**UNITED STATESSECURITIES 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 March 31, 2006.**                                                                                                                                                                                                                                                                                                |
| **or**                                                                                                                                                                                                                                                                                                                                                 |
| o                                                                                                                                                                                                                                                                                                                                                      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
| **For the transition period from                         to                          ** |

 

**CommissionFile Number 333-56365**

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**FairPoint Communications, Inc.**

(Exact Name of Registrantas Specified in Its Charter)

| **Delaware**                                 |   | **13-3725229**       |
|----------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of             |   | (I.R.S. Employer     |
| Incorporation or  Organization)              |   | Identification  No.) |
| **521 East Morehead Street, Suite 250** |   |                 |
| **Charlotte,  North Carolina**               |   | **28202**            |
| (Address of  Principal Executive Offices)    |   | (Zip Code)           |

 

**(704) 344-8150**

(Registrant’s telephonenumber, including area code)

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Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch 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 o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one)

Large acceleratedfiler o          Acceleratedfiler o           Non-acceleratedfiler x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).Yes o  No x

As of May 2, 2006, there were 35,037,035 sharesof the Registrant’s common stock, par value $0.01 per share, outstanding.

Documentsincorporated by reference: **None**

 

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**INDEX**

|                                         | ** **                                                                                                          | ** ** | **Page** |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.  FINANCIAL INFORMATION** |                                                                                                                |       |
| Item 1.                                 | Financial Statements                                                                                                |       | 4        |   |
|                                    | Condensed  Consolidated Balance Sheets as of March 31, 2006 and December 31,  2005                        |       | 4        |   |
|                                    | Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2006 and 2005           |       | 5        |   |
|                                    | Condensed  Consolidated Statements of Comprehensive Income for the three months ended  March 31, 2006 and 2005 |       | 6        |   |
|                                    | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2006 and 2005           |       | 7        |   |
|                                    | Notes  to Condensed Consolidated Financial Statements                                                               |       | 8        |   |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 19       |   |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 29       |   |
| Item 4.                                 | Controls  and Procedures                                                                                            |       | 30       |   |
| **PART II. OTHER INFORMATION**     |                                                                                                                |       |     |
| Item 1.                                 | Legal  Proceedings                                                                                                  |       | 31       |   |
| Item 1A.                                | Risk Factors                                                                                                        |       | 31       |   |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                        |       | 31       |   |
| Item 3.                                 | Defaults  Upon Senior Securities                                                                                    |       | 32       |   |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                                                |       | 32       |   |
| Item 5.                                 | Other  Information                                                                                                  |       | 32       |   |
| Item 6.                                 | Exhibits                                                                                                            |       | 32       |   |
|                                    | Signatures                                                                                                          |       | 33       |   |

                                                                                                                                                                                                                                                                                                

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**PART I—FINANCIALINFORMATION**

**Cautionary NoteRegarding Forward-Looking Statements**

Some statements inthis Quarterly Report are known as “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, or theSecurities Act, and Section 21E of the Securities Exchange Act of 1934, orthe Exchange Act. Forward-looking statements may relate to, among otherthings:

·       futureperformance generally,

·       ourdividend policy and expectations regarding dividend payments,

·       businessdevelopment activities,

·       futurecapital expenditures,

·       futureinterest expense,

·       distributionsfrom minority investments and passive partnership interests,

·       netoperating loss carry forwards,

·       technologicaldevelopments and changes in the communications industry,

·       financingsources and availability,

·       regulatorysupport payments,

·       theeffects of regulation and competition, and

·       pendinglitigation.

These forward-looking statements include, butare not limited to, statements about our plans, objectives, expectations andintentions and other statements contained in this Quarterly Report that are nothistorical facts. When used in this Quarterly Report, the words “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressionsare generally intended to identify forward looking statements. Because theseforward-looking statements involve known and unknown risks anduncertainties, there are important factors that could cause actual results,events or developments to differ materially from those expressed or implied bythese forward-looking statements, including our plans, objectives,expectations and intentions and other factors discussed in this QuarterlyReport and in Exhibit 99.1 to this Quarterly Report. You should not place unduereliance on such forward-looking statements, which are based on theinformation currently available to us and speak only as of the date on whichthis Quarterly Report was filed with the Securities and Exchange Commission, orthe SEC. We undertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.However, your attention is directed to any further disclosures made on relatedsubjects in our subsequent periodic reports filed with the SEC on Forms 10-K,10-Q and 8-K and Schedule 14A.

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**Item 1.**                        FinancialStatements.

*Except as otherwiserequired by the context, references in this Quarterly Report to “FairPoint,” “ourcompany,” “we,” “us,” or “our” refer to the combined business of FairPointCommunications, Inc. and all of its subsidiaries. Except as otherwiserequired by the context, all references to the “Company” refer to FairPointCommunications, Inc. excluding its subsidiaries.*

**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESCondensed Consolidated Balance Sheets**

| ** **                                          | ** ** | **March 31,**                   | ** **  | **December 31,** | ** **  |
|-----------------------------------------------------|------------|--------------------------------------|-------------|-----------------------|-------------|
| ** **                                          | ** ** | **2006**                             | ** **  | **2005**              | ** **  |
| ** **                                          | ** ** | **(unaudited)**                      | ** **  | ** **            | ** **  |
| ** **                                          | ** ** | **(Dollars in thousands)** | ** **  |
| **Assets**                                          | ** ** | ** **                           | ** **  |                  | ** **  | ** ** |   |
| Current assets:                                     |       |                                 |        |                  |        |   |   |
| Cash                                                |       | $                                    | 9,655       |                  |        | $ | 5,083 |   |   |
| Accounts receivable, net                            |       | 29,740                               |        |                  | 34,985      |   |   |
| Other                                               |       | 12,412                               |        |                  | 9,200       |   |   |
| Deferred income tax, net                            |       | 26,800                               |        |                  | 29,190      |   |   |
| Assets of discontinued  operations                  |       | —                               |        |                  | 90          |   |   |
| **Total current assets**                            | ** ** | **78,607**                           | ** **  |                  | **78,548**  | ** ** |   |
| Property, plant, and  equipment, net                |       | 233,023                              |        |                  | 242,617     |   |   |
| Investments                                         |       | 38,228                               |        |                  | 39,808      |   |   |
| Goodwill                                            |       | 481,343                              |        |                  | 481,343     |   |   |
| Deferred income tax, net                            |       | 44,264                               |        |                  | 47,160      |   |   |
| Deferred charges and  other assets                  |       | 21,507                               |        |                  | 18,663      |   |   |
| **Total assets**                                    | ** ** | **$**                                | **896,972** | ** **            |        | **$** | **908,139** | ** ** |   |
| **Liabilities  and Stockholders’ Equity**      | ** ** | ** **                           | ** **  |                  | ** **  | ** ** |   |
| Current liabilities:                                |       |                                 |        |                  |        |   |   |
| Accounts payable                                    |       | $                                    | 10,267      |                  |        | $ | 12,030 |   |   |
| Dividends payable                                   |       | 13,817                               |        |                  | 13,789      |   |   |
| Current portion of  long-term debt                  |       | 685                                  |        |                  | 677         |   |   |
| Demand notes payable                                |       | 336                                  |        |                  | 338         |   |   |
| Accrued interest payable                            |       | 141                                  |        |                  | 288         |   |   |
| Other accrued  liabilities                          |       | 16,171                               |        |                  | 20,808      |   |   |
| Liabilities of  discontinued operations             |       | 2,543                                |        |                  | 2,495       |   |   |
| **Total current liabilities**                       | ** ** | **43,960**                           | ** **  |                  | **50,425**  | ** ** |   |
| Long-term liabilities:                              |       |                                 |        |                  |        |   |   |
| Long-term debt, net of  current portion             |       | 604,805                              |        |                  | 606,748     |   |   |
| Deferred credits and  other long-term liabilities   |       | 5,410                                |        |                  | 4,108       |   |   |
| **Total long-term liabilities**                     | ** ** | **610,215**                          | ** **  |                  | **610,856** | ** ** |   |
| Minority interest                                   |       | 10                                   |        |                  | 10          |   |   |
| Stockholders’ equity:                          |       |                                 |        |                  |        |   |   |
| Common stock                                        |       | 351                                  |        |                  | 350         |   |   |
| Additional paid-in  capital                         |       | 570,500                              |        |                  | 590,131     |   |   |
| Unearned compensation                               |       | —                               |        |                  | (6,475      | ) |   |
| Accumulated deficit                                 |       | (336,915                             | )           |                  | (342,635    | ) |   |
| Accumulated other  comprehensive income, net        |       | 8,851                                |        |                  | 5,477       |   |   |
| **Total stockholders’ equity**                 | ** ** | **242,787**                          | ** **  |                  | **246,848** | ** ** |   |
| **Total liabilities and stockholders’ equity** | ** ** | **$**                                | **896,972** | ** **            |        | **$** | **908,139** | ** ** |   |

 

