FAIRPOINT COMMUNICATIONS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333-56365

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

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

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

(704) 344-8150
(Registrant's telephone number, including area code)

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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 whether the registrant is an accelerated filer (as
defined in R12b-2 of the Exchange Act). Yes / / No /X/

As of November 11, 2002, the registrant had outstanding 45,850,002 shares of
Class A common stock and 4,269,440 shares of Class C common stock.

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FAIRPOINT COMMUNICATIONS, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2002
INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

3

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

4

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSSES)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

5

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

6

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) ORGANIZATION AND BASIS OF FINANCIAL REPORTING

In the opinion of our management, the accompanying financial statements
reflect all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of results of operations, financial position, and cash
flows. The results of operations for the interim periods are not necessarily
indicative of the results of operations which might be expected for the entire
year. The condensed consolidated financial statements should be read in
conjunction with the Company's 2001 Annual Report on Form 10-K. Certain amounts
from 2001 have been reclassified to conform to the current period presentation.

(2) DISCONTINUED OPERATIONS AND RESTRUCTURE CHARGES

In November 2001, the Company announced its plan to discontinue the
competitive communications business operations of its wholly-owned subsidiary,
FairPoint Communications Solutions Corp. ("FairPoint Solutions").

Prior to the Company's decision to discontinue FairPoint Solutions'
competitive communication business, FairPoint Solutions entered into an
agreement on October 19, 2001 to sell certain assets of its competitive
communications operations relating to its business and operations in the
northwest United States to Advanced TelCom, Inc., a wholly-owned subsidiary of
Advance TelCom Group, Inc ("ATG"). The sale of these assets was completed on
December 10, 2001. The transition of customers to ATG was completed in
April 2002.

On November 7, 2001, FairPoint Solutions entered into an agreement with
Choice One Communications Inc. ("Choice One") and certain affiliates of Choice
One to sell certain assets of its competitive communications operations relating
to its business and operations in the northeast United States. The sale of these
assets was completed on December 19, 2001. Included in the terms of the Choice
One sales agreement was an opportunity for FairPoint Solutions to earn
additional restricted shares of Choice One common stock based on the number of
access lines converted to the Choice One operating platform. FairPoint Solutions
earned an additional 1,000,000 restricted shares of Choice One common stock
under these provisions, bringing the total shares received to 3,500,000. The
1,000,000 additional shares earned was recognized as a gain of approximately
$0.8 million within discontinued operations during the second quarter of 2002.
The transition of customers to Choice One was completed in April 2002.

In connection with the sale of assets to Choice One, on November 7, 2001,
the Company announced the cessation of the competitive communications business
of FairPoint Solutions and notified its remaining customers in the Southwest,
Southeast and mid-Atlantic competitive markets to find alternative carriers. The
transition of customers to alternative carriers was completed in April 2002.

As a result of the adoption of the plan to discontinue the operations of the
competitive communications operations, these operating results are presented as
discontinued operations. The financial results of the competitive operations are
presented in the condensed consolidated statements of operations as income
(loss) from discontinued competitive communications operations.

On November 28, 2001, FairPoint Solutions completed an amendment to the
FairPoint Solutions Credit Facility, pursuant to which FairPoint Solutions'
lenders waived certain restrictions with respect to the sale by FairPoint
Solutions of certain of its northwest assets to ATG. On December 19, 2001,
FairPoint Solutions completed another amendment to this credit facility which
provided for such lenders' consent to the sale of certain of FairPoint
Solutions' northeast assets to Choice One and for

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the lenders' forbearance, until March 31, 2002, from exercising their remedies
under the FairPoint Solutions Credit Facility for certain enumerated potential
covenant breaches and potential events of default thereunder.

On May 10, 2002, FairPoint Solutions entered into an Amended and Restated
Credit Agreement with its lenders to restructure the obligations of FairPoint
Solutions and its subsidiaries under the FairPoint Solutions Credit Facility. In
connection with such restructuring, (i) FairPoint Solutions paid certain of its
lenders $5.0 million to satisfy $7.0 million of the obligations under the
FairPoint Solutions Credit Facility, (ii) the lenders converted approximately
$93.9 million of the loans and obligations under the FairPoint Solutions Credit
Facility into shares of the Company's Series A Preferred Stock having a
liquidation preference equal to the amount of the loans and obligations under
the FairPoint Solutions Credit Facility, and (iii) the remaining loans under the
FairPoint Solutions Credit Facility and FairPoint Solutions' obligations under
its swap arrangements were converted into $27.9 million aggregate principal
amount of new term loans.

In the second quarter, the Company recorded a gain in discontinued
operations of approximately $17.5 million for the extinguishment of debt and
settlement of its interest rate swap agreements. The gain represents the
difference between the carrying value of $128.8 million of retired debt and
related swap obligations and the sum of the aggregate value of the cash paid
($5.0 million) plus principal amount of new term loans ($27.9 million) plus the
estimated fair value of the Company's Series A Preferred Stock issued
(approximately $78.4 million).

The converted loans under the new FairPoint Solutions Amended and Restated
Credit Agreement consist of two term loan facilities: (i) Tranche A Loans in the
aggregate principal amount of approximately $8.7 million and (ii) Tranche B
Loans in the aggregate principal amount of approximately $19.2 million, each of
which matures in May, 2007. Interest on the new loans is payable monthly and
accrues at a rate of 8% per annum; provided, however, that upon an event of
default the interest rate shall increase to 10% per annum. Interest on the
Tranche A Loans must be paid in cash and interest on Tranche B Loans may be
paid, at the option of FairPoint Solutions, either in cash or in kind. For the
period ended September 30, 2002, $0.5 million in additional debt was issued to
satisfy the accrued in kind interest on the Tranche B loans. The principal of
the Tranche A Loans is due at maturity and the principal of the Tranche B Loans
is payable as follows: (a) $2,062,000 is due on September 30, 2004;
(b) $4,057,000 is due on September 30, 2005; (c) $5,372,000 is due on
September 30, 2006; and (d) the remaining principal balance is due at maturity.

The loans under the new FairPoint Solutions Amended and Restated Credit
Agreement are guaranteed by certain of FairPoint Solutions' subsidiaries and are
secured by substantially all of the assets of FairPoint Solutions and its
subsidiaries. The Company has not guaranteed the debt owed to the lenders under
the new FairPoint Solutions Amended and Restated Credit Agreement nor does the
Company have any obligation to invest any additional funds in FairPoint
Solutions. Further, our Credit Facility and the indentures governing our senior
subordinated notes contain significant restrictions on the Company's ability to
make investments in FairPoint Solutions. Under a tax sharing agreement, the
Company is obligated to reimburse FairPoint Solutions for any tax benefits it
receives from net operating losses generated by FairPoint Solutions.

Voluntary prepayments of the new loans may be made at any time without
premium or penalty. FairPoint Solutions is also required to make mandatory
prepayments of principal from certain sources including the net proceeds from
asset sales and from excess cash flow generated by its long distance business.

Upon an event of default under the new FairPoint Solutions Amended and
Restated Credit Agreement and the acceleration of the loans thereunder, at the
option of the relevant lender, such loans may be converted into the Company's
Series A Preferred Stock pursuant to the terms of the Amended and Restated
Preferred Stock Issuance and Capital Contribution Agreement dated as of

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May 10, 2002 (the "Preferred Stock Issuance Agreement") by and among the
Company, the Administrative Agent and the lenders.

