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

FORM 10-Q

Commission File Number 333-56365

FairPoint Communications, Inc.
(Exact Name of Registrant as Specified in Its Charter)

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in R12b-2 of the Exchange Act). Yes o    No ý

        As of November 11, 2004, the registrant had outstanding 45,697,566 shares of class A common stock and 4,269,440 shares of class C common stock. There is no public market for the registrant's class A common stock or class C common stock.

FAIRPOINT COMMUNICATIONS, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2004
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.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

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AIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)    Organization and Basis of Financial Reporting

        The accompanying unaudited condensed financial statements of FairPoint Communications, Inc. and subsidiaries (the "Company") as of September 30, 2004 and for the three and nine month periods ended September 30, 2004 and 2003 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2003 and, in the opinion of the Company's management, the unaudited condensed 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 unaudited condensed consolidated financial statements should be read in conjunction with the Company's 2003 Annual Report on Form 10-K. Certain amounts from 2003 have been reclassified to conform to the current period presentation.

(2)    Stock Option Plans

        The Company accounts for its stock option plans using the intrinsic value-based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as modified by SFAS No. 148, permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. SFAS No. 123 allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income (loss) disclosures as if the fair-value method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the intrinsic value-based method of accounting under APB No. 25 and has adopted the disclosure requirements of SFAS No. 123.

        The Company calculates stock-based compensation pursuant to the disclosure provisions of SFAS No. 123 using the straight-line method over the vesting period of the option. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income (loss) would have been:

        Effective October 1, 2004, the Company extended the exercise period on 379,260 of the stock options granted under the 1995 Stock Option Plan. The Company will recognize a compensation charge of $0.4 million related to the modification of these stock options during the fourth quarter of 2004. The compensation charge is measured as the estimated intrinsic value of the award at the date the awards were modified less previously recognized compensation expense recognized for previous grants/modifications of these stock options.

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(3)    Adoption of SFAS 150 "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity"

        The Company prospectively adopted SFAS 150, effective July 1, 2003. The SFAS 150 adoption had no impact on net income (loss) attributed to common stockholders for any of the periods presented.

        SFAS 150 requires the Company to classify as a long-term liability its series A preferred stock and to reclassify dividends and accretion from the series A preferred stock as interest expense. Such stock is described as "Preferred Shares Subject to Mandatory Redemption" in the Company's Condensed Consolidated Balance Sheet as of September 30, 2004 and December 31, 2003 and dividends and accretion on these shares are now included in pre-tax income whereas previously they were presented as a reduction to equity (a dividend) and, therefore, a reduction of net income (loss) available to common stockholders.

        The series A preferred stock was issued to certain lenders in connection with FairPoint Carrier Services, Inc.'s (f/k/a FairPoint Communications Solutions Corp. ("Carrier Services")) debt restructuring and is nonvoting, 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. Certain holders of the series A preferred stock have agreed with the Company to reduce the dividend rate from 17.428% to 15% on the shares they hold for the period from March 6, 2003 to March 6, 2005. 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, (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 12¹/2% senior subordinated notes due 2010 (the "12¹/2% notes") (which 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, unless prohibited by the Company's credit facility or by the indentures governing its 9¹/2% senior subordinated notes due 2008 (the "9¹/2% notes"), floating rate callable securities due 2008 (the "floating rate notes") and 12¹/2% notes.

        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 ($82.3 million) on the mandatory redemption date (May 2011). For the nine months ended September 30, 2004, the series A preferred stock has been increased by $1.0 million to reflect the periodic accretions. The carrying amount of the series A preferred stock has been further increased by $13.8 million in connection with dividends paid in-kind on the outstanding shares of the series A preferred stock for the nine months ended September 30, 2004. These amounts are included in pre-tax income (loss) for the nine month period ended September 30, 2004.

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(4)    Acquisitions

        On December 1, 2003, the Company acquired 100% of the capital stock of Community Service Telephone Co. ("CST") and Commtel Communications Inc. ("CCI") (the "Maine Acquisition"). The purchase price for the Maine Acquisition was approximately $32.6 million. The Maine Acquisition has 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 operations have been included in the accompanying 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 $25.1 million and has been recognized as goodwill.

        The following unaudited pro forma information presents the combined results of operations of the Company as if the Maine Acquisition had occurred on January 1, 2003. These results include certain adjustments, including increased interest expense on debt related to the acquisition, certain preacquisition transaction costs and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations if the Maine Acquisition had been in effect at the beginning of the periods indicated or which may occur in the future.

        On June 18, 2003, the Company, MJD Ventures, Inc. and FairPoint Berkshire Corporation ("FairPoint Berkshire") executed an agreement and plan of merger with Berkshire Telephone Corporation ("Berkshire") to merge FairPoint Berkshire with Berkshire. Shareholders of Berkshire would receive approximately $19.2 million, subject to adjustment. Berkshire is an independent local exchange carrier that provides voice communication services. Berkshire's communities of service are adjacent to Taconic Telephone Corp., one of the Company's subsidiaries. This acquisition is expected to close during the first quarter of 2005, pending required regulatory approvals. This acquisition is referred to herein as the "Berkshire Acquisition."

(5)    Discontinued Operations and Restructure Charges

        Competitive Local Exchange Carrier Operations.    In November 2001, the Company announced its plan to discontinue the competitive local exchange carrier ("CLEC") operations of its wholly-owned subsidiary, Carrier Services. As a result of the adoption of the plan to discontinue the CLEC operations, these operating results are presented as discontinued operations.

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        Assets and liabilities of discontinued CLEC operations as of September 30, 2004 and December 31, 2003 follow:

        In December 2000 and during the first quarter of 2001, the Company initiated a realignment and restructuring of its CLEC business, which resulted in recording a restructuring charge which is included in the table above. The remaining restructuring accrual at September 30, 2004 was $4.4 million, and is primarily associated with remaining equipment and lease obligations. The change in the restructuring accrual from December 31, 2003 to September 30, 2004 was mainly comprised of payments toward the lease obligations.