See accompanying notes to condensed consolidated financial statements

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**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Operations (Unaudited)**

| ** **                                                   | ** ** | **Three months ended**     | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                   | ** ** | **March 31,**                   | ** ** |
| ** **                                                   | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Revenues                                                     |       | $                                    | 64,791     |   | $ | 61,665 |   |
| Operating expenses:                                          |       |                                 |       |   |   |
| Operating expenses,  excluding depreciation and amortization |       | 35,605                               |       | 32,443 |   |
| Depreciation and  amortization                               |       | 13,635                               |       | 13,010 |   |
| Total operating  expenses                                    |       | 49,240                               |       | 45,453 |   |
| Income from  operations                                      |       | 15,551                               |       | 16,212 |   |
| Other income (expense):                                      |       |                                 |       |   |   |
| Net loss on sale  of investments and other assets            |       | (52                                  | )          | (178 | ) |
| Interest and  dividend income                                |       | 340                                  |       | 552 |   |
| Interest expense                                             |       | (9,753                               | )          | (16,970 | ) |
| Equity in net  earnings of investees                         |       | 3,286                                |       | 2,656 |   |
| Other  nonoperating, net                                     |       | —                               |       | (86,164 | ) |
| Total other  expense                                         |       | (6,179                               | )          | (100,104 | ) |
| Income (loss)  before income taxes                           |       | 9,372                                |       | (83,892 | ) |
| Income tax  (expense) benefit                                |       | (3,652                               | )          | 94,934 |   |
| Net income                                                   |       | $                                    | 5,720      |   | $ | 11,042 |   |
| Weighted average  shares outstanding:                        |       |                                 |       |   |   |
| Basic                                                        |       | 34,552                               |       | 23,913 |   |
| Diluted                                                      |       | 34,647                               |       | 24,006 |   |
| Earnings per  share:                                         |       |                                 |       |   |   |
| Basic                                                        |       | $                                    | 0.17       |   | $ | 0.46 |   |
| Diluted                                                      |       | $                                    | 0.17       |   | $ | 0.46 |   |

 

See accompanying notes to condensed consolidated financial statements

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**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Comprehensive Income(Unaudited)**

| ** **                                                                                                                                                                                                                 | ** ** | **Three months ended**                         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                 | ** ** | **March 31,**                                       | ** ** |
| ** **                                                                                                                                                                                                                 | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| ** **                                                                                                                                                                                                                 | ** ** | **(Dollars in thousands)**                     | ** ** |
| Net income                                                                                                                                                                                                                 |       |                                                     | $          | 5,720 |   |   | $ | 11,042 |   |
| Other comprehensive  income:                                                                                                                                                                                               |       |                                                     |       |   |   |   |   |
| Cash flow hedges:                                                                                                                                                                                                          |       |                                                     |       |   |   |   |   |
| Change in net  unrealized gain, net of tax expense of $2.0 million as of the three  months ended March 31, 2006 and net of tax expense of $2.2 million for  the three months ended March 31, 2005 |       |                                                     | 3,374      |   |   | 3,713 |   |
| Comprehensive income                                                                                                                                                                                                       |       |                                                     | $          | 9,094 |   |   | $ | 14,755 |   |

 

See accompanying notes to condensed consolidated financial statements.

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**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows(Unaudited)**

| ** **                                                                                                            | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                                                            | ** ** | **(Dollars in thousands)**             | ** ** |
| Cash flows from operating activities:                                                                                 |       |                                             |       |   |   |
| Net income                                                                                                            |       | $                                                | 5,720      |   | $ | 11,042 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities of continuing operations: |       |                                             |       |   |   |
| Dividends and accretion  on shares subject to mandatory redemption                                                    |       | —                                           |       | 2,362 |   |
| Loss on preferred stock  subject to mandatory redemption                                                              |       | —                                           |       | 9,899 |   |
| Deferred income taxes                                                                                                 |       | 3,253                                            |       | (95,694 | ) |
| Amortization of debt  issue costs                                                                                     |       | 444                                              |       | 711 |   |
| Depreciation and  amortization                                                                                        |       | 13,635                                           |       | 13,010 |   |
| Loss on early retirement  of debt                                                                                     |       | —                                           |       | 76,265 |   |
| Income from equity  method investments                                                                                |       | (3,286                                           | )          | (2,656 | ) |
| Other non cash items                                                                                                  |       | 387                                              |       | 575 |   |
| Changes in assets and liabilities arising from  operations:                                                           |       |                                             |       |   |   |
| Accounts receivable and  other current assets                                                                         |       | 4,293                                            |       | 2,742 |   |
| Accounts payable and  accrued expenses                                                                                |       | (3,262                                           | )          | (19,028 | ) |
| Income taxes                                                                                                          |       | (221                                             | )          | (666 | ) |
| Other assets/liabilities                                                                                              |       | (47                                              | )          | 14 |   |
| Total adjustments                                                                                                     |       | 15,196                                           |       | (12,466 | ) |
| Net cash provided by  (used in) operating activities of continuing operations                                         |       | 20,916                                           |       | (1,424 | ) |
| Cash flows from investing activities of continuing  operations:                                                       |       |                                             |       |   |   |
| Net capital additions                                                                                                 |       | (5,944                                           | )          | (4,660 | ) |
| Distributions from  investments                                                                                       |       | 3,430                                            |       | 2,240 |   |
| Net proceeds from sales  of investments and other assets                                                              |       | 1,746                                            |       | 175 |   |
| Other, net                                                                                                            |       | (36                                              | )          | (181 | ) |
| Net cash used in  investing activities of continuing operations                                                       |       | (804                                             | )          | (2,426 | ) |
| Cash flows from financing activities of continuing  operations:                                                       |       |                                             |       |   |   |
| Net proceeds from  issuance of common stock                                                                           |       | —                                           |       | 432,092 |   |
| Debt issue and offering  costs                                                                                        |       | —                                           |       | (7,488 | ) |
| Proceeds from issuance  of long-term debt                                                                             |       | 13,850                                           |       | 573,409 |   |
| Repayments of long-term  debt                                                                                         |       | (15,787                                          | )          | (793,690 | ) |
| Repurchase of preferred  and common stock                                                                             |       | —                                           |       | (129,278 | ) |
| Payment of fees and  penalties associated with early retirement of long term debt                                     |       | —                                           |       | (59,754 | ) |
| Payment of deferred  transaction fee                                                                                  |       | —                                           |       | (8,445 | ) |
| Proceeds from exercise  of stock options                                                                              |       | 24                                               |       | 184 |   |
| Dividends paid to common  stockholders                                                                                |       | (13,765                                          | )          | — |   |
| Net cash provided by  (used in) financing activities of continuing operations                                         |       | (15,678                                          | )          | 7,030 |   |
| Cash flows of discontinued operations:                                                                                |       |                                             |       |   |   |
| Operating cash flows,  net provided by (used in)                                                                      |       | 138                                              |       | (283 | ) |
| Net increase in cash                                                                                                  |       | 4,572                                            |       | 2,897 |   |
| Cash, beginning of  period                                                                                            |       | 5,083                                            |       | 3,595 |   |
| Cash, end of period                                                                                                   |       | $                                                | 9,655      |   | $ | 6,492 |   |

 

See accompanying notes to condensed consolidated financial statements

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**FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (Unaudited)**

**(1)   Organizationand Basis of Financial Reporting**

The accompanying unauditedcondensed financial statements of FairPoint Communications, Inc. andsubsidiaries as of March 31, 2006 and for the three month periods ended March 31,2006 and 2005 have been prepared on the same basis as the audited consolidatedfinancial statements for the year ended December 31, 2005 and, in theopinion of the Company’s management, the unaudited condensed financialstatements reflect all adjustments, consisting of normal recurring adjustments,necessary for a fair presentation of FairPoint’s results of operations,financial position, and cash flows. The results of operations for the interimperiods are not necessarily indicative of the results of operations which mightbe expected for the entire year. The unaudited condensed consolidated financialstatements should be read in conjunction with the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005.

**(2)   InitialPublic Offering and Other Transactions**

***(a)   General***

On February 8, 2005, the Company consummated aninitial public offering, or the initial public offering, of 25,000,000 sharesof its common stock, par value $0.01 per share, or common stock, at a price tothe public of $18.50 per share.

In connection with theoffering, the Company entered into a new senior secured credit facility, or thecredit facility, with a syndicate of financial institutions, including DeutscheBank Trust Company Americas, as administrative agent. The credit facility iscomprised of a revolving facility in an aggregate principal amount of$100 million (less amounts reserved for letters of credit) and a termfacility in an aggregate principal amount of $588.5 million (including a$22.5 million delayed draw facility). The revolving facility has a sixyear maturity and the term facility has a seven year maturity. In addition, in2006 the Company recorded a $77.8 million loss on early retirement of debtand a $9.9 million loss on redemption of series A preferred stock inconnection with the offering. With respect to the $77.8 million loss onearly retirement of debt, $16.8 million was recorded for the write-off ofexisting debt issuance costs and the remaining $61.0 million was fees andpenalties.

***(b)   Dividends***

The Company has adopted a dividend policy under whicha substantial portion of the cash generated by the Company’s business in excessof operating needs, interest and principal payments on indebtedness, dividendson future senior classes of capital stock, if any, capital expenditures, taxesand future reserves, if any, would in general be distributed as regularquarterly dividend payments to the holders of its common stock, rather thanretained and used for other purposes.

On March 15, 2006,the Company declared a dividend totaling $13.8 million, or $0.39781 per shareof common stock, which was paid on April 18, 2006 to holders of record asof March 31, 2006. In 2006, the Company has paid dividends totaling $13.8million, or $0.39781 per share of common stock.

**(3)   IncomeTaxes**

The Company’s accountingpolicy is to report income tax expense for interim reporting periods using anestimated annual effective income tax rate. However, the effects of significantor unusual items are not 

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consideredin the estimated annual effective tax rate. The tax effect of such events isrecognized in the interim period in which the event occurs.

For the three months endedMarch 31, 2006, the Company recorded income tax expense of$3.7 million, resulting in an effective rate of 39.0%. Exclusive ofunusual items affecting the tax rate, the Company’s effective annual tax rateis estimated at 38.6% for 2006 as compared to 39.1% as of March 31, 2005. Forthe three months ended March 31, 2005, the Company recorded an income taxbenefit of $94.9 million. The income tax benefit and effective tax rate for thethree months ended March 31, 2005 were primarily impacted by unusual itemsoccurring in the quarter. Income tax benefits of $28.0 million were recognizeddue to the taxable loss in the first quarter of 2005 resulting from theextinguishment of debt. In addition, for the three months ended March 31,2005, the Company recognized income tax benefits of $66.0 million from thereversal of the deferred tax valuation allowance that resulted from the Company’sexpectation of generating future taxable income following the recapitalization.