The Series A Preferred Stock issued to the lenders in connection with the
debt restructuring, and any Series A Preferred Stock issuable pursuant to the
Preferred Stock Issuance Agreement, is non-voting, except as required by
applicable law, and is not convertible into common stock of the Company. The
Series A Preferred Stock provides for the payment of dividends at a rate equal
to 17.428% per annum. Dividends on the Series A Preferred Stock are payable, at
the option of the Company, either in cash or in additional shares of Series A
Preferred Stock. The Company has the option to redeem any outstanding Series A
Preferred Stock at any time. The redemption price for such shares is payable in
cash in an amount equal to $1,000 per share plus any accrued but unpaid
dividends thereon (the "Preference Amount"). Under certain circumstances, the
Company would be required to pay a premium of up to 6% of the Preference Amount
in connection with the redemption of the Series A Preferred Stock. In addition,
upon the occurrence of certain events, such as (i) a merger, consolidation,
sale, transfer or disposition of at least 50% of the assets or business of the
Company and its subsidiaries, (ii) a public offering of the Company's common
stock which yields in the aggregate at least $175.0 million, or (iii) the first
anniversary of the maturity of the Company's senior subordinated notes (which
first anniversary will occur in May 2011), the Company would be required to
redeem all outstanding shares of the Series A Preferred Stock at a price per
share equal to the Preference Amount.

The initial carrying amount of the Series A Preferred Stock has been
recorded at its fair value at the date of issuance ($78.4 million). The carrying
amount is being increased by periodic accretions, using the interest method, so
that the carrying amount will equal the mandatory redemption amount
($93.9 million) at the mandatory redemption date (May 2011). During the
nine-month period ended September 30, 2002, the Series A Preferred Stock has
been increased by $0.6 million to reflect the periodic accretions. The carrying
amount of the Series A Preferred Stock has been further increased by
$6.5 million in connection with dividends paid in-kind on the outstanding shares
of the Series A Preferred Stock. The Series A Preferred Stock provides for the
payment of dividends at a rate equal to 17.428% per annum. Additional paid-in
capital has been decreased for the increases in the carrying balance of the
Series A Preferred Stock.

Under the provisions of Statement of Financial Accounting Standards (SFAS)
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
the Company had previously reported two segments: traditional telephone
operations and competitive communications operations. The traditional telephone
operations provide local, long distance and other communications services to
customers in rural communities in which wireline competition is currently
limited for local telecommunications services. The competitive communications
operations provided local, long distance, and other communications services to
customers in markets outside of the Company's traditional telephone markets. The
Company's reportable segments were strategic business units that offered similar
telecommunications related products and services in different markets. They were
managed separately because each segment required different marketing and
operational strategies related to the provision of local and long distance
communications services. The Company utilized certain information for purposes
of making decisions about allocating resources to a segment and assessing a
segment's performance. This information included net earnings (loss) plus
interest expense, income taxes, depreciation and amortization, and non-cash
stock-based compensation charges (EBITDA) and capital expenditures.

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Selected information from discontinued operations for the three months and
nine months ended September 30, 2002 and 2001 follows:

A reconciliation of EBITDA to loss from discontinued operations follows:

Asset and liabilities of discontinued operations as of September 30, 2002
and December 31, 2001 follow:

At December 31, 2001, FairPoint Solutions' outstanding debt
($125.8 million) and the fair value of its interest rate swaps ($3.2 million)
was classified in current liabilities of discontinued operations. In

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connection with FairPoint Solutions' debt restructuring, as of May 10, 2002, the
converted loans of approximately $27.9 million have been classified as long-term
debt as these loans will be serviced through continuing operations. Investments
in marketable securities (consisting of Choice One stock) were reclassified from
discontinued operations to other current assets as these investments upon
liquidation will fund the debt service requirements of FairPoint Solutions'
debt.

On January 1, 2002, the Company adopted the provisions of SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS(SFAS No. 144).
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. Based on the provisions of SFAS No. 144, the
assets and liabilities related to the discontinued competitive communications
operations are presented separately in the asset and liability sections,
respectively, on the accompanying September 30, 2002 consolidated balance sheet.
The December 31, 2001 consolidated balance sheet has been reclassified for
comparative purposes. There was no change to the measurement of the Company's
provisions for discontinued operations as the Company initiated its plan of
disposal prior to December 31, 2001.

In December 2000, the Company initiated a realignment and restructuring of
its competitive communications business, which resulted in the Company recording
an initial charge of approximately $16.5 million.

Of the initial restructuring charge, approximately $3.3 million related to
employee termination benefits and other employee termination related costs. The
Company terminated approximately 360 positions in December 2000. These
reductions resulted from organizational changes within the operations and sales
offices of FairPoint Solutions, including closing facilities in several states.
The operation centers in Birmingham, Alabama and Dallas, Texas were closed and
consolidated to FairPoint Solutions' central operating facility in Albany, New
York. FairPoint Solutions also closed 15 of 41 district sales offices, including
all those in the southeast and southwest regions of the United States.

The restructuring charge included approximately $10.3 million in contractual
obligations for equipment, occupancy, and other lease terminations and other
facility exit costs incurred as a direct result of this plan. The restructuring
charge also included approximately $2.9 million, net of salvage value, for the
write down of property, plant, and equipment. These assets primarily included
leasehold improvements, furniture, and office equipment. Estimated salvage
values were based on estimates of proceeds upon sale of certain of the affected
assets. There were also approximately $0.1 million of other incremental costs
incurred as a direct result of the restructuring plan.

In the first quarter of 2001, the Company completed its plans for the
restructuring of operations at FairPoint Solutions, which resulted in recording
a charge of approximately $33.6 million. Of the total first quarter 2001
restructuring charge, approximately $3.4 million related to employee termination
benefits and other employee termination related costs. The Company terminated
approximately 365 positions in January 2001. Certain positions were eliminated
at the central operating facility in Albany, New York and at the corporate
office in Charlotte, North Carolina. In addition, another 11 sales offices were
closed and staff at the remaining sales offices was reduced.

The restructure charge in the first quarter of 2001 included approximately
$12.2 million in contractual obligations for equipment, occupancy, and other
lease terminations and other facility exit costs incurred as a direct result of
the plan. The restructuring charge also included approximately $17.9 million,
net of salvage value, for the write down of property, plant, and equipment.
There were also approximately $0.1 million of other incremental costs incurred
as a direct result of the restructuring plan.

At December 31, 2001, the remaining restructuring liabilities were limited
to contractual obligations related to equipment and lease terminations. These
liabilities were re-evaluated and the original obligation of approximately
$22.5 million was increased by approximately $1.9 million. The

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original estimates associated with the other obligations were adjusted as
reflected in the following table and the obligations were satisfied as of
December 31, 2001. During the third quarter ended September 30, 2002, the
Company entered into arrangements related to certain leases and revised its
assumptions on certain other remaining leases. For these reasons, there was a
reduction to the remaining restructure obligation of $1.7 million to
$8.1 million from $9.8 million. This reduction has been recognized as a gain in
discontinued operations for the three month period ended September 30, 2002.

Selected information relating to the restructuring charge follows:

(3) INTEREST RATE SWAP AGREEMENTS

The Company assesses interest rate cash flow risk by continually identifying
and monitoring changes in interest rate exposures that may adversely impact
expected future cash flows and by evaluating hedging opportunities. The Company
maintains risk management control systems to monitor interest rate cash flow
risk attributable to both the Company's outstanding or forecasted debt
obligations.

The Company uses variable and fixed-rate debt to finance its operations. The
variable-rate debt obligations expose the Company to variability in interest
payments due to changes in interest rates. Management believes it is prudent to
limit the variability of a portion of its interest payments. To meet this
objective, management enters into interest rate swap agreements to manage
fluctuations in cash flows resulting from interest rate risk. As of
September 30, 2002, the Company has seven interest rate swap agreements with a
combined notional amount of $225.0 million with expiration dates ranging from
May 2003 through May 2004.

The change in the fair value of the interest rate swap agreements has been
recorded in the statement of operations as either a non-cash increase or
reduction to interest expense. Interest expense increased by approximately
$1.0 million for the three months ended September 30, 2002 and approximately
$0.7 million was recorded as a reduction to interest expense for the nine months
ended September 30, 2002. Interest expense increased approximately $6.1 million
and $9.1 million for the

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three months and nine months ended September 30, 2001. In addition,
approximately $0.4 million and $1.1 million has been reclassified as interest
expense from the transition adjustment recorded in accumulated other
comprehensive income during the three month and nine month periods ended
September 30, 2002 and 2001.