        Rural Local Exchange Carrier Operations.    On September 30, 2003, MJD Services Corp. ("MJD Services"), a wholly-owned subsidiary of the Company, completed the sale of all of the capital stock owned by MJD Services of Union Telephone Company of Hartford ("Union"), Armour Independent Telephone Co. ("Armour"), WMW Cable TV Co. ("WMW") and Kadoka Telephone Co. ("Kadoka") to Golden West Telephone Properties, Inc. MJD Services received $24.2 million in proceeds from the sale. The properties sold were geographically isolated from other Company properties making it increasingly difficult to realize additional operating efficiencies. These properties were adjacent to Golden West's operations and offered Golden West numerous operational synergies. The proceeds from this divestiture were used to partially fund the Maine Acquisition completed in 2003. The operations of these companies are presented as discontinued operations. All prior period financial statements have been restated accordingly. This divestiture is referred to herein as the "South Dakota Disposition".

        Income from the South Dakota Disposition operations consists of the following (unaudited):

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(6)    Interest Rate Swap Agreements

        The Company uses variable and fixed-rate debt to finance its operations, capital expenditures and acquisitions. The variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. From time to time, the Company enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt. The last two interest rate swap agreements expired in May 2004.

        The following is a summary of amounts included in realized and unrealized losses on interest rate swaps (dollars in thousands):

(7)    Investments

        The Company has a 7.5% ownership interest in Orange County-Poughkeepsie Limited Partnership, which is accounted for under the equity method. Summary financial information for the partnership follows:

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        This investment represents a passive ownership interest in a partnership. The Company does not control the timing or amount of distributions from such investment. In addition, the Company has been advised that this partnership may adjust its pricing structure. If such an adjustment occurs, the amount of future distributions from this partnership may significantly decrease. Historically, the amount of distributions from this partnership represented a material portion of the Company's cash flow. The Company will reconsider any investment or other accounting implications with respect to this partnership if such an adjustment occurs.

        Following an August 2, 2004 announcement by Choice One Communications Inc. ("Choice One") of a financial restructuring under Chapter 11 of the United States Bankruptcy Code, the quoted market value of the Company's investment in Choice One's common stock declined from $0.5 million at June 30, 2004 to $33,000 at September 30, 2004. The Company expects that the decline in fair value is other-than-temporary, and recorded an impairment loss of $0.5 million in the third quarter of 2004, of which $0.4 million was recorded as a loss in the statement of operations and $0.1 million was recorded as a reduction in accumulated other comprehensive income.

        The Company's investments include investments in nonmarketable securities accounted for using the cost and equity methods of accounting. The Company continually monitors all of these investments for possible impairment by evaluating the financial performance of the businesses in which it invests and comparing the carrying value of the investment to quoted market prices (if available), or the fair value of similar investments, which, in certain instances, are based on traditional valuation models utilizing multiples of cash flows. When circumstances indicate that the fair value of an investment has declined below its carrying value and the decline is other than temporary, the Company records the decline in value as a realized impairment loss and a reduction in the carrying value of the investment.

(8)    Long Term Debt

        On January 30, 2004, the Company amended its credit facility to increase its revolving loan facility from $70.0 million to $85.0 million and its tranche A term loan facility from $30.0 million to $40.0 million. The Company used all of the additional borrowing under the tranche A term loan facility and a portion of the available borrowings under the revolving loan facility to repay in full all of the indebtedness under Carrier Services' credit facility. There was no gain or loss on the extinguishment of this indebtedness.

        The Company may obtain letters of credit under its revolving credit facility to support obligations of the Company incurred in the ordinary course of business in an aggregate principal amount not to exceed $5.0 million and subject to limitations on the aggregate amount outstanding under the revolving credit facility. As of September 30, 2004, the Company had one letter of credit issued in the amount of $0.8 million.

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        The approximate aggregate maturities of long-term debt for each of the five years subsequent to September 30, 2004 are as follows (dollars in thousands):

(9)    Registration Statement

        On November 9, 2004, the Company filed Amendment No. 6 to its Registration Statement on Form S-1 with the Securities and Exchange Commission, amending the Registration Statement on Form S-1 which was originally filed on March 25, 2004, relating to (i) the proposed initial public offering of approximately $655.0 million of income deposit securities ("IDSs"), representing 40,937,500 shares of the Company's class A common stock and $184.2 million aggregate principal amount of senior subordinated notes due 2019, (ii) the exchange of approximately $35.9 million of IDSs or awards of IDSs with the Company's existing common stockholders, optionholders and restricted stock unitholders, and (iii) the offering of $30.0 million aggregate principal amount of senior subordinated notes to be sold separately (not in the form of IDSs). The Company intends to use a portion of the proceeds from the offerings to repay in full its credit facility and consummate tender offers and consent solicitations for all of the 9¹/2% notes, floating rate notes, 12¹/2% notes and 11⁷/8% senior notes due 2010 (the "11⁷/8% notes"). In connection with the IDS offering, the Company also expects to obtain a new senior secured credit facility (the "New Credit Facility"), including a term loan facility and a revolving credit facility, and redeem all of its outstanding series A preferred stock. On November 8, 2004, the Company announced that it had decided to postpone the IDS offering and related transactions and terminated the cash tender offers and consent solicitations for the 9¹/2% notes, the floating rate notes, the 12¹/2% notes and the 11⁷/8% notes which were commenced on July 16, 2004 and were to be consummated in connection with such IDS offering. The Company delayed the IDS offering due to unfavorable market conditions. The Company will continue to monitor market conditions as it proceeds with the registration of the IDS offering with the Securities and Exchange Commission. There can be no assurance that the IDS offering and the related transactions will be completed on the terms described in the registration statement or at all. As of September 30, 2004, the Company had capitalized $6.0 million in costs associated with the IDS offering and the related transactions, which are classified with Deferred Charges and Other Assets.

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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 the Company's 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", "FairPoint", "we", "us" or "our"). The discussion should be read in conjunction with the Company's Consolidated Financial Statements for the year ended December 31, 2003 included in the Company's 2003 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 and related support payments, earnings reviews (such as those currently in process in Idaho, New York and Vermont), 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.