In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible. Management considers the scheduled reversal ofdeferred tax liabilities, projected future taxable income, and tax planningstrategies in making this assessment, as well as all positive and negativeevidence that would affect the recoverability of deferred tax assets. The Companyexpects that future taxable income will more likely than not be sufficient torecover net deferred tax assets.

**(4)   Stock-Based Compensation**

Effectiveon January 1, 2006, the Company adopted the provisions of SFAS 123(R). Asa result of this adoption, amounts previously included in stockholders’ equityas unearned compensation are included in additional paid-in capital as of March 31,2006. At March 31, 2006, the Company had $7.1 million of totalunrecognized compensation cost related to non-vested shares-based paymentarrangements granted under the Company’s four stock-based compensation plans. Thatcost is expected to be recognized over a weighted average period of 2.6 years. Thesestock-based compensation plans are described below. As shares are issuedin connection with any of these plans, they will be issued using newlyregistered shares. Amounts recognized in the financial statements with respectto these plans are as follows (in thousands):

| ** **                                                 | ** ** | **Three months ended  March 31,**         | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                 | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| Amounts charged  against income, before income tax benefit |       |                                                     | $          | 614 |   |   |   | $ | 407 |   |   |
| Amount of related  income tax benefit recognized in income |       |                                                     | (231       | ) |   |   | (153 | ) |   |
| Total net income impact                                    |       |                                                     | $          | 383 |   |   |   | $ | 254 |   |   |

 

***(a)***   1995Stock Incentive Plan

In February 1995, theCompany adopted the FairPoint Communications, Inc. (formerly MJDCommunications, Inc.) 1995 Stock Incentive Plan (the 1995 Plan). The 1995Plan covers officers, directors, and employees of the Company. The Company wasallowed to issue qualified or nonqualified stock options to purchase up to215,410 shares of the Company’s Class A common stock to employees thatwould vest equally over 5 years from the date of employment of the recipientand are exercisable during years 5 through 10. In 1995, the Companygranted options to purchase 161,596 shares at $1.32 per share. No options havebeen granted since 1995. Effective in February 2005, the Company may nolonger grant awards under the 1995 Plan. As of January 1, 2006, only18,013 options remained outstanding, the life of these options had previouslybeen extended to May 21, 2008. In March 2006 the remaining 18,013options 

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outstandingwere exercised. The intrinsic value of these options on the date of exercisewas $230,000, the cash received was $24,000 and the tax benefit was $87,000.

These stock options weregranted by the Company prior to becoming a public company and therefore theCompany is accounting for these options under the prospective method under SFAS123(R). The per share weighted average fair value of stock options grantedduring 1995 was $0.69 on the date of grant using the Black-Scholes option-pricingmodel. Input variables used in the model included no expected dividend yields,a risk-free interest rate of 6.41%, and an estimated option life of fiveyears. Because the Company was not public on the date of the grant, noassumption as to the volatility of the stock price was made.

***(b)***   1998Stock Incentive Plan

In August 1998, theCompany adopted the FairPoint Communications, Inc. (formerly MJDCommunications, Inc.) Stock Incentive Plan (the 1998 Plan). The 1998 Planprovided for grants of up to 1,317,425 of nonqualified stock options toexecutives and members of management, at the discretion of the compensationcommittee of the board of directors. Options vest in 25% increments on thesecond, third, fourth, and fifth anniversaries of an individual grant. In theevent of a change in control, outstanding options will vest immediately. Effectivein February 2005, the Company may no longer grant awards under the 1998Plan.

Pursuant to the terms of the grant, options granted in1998 and 1999 become exercisable only in the event that the Company is sold, aninitial public offering of the Company’s common stock results in the principalshareholders holding less than 10% of their original ownership, or otherchanges in control, as defined, occur. The number of options that may becomeultimately exercisable also depends upon the extent to which the price pershare obtained in the sale of the Company would exceed a minimum selling priceof $22.59 per share. All options have a term of 10 years from date of grant.For those options granted in 1998 and 1999, the Company will recordcompensation expense for the excess of the estimated market value of its commonstock over the exercise price of the options when and if a sale of the Company,at the prices necessary to result in exercisable options under the grant,becomes imminent or likely. The initial public offering of the Company’s commonstock that occurred on February 8, 2005 did not trigger exercisability ofthese options. Upon termination of a plan participant’s employment with theCompany, the Company may repurchase all or any portion of the vested optionsfor a cash payment equal to the excess of the fair market value of the sharesover the option exercise price. The Company has not previously exercised thisright and doesn’t currently have any intend to exercise this right in thefuture.

These stock options were granted by the Company priorto becoming a public company and therefore the Company is accounting for theseoptions under the prospective method under SFAS 123(R). The per share weightedaverage fair value of stock options granted under the 1998 Plan during 2000 was$58.95 on the date of grant using the Black-Scholes option-pricing model.Input variables used in the model included no expected dividend yields, a risk-freeinterest rate of 6.52%, and an estimated option life of 10 years. Because theCompany was not public on the date of the grant, no assumption as to thevolatility of the stock price was made. As of March 31, 2006 andDecember 31, 2005, options to purchase 832,888 shares of common stock wereoutstanding with a weighted average exercise price of $10.80.

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The following tablepresents the weighted average price and contractual life information about thevarious option groups outstanding at March 31, 2006.

 

| **Options outstanding** | ** ** | **Options  exercisable** | ** **         |
|------------------------------|------------|--------------------------|--------------------|
| ** **                   | ** ** | **Number**               | ** **         | ** ** | ** ** | ** ** | ** ** | **Number** | ** ** |
| ** **                   | ** ** | **outstanding at**  | ** **         | **Remaining** | ** ** | **Aggregate** | ** ** | **exercisable at** | ** ** |
| **Exercise**                 | ** ** | ** **               | **March 31,** | ** ** | **contractual** | ** ** | **Intrinsic** | ** ** | **March 31,** | ** ** |
| **price**                    | ** ** | ** **               | **2006**           | ** ** | **life** | ** ** | **Value** | ** ** | **2006** | ** ** |
| ** **                   | ** ** | ** **               | ** **         | **(years)** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| $9.02                        |       | 756,332                  |               | 2.35 |   | $ 3,630 |   | — |   |
| 14.46                        |       | 29,183                   |               | 3.25 |   | — |   | — |   |
| 36.94                        |       | 47,373                   |               | 5.75 |   | — |   | — |   |
|                         |       | 832,888                  |               |   |   | $ 3,630 |   | — |   |

 

The weighted averageremaining contractual life for the options outstanding at March 31, 2006is 2.6 years. The aggregate intrinsic value in the preceding tablerepresents the total pre-tax intrinsic value, based on the closing price of theCompany’s stock of $13.82 on March 31, 2006.

***(c)***   2000 Employee StockIncentive Plan

In May 2000, theCompany adopted the FairPoint Communications, Inc. 2000 Employee StockIncentive Plan (the 2000 Plan). The 2000 Plan provided for grants tomembers of management of up to 1,898,521 options to purchase Class Acommon stock, at the discretion of the compensation committee. During 2002, theCompany amended the 2000 Plan to limit the number of shares available for grantto 448,236. In December 2003, the Company amended the 2000 Plan to allowfor the grant to members of management of up to 1,898,521 shares of stock unitsin addition to shares available for stock options. Options granted under the2000 Plan may be of two types: (i) incentive stock options and (ii) non–statutorystock options. Unless the compensation committee shall otherwise specify at thetime of grant, any option granted under the 2000 Plan shall be a non-statutorystock option. Effective in February 2005, the Company may no longer grantawards under the 2000 Plan.

Under the 2000 Plan,unless otherwise determined by the compensation committee at the time of grant,participating employees are granted options to purchase Class A commonstock at exercise prices not less than the market value of the Company’s Class Acommon stock at the date of grant. Options have a term of 10 years from date ofgrant. Options vest in increments of 10% on the first anniversary, 15% on thesecond anniversary, and 25% on the third, fourth, and fifth anniversaries of anindividual grant. Stock units vest in increments of 33% on each of the third,fourth, and fifth anniversaries of the award. Subject to certain provisions,the Company can cancel each option in exchange for a payment in cash of anamount equal to the excess of the fair market value of the shares over the exerciseprice for such option. The Company has not previously exercised this right anddoesn’t currently have any intend to exercise this right in the future.

The 2000 Plan stockoptions and stock units were granted by the Company prior to becoming a publiccompany and therefore the Company is accounting for these awards under theprospective method under SFAS 123(R). The per share weighted average fair valueof stock options granted under the 2000 Plan during 2003, was $8.39 on the dateof grant using the Black Scholes option-pricing model. Input variablesused in the model included no expected dividend yields, a weighted average riskfree interest rate of 4.26% in 2003 and an estimated option life of10 years. Because the Company was not public on the date of grant, noassumption as to the volatility of the stock price was made.

As of March 31, 2006and December 31, 2005, there were 240,638 options outstanding under the2000 Plan with a weighted average exercise price of $36.94 and remainingcontractual life of 6.6 years. As of March 31, 2006, 218,937 optionswith a remaining contractual life of 6.5 years were exercisable with a 

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weightedaverage exercise price of $36.94. Based upon the fair market value of the stockas of March 31, 2006 of $13.82, these options do not have any intrinsicvalue.

As of March 31, 2006,there were 26,442 stock units outstanding with a weighted average grant datefair value per share of $32.51. None of these awards were vested as ofMarch 31, 2006 or December 31, 2005.