(4) ACQUISITIONS

On September 4, 2001, the Company acquired 100% of the common stock of
Marianna and Scenery Hill Telephone Company. On September 28, 2001, the Company
acquired certain assets of Illinois Consolidated Telephone Company. The
aggregate purchase price for these acquisitions was approximately
$23.5 million. These telephone properties have historically realized stable
operating results and positive cash flow margins. The acquisitions have been
accounted for using the purchase method of accounting for business combinations
and, accordingly, the acquired assets and liabilities have been recorded at
their estimated fair values at the dates of acquisition, and 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 $14.4 million and has been recognized as goodwill.

The following unaudited pro forma information presents the combined results
of operations of the Company as though the acquisitions occurred on January 1,
2001. These results include certain adjustments, including increased interest
expense on debt related to the acquisitions, certain preacquisition transaction
costs, and related income tax effects. The pro forma financial information does
not necessarily reflect the results of operations as if the acquisitions had
been in effect at the beginning of the period or which may be attained in the
future.

(5) ISSUANCE OF STOCK OPTIONS

In January 2002, the compensation committee of the Board of Directors of the
Company approved the grant of options to purchase 250,000 shares of common stock
of the Company. These options were granted under the MJD Communications, Inc.
Stock Incentive Plan and are exercisable at an exercise price of $7.00 per
share, which was the estimated fair market value of the Company's common stock
on the date of the grant. The options have a term of ten years.

In March 2002, the compensation committee approved the grant of options to
purchase 1,337,109 shares of common stock of the Company. These options were
granted under the 2000 Employee Stock Option Plan and are exercisable at an
exercise price of $7.00 per share. The options have a term of ten years.

(6) AMORTIZATION OF INTANGIBLE ASSETS

The Company adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS
No. 142), as of January 1, 2002. The Company ceased amortizing goodwill and
equity method goodwill on January 1, 2002. The Company performed a transitional
impairment test of goodwill. In performing that test, the Company determined
that the carrying amount of its reporting unit did not exceed its estimated fair
value and, therefore, the Company did not record an impairment loss.

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As of the date of adoption of SFAS No. 142, the Company had unamortized
goodwill of approximately $454.3 million and equity method goodwill of
approximately $10.3 million. Amortization expense related to goodwill and equity
method goodwill was approximately $3.0 million and approximately $0.1 million,
respectively, for the three months ended September 30, 2001. Amortization
expense related to goodwill and equity method goodwill was approximately
$8.9 million and approximately $0.2 million for the nine months ended
September 30, 2001.

Following is the September 30, 2001 consolidated statement of operations,
adjusted as if SFAS No. 142 had been effective as of January 1, 2001, compared
to the same periods ended September 30, 2002:

As of the date of adoption, the Company had $1.8 million in covenants not to
compete that are intangible assets subject to amortization under SFAS 142. The
Company recorded amortization of $0.2 million and $0.8 million for the three
months and nine months ending September 30, 2002. The Company will continue to
amortize the covenants over their remaining estimated useful lives and will
record amortization of $0.2 million over the remainder of 2002, $0.7 million
during 2003, and $0.1 million during 2004.

(7) INVESTMENTS

The Company continually evaluates its investment holdings for evidence of
impairment. During the second and third quarters of 2002, the Company determined
that the decline in market value of its Choice One common stock was "other than
temporary." As such, the Company recorded a non-cash charge of $1.8 million and
$7.4 million during the three month and nine month periods ended September 30,
2002. This charge is classified with the net loss on investments in the
condensed consolidated statements of operations.

(8) LONG TERM DEBT

The Company amended its Credit Facility in July 2002 to provide for a letter
of credit sub-facility. The amendment will provide the ability to request
letters of credit to support obligations of the Company and/or obligations of
its subsidiaries incurred in the ordinary course of business in an aggregate
principal amount not to exceed $5,000,000 and subject to limitations on the
aggregate amount outstanding under the Credit Facility. As of November 1, 2002,
a $0.4 million letter of credit had been issued.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis provides information that our
management believes is relevant to an assessment and understanding of the
consolidated results of operations and financial condition of FairPoint
Communications, Inc. and its subsidiaries (collectively, the "Company" or
"FairPoint"). The discussion should be read in conjunction with the Company's
Consolidated Financial Statements for the year ended December 31, 2001 included
in the Company's Annual Report on Form 10-K.

Certain statements included in this document are forward-looking, such as
statements relating to estimates of operating and capital expenditure
requirements, future revenue and operating income, and cash flow and liquidity.
Such forward-looking statements are based on the Company's current expectations
and are subject to a number of risks and uncertainties that could cause actual
results in the future to differ significantly from results expressed or implied
in any forward-looking statements made by, or on behalf of, the Company. These
risks and uncertainties include, but are not limited to, risks and uncertainties
relating to economic conditions and trends, acquisitions and divestitures,
growth and expansion, telecommunication regulations, changes in technology,
product acceptance, the ability to construct, expand and upgrade its services
and facilities and other risks discussed in the reports that the Company files
from time to time with the U.S. Securities and Exchange Commission (the "SEC").
These and other risks are detailed below as well as in other documents filed by
the Company with the Securities and Exchange Commission.

OVERVIEW

We are a provider of telecommunications services to customers in rural
communities. We offer an array of services that include local voice, long
distance, data and Internet. We were incorporated in February 1991 for the
purpose of acquiring and operating rural telephone companies in rural markets.
Since our inception, we have acquired 29 such companies, which are located in 18
states.

All of our rural telephone company subsidiaries qualify as rural local
exchange carriers or "RLECs" under the Telecommunications Act of 1996. RLECs are
generally characterized by stable operating results, and strong cash flow
margins and primarily operate in a favorable regulatory environment. In
particular, pursuant to existing state and federal regulations, we are able to
charge rates which enable us to recover our operating and capital costs, plus a
reasonable (as determined by the relevant regulatory authority) rate of return
on our invested capital. In addition, because RLECs primarily serve sparsely
populated rural areas and small towns, competition from competitive local
exchange carriers, or "CLECs", is typically limited due to the generally
unfavorable economics of constructing and operating competitive systems in such
areas. We believe these attractive characteristics of the RLEC market, combined
with our ability to draw on our existing corporate resources, create the
opportunity to maintain and improve our operating results and cash flows.

In early 1998, we launched our CLEC enterprise through our wholly owned
subsidiary, FairPoint Solutions, in an effort to extend our service offering to
markets adjacent to our RLECs. In November 2001, we announced our plan to
discontinue our CLEC operations. In June 2002, FairPoint Solutions completed the
disposition of its CLEC operations. For additional information about the
Company's decision to discontinue its CLEC operations, see the "Notes to the
Condensed Consolidated Financial Statements".

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REVENUES

We derive our revenues from:

- Local calling services. We receive revenues from providing local exchange
telephone services, including monthly recurring charges for basic service,
usage charges for local calls and service charges for special calling
features.

- Network access charges. These revenues consist primarily of charges paid
by long distance companies and other customers for access to our networks
in connection with the origination and/or termination of long distance
telephone calls both to and from our customers. Access charges to long
distance carriers and other customers are based on access rates filed with
the FCC for interstate services and state regulatory agencies for
intrastate services.

- Long distance services. We receive revenues for long distance services to
our retail and wholesale long distance customers.

- Data and Internet services. We receive revenues from monthly recurring
charges for services, including digital subscriber line, special access,
private lines, Internet and other services.

- Other services. We receive revenues from other services, including billing
and collection and directory services.

The following summarizes our percentage of revenues from continuing
operations from these sources:

OPERATING EXPENSES

Our operating expenses are categorized as network operating costs; selling,
general and administrative expenses; and depreciation and amortization.

- Network operating costs include costs incurred in connection with the
operation of our central offices and outside plant facilities and related
operations. In addition to the operational costs of owning and operating
our own facilities, we also purchase long distance services from the
RBOCs, large independent telephone companies and third party long distance
providers.

- Selling, general and administrative expenses consist of expenses relating
to sales and marketing, customer service and administration and corporate
and personnel administration.