Overview

        We are a leading provider of communications services in rural communities, offering an array of services including local voice, long distance, data, Internet and broadband product offerings. We are one of the largest telephone companies in the United States focused on serving rural communities, and we believe that we are the 16^th largest local telephone company, in each case based on number of access lines. We operate in 17 states with approximately 272,691 access line equivalents (including voice access lines (242,271) and digital subscriber lines (30,420) ("DSL")) in service as of September 30, 2004.

        We were incorporated in February 1991 for the purpose of operating and acquiring incumbent telephone companies in rural markets. Since 1993, we have acquired 30 such businesses, 26 of which we continue to own and operate. Many of our telephone companies have served their respective communities for over 75 years. The majority of the rural communities we serve have fewer than 2,500 residents. All of our telephone company subsidiaries qualify as rural local exchange carriers ("RLECs"), under the Telecommunications Act of 1996.

        RLECs generally are characterized by stable operating results and strong cash flow margins and operate in supportive regulatory environments. In particular, existing state and federal regulations permit us to charge rates that enable us to recover our operating costs, plus a reasonable rate of return on our invested capital (as determined by relevant regulatory authorities). Competition is typically limited because RLECs primarily serve sparsely populated rural communities with predominantly residential customers, and the cost of operations and capital investment requirements for new entrants is high. As a result, in our markets, we have experienced virtually no wireline competition and limited competition from cable providers. While most of our markets are served by wireless service providers, their impact on our business has been limited.

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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.



•

Universal Service Fund-high cost loop support ("USF"). We receive payments from the USF to support the high cost of our operations in rural markets. This revenue stream fluctuates based upon our average cost per loop compared to the national average cost per loop. For example, if the national average cost per loop increases and our operating costs (and average cost per loop) remain constant or decrease, the payments we receive from the Universal Service Fund would decline. Conversely, if the national average cost per loop decreases and our operating costs (and average cost per loop) remain constant or increase, the payments we receive from the Universal Service Fund would increase. Over the past year, the national average cost per loop in relation to our average cost per loop has increased and our management believes the national average cost per loop may continue to increase in relation to our average cost per loop and, as a result, payments we receive from the Universal Service Fund could decline.



•

Interstate access revenue. These revenues are primarily based on a regulated return on rate base and recovery of allowable expenses associated with the origination and termination of interstate toll calls both from and toour customers. Interstate access charges to long distance carriers and other customers are based on access rates filed with the Federal Communications Commission ("FCC"). These revenues also include USF payments for local switching support, long term support and interstate common line support.



•

Intrastate access revenue. 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 termination of intrastate long distance telephone calls both from and to our customers. Intrastate access charges to long distance carriers and other customers are based on access rates filed with the state regulatory agencies.



•

Long distance services. We receive revenues from long distance services we provide to our residential and business customers. In addition, our subsidiary, Carrier Services, provides our RLECs and other non-affiliated communications providers with wholesale long distance services.



•

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, directory services and sale and maintenance of customer premise equipment.

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

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Operating Expenses

        Our expenses are categorized as operating expenses, depreciation and amortization and stock-based compensation.

•

Operating expenses include cash 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 regional Bell operating companies, large independent telephone companies and third party long distance providers. In addition, our operating expenses include 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.



•

Stock-based compensation consists of non-cash compensation charges incurred in connection with the employee stock options granted to our executive officers, and stockholder appreciation rights agreements granted to two executive officers.

Acquisitions

        We intend to continue to pursue selective acquisitions:

•

On December 1, 2003, we purchased all of the capital stock of CST and CCI. CST and CCI served approximately 13,280 access line equivalents in central Maine as of the date of such acquisition.



•

On June 18, 2003, we executed an agreement and plan of merger with Berkshire to merge FairPoint Berkshire with Berkshire, pending required regulatory approvals. Shareholders of Berkshire would receive approximately $19.2 million in the merger, subject to adjustment. Berkshire is an independent local exchange carrier that provides voice communication services to over 7,200 access line equivalents serving five communities in New York State. Berkshire's communities of service are adjacent to Taconic Telephone Corp., one of the Company's subsidiaries. This acquisition is expected to close during the first quarter of 2005, pending required regulatory approvals.

        In the normal course of business, we evaluate selective acquisitions and may enter into non-binding letters of intent with respect to such acquisitions, subject to customary conditions.

Stock Based Compensation

        Non-cash compensation charges associated with restricted stock units were $133,000 for the nine months ended September 30, 2004.

        In 2003, we did not recognize any material non-cash compensation charges, primarily due to the fact that the per share fair market value of our common stock remained relatively stable.

Discontinued Operations

        On September 30, 2003, MJD Services completed the sale of all of the capital stock owned by MJD Services of Union, Armour, WMW and Kadoka to Golden West. MJD Services received approximately $24.2 million in proceeds from the South Dakota Disposition. The companies sold to Golden West served approximately 4,150 voice access lines located in South Dakota. The operations of these companies are presented as discontinued operations and all prior period financial statements have been restated accordingly. We recorded a gain on disposal of the South Dakota companies of $7.8 million during the third quarter of 2003.

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        In November 2001, we decided to discontinue the CLEC operations of Carrier Services. 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 Carrier Services' CLEC operations.

        Carrier Services continues to provide wholesale long distance services and support to our RLEC subsidiaries and other independent local exchange companies and their affiliates. These services allow such companies to operate their own long distance communication services and sell such services to their respective customers. Our long distance business is included as part of continuing operations in the accompanying financial statements.

        The information in our quarter-to-quarter comparisons below represents only our results from continuing operations.