***(d)***   2005Stock Incentive Plan

In February 2005, theCompany adopted the FairPoint Communications, Inc. 2005 Stock IncentivePlan (the 2005 Plan). The 2005 Plan provides for the grant of up to 947,441shares of non-vested stock, stock units and stock options to members of theCompany’s board of directors and certain key members of the Company’smanagement. At March 31, 2006, 423,503 shares of common stock may beissued in the future pursuant to awards authorized under the 2005 Plan.

As of March 31, 2006,the Company has granted 573,716 shares of non-vested stock issued under theCompany’s 2005 Plan to certain employees. These shares vest over periodsranging from three to four years and certain of these shares pay currentdividends. In March 2006, the board of directors approved the grant of anadditional 100,000 shares to the Company’s chief executive officer. Theseshares will be granted under the 2005 Plan, or a replacement plan approved bythe Company’s shareholders, in two installments of 50,000 shares each onJanuary 1, 2007 and January 1, 2008. These shares are considered tohave been granted in March 2006 under SFAS 123(R) at a grant datefair value of $14.02 per share.

In the second quarter of2005, the Company’s board of directors approved an annual award to each of theCompany’s non-employee directors of approximately $30,000 in the form ofnon-vested stock or stock units, at the recipient’s option, issued under the2005 Plan. The non-vested stock and stock units will vest in four equalquarterly installments on the first day of each of the first four calendarquarters following the grant date, commencing on July 1, 2005, and theholders thereof will be entitled to receive dividends from the date of grant,whether or not vested. In the second quarter of 2005, the Company granted 1,870shares of non-vested stock with a total value at the grant date ofapproximately $30,000 and 7,480 stock units with a total value at the grantdate of approximately $120,000 to the Company’s non-employee directors. As of March 31,2006, an additional 672 stock units were granted in lieu of dividends on thestock units. In addition, in February 2006, 467 stock units weregranted to a newly appointed non-employee director. These stock units vest on April 1,2006.

The fair value of theawards is calculated as the fair market value of the shares on the date ofgrant. Beginning on January 1, 2006, the Company adopted the provisions ofSFAS 123(R) using the modified prospective method for the awards under the2005 Plan as all awards were granted subsequent to the Company becoming public.Under this methodology, the Company is required to estimate expectedforfeitures related to these grants and, for the non-dividend paying shares,the compensation expense is reduced by the present value of the dividends whichwere not paid on those shares prior to their vesting.

The followingtable presents information regarding non-vested stock granted to employeesunder the 2005 Plan for the first quarter of 2006:

| ** **                         | ** ** | ** **      | ** ** | **Weighted**                  | ** ** |
|------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                         | ** ** | ** **      | ** ** | **average grant**        | ** ** |
| ** **                         | ** ** | **Shares**      | ** ** | **date fair value** | ** ** |
| ** **                         | ** ** | **outstanding** | ** ** | **per share**            | ** ** |
| Non-vested stock                   |       |            |       |                          |       |   |   |   |   |
| Non-vested at January 1, 2006 |       |            | 470,029    |                          |       |   | $ | 18.13 |   |   |
| Granted                            |       |            | 50,000     |                          |       |   | 14.02 |   |   |
| Vested                             |       |            | —     |                          |       |   | — |   |   |
| Forfeited                          |       |            | (6,316     | )                             |       |   | 18.50 |   |   |
| Non-vested at  March 31, 2006 |       |            | 513,713    |                          |       |   | 17.72 |   |   |
|                                    |            |                 |            |                               |            |  |  |  |  |  |

 

 

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**(5)   DiscontinuedOperations and Restructure Charges**

In November 2001, the Company announced its planto discontinue the competitive communications business operations of its whollyowned subsidiary, FairPoint Carrier Services, Inc., or Carrier Services.As a result of the adoption of the plan to discontinue the competitivecommunications operations, these operating results are presented asdiscontinued operations.

Net liabilities ofdiscontinued competitive communications operations as of March 31, 2006and December 31, 2005 were $2.5 million and $2.4 million,respectively. The remaining restructuring accrual at March 31, 2006 was$1.4 million, and is primarily associated with remaining equipment andlease obligations.

**(6)   InterestRate Swap Agreements**

The Company assesses interest rate cash flow risk bycontinually identifying and monitoring changes in interest rate exposures thatmay adversely impact expected future cash flows and by evaluating hedgingopportunities. The Company maintains risk management control systems to monitorinterest rate cash flow risk attributable to both the Company’s outstanding andforecasted debt obligations. The risk management control systems involve theuse of analytical techniques, including cash flow sensitivity analysis, toestimate the expected impact of changes in interest rates on the Company’sfuture cash flows.

The Company uses variable and fixed-rate debt tofinance its operations, capital expenditures, and acquisitions. The variable-ratedebt obligations expose the Company to variability in interest payments due tochanges in interest rates. The Company believes it is prudent to limit thevariability of a portion of its interest payments. To meet this objective, theCompany enters into interest rate swap agreements to manage fluctuations incash flows resulting from interest rate risk. These swaps change the variable-ratecash flow exposure on the debt obligations to fixed cash flows. Under the termsof the interest rate swaps, the Company pays a variable interest rate plus anadditional payment if the variable rate payment is below a contractual rate, orit receives a payment if the variable rate payment is above the contractualrate.

On February 8, 2005, the Company entered intothree interest rate swap agreements, with notional amounts of $130 millioneach, to effectively convert a portion of its variable rate interest exposureto fixed rates ranging from 3.76% to 4.11%, plus a 2.0% margin. These swapagreements expire beginning December 31, 2007 through December 31,2009. On April 7, 2005, the Company entered into two additional interestrate swap agreements, one with the notional amount of $50.0 million toeffectively convert a portion of its variable rate interest exposure to a fixedrate of 4.69%, plus a 2.0% margin, beginning on April 29, 2005 and endingon March 31, 2011, and one with the notional amount of $50.0 million toeffectively convert a portion of its variable rate interest exposure to a fixedrate of 4.72%, plus a 2.0% margin, beginning on June 30, 2005 and endingon March 31, 2012. As a result of these swap agreements, as of March 31,2006, approximately 82% of the Company’s indebtedness bore interest at fixedrates rather than variable rates. Effective on September 30, 2005, theCompany amended the terms of its credit facility. This amendment reduced theeffective interest rate margins applicable to the Company’s interest rate swapagreements by 0.25% to 1.75%.

These interest rate swapsqualify as cash flow hedges for accounting purposes. The effect of hedgeineffectiveness on net earnings was insignificant for the three months ended March 31,2006. At March 31, 2006, the fair market value of these swaps wasapproximately $14.2 million and has been recorded, net of tax of$5.3 million, as an increase in comprehensive income. Of the$14.2 million, $5.2 million has been included in other current assetsand $9.0 million has been included in other long-term assets.

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**(7)   Investments**

TheCompany has a 7.5% ownership in Orange County Poughkeepsie Limited Partnership,which is accounted for under the equity method. Summary financial informationfor the partnership follows (in thousands): 

| ** **                          | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Current assets                      |       |                        | $          | 9,812                        |       |   |   | $ | 13,432 |   |   |
| Property, plant  and equipment, net |       |                        | 37,516     |                         |       |   | 36,786 |   |   |
| Total assets                        |       |                        | $          | 47,328                       |       |   |   | $ | 50,218 |   |   |
| Current liabilities                 |       |                        | $          | 432                          |       |   |   | $ | 298 |   |   |
| Partners’ capital              |       |                        | 46,896     |                         |       |   | 49,920 |   |   |
|                                |       |                        | $          | 47,328                       |       |   |   | $ | 50,218 |   |   |

 

| ** **       | ** ** | **Three months ended  December 31,** | ** ** |
|------------------|------------|-----------------------------------------------------|------------|
| ** **       | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Revenues         |       | $                                                   | 50,225     |   | $ | 40,881 |   |
| Operating income |       | 40,683                                              |       | 33,511 |   |
| Net income       |       | 40,976                                              |       | 33,774 |   |
|                  |            |                                                     |            |  |  |  |  |

 

The Company also has otherinvestments in non-marketable securities which are accounted for using the costand equity methods of accounting. The Company continually monitors all of theseinvestments for possible impairment by evaluating the financial performance ofthe businesses in which it invests and comparing the carrying value of theinvestment to quoted market prices (if available), or the fair values ofsimilar investments, which in certain instances, is based on traditionalvaluation models utilizing multiples of cash flows. When circumstances indicatethat a decline in the fair value of the investment has occurred and the declineis other than temporary, the Company records the decline in value as a realizedimpairment loss and a reduction in the cost of the investment.

**(8)   Long TermDebt**

Longterm debt at March 31, 2006 and December 31, 2005 is shown below: 

| ** **                                                                                                                                                     | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                     | ** ** | **(In thousands)**  | ** ** |
| Senior secured  notes (credit facility), variable rates ranging from 6.32% to 8.43% (weighted  average rate of 6.34%) at March 31, 2006, due 2011 to 2012 |       | $                        | 600,500    |                        |       | $ | 602,275 |   |   |
| Senior notes, 11.875%,  due 2010                                                                                                                               |       | 2,050                    |       |                        | 2,050      |   |   |
| Senior notes to  RTFC, fixed rate, ranging from 8.2% to 9.2%, due 2009 to 2014                                                                                 |       | 2,940                    |       |                        | 3,100      |   |   |
| Total outstanding long-term debt                                                                                                                               |       | 605,490                  |       |                        | 607,425    |   |   |
| Less current  portion                                                                                                                                          |       | (685                     | )          |                        | (677       | ) |   |
| Total long-term  debt, net of current portion                                                                                                                  |       | $                        | 604,805    |                        |       | $ | 606,748 |   |   |

 

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Theapproximate aggregate maturities of long-term debt for each of the five yearssubsequent to March 31, 2006 are as follows (in thousands): 

| **Year ending March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                     |       |       | $          | 685        |       |   |
| 2008                                     |       |       | 723        |       |       |
| 2009                                     |       |       | 623        |       |       |
| 2010                                     |       |       | 140        |       |       |
| 2011                                     |       |       | 14,213     |       |       |
| Thereafter                               |       |       | 589,106    |       |       |
|                                     |       |       | $          | 605,490    |       |   |

 

The Company entered into a credit facility consistingof a revolving facility in an aggregate principal amount of up to$100.0 million and a term facility in an aggregate principal amount of$588.5 million.