- Depreciation and amortization includes depreciation of our communications
network and equipment and, prior to January 1, 2002, amortization of
goodwill related to our acquisitions.

ACQUISITIONS

During 2001, we acquired one RLEC and certain assets of additional telephone
exchanges for an aggregate purchase price of $24.2 million, which included
$0.7 million of acquired debt. At the respective dates of acquisition, these
businesses served an aggregate of approximately 5,600 access lines.

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DISCONTINUED OPERATIONS

In November 2001, we decided to discontinue the CLEC operations of FairPoint
Solutions. This decision was a proactive response to the deterioration in the
capital markets, the general slow-down of the economy and the
slower-than-expected growth in FairPoint Solutions' CLEC operations.

Prior to our decision to discontinue FairPoint Solutions' CLEC operations,
FairPoint Solutions entered into an agreement on October 19, 2001 to sell
certain of its assets in the Northwest to ATG. On November 7, 2001, FairPoint
Solutions entered into an agreement to sell certain of its assets in the
Northeast to Choice One. Included in the terms of the Choice One sales agreement
was an opportunity for FairPoint Solutions to earn additional restricted shares
of Choice One common stock based on the number of access lines converted to the
Choice One operating platform. FairPoint Solutions earned 1,000,000 restricted
shares of Choice One common stock under these provisions. These shares were
recognized as a gain of approximately $0.8 million within discontinued
operations during the second quarter of 2002.

In addition, FairPoint Solutions notified its remaining customers in the
Southwest, Southeast, and Mid-Atlantic competitive markets to find alternative
carriers. The transition of customers to ATG, Choice One and alternative
carriers was completed in April 2002. As a result of these transactions and the
transition of all FairPoint Solutions customers to other service providers,
FairPoint Solutions has completed the disposition of its CLEC operations.

FairPoint Solutions will continue to provide wholesale long distance
services and support to our RLEC subsidiaries and other independent local
exchange companies. These services allow such companies to operate their own
long distance communication services and sell such services to their respective
customers. The Company's long distance business is included as part of
continuing operations in the accompanying financial statements.

RESULTS OF OPERATIONS

THREE MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTH PERIOD
ENDED SEPTEMBER 30, 2001

REVENUES. Revenues from continuing operations decreased $3.5 million to
$59.1 million for the three months ended September 30, 2002 compared to
$62.6 million for the three months ended September 30, 2001. Operating revenues
of our earlier acquired RLEC telephone companies decreased $3.0 million; in
addition, we experienced a $1.6 million decrease in revenues from our wholesale
long distance company. Offsetting the decreases was an increase of $1.1 million
attributable to revenues from RLEC telephone companies we acquired in 2001.
Local calling services increased $2.8 million, including an increase of
$1.9 million primarily from an increase in the subscriber line charge ("SLC")
billed to local end users, as well as an increase of $0.4 million from the
companies we acquired in 2001. The SLC increase was implemented as part of the
Multi Association Group Plan ("Mag plan") that took effect on January 1, 2002
and shifts revenue to local calling services and away from network access.
Network access revenues decreased $5.2 million, net of an increase of
$0.5 million from companies we acquired in 2001. Network access revenues of our
earlier acquired RLEC telephone companies decreased $5.8 million. Network access
revenue decreases are associated with rate cases and access adjustments in
Maine, Kansas, Vermont and Illinois as well as the overall impact of the Mag
plan. Long distance revenues decreased $1.9 million as revenues from our
wholesale long distance company decreased $1.6 million due to a loss of
customers as a result from increased rates. Long distance revenues from our RLEC
business decreased $0.3 million due to lower long distance minutes of use. Data
and Internet services revenues increased $1.4 million, including an increase of
$0.1 million from 2001 acquisitions and an increase of $1.3 million as a result
of increased service offerings to our customers of our earlier acquired RLEC
telephone company businesses. Other revenues decreased by

17

$0.6 million as a result of reductions in billing and collections revenues and
non-regulated telephone services revenues.

OPERATING EXPENSES OF CONTINUING OPERATIONS

NETWORK OPERATING COSTS. Network operating costs from continuing operations
decreased $2.9 million to $15.7 million for the three months ended
September 30, 2002 from $18.6 million for the three months ended September 30,
2001. Of this decrease, $1.4 million was attributable to expense reductions in
the operation of our earlier acquired RLEC telephone companies. Also, operating
taxes of our earlier acquired RLEC telephone companies decreased $0.8 million
due to audits and one-time adjustments to property and capital stock
assessments. Expenses of our wholesale long distance company also decreased
$1.0 million as a result of lower minutes of use. The decrease was offset by a
$0.3 million increase attributable to the RLEC telephone companies we acquired
in 2001.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses from continuing operations decreased $3.2 million to
$10.8 million for the three months ended September 30, 2002 compared to
$14.0 million for the three months ended September 30, 2001. Due to expense
reduction efforts throughout the Company, expenses of our earlier acquired RLEC
telephone companies decreased $3.3 million, which $0.1 million was attributable
to our wholesale long distance company. The decrease in expenses was offset by
an increase of $0.2 million from the companies we acquired in 2001.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization from
continuing operations decreased $2.2 million to $11.8 million for the three
months ended September 30, 2002 from $14.0 million for the three months ended
September 30, 2001. The decrease of $3.0 million attributable to the
discontinuance of amortizing goodwill upon the implementation of SFAS No. 142
was offset by increases in depreciation of property, plant, and equipment
consisting of $0.6 million attributable to the increased investment in our
communications network by our RLECs acquired prior to 2001 and $0.2 million
related to the companies we acquired in 2001.

INCOME FROM OPERATIONS. Income from continuing operations increased
$4.7 million to $20.7 million for the three months ended September 30, 2002 from
$16.0 million for the three months ended September 30, 2001. Of this increase,
$4.8 million was attributable to our earlier acquired RLEC telephone companies
and $0.4 million was attributable to the RLEC telephone companies we acquired in
2001. Income from operations of our wholesale long distance company decreased
$0.5 million to $0.2 million for the three months ended September 30, 2002 from
$0.7 million for the three months ended September 30, 2001.

OTHER INCOME (EXPENSE). Total other expense from continuing operations
decreased $5.2 million to $21.5 million for the three months ended
September 30, 2002 from $26.7 million for the three months ended September 30,
2001. The net change is mainly attributable to the decrease in non-cash interest
expense associated with SFAS No. 133. Interest expense decreased $6.0 million to
$21.6 million for the three months ended September 30, 2002, from $27.6 million
for the three months ended September 30, 2001. Due to the change in fair value
of our interest rate swaps, non-cash interest expense decreased from
$6.1 million for the three months ended September 30, 2001 to $1.0 million for
the three months ended September 30, 2002. A write-down of approximately
$1.8 million in the value of our shares of Choice One stock was recorded as a
non-cash charge in net loss on investments in the Statement of Operations during
the three months ended September 30, 2002 as it was determined that the decline
in market value was "other than temporary." Other income increased $0.8 million
to $2.0 million for the three months ended September 30, 2002, from
$1.2 million for the three months ended September 30, 2001, which was primarily
attributable to undistributed earnings from equity investments.

18

INCOME TAX EXPENSE. Income tax expense from continuing operations decreased
$0.2 million to $0.1 million for the three months ended September 30, 2002 from
$0.3 million for the three months ended September 30, 2001. The income tax
expense relates primarily to income taxes owed in certain states.

DISCONTINUED OPERATIONS. During the third quarter ended September 30, 2002,
the Company entered into arrangements related to certain leases and revised its
assumptions on certain other remaining leases. For these reasons, there was a
reduction to the remaining restructure obligation of $1.7 million to
$8.1 million from $9.8 million. Losses from discontinued operations for the
three months ended September 30, 2001 were $15.6 million.

NET EARNINGS (LOSS). Our net earnings were $0.9 million for the three
months ended September 30, 2002, compared to a loss of $26.6 million for the
three months ended September 30, 2001, as a result of the factors discussed
above.

NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2001

REVENUES. Revenues from continuing operations decreased $3.0 million to
$174.3 million for the nine months ended September 30, 2002 from $177.3 million
for the nine months ended September 30, 2001. Operating revenues of our earlier
acquired RLEC telephone companies decreased $5.9 million and a decrease of
$1.2 million was attributable to revenues from our wholesale long distance
company. Offsetting the decreases was $4.1 million attributable to revenues from
RLEC telephone companies we acquired in 2001. Local calling services increased
by $7.4 million, including an increase of $4.7 million primarily from an
increase in the subscriber line charge ("SLC") billed to local end users, as
well as an increase of $1.4 million from the RLEC telephone companies we
acquired in 2001. The SLC increase was implemented as part of the Multi
Association Group Plan ("Mag plan") that took effect on January 1, 2002 and
shifts revenue to local calling services and away from network access. Network
access revenues decreased $12.9 million, net of an increase of $2.1 million from
RLEC telephone companies we acquired in 2001. Network access revenues of our
earlier acquired RLEC telephone companies decreased $15.0 million. Network
access revenue decreases are associated with rate cases and access adjustments
in Maine, Kansas, Vermont and Illinois as well as the overall impact of the Mag
plan. Long distance revenues decreased $2.2 million. $1.0 million of the
decrease is attributable to our RLEC business due to lower long distance minutes
of use and $1.2 million is attributable to a loss of long distance wholesale
customers. Data and Internet services revenues increased $5.9 million, including
an increase of $0.4 million from 2001 acquisitions and an increase of
$5.5 million as a result of increased service offerings to our customers of our
earlier acquired RLEC telephone company businesses. Other revenues decreased by
$1.2 million as a result of reductions in billing and collections revenues and
non-regulated telephone services revenues.

OPERATING EXPENSES OF CONTINUING OPERATIONS

NETWORK OPERATING COSTS. Network operating costs from continuing operations
decreased $2.1 million to $48.1 million for the nine months ended September 30,
2002 from $50.2 million for the nine months ended September 30, 2001. Due to
expense reduction efforts throughout the Company, expenses of our earlier
acquired RLEC telephone companies decreased $1.4 million. Also, operating taxes
of our earlier acquired RLEC telephone companies decreased $0.9 million due to
audits and one-time adjustments to property and capital stock assessments.
Expenses of our wholesale long distance company also decreased $0.6 million as a
result of lower minutes of use. The decreases were offset by the $0.8 million
increase from the RLEC telephone companies we acquired in 2001.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses from continuing operations decreased $5.1 million to
$32.6 million for the nine months ended September 30,

19

2002 compared to $37.7 million for the nine months ended September 30, 2001. Due
to expense reduction efforts throughout the Company, expenses of our earlier
acquired RLEC telephone companies decreased $5.3 million, net of $1.9 million of
bad debt expense recorded due to the WorldCom, Inc. bankruptcy declared on
July 21, 2002. Expenses of our wholesale long distance company decreased
$0.2 million. The decrease in expenses was offset by an increase of
$0.4 million from the RLEC telephone companies we acquired in 2001.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization from
continuing operations decreased $6.8 million to $35.1 million for the nine
months ended September 30, 2002 from $41.9 million for the nine months ended
September 30, 2001. The decrease of $9.1 million attributable to the
discontinuance of amortizing goodwill upon the implementation of SFAS No. 142
was offset by increases in depreciation of property, plant, and equipment
consisting of $1.6 million attributable to the increased investment in our
communications network by our RLEC telephone companies we acquired prior to 2001
and $0.7 million related to the companies we acquired in 2001.

INCOME FROM OPERATIONS. Income from continuing operations increased
$11.1 million to $58.5 million for the nine months ended September 30, 2002 from
$47.4 million for the nine months ended September 30, 2001. Of this increase,
$9.3 million was attributable to our earlier acquired RLEC telephone companies
and $2.1 million was attributable to the RLEC telephone companies we acquired in
2001. Income from our wholesale long distance company decreased $0.3 million to
$0.9 million for the nine months ended September 30, 2002 from $1.2 million for
the nine months ended September 30, 2001.

OTHER INCOME (EXPENSE). Total other expense from continuing operations
decreased $6.5 million to $60.6 million for the nine months ended September 30,
2002 from $67.1 million for the nine months ended September 30, 2001. The
expense consists primarily of interest expense on long-term debt. Interest
expense decreased $11.4 million to $60.1 million for the nine months ended
September 30, 2002, from $71.5 million for the nine months ended September 30,
2001 which is mainly attributable to the non-cash interest expense associated
with SFAS No. 133. Due to the change in fair value of our interest rate swaps,
for the nine month period ended September 30, 2002, interest expense was reduced
by $0.7 million compared to a non-cash increase of $9.1 million for the nine
months ended September 30, 2001. The net loss on investments changed by
$6.8 million and is primarily attributable to an "other than temporary"
write-down of approximately $7.4 million in the value of our shares of Choice
One stock during the period ended September 30, 2002. Other income increased
$2.4 million to $5.7 million for the nine months ended September 30, 2002, from
$3.3 million for the nine months ended September 30, 2001, which was primarily
attributable to undistributed earnings from equity investments.

INCOME TAX EXPENSE. Income tax expense from continuing operations decreased
$0.5 million to $0.4 million for the nine months ended September 30, 2002 from
$0.9 million for the nine months ended September 30, 2001. The income tax
expense relates primarily to income taxes owed in certain states.

DISCONTINUED OPERATIONS. Income from discontinued operations for the nine
months ended September 30, 2002 was $20.0 million, of which $17.5 million was
attributable to the gain recorded for the extinguishment of debt and settlement
of interest rate swap agreements, $0.8 million was attributable to the gain
recorded upon receipt of additional shares of Choice One stock and $1.7 million
was attributable to the gain recorded due to the reduction in lease accruals as
a result of arrangements related to certain leases and revised assumptions on
certain other remaining leases. Losses from discontinued operations for the nine
months ended September 30, 2001 were $88.8 million.

20

NET EARNINGS (LOSS). Our net earnings were $17.5 million for the nine
months ended September 30, 2002, compared to a loss of $109.5 million for the
nine months ended September 30, 2001, as a result of the factors discussed
above.

LIQUIDITY AND CAPITAL RESOURCES

Our cash requirements include general corporate expenditures, capital
expenditures, debt service and acquisitions. We expect that our RLEC telephone
companies' cash flow from operations will fund our capital expenditures, working
capital and debt service requirements for the foreseeable future.

Historically, we have used the proceeds from institutional and bank debt and
private equity offerings to fund acquisitions. We may secure additional funding
through the sale of public or private debt and/or equity securities or enter
into another bank credit facility to fund future acquisitions and operations. If
our operating results are below expectations, there can be no assurance that we
will be successful in raising sufficient additional capital on terms that we
consider acceptable, or that our operations will produce positive cash flow in
sufficient amounts to meet our liquidity requirements. The failure to raise and
generate sufficient funds may require us to delay or abandon some of our planned
acquisitions or expenditures, which could have a material adverse effect on our
growth.

In November 2001, FairPoint Solutions announced its decision to discontinue
its CLEC operations and announced the proposed sale of certain of its
competitive communications assets. In December 2001, FairPoint Solutions
completed these asset sales. In April 2002, FairPoint Solutions completed the
process of transitioning customers to ATG, Choice One or alternative carriers.
As a result of these transactions, FairPoint Solutions has completed the
cessation of its competitive communications business operations. FairPoint
Solutions' cash flow requirements include general corporate expenditures,
expenses related to discontinued operations and debt service. We expect
FairPoint Solutions' cash flow requirements will be funded from available cash,
the liquidation of its remaining assets, available cash flows from operations
and from limited additional investments permitted under our Credit Facility and
the indentures governing our senior subordinated notes. Our Credit Facility and
the indentures governing our senior subordinated notes contain significant
restrictions on the Company's ability to make investments in FairPoint
Solutions. As of September 30, 2002, the Company could have invested up to
$24.5 million in FairPoint Solutions in compliance with such agreements. We
believe these sources will be adequate to fund the complete discontinuation of
the competitive communications business.