Results of Operations

        The following table sets forth the percentages of revenues represented by selected items reflected in our consolidated statements of operations. The quarter-to-quarter and year-to-date comparison of financial results is not necessarily indicative of future results:

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Three Month Period Ended September 30, 2004 Compared with Three Month Period Ended September 30, 2003

Revenues

        Revenues.    Revenues increased $6.8 million to $65.4 million in 2004 compared to $58.6 million in 2003. $2.3 million of this increase was attributable to the Maine Acquisition and $4.5 million to revenues from our existing operations. We derived our revenues from the following sources:

        Local calling services.    Local calling service revenues increased $1.7 million from $14.3 million in 2003 to $16.0 million in 2004. Revenues from our existing operations increased $0.9 million, mainly attributable to the implementation of Basic Service Calling Areas ("BSCA") in the state of Maine, which changes and expands basic service calling areas and has the effect of shifting revenues from intrastate access to local services. The remaining increase of $0.8 million was attributable to the Maine Acquisition.

        Universal service fund high cost loop.    USF high cost loop receipts increased $1.4 million to $5.8 million in 2004 from $4.4 million in 2003. Our existing operations accounted for all of this increase. A reclassification of plant has increased our USF receipts in our Maine and Idaho companies that has more than offset a drop in receipts from the USF related to increases in the National Average Cost Per Loop.

        Interstate access revenues.    Interstate access revenues increased $0.2 million from $17.2 million in 2003 to $17.4 million in 2004. The Maine Acquisition attributed $0.8 million and was offset by a $0.6 million decrease from our existing operations. Cost study true ups recorded during the three month period in 2004 were less than the cost study true ups recorded during the same period in 2003.

        Intrastate access revenues.    Intrastate access revenues decreased from $11.0 million in 2003 to $10.8 million in 2004. The decrease from our existing operations was $0.5 million before being offset by $0.3 million in revenues contributed by the Maine Acquisition. The decrease from our existing operations is attributed to a decrease of approximately $0.6 million related to the BSCA plan implemented in Maine as discussed above in local calling services. A slight increase in interconnection revenues offset this decrease.

        Long distance services.    Long distance services revenues increased $0.9 million from $4.1million in 2003 to $5.0 million in 2004. This was all attributable to our existing operations as a result of promotional efforts and product bundles which include long distance and are designed to generate more revenue.

        Data and Internet services.    Data and Internet services revenues increased $1.8 million from $3.3 million in 2003 to $5.1 million in 2004. This increase is due primarily to increases in DSL customers as we continue to market our broadband services. Our DSL subscribers increased from 12,271 as of September 30, 2003 to 30,420 as of September 30, 2004, a 148% increase during this period.

        Other services.    Other revenues increased from $4.3 million in 2003 to $5.4 million in 2004. An increase of $0.9 million from existing operations was due to a $1.2 million one-time sale and installation of E911 system equipment. This was offset by $0.3 million of reductions in billing and collection revenues, as inter-exchange carriers continue to take back the billing function for their more significant long distance customers. We expect the billing and collection trend to continue. The Maine Acquisition contributed $0.2 million to the increase.

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Operating Expenses

        Operating expenses and cost of goods sold, excluding depreciation and amortization. Operating expenses increased $5.4 million to $34.2 million in 2004 from $28.8 million in 2003. Of the increase, $4.2 million is related to our existing operations and $1.2 million is related to expenses of the companies we acquired in the Maine Acquisition. Wages, benefits and contracted services increased $0.6 million due to merit increases, an increase in our incentive compensation plan and an increase in the number of our employees compared to a year ago. Network operations expense, wholesale DSL charges and transport and network costs associated with our broadband initiatives increased $1.1 million. Cost of goods sold associated with the one-time sale and installation of E911 system equipment was $1.0 million in 2004. Marketing and promotion expenses increased $0.5 million due to higher levels of activity related to the promotion of custom calling features, data services and other products. Billing costs have increased $0.3 million as we incur costs associated with the conversion of our billing systems into an integrated platform.

        Depreciation and amortization.    Depreciation and amortization increased $0.2 million to $12.2 million in 2004 from $12.0 million in 2003. All of this increase was attributable to the Maine Acquisition.

        Stock based compensation.    For the three months ended September 30, 2004, stock-based compensation associated with restricted stock units was $45,000. During the three months ended September 30, 2003 there were no stock-based compensation charges.

        Income from operations.    Income from operations increased $1.2 million to $19.0 million in 2004 from $17.8 million in 2003. Of the increase, $0.5 million was attributable to our existing operations and $0.7 million was attributable to the Maine Acquisition.

        Other income (expense).    Total other expense increased $1.1 million to $23.2 million in 2004 from $22.1 million in 2003. The increase consisted primarily of interest expense on long-term debt, which increased $0.6 million to $26.2 million in 2004 from $25.6 million in 2003. A loss of $0.4 million on the sale or impairment of assets was incurred during the three months ended September 31, 2004, mainly associated with the bankruptcy of Choice One Communications Inc. During the three months ended September 30, 2003, the company recorded a gain on the sale of assets of $0.5 million, for a net change in gain or loss on sale of investments and other assets of $0.9 million. This is offset by a $0.2 million increase in net earnings from equity investments in 2004 as compared to 2003 and a $0.2 million change associated with interest rate swap agreements. All interest rate swap agreements expired by May 2004.

        The following is a summary of amounts included in realized and unrealized losses on interest rate swaps (dollars in thousands):

        Income tax expense.    Income tax expense increased $0.1 million from an $18,000 benefit in 2003 to a $0.1 million expense in 2004. The income tax expense relates primarily to income taxes owed in certain states.

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        Discontinued operations.    Net income from discontinued operations of our existing operations sold in the South Dakota Disposition was $0.7 million in 2003. The companies were sold on September 30, 2003 and resulted in the recognition of a gain on the disposal of the discontinued operations of $7.8 million.

        Net income (loss).    Net loss attributable to common stockholders for the three months ended September 30, 2004 was $4.2 million. Our 2003 net income attributable to common stockholders was $4.3 million. The difference between 2004 and 2003 is a result of a number of the factors discussed above, but primarily due to the $8.5 million income from discontinued operations reported during 2003.