The term facility matures in February 2012 andthe revolving facility matures in February 2011. Borrowings bear interest,at the Company’s option, for the revolving facility and for the term facilityat either (a) the Eurodollar rate (as defined in the credit facility) plusan applicable margin or (b) the Base rate (as defined in the creditfacility) plus an applicable margin. The Eurodollar rate applicable margin andthe Base rate applicable margin for loans under the credit facility are 2.0%and 1.0%, respectively. Effective on September 30, 2005, the Companyamended its credit facility to reduce the effective interest rate margins onthe $588.5 million term facility by 0.25% to 1.75% on Eurodollar loans and to0.75% for Base rate loans. Interest with respect to Base rate loans is payablequarterly in arrears and interest with respect to Eurodollar loans is payableat the end of the applicable interest period and every three months in the caseof interest periods in excess of three months.

The credit facility provides for payment to thelenders of a commitment fee on any unused commitments equal to 0.5% per annum,payable quarterly in arrears, as well as other fees.

The credit facility requires certain mandatoryprepayments, including first to prepay outstanding term loans under the creditfacility and, thereafter, to repay loans under the revolving facility and/or toreduce revolving facility commitments with, subject to certain conditions andexceptions, 100% of the net cash proceeds the Company receives from any sale,transfer or other disposition of any assets (subject to certain reinvestmentelection provisions and excluded assets sales), 100% of net casualty insuranceproceeds and 100% of the net cash proceeds the Company receives from theissuance of permitted securities and, at certain times if the Company is notpermitted to pay dividends, with 50% of the increase in the Company’sCumulative Distributable Cash (as defined in the credit facility) during theprior fiscal quarter. Reductions to the revolving commitments under the creditfacility from the foregoing recapture events will not reduce the revolvingcommitments under the credit facility below $50.0 million.

The credit facility provides for voluntary prepaymentsof the revolving facility and the term facility and voluntary commitmentreductions of the revolving facility, subject to giving proper notice andcompensating the lenders for standard Eurodollar breakage costs, if applicable.

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The credit facilityrequires that the Company maintain certain financial covenants. The creditfacility contains customary affirmative covenants, including, withoutlimitation, the following tests: a minimum interest coverage ratio equal to orgreater than 3.0:1 and a maximum leverage ratio equal to or less than 5.25:1.The credit facility also contains negative covenants and restrictions,including, among others, with respect to redeeming and repurchasing otherindebtedness, loans and investments, additional indebtedness, liens, capitalexpenditures, changes in the nature of the Company’s business, mergers,acquisitions, asset sales and transactions with the Company’s affiliates. Thecredit facility restricts the Company’s ability to declare and pay dividends onits common stock as follows:

·       TheCompany may use all of its available cash accumulated after April 1, 2005plus certain incremental funds to pay dividends, but may not in general paydividends in excess of such amount. “Available cash” is defined in the credit facilityas Adjusted EBITDA (a) minus (i) interest expense, (ii) repaymentsof indebtedness other than repayments of the revolving facility (unless fundedby debt or equity), (iii) capital expenditures (unless funded by long-termdebt, equity or the proceeds from asset sales or insurance recovery events), (iv) cashtaxes, (v) cash consideration paid for acquisitions (unless funded by debtor equity), (vi) cash paid to make certain investments, and (vii) certainnon-cash items excluded from Adjusted EBITDA and paid in cash and (b) plus(i) the cash amount of extraordinary gains and gains on sales of assetsand (ii) certain non-cash items excluded from Adjusted EBITDA and receivedin cash. “Adjusted EBITDA” is defined in the credit facility as ConsolidatedNet Income (which is defined in the credit facility and includes distributionsfrom investments) (a) plus the following to the extent deducted fromConsolidated Net Income: provision for income taxes, interest expense,depreciation, amortization, losses on sales of assets and other extraordinarylosses, and certain other non-cash items, and (b) minus, to the extentincluded in Consolidated Net Income, gains on sales of assets and otherextraordinary gains and all non-cash items.

·       TheCompany may not pay dividends if a default or event of default under the creditfacility has occurred and is continuing or would exist after giving effect tosuch payment, if the Company’s leverage ratio is above 5.00 to 1.00 or if theCompany does not have at least $10 million of cash on hand (includingunutilized commitments under the credit facility’s revolving facility).

The credit facility also permits the Company to useavailable cash to repurchase shares of its capital stock, subject to the sameconditions.

The Company may obtain letters of credit under therevolving facility to support obligations of the Company and/or obligations ofits subsidiaries incurred in the ordinary course of business in an aggregateprincipal amount not to exceed $10.0 million and subject to limitations onthe aggregate amount outstanding under the revolving facility. As of March 31,2006, a letter of credit had been issued for $1.3 million.

The credit facility is guaranteed, jointly andseverally, subject to certain exceptions, by all first tier subsidiaries of theCompany. The Company has provided to Deutsche Bank Trust Company Americas, ascollateral agent for the benefit of the lenders under the credit facility andcertain hedging creditors under permitted hedging agreements, collateralconsisting of (subject to certain exceptions) 100% of the Company’s equityinterests in the subsidiary guarantors and certain other intermediate holdingcompany subsidiaries. Newly acquired or formed direct or indirect subsidiariesof the Company which own equity interests of any subsidiary that is anoperating company will be required to provide the collateral described above.

The credit facilitycontains customary events of default, including but not limited to, failure topay principal, interest or other amounts when due, breach of covenants orrepresentations, cross-defaults to certain other indebtedness in excessof specified amounts, judgment defaults in excess of specified 

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amounts,certain ERISA defaults, the failure of any guaranty or security documentsupporting the credit facility and certain events of bankruptcy and insolvency.

**(9)   EarningsPer Share**

Earnings per share has been computed in accordancewith SFAS No. 128, *Earnings Per Share*.Basic earnings per share is computed by dividing net income by the weightedaverage number of shares of common stock outstanding for the period. Exceptwhen the effect would be anti-dilutive, the diluted earnings per sharecalculation calculated using the treasury stock method includes the impact ofstock units, shares of non-vested common stock and shares that could be issuedunder outstanding stock options. For the three months ended March 31, 2006and March 31, 2005, diluted weighted average shares of common stockoutstanding included 94,739 and 93,183 shares, respectively, associated withoutstanding stock options and non-vested stock and stock units.

Thenumber of potential shares of common stock excluded from the calculation ofdiluted net income per share, prior to the application of the treasury stockmethod, is as follows (in thousands): 

| ** **                                         | ** ** | **Three months ended  March 31,**         | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                         | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| Contingent stock  options                          |       |                                                     | 833        |   |   |   | 833 |   |   |
| Shares excluded  as effect would be anti-dilutive: |       |                                                     |       |   |   |   |   |   |   |
| Stock options                                      |       |                                                     | 241        |   |   |   | 241 |   |   |
| Non-vested stock                                   |       |                                                     | 541        |   |   |   | 474 |   |   |
| Stock units                                        |       |                                                     | 28         |   |   |   | 26 |   |   |
| Total                                              |       |                                                     | 1,643      |   |   |   | 1,574 |   |   |

 

**(10)   SubsequentEvent**

On August 4, 2005, the Board of Directors of theRural Telephone Bank, or RTB, approved the liquidation and dissolution of theRTB. As part of such liquidation and dissolution, all RTB loans were to betransferred to the Rural Utilities Service and all shares of the RTB’s Class AStock, Class B Stock and Class C Stock were to be redeemed at parvalue. The Company had no outstanding loans with the RTB but owned 2,477,493shares of Class B Stock and 24,380 shares of Class C Stock. Thisliquidation was completed in April 2006, and as a result, the Companyreceived proceeds of $26.9 million from the RTB. The Company will record a gainon this investment of approximately $4.1 million in the second quarter of 2006.

On May 1, 2006, theCompany received proceeds of $16.9 million from the sale of its investment inSouthern Illinois Cellular Corp. The Company will record a gain on thisinvestment of approximately $12.4 million in the second quarter of 2006. Inaddition to the $16.9 million in proceeds received on May 1, 2006,approximately $2.6 million will be held in escrow and the Company will notrecord the gain on this portion of the transaction until the proceeds arereceived.

**(11)   Litigation**

On June 6, 2005, a purported class actioncomplaint was filed in the General Court of Justice, Superior Court Division,of the State of North Carolina by Robert Lowinger on behalf of himself and allother similarly situated persons against the Company, the Company’s Chairmanand Chief Executive Officer, certain of the Company’s current and formerdirectors and certain of the Company’s stockholders. The complaint allegesviolations of Sections 11 and 12(a)(2) and liability under Section 15of the Securities Act, and alleges that the Company’s registration statement onForm S-1 (which was declared effective by the SEC on February 3,2005) and the related prospectus dated February 3, 2005, each relating tothe 

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Company’s initial publicoffering of common stock, contained certain material misstatements and omittedcertain material information necessary to be included relating to the Company’sbroadband products and access line trends. The plaintiff, who has been aplaintiff in several prior securities cases, seeks rescission rights andunspecified damages on behalf of a purported class of purchasers of the commonstock “issued pursuant and/or traceable to the Company’s IPO during the periodfrom February 3, 2005 through March 21, 2005”. The Company removedthe action to Federal Court. The plaintiff filed a motion to remand the actionto the North Carolina State Court, which was denied by the Federal Magistrate. Theplaintiff has objected to and appealed the Magistrate’s decision to theDistrict Court Judge. The Company has contested the appeal and filed a Motionto Dismiss the action. The Magistrate, on February 9, 2006, issued aMemorandum and a Recommendation to the District Court Judge that the Motion toDismiss be granted and that the complaint be dismissed with prejudice. Theplaintiff has filed a Notice of Objection to the Magistrate’s Recommendation. Boththe appeal of denial of the Motion to Remand and the Motion to Dismiss arepending before the District Court Judge. The Company believes that this actionis without merit and intends to continue to defend the litigation vigorously.

