with respect to Brady Buckley.

ITEM 12. SECURITY OWNERSHIP AND BENEFICIAL MANAGEMENT

The following table sets forth information regarding beneficial ownership of
the Company's common stock ("Common Stock") as of December 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)..................................... 152,580.0 8.4%
Meyer Haberman (9).......................................... 95,362.5 5.3%
Jack H. Thomas (3).......................................... 111,573.5 6.1%
Eugene B. Johnson (4)....................................... 55,005.0 3.0%
John P. Duda (5)............................................ 16,030.0 0.8%
G. Brady Buckley............................................ 0.0 0.0%
Walter E. Leach, Jr. (6).................................... 10,588.0 0.5%
Timothy W. Henry............................................ 850.0 0.05%
George E. Matelich (7)...................................... 697,788.4 38.5%
Frank K. Bynum, Jr. (7)..................................... 697,788.4 38.5%
Reid G. Leggett (8)......................................... 697,788.4 38.5%
Nelson Schwab III (8)....................................... 697,788.4 38.5%
All Executive Officers and Directors as a group (10 1,838,987.0 99.0%
stockholders).............................................

5% Stockholders:
Carousel Capital Partners, L.P. (8)......................... 697,788.4 38.5%
201 North Tryon Street, Suite 2450
Charlotte, North Carolina 28202

Kelso Investment Associates V, L.P. and Kelso Equity 697,788.4 38.5%
Partners V, L.P. (8)......................................
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 1,810,146.8
shares of common stock outstanding as of December 31, 1998. Vested options
granted to purchase 39,086 shares and warrants to purchase 829.4 shares
result in 1,850,061.2 fully diluted shares as of December 31, 1998.

58
<PAGE>
(2) Includes 152,580 shares owned by JED Communications Associates, Inc., a
corporation owned 100% by Mr. Bergstein and his immediate family. Excludes
warrants to purchase 62.2 shares of Common Stock.

(3) Includes 14,210 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 103.3 shares of Common Stock.

(4) Includes 10,660 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 206.4 shares of Common Stock.

(5) Includes 10,660 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 165.1 shares of Common Stock.

(6) Includes 5,688 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 148.2 shares of Common Stock.

(7) Includes 630,418.5 shares owned by Kelso Investment Associates V, L.P.
("KIAV") and 67,369.9 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.

(8) Includes 697,788.4 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.

(9) Includes 9,000 shares owned by Mr. Haberman's wife with respect to which
shares Mr. Haberman disclaims beneficial ownership.

59
<PAGE>
ITEM 13. 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 Management Services Agreement was terminated on April 1, 1998 and, in lieu
thereof, Messrs. Thomas and Johnson received compensation directly from the
Company. Between January 1, 1998 and April 1, 1998, Partners LP was paid
$225,000, a significant portion of which was for compensation paid to
Messrs. Thomas and Johnson.

FINANCIAL ADVISORY AGREEMENTS

On July 31, 1997, the Company entered into Financial Advisory Agreements
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
1998, the Company paid $367,204 in such fees and related expenses to the Equity
Investors.

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. The agreement was renewed in
1998. Fees and related expenses paid in 1998 were $103,306.

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. In
the year ended December 31, 1998, Paul Hastings was paid approximately
$2,308,000 by the Company for legal services.

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

60
<PAGE>
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. During 1998, upon
Kelso investing additional equity, a second representative was added to the
Board increasing the number of board members from seven to eight.

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")
entered into certain Time Promissory Notes in an aggregate amount not exceeding
$3,000,000 ("Notes"). JED Communications Associates, Inc. ("JED"), a corporation
owned 100% by Mr. Bergstein and his immediate family, and Meyer Haberman entered
into Pledge Agreements ("Pledge Agreements" and collectively with the Notes, the
"Loan Documents"), in October 1998, with Bankers Trust Company ("BT"). Pursuant
to the Loan Documents, the Borrowers will be (i) entitled to borrow money from
BT and (ii) JED and Meyer Haberman were 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 entered 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 entered into such agreements in
order to retain control of the Shares and because such agreements provide for
the purchase of such Shares by the Company at a substantial discount to the
current fair market value of the Shares.

PURCHASE OF COMMON STOCK BY MANAGEMENT

In conjunction with the Credit Facility, 15,700 shares of the Company's
common stock were purchased by certain members of management for $537,741 as
follows.