Nine Month Period Ended September 30, 2004 Compared with Nine Month Period Ended September 30, 2003

Revenues

        Revenues.    Revenues increased $17.1 million to $188.8 million in 2004 compared to $171.7 million in 2003. $6.6 million of this increase was attributable to the Maine Acquisition and $10.5 million to revenues from our existing operations. We derived our revenues from the following sources:

        Local calling services.    Local calling service revenues increased $5.6 million from $41.7 million in 2003 to $47.3 million in 2004. Revenues from our existing operations increased $3.2 million. Of this increase, $2.8 million is attributable to the implementation of BSCA in the state of Maine, which changes and expands basic service calling areas and has the effect of shifting revenues from intrastate access to local services. Despite a 2.6% decline in net voice access lines, the remaining $0.4 million increase in local revenues from existing operations is due to increases in local calling features and local interconnection revenues. The remaining increase of $2.4 million in local calling service revenues was attributable to the Maine Acquisition.

        Universal service fund high cost loop.    USF high cost loop receipts increased $2.8 million to $17.1 million in 2004 from $14.3 million in 2003. Our existing operations accounted for all of this increase. A reclassification of plant has increased our USF receipts in our Maine and Idaho companies that has more than offset a drop in receipts from the USF related to increases in the National Average Cost Per Loop.

        Interstate access revenues.    Interstate access revenues increased $3.1 million from $49.0 million in 2003 to $52.1 million in 2004. Our existing operations accounted for $0.6 million of this increase due to expense increases from our regulated operations that resulted in higher interstate revenue requirements, and $2.5 million was attributable to the Maine Acquisition.

        Intrastate access revenues.    Intrastate access revenues decreased from $32.6 million in 2003 to $31.9 million in 2004. The decrease from our existing operations was $1.6 million before being offset by $0.9 million in revenues contributed by the Maine Acquisition. The decrease was mainly attributed to a decrease of $1.8 million related to the BSCA plan implemented in Maine as discussed above in local calling services.

        Long distance services.    Long distance services revenues increased $1.6 million from $11.7 million in 2003 to $13.3 million in 2004. This was all attributable to our existing operations as a result of promotional efforts and bundles with unlimited long distance designed to generate more revenue.

        Data and Internet services.    Data and Internet services revenues increased $4.0 million from $9.6 million in 2003 to $13.6 million in 2004. This increase is due primarily to increases in DSL customers as we continue to aggressively market our broadband services. Our DSL subscribers increased from 12,271 as of September 30, 2003 to 30,420 as of September 30, 2004, a 148% increase during this period.

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        Other services.    Other revenues increased from $12.8 million in 2003 to $13.7 million in 2004. An increase of $0.4 million from existing operations was due to a $1.2 million one-time sale and installation of E911 system equipment. This was offset by $0.8 million of reductions in billing and collection revenues, as inter-exchange carriers continue to take back the billing function for their more significant long distance customers. We expect the billing and collection trend to continue. The Maine Acquisition contributed $0.5 million to the increase.

Operating Expenses

        Operating expenses and cost of goods sold, excluding depreciation and amortization. Operating expenses increased $14.8 million to $96.4 million in 2004 from $81.6 million in 2003. Of the increase, $11.4 million is related to our existing operations and $3.4 million is related to expenses of the companies we acquired in 2003 in the Maine Acquisition. Wages and benefits increased $3.3 million due to merit increases, an increase in our incentive compensation plan and an increase in the number of our employees compared to a year ago. As we change our company to a more data/broadband and sales organization, our training costs have also increased by $0.2 million as compared to the same period in 2003. Network operations expense, wholesale DSL charges and transport and network costs associated with our broadband initiatives increased $2.8 million. Cost of goods sold associated with the one-time sale and installation of E911 system equipment was $1.0 million in 2004. Bad debt expense was $1.1 million higher in 2004 than 2003 due primarily to a recovery received in 2003. Marketing and promotion expenses increased $1.2 million due to higher levels of activity related to the promotion of custom calling features, data services and other products. Billing costs have increased $0.8 million as we incur costs associated with the conversion of our billing systems into an integrated platform.

        Depreciation and amortization.    Depreciation and amortization increased $0.7 million to $36.9 million in 2004 from $36.2 million in 2003. All of this increase was attributable to the Maine Acquisition.

        Stock based compensation.    For the nine months ended September 30, 2004, stock-based compensation associated with restricted stock units was $133,000. During the nine months ended September 30, 2003 there were no stock-based compensation charges.

        Income from operations.    Income from operations increased $1.6 million to $55.5 million in 2004 from $53.9 million in 2003. A $0.7 million decrease attributable to our existing operations was offset by a $2.3 million increase attributable to the Maine Acquisition.

        Other income (expense).    Total other expense increased $10.5 million to $68.8 million in 2004 from $58.3 million in 2003. The increase consisted primarily of interest expense on long-term debt, which increased $13.1 million to $77.7 million in 2004 from $64.6 million in 2003, mainly attributable to the extinguishment of debt in connection with our issuance of the 11⁷/8% notes during the first quarter of 2003 and the adoption of SFAS 150 as of July 1, 2003, the latter of which resulted in our recording $14.8 million in interest expense related to dividends and accretion on series A preferred stock for the nine months ended September 30, 2004 compared to $4.4 million for the nine months ended September 30, 2003. Earnings in equity investments increased $0.7 million to $7.9 million in 2004 from $7.2 million in 2003. Other non operating income (expense) includes net loss on the extinguishment of debt and expenses related to the loss on the write off of loan origination costs. In conjunction with the issuance of $225.0 million of the 11⁷/8% notes during the first quarter of 2003, we recorded $3.5 million in non-operating gains on the extinguishment of a portion of the 9¹/2% notes, the 12¹/2% notes and Carrier Services loans. These gains were offset by a non-operating loss of $5.0 million for the write-off of debt issue costs related to this extinguishment of debt in 2003.

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        The following is a summary of amounts included in realized and unrealized losses on interest rate swaps (dollars in thousands):

        Income tax expense.    Income tax expense was approximately $0.3 million in 2004 and 2003. The income tax expense relates primarily to income taxes owed in certain states.