From time to time, the Company is involved inlitigation and regulatory proceedings arising out of its operations. Managementbelieves that the Company is not currently a party to any legal proceedings,the adverse outcome of which, individually or in the aggregate, would have amaterial adverse effect on the Company’s financial position or results ofoperations.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

The following discussionand analysis provides information that the Company’s management believes isrelevant to an assessment and understanding of the consolidated results ofoperations and financial condition of FairPoint Communications, Inc. andits subsidiaries. The discussion should be read in conjunction with FairPoint’sConsolidated Financial Statements for the year ended December 31, 2005included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005.

**Overview**

We are a leading provider of communications servicesin rural communities, offering an array of services, including local and longdistance voice, data, Internet and broadband product offerings. We are one ofthe largest telephone companies in the United States focused on serving ruralcommunities and we are the 17th largest local telephone company, in each casebased on number of access lines. We operate in 17 states with 290,682 accessline equivalents (including voice access lines and high speed data lines, whichinclude digital subscriber lines, or DSL, wireless broadband and cable modems)in service as of March 31, 2006.

We were incorporated in February 1991 for thepurpose of acquiring and operating incumbent telephone companies in ruralmarkets. Since 1993, we have acquired 32 such businesses, 28 of which wecontinue to own and operate. Many of our telephone companies have served theirrespective communities for over 75 years. The majority of the ruralcommunities we serve have fewer than 2,500 access lines. All of our telephonecompanies qualify as rural local exchange carriers under the TelecommunicationsAct of 1996, or the Telecommunications Act.

Rural local exchange carriers generally arecharacterized by stable operating results and strong cash flow margins andoperate in supportive regulatory environments. In particular, existing stateand federal regulations permit us to charge rates that enable us to recover ouroperating costs, plus a reasonable rate of return on our invested capital (asdetermined by relevant regulatory authorities). Competition is typicallylimited because rural local exchange carriers primarily serve sparselypopulated rural communities with predominantly residential customers, and thecost of operations and capital investment requirements for new entrants ishigh. As a result, in our markets, we have experienced limited wirelinecompetition and limited voice competition from cable providers. However, ifcompetition were to increase, the originating and terminating access revenueswe receive may be reduced as a result of wireless, voice over internetprotocol, or VOIP, or other new technology utilization. We periodicallynegotiate interconnection agreements with other telecommunications providerswhich could ultimately result in increased competition in those markets.

Access lines are an important element of our business.Historically, rural telephone companies have experienced consistent growth inaccess lines because of positive demographic trends, insulated rural localeconomies and little competition. Recently, however, many rural telephonecompanies have experienced a loss of access lines due to challenging economicconditions, increased competition and the introduction of DSL services(resulting in customers canceling second lines in favor of DSL). We have notbeen immune to these conditions. We have been able to mitigate our access lineloss somewhat through bundling services, retention programs, continuedcommunity involvement and a variety of other focused programs.

During 2005, 17 of our operating companies wereconverted to a single outsourced billing platform. On October 7, 2005, welearned that the billing service bureau used by us for these 17 operatingcompanies had contracted to sell the software underlying our billing system andagreed not to add any future customers to its service bureau platform. Inaddition to the short term difficulties we experienced during the billingconversion, this potential sale raised concerns about the long-term reliabilityof the service bureau. On November 7, 2005, we reached an agreement withthis outsourced service bureau to transition to another service provider of ourchoice by December 31, 2006. As part of this settlement, we will receive 

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$4.0 million in cash ascompensation from the outsourced billing provider in order to relieve it fromits responsibilities under the original service bureau contract. In addition,we do not have to pay an additional $1.1 million which was scheduled to be paidto the service provider. We have selected MACC as our new provider of billingservices. We expect to complete the conversion of 17 of our operatingcompanies, or approximately two thirds of our access lines, by the middle of2006 and the remaining companies by the middle of 2007.

Our board of directors has adopted a dividend policywhich reflects our judgment that our stockholders would be better served if wedistributed a substantial portion of the cash generated by our business inexcess of operating needs, interest and principal payments on our indebtedness,dividends on future senior classes of our capital stock, if any, capitalexpenditures, taxes and future reserves, if any, as regular quarterly dividendpayments to the holders of our common stock, rather than retained and used suchcash for other purposes.

We are subject to regulation primarily by federal andstate governmental agencies. At the federal level, the FCC has jurisdictionover interstate and international communications services. Statetelecommunications regulators exercise jurisdiction over intrastatecommunications services.

We face risks that couldmaterially adversely affect our business, consolidated financial condition,results of operations or liquidity or the market price of our common stock. Fora discussion of certain of the risks facing us, see Exhibit 99.1 to thisQuarterly Report.

**Revenues**

Wederive our revenues from:

·       *Local calling services*.   Wereceive revenues from providing local exchange telephone services, including monthlyrecurring charges for basic service, usage charges for local calls and servicecharges for special calling features.

·       *Universal Service Fund high cost loop support*.   Wereceive payments from the Universal Service Fund to support the high cost ofour operations in rural markets. This revenue stream fluctuates based upon ouraverage cost per loop compared to the national average cost per loop. Forexample, if the national average cost per loop increases and our operatingcosts (and average cost per loop) remain constant or decrease, the payments wereceive from the Universal Service Fund would decline. Conversely, if thenational average cost per loop decreases and our operating costs (and averagecost per loop) remain constant or increase, the payments we receive from theUniversal Service Fund would increase. The national average cost per loop inrelation to our average cost per loop has increased, and we believe that thenational average cost per loop will likely continue to increase in relation toour average cost per loop. As a result, the payments we receive from theUniversal Service Fund have declined and will likely continue to decline.

·       *Interstate access revenue*.   Theserevenues are primarily based on a regulated return on rate base and recovery ofallowable expenses associated with the origination and termination ofinterstate calls both to and from our customers. Interstate access charges tolong distance carriers and other customers are based on access rates filed withthe Federal Communications Commission. These revenues also include UniversalService Fund payments for local switching support, long term support andinterstate common line support.

·       *Intrastate access revenue*.   Theserevenues consist primarily of charges paid by long distance companies and othercustomers for access to our networks in connection with the origination andtermination of long distance telephone calls both to and from our customers.Intrastate access 

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charges to long distancecarriers and other customers are based on access rates filed with the stateregulatory agencies.

·       *Long distance services*.   We receiverevenues from long distance services we provide to our residential and businesscustomers. In addition, Carrier Services provides communications providers notaffiliated with us with wholesale long distance services.

·       *Data and Internet services*.   Wereceive revenues from monthly recurring charges for services, including highspeed data, special access, private lines, Internet and other services.

·       *Other services*.   We receive revenuesfrom other services, including billing and collection, directory services andsale and maintenance of customer premise equipment.

Thefollowing summarizes our revenues and percentage of revenues from continuingoperations from these sources (in thousands): 

| ** **                             | ** ** | **Revenues**                                     | ** ** | **% of Revenues**                      | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **Three months  ended March 31,** | ** ** | **Three months  ended March 31,** | ** ** |
| ** **                             | ** ** | **2006**                                         | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ***Revenue  Source***                  |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Local calling  services                |       | $                                                | 16,282     |                                             | $          | 15,617 |   |   | 25 | % |   |   | 25 | % |   |
| Universal Service  Fund high cost loop |       | 4,819                                            |       | 4,796                                            |       |   | 8 | % |   |   | 8 | % |   |
| Interstate access  revenues            |       | 17,636                                           |       | 16,880                                           |       |   | 27 | % |   |   | 27 | % |   |
| Intrastate access  revenues            |       | 8,977                                            |       | 10,083                                           |       |   | 14 | % |   |   | 16 | % |   |
| Long distance  services                |       | 5,399                                            |       | 4,682                                            |       |   | 8 | % |   |   | 8 | % |   |
| Data and Internet  services            |       | 6,683                                            |       | 5,592                                            |       |   | 10 | % |   |   | 9 | % |   |
| Other services                         |       | 4,995                                            |       | 4,015                                            |       |   | 8 | % |   |   | 7 | % |   |
| Total                                  |       | $                                                | 64,791     |                                             | $          | 61,665 |   |   | 100 | % |   |   | 100 | % |   |

 

**Operating Expenses**

Our operatingexpenses are categorized as operating expenses and depreciation andamortization.

·       Operatingexpenses include cash expenses incurred in connection with the operation of ourcentral offices and outside plant facilities and related operations. Inaddition to the operational costs of owning and operating our own facilities,we also purchase long distance services from the regional bell operatingcompanies, large independent telephone companies and third party long distanceproviders. In addition, our operating expenses include expenses relating tosales and marketing, customer service and administration and corporate andpersonnel administration. Also included in operating expenses are non-cashexpenses related to stock based compensation. Stock based compensation consistsof compensation charges incurred in connection with the employee stock options,stock units and non-vested stock granted to our executive officers anddirectors.

·       Depreciation andamortization includes depreciation of our communications network and equipment.

**Acquisitions**

We intend tocontinue to pursue selective acquisitions:

·       OnJanuary 25, 2006, we agreed to purchase the assets of Cass CountyTelephone Company Limited Partnership, or Cass County Telephone, forapproximately $33.0 million in cash, subject to adjustment. Cass CountyTelephone serves approximately 8,600 access line equivalents in Missouri andKansas. This acquisition is expected to close in the middle of 2006 afterregulatory approvals.