<TABLE>
<CAPTION>
AGGREGATE
PER SHARE NUMBER PURCHASE
NAME OF MANAGEMENT PERSONNEL PRICE(A) OF SHARES (B) PRICE
- ---------------------------- --------- ------------- ----------
<S> <C> <C> <C>
John P. Duda............................................... $34.25 1,000 $ 34,250.0
Jack. H. Thomas............................................ $34.25 2,000 $ 68,500.0
Eugene B. Johnson.......................................... $34.25 4,000 $137,000.0
Walter E. Leach, Jr........................................ $34.25 2,000 $ 68,500.0
Michael J. Stein........................................... $34.25 2,750 $ 94,187.5
Pamela D. Clark............................................ $34.25 450 $ 15,412.5
Lisa R. Hood............................................... $34.25 150 $ 5,137.5
Timothy W. Henry........................................... $34.25 850 $ 29,112.5
Patrick R. Eudy............................................ $34.25 1,500 $ 51,375.0
Patrick L. Morse........................................... $34.25 1,000 $ 34,250.0
</TABLE>

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

(a) The price per share has been adjusted to reflect the stock split which
occurred in November, 1998.

(b) The number of shares have been adjusted to reflect the stock split which
occurred in November, 1998.

61
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

MJD COMMUNICATIONS, INC.

INDEPENDENT AUDITORS' REPORT AND SCHEDULE
FORM 10-K SECURITIES AND EXCHANGE COMMISSION
DECEMBER 31, 1998, 1997 AND 1996
(With Independent Auditors' Report Thereon)

62
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
MJD Communications, Inc.:

Under date of February 19, 1999, we reported on our audits of the
consolidated balance sheets of MJD Communications, Inc. and subsidiaries as of
December 31, 1998 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, 1998, which are included in the Form
10-K. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the schedule based on
our audits.

In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

/s/ KPMG LLP

Lincoln, Nebraska
February 19, 1999

63
<PAGE>
SCHEDULE II

MJD COMMUNICATIONS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ADDITIONS CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF DUE TO COSTS AND FROM ALLOWANCE END OF
DESCRIPTION YEAR ACQUISITIONS EXPENSES (NOTE) YEAR
- ----------- ------------ ------------ ---------- -------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998,
allowance deducted from asset
accounts, allowance for
doubtful receivables $ 49 240 303 223 369
==== === === === ===
Year ended December 31, 1997,
allowance deducted from asset
accounts, allowance for
doubtful receivables $ 58 -- -- 9 49
==== === === === ===
Year ended December 31, 1996,
allowance deducted from asset
accounts, allowance for
doubtful receivables $254 -- 5 201 58
==== === === === ===
</TABLE>

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

Note: Customers' accounts written-off, net of recoveries.

See accompanying independent auditors' report.

64
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S> <C> <C>
MJD COMMUNICATIONS, INC.

By: /s/ WALTER E. LEACH, JR.
-----------------------------------------
Walter E. Leach, Jr.
SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND SECRETARY
</TABLE>

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ DANIEL G. BERGSTEIN
------------------------------------------- Director November 15, 1999
Daniel G. Bergstein

------------------------------------------- Director November , 1999
Meyer Haberman

/s/ JACK H. THOMAS Director, Chairman of the
------------------------------------------- Board of Directors, and November 15, 1999
Jack H. Thomas Chief Executive Officer

Director, Vice Chairman of
/s/ EUGENE B. JOHNSON the Board of Directors,
------------------------------------------- Executive Vice President November 15, 1999
Eugene B. Johnson and Secretary

/s/ GEORGE E. MATELICH
------------------------------------------- Director November 15, 1999
George E. Matelich

------------------------------------------- Director November , 1999
Reid G. Leggett

------------------------------------------- Director November , 1999
Nelson Schwab, III
</TABLE>

65
<PAGE>
<TABLE>
<C> <S> <C>
/s/ FRANK K. BYNUM, JR.
------------------------------------------- Director November 15, 1999
Frank K. Bynum, Jr.

Senior Vice Financial
/s/ WALTER E. LEACH JR. Officer
------------------------------------------- and Secretary November 15, 1999
Walter E. Leach Jr. (Principal Financial
Officer)

/s/ LISA R. HOOD
------------------------------------------- Controller (Principal November 15, 1999
Lisa R. Hood Accounting Officer)
</TABLE>

66
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
- ------- ----------- --------
<S> <C> <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*............................
2.10 Stock Purchase Agreement, dated as of October 16, 1998 among
MJD Services Corp., Carla J. Brownlee and Ravenswood
Communications, Inc. .....................................
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*.....
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*..................................................
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
- ------- ----------- --------
<S> <C> <C>
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 B. 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.................................
23.6 Consent of KPMG Peat Marwick................................
27 Financial Data Schedule.....................................
</TABLE>

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

* Previously filed.