        Discontinued operations.    Net income from discontinued operations of our companies sold in the South Dakota Disposition was $1.9 million in 2003. The companies were sold on September 30, 2003 and resulted in the recognition of a gain on the disposal of the discontinued operations of $7.8 million during 2003. During the nine months ended September 30, 2004, we recorded a reduction to our liability associated with the discontinuation of our CLEC operations of $0.7 million. This is mainly attributable to excise tax refunds received from the Internal Revenue Service as well as a reduction in liabilities associated with potential property tax payments.

        Net income (loss).    Net loss attributable to common stockholders for the nine-months ended September 30, 2004 was $12.9 million. Our 2003 net loss attributable to common stockholders was $0.9 million after giving effect to $8.9 million in dividends and accretion related to our series A preferred stock and the repurchase of series A preferred stock at a discount of $2.9 million. The difference between 2004 and 2003 is a result of certain of the factors discussed above.

Liquidity and Capital Resources

        We intend to fund our operations, capital expenditures, interest expense and working capital requirements from internal cash from operations. To fund future acquisitions, we intend to use borrowings under our revolving credit facility, or we will need to secure additional funding through the sale of public or private debt and/or equity securities or enter into another bank credit facility. We currently have a revolving credit facility of $85.0 million, $46.8 million of which was available as of September 30, 2004. Our ability to make principal payments on our indebtedness will depend on our ability to generate cash in the future. We will need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance our indebtedness on commercially reasonable terms or at all. For the nine months ended September 30, 2004 and 2003, cash provided by operating activities of continuing operations was $32.9 million and $23.7 million, respectively.

        Net cash used in investing activities from continuing operations was $12.1 million and $11.2 million for the nine months ended September 30, 2004 and 2003, respectively. These cash flows primarily reflect net capital expenditures of $24.0 million and $19.3 million for the nine months ended September 30, 2004 and 2003, respectively. Offsetting capital expenditures were distributions from investments of $11.8 million and $8.7 million for the nine months ended September 30, 2004 and 2003, respectively. The $11.8 million received in 2004 includes a non-recurring $2.5 million distribution to one of our subsidiaries, Chouteau Telephone Company, indirectly from Independent Cellular Telephone LLC resulting from the sale of Independent Cellular Telephone LLC's membership interest in an operating cellular limited liability company. These investments represent passive ownership interests in partnerships. We do not control the timing or amount of distributions from such investments. In addition, we have been advised that one of these partnerships may adjust its pricing structure. If such an adjustment occurs, the amount of future distributions from this partnership may significantly

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decrease. Historically, the amount of distributions from this partnership represented a material portion of our cash flow. We will reconsider any investment or other accounting implications with respect to this partnership if such an adjustment occurs.

        Net cash used in financing activities from continuing operations was $18.9 million and $15.1 million for the nine months ended September 30, 2004 and 2003, respectively. These cash flows primarily represent net repayment of long-term debt of $12.2 million and $5.6 million in debt issuance costs for the nine months ended September 30, 2004. For the nine months ended September 30, 2003, net proceeds from the issuance of long term debt of $9.6 million were offset by debt issuance and offering costs of $15.1 million and the repurchase of preferred stock and common stock of $9.6 million.

        Our annual capital expenditures for our rural 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. Net capital expenditures were approximately $24.0 million for the nine months ended September 30, 2004 and are expected to be approximately $36.6 million for the period from October 1, 2004 through September 30, 2005.

        Our credit facility was amended and restated on March 6, 2003. Our credit facility was further amended on December 17, 2003, which amendment became effective on January 30, 2004, to increase our credit facility's revolving loan facility from $70 million to $85 million and tranche A term loan facility from $30 million to $40 million. On January 30, 2004, the Company used additional borrowings under the tranche A term loan facility and a portion of the available borrowings under the revolving loan facility to repay in full all indebtedness under Carrier Services' credit facility.

        We intend to use borrowings under our credit facility's revolving loan facility to fund the Berkshire Acquisition.

        For a summary description of our debt see "—Description of Certain Indebtedness."

        In May 2002, Carrier Services entered into an amended and restated credit facility with its lenders to restructure its obligations under its credit facility. In the restructuring, (i) Carrier Services paid certain of its lenders $5.0 million to satisfy $7.0 million of obligations under the credit facility, (ii) the lenders converted approximately $93.9 million of the loans under the credit facility into shares of the Company's series A preferred stock and (iii) the remaining loans under the credit facility and certain swap obligations were converted into $27.9 million of new term loans. In March 2003, the Company used a portion of the proceeds from the offering of its 11⁷/8% notes and borrowings under the credit facility's tranche A term loan facility to repay $2.2 million principal amount of loans under the Carrier Services credit facility, at approximately a 30% discount to par. On January 30, 2004, the Company used additional borrowings under its credit facility's tranche A term loan facility and a portion of the available borrowings under its credit facility's revolving loan facility to repay in full all indebtedness under Carrier Services' credit facility.

        On November 9, 2004, the Company filed Amendment No. 6 to its Registration Statement on Form S-1 with the Securities and Exchange Commission, amending the Registration Statement on Form S-1 which was originally filed on March 25, 2004, relating to (i) the proposed initial public offering of approximately $655.0 million of IDSs, representing 40,937,500 shares of the Company's class A common stock and $184.2 million aggregate principal amount of senior subordinated notes due 2019, (ii) the exchange of approximately $35.9 million of IDSs or awards of IDSs with the Company's existing common stockholders, optionholders and restricted stock unitholders, and (iii) the offering of $30.0 million aggregate principal amount of senior subordinated notes to be sold separately (not in the form of IDSs). The Company intends to use a portion of the proceeds from the offerings to repay in full its credit facility and consummate tender offers and consent solicitations for all of the 9¹/2% notes, floating rate notes, 12¹/2% notes and 11⁷/8% notes. In connection with the IDS offering, the Company also expects to obtain a new senior secured credit facility, including a term loan facility and a revolving credit facility, and redeem all of its outstanding series A preferred stock. On November 8, 2004, the

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Company announced that it had decided to postpone the IDS offering and related transactions and terminated the cash tender offers and consent solicitations for the 9¹/2% notes, the floating rate notes, the 12¹/2% notes and the 11⁷/8% notes which were commenced on July 16, 2004 and were to be consummated in connection with such IDS offering. The Company delayed the IDS offering due to unfavorable market conditions. The Company will continue to monitor market conditions as it proceeds with the registration of the IDS offering with the Securities and Exchange Commission. There can be no assurance that the IDS offering and the related transactions will be completed on the terms described in the registration statement or at all. As of September 30, 2004, the Company had capitalized $6.0 million in costs associated with the IDS offering and the related transactions, which are classified with Deferred Charges and Other Assets.