FairPoint Solutions will continue to provide wholesale long distance
services and support to our RLEC subsidiaries and other independent local
exchange companies, which allows these customers to operate their own long
distance communications services. Historically, the wholesale long distance
business enterprise has been profitable and self-funding.

On May 10, 2002, FairPoint Solutions entered into an Amended and Restated
Credit Agreement with its lenders to restructure the obligations of FairPoint
Solutions and its subsidiaries under the FairPoint Solutions Credit Facility. In
connection with such restructuring, (i) FairPoint Solutions paid certain of its
lenders $5.0 million to satisfy $7.0 million of the obligations under the
FairPoint Solutions Credit Facility, (ii) the lenders converted approximately
$93.9 million of the loans and obligations under the FairPoint Solutions Credit
Facility into shares of the Company's Series A Preferred Stock having a
liquidation preference equal to the amount of the loans and obligations under
the FairPoint Solutions Credit Facility, and (iii) the remaining loans under the
FairPoint Solutions Credit Facility and FairPoint Solutions' obligations under
its swap arrangements were converted into $27.9 million aggregate principal
amount of new term loans.

In the second quarter, the Company recorded a gain in discontinued
operations of approximately $17.5 million for the extinguishment of debt and
settlement of its interest rate swap agreements. The gain represents the
difference between the carrying value of $128.8 million of retired debt and
related

21

swap obligations and the sum of the aggregate value of the cash paid
($5.0 million) plus principal amount of new term loans ($27.9 million) plus the
estimated fair value of the Company's Series A Preferred Stock issued
(approximately $78.4 million).

The converted loans under the new FairPoint Solutions Amended and Restated
Credit Agreement consist of two term loan facilities: (i) Tranche A Loans in the
aggregate principal amount of approximately $8.7 million and (ii) Tranche B
Loans in the aggregate principal amount of approximately $19.2 million, each of
which matures in May, 2007. Interest on the new loans is payable monthly and
accrues at a rate of 8% per annum; provided, however, that upon an event of
default the interest rate shall increase to 10% per annum. Interest on the
Tranche A Loans must be paid in cash and interest on Tranche B Loans may be
paid, at the option of FairPoint Solutions, either in cash or in kind. For the
period ended September 30, 2002, $0.5 million in additional debt was issued to
satisfy the accrued in kind interest on the Tranche B loans. The principal of
the Tranche A Loans is due at maturity and the principal of the Tranche B Loans
is payable as follows: (a) $2,062,000 is due on September 30, 2004;
(b) $4,057,000 is due on September 30, 2005; (c) $5,372,000 is due on
September 30, 2006; and (d) the remaining principal balance is due at maturity.

The loans under the new FairPoint Solutions Amended and Restated Credit
Agreement are guaranteed by certain of FairPoint Solutions' subsidiaries and are
secured by substantially all of the assets of FairPoint Solutions and its
subsidiaries. The Company has not guaranteed the debt owed to the lenders under
the new FairPoint Solutions Amended and Restated Credit Agreement nor does the
Company have any obligation to invest any additional funds in FairPoint
Solutions. Further, our Credit Facility and the indentures governing our senior
subordinated notes contain significant restrictions on the Company's ability to
make investments in FairPoint Solutions. Under a tax sharing agreement, the
Company is obligated to reimburse FairPoint Solutions for any tax benefits it
receives from net operating losses generated by FairPoint Solutions.

Voluntary prepayments of the new loans may be made at any time without
premium or penalty. FairPoint Solutions is also required to make mandatory
prepayments of principal from certain sources including the net proceeds from
asset sales and from excess cash flow generated by its long distance business.

Upon an event of default under the new FairPoint Solutions Amended and
Restated Credit Agreement and the acceleration of the loans thereunder, at the
option of the relevant lender, such loans may be converted into the Company's
Series A Preferred Stock pursuant to the terms of the Amended and Restated
Preferred Stock Issuance and Capital Contribution Agreement dated as of May 10,
2002 (the "Preferred Stock Issuance Agreement") by and among the Company, the
Administrative Agent and the lenders.

The Series A Preferred Stock issued to the lenders in connection with the
debt restructuring, and any Series A Preferred Stock issuable pursuant to the
Preferred Stock Issuance Agreement, is non-voting, except as required by
applicable law, and is not convertible into common stock of the Company. The
Series A Preferred Stock provides for the payment of dividends at a rate equal
to 17.428% per annum. Dividends on the Series A Preferred Stock are payable, at
the option of the Company, either in cash or in additional shares of Series A
Preferred Stock. The Company has the option to redeem any outstanding Series A
Preferred Stock at any time. The redemption price for such shares is payable in
cash in an amount equal to $1,000 per share plus any accrued but unpaid
dividends thereon (the "Preference Amount"). Under certain circumstances, the
Company would be required to pay a premium of up to 6% of the Preference Amount
in connection with the redemption of the Series A Preferred Stock. In addition,
upon the occurrence of certain events, such as (i) a merger, consolidation,
sale, transfer or disposition of at least 50% of the assets or business of the
Company and its subsidiaries, (ii) a public offering of the Company's common
stock which yields in the aggregate at least $175.0 million, or (iii) the first
anniversary of the maturity of the Company's senior subordinated

22

notes (which first anniversary will occur in May 2011), the Company would be
required to redeem all outstanding shares of the Series A Preferred Stock at a
price per share equal to the Preference Amount.

The initial carrying amount of the Series A Preferred Stock has been
recorded at its fair value at the date of issuance ($78.4 million). The carrying
amount is being increased by periodic accretions, using the interest method, so
that the carrying amount will equal the mandatory redemption amount
($93.9 million) at the mandatory redemption date (May 2011). During the
nine-month period ended September 30, 2002, the Series A Preferred Stock has
been increased by $0.6 million to reflect the periodic accretions. The carrying
amount of the Series A Preferred Stock has been further increased by
$6.5 million in connection with dividends paid in-kind on the outstanding shares
of the Series A Preferred Stock. The Series A Preferred Stock provides for the
payment of dividends at a rate equal to 17.428% per annum. Additional paid-in
capital has been decreased for the increases in the carrying balance of the
Series A Preferred Stock.

CAPITAL EXPENDITURES

Our annual capital expenditures for our traditional telephone operations
have historically been significant. Because existing regulations allow us to
recover our operating and capital costs, plus a reasonable return on our
invested capital in regulated telephone assets, capital expenditures constitute
an attractive use of our cash flow. For the period from October 1, 2002 through
September 30, 2003, we expect capital expenditures to be approximately
$40.0 million. For the three months and nine months ended September 30, 2002,
capital expenditures were $9.7 million and $19.7 million, respectively.

DEBT FINANCING

We have utilized a variety of debt instruments to fund our business,
including:

OUR CREDIT FACILITY. Our Credit Facility provides for two term facilities,
one with approximately $65.7 million principal amount outstanding as of
September 30, 2002 that matures on March 31, 2006 and the other with the
principal amount of approximately $129.3 million outstanding as of
September 30, 2002 that matures on March 31, 2007. Our Credit Facility also
provides for a revolving facility with a principal amount of $85.0 million that
matures on September 30, 2004 and a revolving acquisition facility with a
principal amount of $165.0 million that also matures on September 30, 2004. As
of September 30, 2002, $60.0 million was outstanding on the revolving facility
and $82.9 million was outstanding on the revolving acquisition facility. The
Credit Facility requires that we comply with certain financial covenants. As of
September 30, 2002, these financial covenants limited the commitment
availability under the revolving and acquisition facilities to $101.5 million.

We amended our Credit Facility in July 2002 to provide for a letter of
credit sub-facility. The amendment will provide us with the ability to request
letters of credit to support our obligations and/or obligations of our
subsidiaries incurred in the ordinary course of business in an aggregate
principal amount not to exceed $5,000,000 and subject to limitations on the
aggregate amount outstanding under the Credit Facility. As of November 1, 2002,
a $0.4 million letter of credit had been issued.