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·       OnMay 2, 2005, we completed the acquisition of Berkshire TelephoneCorporation, or Berkshire, for a purchase price of approximately$20.3 million (or $16.4 million net of cash acquired). Berkshire is anindependent local exchange carrier that provides voice communication, cable andinternet services to over 7,200 access line equivalents, as of the date ofacquisition, serving five communities in New York State. Berkshire’scommunities of service are adjacent to those of Taconic Telephone Corp., one ofthe Company’s subsidiaries.

·       OnSeptember 1, 2005, we completed the acquisition of BentleyvilleCommunications Corporation, or Bentleyville, for a purchase price ofapproximately $11.0 million (or $9.3 million net of cash acquired),subject to adjustment. Bentleyville, which had approximately 3,600 access lineequivalents at the date of acquisition, provides telecommunications, cable andinternet services to rural areas of Southwestern Pennsylvania which areadjacent to our existing operations in Pennsylvania.

In the normal course ofbusiness, we evaluate selective acquisitions and may enter into non-bindingletters of intent with respect to such acquisitions, subject to customaryconditions. Management currently intends to fund future acquisitions throughthe use of the revolving facility of our credit facility or additional debtfinancing or the issuance of additional shares of our common stock. However,our substantial amount of indebtedness and our dividend policy could restrictour ability to obtain such financing on acceptable terms or at all.

**Results ofOperations**

The following tables setforth the percentages of revenues represented by selected items reflected inour consolidated statements of operations. The comparisons of financial resultsare not necessarily indicative of future results.

**Three Months Ended March 31, 2006 Compared withThree Months Ended March 31, 2005**

| ** **                                       | ** ** | **Three months ended  March 31,** | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                         | ** ** | **% of revenue**                       | ** ** | **2005** | ** ** | **% of revenue** | ** ** |
| Revenues                                         |       | $                                                | 64,791     |                                             |       | 100.0 | % |   | $ | 61,665 |   |   | 100.0 | % |   |
| Operating  expenses                              |       | 35,605                                           |       |                                             | 55.0       | % |   | 32,443 |   |   | 52.6 | % |   |
| Depreciation and  amortization                   |       | 13,635                                           |       |                                             | 21.0       | % |   | 13,010 |   |   | 21.1 | % |   |
| Total operating  expenses                        |       | 49,240                                           |       |                                             | 76.0       | % |   | 45,453 |   |   | 73.7 | % |   |
| Income from  operations                          |       | 15,551                                           |       |                                             | 24.0       | % |   | 16,212 |   |   | 26.3 | % |   |
| Net loss on sale of investments and other assets |       | (52                                              | )          |                                             | (0.0       | )% |   | (178 | ) |   | (0.3 | )% |   |
| Interest and  dividend income                    |       | 340                                              |       |                                             | 0.5        | % |   | 552 |   |   | 0.9 | % |   |
| Interest expense                                 |       | (9,753                                           | )          |                                             | (15.1      | )% |   | (16,970 | ) |   | (27.5 | )% |   |
| Equity in net  earnings of investees             |       | 3,286                                            |       |                                             | 5.1        | % |   | 2,656 |   |   | 4.3 | % |   |
| Other  non-operating, net                        |       | —                                           |       |                                             | —     |   |   | (86,164 | ) |   | (139.7 | )% |   |
| Total other  expense                             |       | (6,179                                           | )          |                                             | (9.5       | )% |   | (100,104 | ) |   | (162.3 | )% |   |
| Income (loss) before income taxes                |       | 9,372                                            |       |                                             | 14.5       | % |   | (83,892 | ) |   | (136.0 | )% |   |
| Income tax  benefit (expense)                    |       | (3,652                                           | )          |                                             | (5.6       | )% |   | 94,934 |   |   | 153.9 | % |   |
| Net income                                       |       | $                                                | 5,720      |                                             |       | 8.8 | % |   | $ | 11,042 |   |   | 17.9 | % |   |

 

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**Revenues**

*Revenues.*   Revenues increased $3.1 million to $64.8 million in 2006compared to $61.7 million in 2005. Of this increase, $2.5 million wasattributable to the Berkshire and Bentleyville acquisitions in 2005 and $0.6million was attributable to our existing operations. We derived our revenuesfrom the following sources:

*Local calling services.*   Local calling service revenues increased $0.7 million to$16.3 million in 2006 compared to $15.6 million in 2005. Excluding theimpact of acquired operations, local calling service revenues increased $0.2million compared to the first quarter of 2005. The primary driver of thisincrease is an increase in wireless interconnection revenue. Voice accesslines, including lines acquired, increased 1.0% from the first quarter of 2005but decreased sequentially from the fourth quarter of 2005 by 0.9%. Voiceaccess lines, excluding acquired lines, decreased 1.3% from the first quarterof 2005.

*Universal Service Fund high cost loop.*   Universal Service Fund high cost loop receipts remained flat at$4.8 million in the first quarter of 2006 and 2005.

*Interstate access revenues.*   Interstate access revenues were $17.6 million for the three monthsended March 31, 2006 compared to $16.9 million for the three months ended March 31,2005. Excluding the impact of acquired companies, interstate access revenuesincreased $0.2 million compared to 2005.

*Intrastate access revenues.*   Intrastate access revenues decreased $1.1 million from$10.1 million in 2005 to $9.0 million in 2006. Excluding the impactof acquired companies, intrastate access revenues decreased $1.5 millioncompared to 2005. Intrastate access revenue declined primarily due to adecrease in access rates and a decrease in minutes of use compared to the firstquarter of 2005. The rate decrease is primarily due to intrastate ratereductions implemented in Maine in the second quarter of 2005. Intrastaterevenues are expected to continue to decline as we expect minutes of use tocontinue to decline.

*Long distance services.*   Long distanceservices revenues increased $0.7 million from $4.7 million in 2005 to$5.4 million in 2006. This is attributable to the increase in subscribersand minutes related to bundles and packages sold to our existing customers.Interstate long distance penetration as of March 31, 2006 was 45.2%of voice access lines as compared to 40.9% as of March 31, 2005.

*Data and Internet services.*   Data and internet services revenues increased $1.1 million to$6.7 million in 2006 compared to 2005. This increase is due primarily toincreases in high speed data customers as we continue to market our broadbandservices. Our high speed data subscribers increased from 36,917 as of March 31,2005 to 49,145 as of March 31, 2006 and represents a 20.3% penetration ofvoice access lines.

*Other services.*   Other revenues increased from $4.0 million in 2005 to$5.0 million in 2006. Excluding the impact of acquired companies, otherrevenues increased $0.4 million compared to 2005. This increase is principallydriven by an increase in directory revenues in 2006.

**Operating Expenses**

*Operatingexpenses, excluding depreciation and amortization.**  *Operating expenses increased$3.2 million to $35.6 million in 2006 from $32.4 million in 2005.Approximately $1.4 million of this increase is related to operating expenses ofthe companies acquired during 2005. In addition, this increase is primarilydriven by an increase in audit and tax related expenses of $0.5 million, anincrease in legal expenses of $0.2 million and an increase in billing expensesof $0.5 million. Also in the first quarter of 2005, employee benefits expenseswere reduced by $0.7 million related to an adjustment to the Company’sestimated health insurance reserves. Included in operating expenses arenon-cash stock based compensation expenses associated with the award ofrestricted stock and restricted units. For the three months ended March 31,2006 and 2005, stock based compensation expenses totaled $0.6 million and $0.4 million.

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*Depreciationand amortization.**  *Depreciationand amortization expense increased $0.6 million to $13.6 million in2006.

*Incomefrom operations.**  *Incomefrom operations decreased $0.7 million to $15.6 million in 2006. Thiswas driven principally by the increased percentage of lower margin unregulatedrevenues in our total business mix due to DSL and long distance revenue growth,which offset higher margin regulated revenues. In addition to the increase inunregulated products, we experienced declines in intrastate revenues which havesignificantly higher margins and we have also experienced an increase inoperating expenses.

*Otherincome (expense).**  *Totalother expense decreased $93.9 million to $6.2 million in 2006 from$100.1 million in 2005. Interest expense decreased $7.2 million to$9.8 million in 2006, mainly attributable to the initial public offeringand related transactions in 2005 which substantially de-leveraged us andprovided a decrease in interest expense. In addition, our series Apreferred stock was repurchased which eliminated dividends and accretion on ourseries A preferred stock for the three months ended March 31, 2006,which under Statement of Financial Accounting Standards No. 150, or SFAS No. 150,were being reported as interest expense. Also, in 2005, in connection with theinitial public offering, we repurchased our series A preferred stock and repaidour old credit facility and repurchased or redeemed substantially all of ourhigh yield debt which resulted in significant charges of $86.2 million due tofees and penalties paid on the repurchase/redemption and for the write-off ofunamortized debt issuance costs.

*Incometax (expense) benefit.**  *Incometax expense of $3.7 million was recorded for the three months ended March 31,2006, resulting in an effective rate of 39.0%. Exclusive of unusual itemsaffecting the tax rate, our effective annual tax rate is estimated at 38.6% for2006 as compared to 39.1% as of March 31, 2005. The income tax benefit andeffective tax rate for the three months ended March 31, 2005 wereprimarily impacted by unusual items occurring in the quarter. Income taxbenefits of $28.0 million were recognized due to the taxable loss in thequarter resulting from the extinguishment of debt. In addition, we recognizedincome tax benefits of $66.0 million from the reversal of the deferred taxvaluation allowance that resulted from our expectation of generating futuretaxable income following the initial public offering and related transactions. Ouraccounting policy is to report income tax expense for interim reporting periodsusing an estimated annual effective income tax rate. However, the effects ofsignificant or unusual items are not considered in the estimated annualeffective tax rate. The tax effect of such events is recognized in the interimperiod in which the event occurs.