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 as of September 30, 2004 and the periods in which payments are due:

(1)

The Company has the option to redeem the 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 12¹/2% notes (which first anniversary will occur in May 2011), unless prohibited by its credit facility or the indentures governing its 9¹/2% notes, floating rate notes and 12¹/2% notes.

(2)

Real property lease obligations of $8.0 million associated with the discontinued operations discussed in note (5) to our condensed consolidated financial statements are stated in this table at total contractual amounts. However, we have negotiated lease terminations or subleases on these properties to reduce the total obligation. Operating leases from continuing operations of $4.2 million are also included.

(3)

Payable to affiliates of Kelso & Company upon the occurrence of certain events, which include the consummation of the IDS offering.

        As of September 30, 2004, we did not have any derivative financial instruments.

Description of Certain Indebtedness

        We have utilized a variety of debt instruments to fund our business and we have a significant amount of debt outstanding. Our high level of debt could significantly affect our business by: making it more difficult for us to satisfy our obligations, including making scheduled interest payments under our

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debt obligations; limiting our ability to obtain additional financing; increasing our vulnerability to generally adverse economic and communications industry conditions, including changes in interest rates; requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for other purposes; limiting our flexibility in planning for, or reacting to, changes in our business and the communications industry; and placing us at a competitive disadvantage compared to those of our competitors that have less debt.

        In addition, our credit facility and the indentures governing our 9¹/2% notes, floating rate notes, 12¹/2% notes and 11⁷/8% notes contain covenants that limit our operating flexibility and restrict our ability to take specific actions, even if we believe such actions are in our best interest. These include restrictions on our ability to: incur additional debt; pay dividends or distributions on, or redeem or repurchase, capital stock; create liens or negative pledges with respect to our assets; make investments, loans or advances; make capital expenditures; issue, sell or allow distributions on capital stock of specified subsidiaries; enter into sale and leaseback transactions; prepay or defease specified indebtedness; enter into transactions with affiliates; enter into specified hedging arrangements; merge, consolidate or sell our assets; or engage in any business other than communications. We also are required to maintain specified financial ratios and/or meet financial tests prescribed by our amended and restated credit facility. We may not be able to meet these requirements or satisfy these covenants in the future. If we fail to do so, our debts could become immediately payable at a time when we are unable to pay them, which could have an adverse effect on our business.

Our credit facility

        We have a credit facility with various lenders, Wachovia Bank, National Association, as documentation agent, Deutsche Bank Trust Company Americas, as administrative agent, and Bank of America, N.A., as syndication agent. Our credit facility was amended and restated as part of a refinancing completed on March 6, 2003 to provide for, among other things, rescheduled amortization and an excess cash flow sweep with respect to the tranche C term facility. Our credit facility was further amended on December 17, 2003, which amendment became effective January 30, 2004, to increase the credit facility's revolving loan facility from $70 million to $85 million and tranche A term loan facility from $30 million to $40 million. All of our obligations under our credit facility are unconditionally and irrevocably guaranteed jointly and severally by four of our first-tier subsidiaries. Outstanding debt under our credit facility is secured by a first priority perfected security interest in all of the capital stock of certain of our subsidiaries.

        Our credit facility is comprised of the following facilities:

        Revolving loan facility.    A revolving loan facility of $85 million, of which $38.2 million was outstanding as of September 30, 2004. These loans mature on March 31, 2007 and bear interest per annum at either a base rate plus 3.00% or LIBOR plus 4.00%. On January 30, 2004, the Company increased the revolving loan facility from $70 to $85 million.

        Tranche A term loan facility.    A tranche A term loan facility of $40.0 million. As of September 30, 2004, $40.0 million of tranche A term loans were outstanding. These loans mature on March 31, 2007 and bear interest per annum at either a base rate plus 3.00% or LIBOR plus 4.00%. On January 30, 2004, the Company increased the tranche A term loan facility from $30 to $40 million.

        Tranche C term loan facility.    As of September 30, 2004, approximately $106.9 million of tranche C term loans remained outstanding. These loans mature on March 31, 2007. Mandatory repayments under the tranche C term loan facility are scheduled to be $19.3 million and $26.4 million for the years ended December 31, 2005 and December 31, 2006, respectively, and a final $61.2 million is due on March 31, 2007. Tranche C term loans bear interest per annum at either a base rate plus 3.50% or LIBOR plus 4.50%.

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Covenants and Events of Default

        Our credit facility contains certain customary covenants and other credit requirements of the Company and its subsidiaries and certain customary events of default.

Prepayments

        Net cash proceeds from asset sales are required to be applied as mandatory prepayments of principal on outstanding loans unless such proceeds are used by us to finance acquisitions permitted under our amended and restated credit facility within 180 days of our receipt of such proceeds. Change of control transactions trigger a mandatory prepayment obligation. Voluntary prepayments of loans, including interim prepayments of revolving loans with proceeds of asset sales that are not used to prepay term loans in anticipation of being subsequently applied to fund a permitted acquisition or acquisitions within 180 days of the asset sale, may be made at any time without premium or penalty, provided that voluntary prepayments of Eurodollar loans made on a date other than the last day of an interest period applicable thereto shall be subject to customary breakage costs.