SENIOR SUBORDINATED NOTES AND FLOATING RATE NOTES ISSUED IN 1998. We have
outstanding publicly held debt comprised of $125.0 million of aggregate
principal amount of 9 1/2% senior subordinated notes and $75.0 million aggregate
principal amount of floating rate notes. Interest on the senior subordinated
notes and floating rate notes is payable semi-annually in cash on each May 1 and
November 1. Both series of notes mature on May 1, 2008. These notes are general
unsecured obligations, subordinated in right of payment to all existing and
future senior debt and effectively subordinated to all existing and future debt
and other liabilities of our subsidiaries.

23

SENIOR SUBORDINATED NOTES ISSUED IN 2000. In May 2000, we issued
$200.0 million of aggregate principal amount of 12 1/2% senior subordinated
notes. Interest on these notes is payable semi-annually in cash on May 1 and
November 1 of each year. These notes will mature on May 1, 2010. These notes are
general unsecured obligations and rank equally with all of the Company's other
unsecured senior subordinated indebtedness and are subordinated in right of
payment to all of the Company's senior indebtedness, whether or not secured, and
effectively subordinated to all existing and future debt and other liabilities
of our subsidiaries.

FAIRPOINT SOLUTIONS CREDIT FACILITY. On May 10, 2002, FairPoint Solutions
entered into an Amended and Restated Credit Agreement with its lenders to
restructure the obligations of FairPoint Solutions and its subsidiaries under
the FairPoint Solutions Credit Facility. In connection with such restructuring,
(i) FairPoint Solutions paid certain of its lenders $5.0 million to satisfy
$7.0 million of the obligations under the FairPoint Solutions Credit Facility,
(ii) the lenders converted approximately $93.9 million of the loans and
obligations under the FairPoint Solutions Credit Facility into shares of the
Company's Series A Preferred Stock having a liquidation preference equal to the
amount of the loans and obligations under the FairPoint Solutions Credit
Facility, and (iii) the remaining loans under the FairPoint Solutions Credit
Facility and FairPoint Solutions' obligations under its swap arrangements were
converted into $27.9 million aggregate principal amount of new term loans.

In the second quarter, the Company recorded a gain in discontinued
operations of approximately $17.5 million for the extinguishment of debt and
settlement of its interest rate swap agreements. The gain represents the
difference between the carrying value of $128.8 million of retired debt and
related swap obligations and the sum of the aggregate value of the cash paid
($5.0 million) plus principal amount of new term loans ($27.9 million) plus the
estimated fair value of the Company's Series A Preferred Stock issued
(approximately $78.4 million).

The converted loans under the new FairPoint Solutions Amended and Restated
Credit Agreement consist of two term loan facilities: (i) Tranche A Loans in the
aggregate principal amount of approximately $8.7 million and (ii) Tranche B
Loans in the aggregate principal amount of approximately $19.2 million, each of
which matures in May, 2007. Interest on the new loans is payable monthly and
accrues at a rate of 8% per annum; provided, however, that upon an event of
default the interest rate shall increase to 10% per annum. Interest on the
Tranche A Loans must be paid in cash and interest on Tranche B Loans may be
paid, at the option of FairPoint Solutions, either in cash or in kind. For the
period ended September 30, 2002, $0.5 million in additional debt was issued to
satisfy the accrued in kind interest on the Tranche B loans. The principal of
the Tranche A Loans is due at maturity and the principal of the Tranche B Loans
is payable as follows: (a) $2,062,000 is due on September 30, 2004;
(b) $4,057,000 is due on September 30, 2005; (c) $5,372,000 is due on
September 30, 2006; and (d) the remaining principal balance is due at maturity.

The loans under the new FairPoint Solutions Amended and Restated Credit
Agreement are guaranteed by certain of FairPoint Solutions' subsidiaries and are
secured by substantially all of the assets of FairPoint Solutions and its
subsidiaries. The Company has not guaranteed the debt owed to the lenders under
the new FairPoint Solutions Amended and Restated Credit Agreement nor does the
Company have any obligation to invest any additional funds in FairPoint
Solutions. Further, our Credit Facility and the indentures governing our senior
subordinated notes contain significant restrictions on the Company's ability to
make investments in FairPoint Solutions. Under a tax sharing agreement, the
Company is obligated to reimburse FairPoint Solutions for any tax benefits it
receives from net operating losses generated by FairPoint Solutions.

Voluntary prepayments of the new loans may be made at any time without
premium or penalty. FairPoint Solutions is also required to make mandatory
prepayments of principal from certain sources including the net proceeds from
asset sales and from excess cash flow generated by the long distance business.

24

Upon an event of default under the new FairPoint Solutions Amended and
Restated Credit Agreement and the acceleration of the loans thereunder, at the
option of the relevant lender, such loans may be converted into the Company's
Series A Preferred Stock pursuant to the terms of the Amended and Restated
Preferred Stock Issuance and Capital Contribution Agreement dated as of May 10,
2002 (the "Preferred Stock Issuance Agreement") by and among the Company, the
Administrative Agent and the lenders.

The Series A Preferred Stock issued to the lenders in connection with the
debt restructuring, and any Series A Preferred Stock issuable pursuant to the
Preferred Stock Issuance Agreement, is non-voting, except as required by
applicable law, and is not convertible into common stock of the Company. The
Series A Preferred Stock provides for the payment of dividends at a rate equal
to 17.428% per annum. Dividends on the Series A Preferred Stock are payable, at
the option of the Company, either in cash or in additional shares of Series A
Preferred Stock. The Company has the option to redeem any outstanding Series A
Preferred Stock at any time. The redemption price for such shares is payable in
cash in an amount equal to $1,000 per share plus any accrued but unpaid
dividends thereon (the "Preference Amount"). Under certain circumstances, the
Company would be required to pay a premium of up to 6% of the Preference Amount
in connection with the redemption of the Series A Preferred Stock. In addition,
upon the occurrence of certain events, such as (i) a merger, consolidation,
sale, transfer or disposition of at least 50% of the assets or business of the
Company and its subsidiaries, (ii) a public offering of the Company's common
stock which yields in the aggregate at least $175.0 million, or (iii) the first
anniversary of the maturity of the Company's senior subordinated notes (which
first anniversary will occur in May 2011), the Company would be required to
redeem all outstanding shares of the Series A Preferred Stock at a price per
share equal to the Preference Amount.

SUMMARY OF CONTRACTUAL OBLIGATIONS

The tables set forth below contain information with regard to disclosures
about contractual obligations and commercial commitments.

The following table discloses aggregate information about our contractual
obligations and the periods in which payments are due:

25

The following table discloses aggregate information about our commercial
commitments. Commercial commitments are items that we could be obligated to pay
in the future. They are not included in our Condensed Consolidated Balance
Sheets.

The following table discloses aggregate information about our derivative
financial instruments, the source of fair value of these instruments and their
maturities:

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

(1) The Company has the option to redeem any portion of the outstanding
Series A Preferred Stock at any time. Under certain circumstances, the
Company would be required to pay a premium of up to 6% in connection with
the redemption. The Company is required to redeem the Series A Preferred
Stock upon the occurrence of one of the following events: (i) a merger,
consolidation, sale, transfer or disposition of at least 50% of the assets
or business of the Company and its subsidiaries, (ii) a public offering of
the Company's common stock which yields in the aggregate at least
$175.0 million, or (iii) the first anniversary of the maturity of the
Company's senior subordinated notes (which first anniversary will occur in
May 2011).

(2) Operating lease obligations represent amounts associated with the
discontinued operations discussed in note 2 and are stated in this table at
total contractual amounts. However, the Company intends to negotiate lease
terminations or subleases on these properties to reduce the total
obligation.

(3) Payable to an existing shareholder upon liquidation of their holdings.

(4) Fair value of interest rate swaps at September 30, 2002 was provided by the
counterparties to the underlying contracts using consistent methodologies.

CASH FLOWS

Net cash provided by operating activities of continuing operations was
$52.8 million and $36.5 million for the nine months ended September 30, 2002 and
2001, respectively. Net cash used in investing activities from continuing
operations was $13.1 million and $42.5 million for the nine months ended
September 30, 2002 and 2001, respectively. These cash flows primarily reflect
net capital expenditures of $19.6 million and $28.8 million for the nine months
ended September 30, 2002 and 2001, respectively. $18.4 million was used for
acquisitions of telephone properties for the nine months ended September 30,
2001. Net cash used by financing activities from continuing operations was
$25.9 million for the nine months ended September 30, 2002. These cash flows
primarily represent repayments of long term debt of $102.9 million and
borrowings of $78.1 million. Net cash provided by financing activities from
continuing operations was $85.8 million for the nine months ended

26

September 30, 2001. These cash flows primarily represent repayments of long term
debt of $179.5 million and borrowings of $268.6 million. A majority of the
proceeds received from financing activities during the nine months ended
September 30, 2001 was used to provide cash used in the operation of the
discontinued competitive communications business of $83.0 million.

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board (FASB) issued SFAS No. 143,
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which is effective January 1, 2003.
This statement requires, among other things, the accounting and reporting of
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal operation of a
long-lived asset. The Company has not yet determined the impact of the adoption
of this standard on its financial position, results of operations and cash
flows.

The FASB issued SFAS No. 145, RECISSION OF FASB STATEMENTS NO. 4, 44, AND
64, AMENDMENT OF FASB STATEMENT NO. 13 AND TECHNICAL CORRECTIONS(SFAS No. 145).
This statement eliminates the requirement that gains and losses from
extinguishments of debt be required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. The
statement requires gains and losses from extinguishment of debt to be classified
as extraordinary items only if they meet the criteria in Accounting Priniples
Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS
OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, which provides guidance for
distinguishing transactions that are part of an entity's recurring operations
from those that are unusual or infrequent or that meet the criteria for
classification as an extraordinary item. We adopted SFAS No. 145 in the second
quarter of 2002. During 2002, we recognized a $17.5 million gain for the
extinguishment of the FairPoint Solutions' debt and settlement of its interest
rate swap agreements. This gain is classified within discontinued operations.

In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES (SFAS 146). SFAS 146 will apply to exit
("restructuring") plans initiated after December 31, 2002. Under SFAS 146,
restructuring costs associated with a plan to exit an activity are required to
be recognized when incurred. Currently, the Company's accounting policy is to
recognize exit costs when the Company commits to an exit plan, consistent with
the guidance in EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)."

In October 2002, the Emerging Issues Task Force of the FASB reached
tentative conclusion on the accounting for revenues in transactions that involve
multiple deliverables. The expected guidance will govern how to identify whether
goods or services or both, that are to be delivered separately in a bundled
sales arrangement, should be accounted for separately. The guidance from the
tentative conclusion would be effective for fiscal years beginning after
December 15, 2002, if the EITF ultimately reaches a consensus on the issue. The
Company would, therefore, be required to adopt the guidance in the financial
statements for the quarter ended March 31, 2003. The Company has not yet
determined the impact of this issue on the consolidated financial statements.

INFLATION

We do not believe inflation has a significant effect on our operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2002, we recorded our marketable available-for-sale equity
securities at a fair value of $1.3 million. These securities have exposure to
price risk. A hypothetical ten percent adverse change in quoted market prices
would decrease the recorded value by approximately $0.1 million.

27

We have limited our exposure to material future earnings or cash flow
exposures from changes in interest rates on long-term debt, since approximately
78% of our debt bears interest at fixed rates or effectively at fixed rates
through the use of interest rate swaps. However, our earnings are affected by
changes in interest rates as our long-term debt under our credit facilities have
variable interest based on either the prime rate or LIBOR. If interest rates on
our variable rate debt averaged 10% more, our interest expense would have
increased, and our loss from continuing operations before taxes would have
increased by approximately $1.6 million for the nine months ended September 30,
2002.

We have entered into interest rate swaps to manage our exposure to
fluctuations in interest rates on our variable rate debt. The fair value of
these swaps was approximately $(10.0) million at September 30, 2002. The fair
value indicates an estimated amount we would have to pay to cancel the contracts
or transfer them to other parties. In connection with our Credit Facility, we
used six interest rate swap agreements, with notional amounts of $25.0 million
each, to effectively convert a portion of our variable interest rate exposure to
fixed rates ranging from 8.07% to 10.34%. The swap agreements expire from
November 2003 to May 2004. In connection with our floating rate notes, we used
an interest rate swap agreement, with a notional amount of $75.0 million to
effectively convert our variable interest rate exposure to a fixed rate of
10.78%. This swap agreement expires in May 2003.

ITEM 4. CONTROLS AND PROCEDURES.

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

Within 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in rule 15d-14(c) of the Securities Exchange Act of 1934
(the "Exchange Act")).

Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures (a) are effective to ensure that information required to be disclosed
by the Company in this report has been timely recorded, processed, summarized
and reported and (b) include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
this report has been accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

(b) CHANGES IN INTERNAL CONTROLS.

There have been no significant changes in the Company's internal controls
or, to the knowledge of the management of the Company, in other factors that
could significantly affect these controls subsequent to the date of the
Company's evaluation.

28

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULT ON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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

* Filed herewith.

(1) Incorporated by reference to the annual report of the Company for the year
ended 1999, filed on Form 10-K.

(2) Incorporated by reference to the amended annual report of the Company for
the year ended 1999, filed on Form 10-K/A.

31

(3) Incorporated by reference to the registration statement on Form S-4 of the
Company, declared effective as of October 1, 1998.

(4) Incorporated by reference to the registration statement on Form S-4 of the
Company, declared effective as of August 9, 2000.

(5) Incorporated by reference to the quarterly report of the Company for the
period ended September 30, 2000, filed on Form 10-Q.

(6) Incorporated by referenced to the annual report of the Company for the year
ended 2000, filed on Form 10-K.

(7) Incorporated by reference to the quarterly report of the Company for the
period ended March 31, 2001, filed on Form 10-Q.

(8) Incorporated by reference to the quarterly report of the Company for the
period ended June 30, 2001, filed on Form 10-Q.

(9) Incorporated by reference to the current report on Form 8-K, filed on
November 18, 2001.

(10) Incorporated by reference to the annual report of the Company for the year
ended 2001, filed on Form 10-K.

(11) Incorporated by reference to the quarterly report of the Company for the
period ended March 31, 2002, filed on Form 10-Q.

(12) Incorporated by reference to the quarterly report of the Company for the
period ended June 30, 2002, filed on Form 10-Q.

(b) Reports on Form 8-K

On September 26, 2002, the Company filed a Current Report on Form 8-K
announcing that certain of its executive officers participated in a high
yield conference sponsored by Deutsche Bank.

32

SIGNATURES

Pursuant to the requirement 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.

FAIRPOINT COMMUNICATIONS, INC.

By: /s/ WALTER E. LEACH, JR.
------------------------------------------
Name: Walter E. Leach, Jr.
Title: SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

33

CERTIFICATION

I, Eugene B. Johnson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of FairPoint
Communications, Inc. (the "Company");

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this quarterly
report;

4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in rule 15d-14 under the Securities Exchange Act of 1934, as amended) for
the Company and we have:

(i) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report was being
prepared;

(ii) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

(iii) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent
function):

(i) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and

(ii) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and

6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the Evaluation Date, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: November [14], 2002

/s/ EUGENE B. JOHNSON
- ----------------------------
Eugene B. Johnson
Chief Executive Officer

34

CERTIFICATION

I, Walter E. Leach, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of FairPoint
Communications, Inc. (the "Company");

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this quarterly
report;

4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in rule 15d-14 under the Securities Exchange Act of 1934, as amended) for
the Company and we have:

(i) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report was being
prepared;

(ii) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

(iii) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent
function):

(i) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and

(ii) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and

6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the Evaluation Date, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: November [14], 2002

/s/ WALTER E. LEACH, JR.
- ----------------------------
Walter E. Leach, Jr.
Chief Financial Officer

35