        In addition, our credit facility provides that on the date occurring ninety days after the last day of each of our fiscal years, commencing December 31, 2003, 50% of excess cash flow (as defined in our credit facility) for the immediately preceding fiscal year shall be applied as a mandatory repayment of the then outstanding tranche C term loan facility; provided, however, that such requirement shall terminate at such time as (i) we first meet a senior secured leverage ratio (as defined in our credit facility) of less than or equal to 1.00 to 1.00 and (ii) no default or event of default exists under our amended and restated credit facility.

9¹/2% notes and floating rate notes issued in 1998

        The Company issued $125.0 million of 9¹/2% notes and $75.0 million of floating rate notes in 1998. The 9¹/2% notes bear interest at the rate of 9¹/2% per annum and the floating rate notes bear interest at a rate per annum equal to LIBOR plus 418.75 basis points, in each case payable semi-annually in arrears. The LIBOR rate on the floating rate notes is determined semi-annually. In March 2003 the Company repurchased $9.8 million aggregate principal amount of the 9¹/2% notes.

        The 9¹/2% notes and floating rate notes mature on May 1, 2008. The Company may redeem the 9¹/2% notes and the floating rate notes at any time, in each case, at the redemption prices stated in the indenture under which those notes were issued, together with accrued and unpaid interest, if any, to the redemption date. In the event of a change of control, the Company must offer to repurchase the outstanding 9¹/2% notes and floating rate notes for cash at a purchase price of 101% of the principal amount of such notes, together with all accrued and unpaid interest, if any, to the date of repurchase.

        The 9¹/2% notes and floating rate notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company, including all obligations under our credit facility.

        The indenture governing the Company's 9¹/2% notes and floating rate notes contains certain customary covenants and events of default.

12¹/2% notes issued in 2000

        The Company issued $200.0 million of 12¹/2% notes in 2000. The 12¹/2% notes bear interest at the rate of 12¹/2% per annum payable semi-annually in arrears. In March 2003 the Company repurchased $7.0 million aggregate principal amount of the 12¹/2% notes.

        The 12¹/2% notes mature on May 1, 2010. The Company may redeem the 12¹/2% notes on or after May 1, 2005 at the redemption prices stated in the indenture under which the 12¹/2% notes were issued, together with accrued and unpaid interest, if any, to the redemption date. In the event of a change of control, the Company must offer to repurchase the outstanding 12¹/2% notes for cash at a purchase

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price of 101% of the principal amount of such notes, together with all accrued and unpaid interest, if any, to the date of repurchase.

        The 12¹/2% notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company, including all obligations under our credit facility.

        The indenture governing the 12¹/2% notes contains certain customary covenants and events of default.

11⁷/8% notes issued in 2003

        The Company issued $225.0 million of 11⁷/8% notes in 2003. The 11⁷/8% notes bear interest at the rate of 11⁷/8% per annum payable semi-annually in arrears.

        The 11⁷/8% notes mature on March 1, 2010. The Company may redeem the 11⁷/8% notes at any time on or after March 1, 2007 at the redemption prices stated in the indenture under which the 11⁷/8% notes were issued, together with accrued and unpaid interest, if any, to the redemption date. In the event of a change of control, the Company must offer to repurchase the outstanding 11⁷/8% notes for cash at a purchase price of 101% of the principal amount of such notes, together with all accrued and unpaid interest, if any, to the date of repurchase.

        The 11⁷/8% notes are general unsecured obligations of the Company, ranking pari passu in right of payment with all existing and future senior debt of the Company, including all obligations under our credit facility, and senior in right of payment to all existing and future subordinated indebtedness of the Company.

        The indenture governing the 11⁷/8% notes contains certain customary covenants and events of default.

New Accounting Standards

        In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. In December 2003, the FASB revised Interpretation No. 46, which clarifies the application of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements. As per ARB No. 51, a general rule for preparation of consolidated financial statements of a parent and its subsidiary is ownership by the parent, either directly or indirectly, of over fifty percent of the outstanding voting shares of a subsidiary. However, application of the majority voting interest requirement of ARB No. 51 to certain types of entities may not identify the party with a controlling financial interest because the controlling financial interest may be achieved through arrangements that do not involve voting interest. Interpretation No. 46 clarifies applicability of ARB No. 51 to entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. Interpretation No. 46 requires an entity to consolidate a variable interest entity even though the entity does not, either directly or indirectly, own over fifty percent of the outstanding voting shares. Interpretation No. 46 is applicable for financial statements issued for reporting periods that end after March 15, 2004. The implementation of Interpretation No. 46 did not have a significant impact on our financial statements.

        In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a non-public

27

entity, in which case this statement shall be effective for fiscal periods beginning after December 15, 2003. For purposes of SFAS No. 150, we meet the definition of a nonpublic entity. As described in note 3 to our consolidated financial statements contained in this Quarterly Report on Form 10-Q, we adopted SFAS No. 150 early, as of July 1, 2003.

Inflation

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

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        During the quarter ended September 30, 2004, we impaired the value of our Choice One stock due to an other-than-temporary decline in market value. At September 30, 2004, the carrying value of such stock is zero.

        Approximately 68% of our debt bears interest at fixed rates or effectively at fixed rates. However, our earnings are affected by changes in interest rates as our floating rate notes and borrowings under our credit facility have variable interest rates based on either the prime rate or LIBOR. If interest rates on our variable rate debt increased by 10%, our interest expense would have increased, and our loss from continuing operations before taxes would have increased by approximately $0.4 million for the nine months ended September 30, 2004.

        Our Annual Report on Form 10-K for the year ended December 31, 2003 contains information about market risks under "Item 7A. Quantitative and Qualitative Disclosures about Market Risk."

ITEM 4.    CONTROLS AND PROCEDURES

        (a) Evaluation of disclosure controls and procedures.

        As of the end of the period covered by this quarterly 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 rules 13a-15(e) and 15d-15(e) 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, as of the end of the period covered by this quarterly report, the Company's disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by the Company in reports filed under the Exchange Act is 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 reports filed or submitted under the Exchange Act is 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 control over financial reporting (as defined in rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this quarterly report that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting.

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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

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