*Net income.**  *Net income was $5.7 millionfor the three months ended March 31, 2006 as compared to net income of$11.0 million for the three months ended March 31, 2005. Thedifferences between 2006 and 2005 are a result of the factors discussed above.

**Liquidity and CapitalResources**

Our short-term and long-term liquidity needs ariseprimarily from: (i) interest payments primarily related to our creditfacility; (ii) capital expenditures; (iii) working capitalrequirements as may be needed to support the growth of our business; (iv) dividendpayments on our common stock; and (v) potential acquisitions. Our board ofdirectors has adopted a dividend policy which reflects our judgment that ourstockholders would be better served if we distributed a substantial portion ofour cash available for distribution to them instead of retaining it in ourbusiness. However, we are not required to pay dividends, and our board ofdirectors may modify or revoke our dividend policy at any time. Dividendpayments are within the sole discretion of our board of directors and willdepend upon, among other things, our results of operations, our financialcondition, future developments that could differ materially from our currentexpectations, including competitive or technological developments (which could,for example, increase our need for capital expenditures), acquisitionopportunities or other factors.

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On March 15, 2006, we declared a dividend of$0.39781 per share of common stock, which was paid on April 18, 2006 toholders of record as of March 31, 2006. In 2006, we have paid dividendstotaling $13.8 million, or $0.39781 per share of common stock.

We expect to fund our operations, interest expense,capital expenditures and dividend payments on our common stock for the nexttwelve months principally from cash from operations and distributions frominvestments. To fund future acquisitions, we intend to use cash from operationsand borrowings under our credit facility, or, subject to the restrictions inour credit facility, to arrange additional funding through the sale of publicor private debt and/or equity securities, or obtain additional senior bankdebt.

For the three months ended March 31, 2006, cashprovided by operating activities of continuing operations was $20.9 millioncompared to cash used in operating activities of continuing operations of$1.4 million for the three months ended March 31, 2005. The use ofcash in the three months ended March 31, 2005 was primarily a result ofthe initial public offering and related transactions which substantiallyde-leveraged the Company resulting in a reduction in accrued interest balances.

Our ability to service our indebtedness depends on ourability to generate cash in the future. We are not required to make anyscheduled principal payments under our credit facility’s term facility prior tomaturity in February 2012. We will need to refinance all or a portion ofour indebtedness on or before maturity. We may not be able to refinance ourindebtedness on commercially reasonable terms or at all. If we were unable torenew or refinance our credit facility, our failure to repay all amounts due onthe maturity date would cause a default under our credit facility. In addition,borrowings under our credit facility bear interest at variable interest rates.

On February 8, 2005, we entered into threeinterest rate swap agreements, with notional amounts of $130 million each, toeffectively convert a portion of our variable rate interest exposure to fixedrates ranging from 3.76% to 4.11%, plus a 2.0% margin. These swap agreementsexpire beginning December 31, 2007 through December 31, 2009. On April 7,2005, we entered into two additional interest rate swap agreements, one withthe notional amount of $50.0 million to effectively convert a portion of ourvariable rate interest exposure to a fixed rate of 4.69%, plus a 2% margin,beginning on April 29, 2005 and ending on March 31, 2011, and onewith the notional amount of $50.0 million to effectively convert a portion ofour variable rate interest exposure to a fixed rate of 4.72%, plus a 2% margin,beginning on June 30, 2005 and ending on March 31, 2012. Effective onSeptember 30, 2005, we amended our credit facility to reduce the effectiveinterest rate margins on the $588.5 million term facility by 0.25% to 1.75% onEurodollar loans and to 0.75% for Base rate loans. This amendment alsoeffectively reduced the fixed interest rates on our interest rate swapagreements by 0.25%.As a result of these swap agreements, as of March 31,2006, approximately 82% of our indebtedness bore interest at fixed rates ratherthan variable rates. After these interest rate swap agreements expire, ourannual debt service obligations on such portion of the term loans will varyfrom year to year unless we enter into a new interest rate swap or purchase aninterest rate cap or other interest rate hedge. To the extent interest ratesincrease in the future, we may not be able to enter into new interest rateswaps or to purchase interest rate caps or other interest rate hedges onacceptable terms.

Based on the dividend policy with respect to ourcommon stock, we may not have any significant cash available to meet anyunanticipated liquidity requirements, other than available borrowings, if any,under our revolving facility. As a result, we may not retain a sufficientamount of cash to finance growth opportunities, including acquisitions, orunanticipated capital expenditures or to fund our operations. If we do not havesufficient cash for these purposes, our financial condition and our businesswill suffer. However, our board of directors may, in its discretion, amend orrepeal the dividend policy to decrease the level of dividends provided for ordiscontinue entirely the payment of dividends.

We used net proceeds received from the offering, togetherwith approximately $566.0 million of borrowings under the term facility ofour credit facility, to, among other things, repay all outstanding loans 

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under our old creditfacility, repurchase all of our series A preferred stock and consummatetender offers and consent solicitations in respect of our outstanding 91¤2%notes, floating rate notes, 121¤2%notes and 117¤8%notes. On March 10, 2005, we redeemed the remaining outstanding 91¤2%notes and floating rate notes. On May 2, 2005, we redeemed the remainingoutstanding 121¤2%notes with borrowings of $22.4 million under the delayed draw facility ofour credit facility.

Net cash used in investing activities of continuingoperations was $0.8 million and $2.4 million for the three monthsended March 31, 2006 and 2005, respectively. These cash flows primarilyreflect net capital expenditures of $5.9 million and $4.7 million forthe three months ended March 31, 2006 and 2005, respectively. Offsettingcapital expenditures were distributions from investments of $3.4 millionand $2.2 million for the three months ended March 31, 2006 and 2005,respectively, and proceeds from the sale of investments of $1.7 million and$0.2 million, respectively. The distributions from investments representpassive ownership interests in partnership and other investments. We do notcontrol the timing or amount of distributions from such investments.

Net cash used in financing activities of continuingoperations was $15.7 million for the three months ended March 31,2006. Net cash provided by financing activities of continuing operations was$7.0 million for the three months ended March 31, 2005. For the threemonths ended March 31, 2006, we used cash to pay dividends of $13.8million and used cash of $1.9 million associated with the net repayment of longterm debt. For the three months ended March 31, 2005, net proceeds fromthe issuance of common stock of $432.1 million was used for the netrepayment of long term debt of $220.3 million and the repurchase ofpreferred and common stock of $129.3 million. Remaining proceeds were usedto pay fees and penalties associated with the early retirement of long termdebt of $59.8 million, to pay a deferred transaction fee of$8.4 million and pay debt issuance costs of $7.5 million.

On January 26, 2006, we agreed to purchase theassets of Cass County Telephone for approximately $33.0 million in cash,subject to adjustment. In April, 2006, we received proceeds of $26.9 millionfrom the liquidation of our investment in the Rural Telephone Bank. In addition,on May 1, 2006, we received proceeds of $16.9 million from the sale of ourinvestment in Southern Illinois Cellular Corp. We expect to fund theacquisition of Cass County Telephone from cash on hand and from borrowingsunder the revolving facility of our credit facility.

Our annual capital expenditures for our ruraltelephone operations have historically been significant. Because existingregulations allow us to recover our operating and capital costs, plus areasonable return on our invested capital in regulated telephone assets,capital expenditures generally constitute an attractive use of our cash flow.Net capital expenditures were approximately $5.9 million for the threemonths ended March 31, 2006. We expect total capital expenditures for 2006to be approximately $29.5 to $31.5 million. We expect a significant portion ofcapital expenditures will be made in the second quarter of 2006.

Our credit facility consists of a $100.0 millionrevolving facility, of which $88.0 million was available at March 31,2006, that matures in February 2011 and a term facility of$588.5 million with $588.5 million outstanding at March 31, 2006that matures in February 2012. A $1.3 million letter of credit wasalso outstanding as of March 31, 2006. On March 11, 2005, April 29,2005 and September 14, 2005, we entered into amendments to our creditfacility. For a summary description of our credit facility, see note 9 of the “Notesto Condensed Consolidated Financial Statements” in this quarterly report.

In 2003, the Company issued $225.0 millionaggregate principal amount of the 117¤8% notes. Thesenotes were to mature on March 1, 2010. These notes are general unsecuredobligations of the Company, ranking *paripassu* in right of payment with all existing and future senior debtof the Company, including all obligations under our credit facility, and seniorin right of payment to all existing and future subordinated indebtedness of theCompany. On February 9, 2005, we repurchased $223.0 million principalamount of the 117¤8%notes tendered pursuant to the tender offer for such notes. $2.1 millionprincipal amount of the 117¤8%notes remains outstanding.

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**Summary ofContractual Obligations**

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

Thefollowing table discloses aggregate information about our contractualobligations as of March 31, 2006 and the periods in which paymentsare due: 

| ** **                          | ** ** | **Payments due by period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**      | ** ** |
| Contractual obligations:            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt maturing within one year       |       | $                                         | 685        |   |   | $ | 685 |   |   |   | $ | — |   |   | $ | — |   | $ | — |   |
| Long term debt                      |       | 604,805                                   |       |   | — |   |   |   | 1,346 |   |   | 14,353 |   | 589,106 |   |
| Operating leases(1)                 |       | 7,776                                     |       |   | 2,316 |   |   |   | 2,074 |   |   | 1,184 |   | 2,202 |   |
| Minimum purchase contract           |       | 1,273                                     |       |   | 863 |   |   |   | 386 |   |   | 24 |   | — |   |
| Total contractual  cash obligations |       | $                                         | 614,539    |   |   | $ | 3,864 |   |   |   | $ | 3,806 |   |   | $ | 15,561 |   | $ | 591,308 |   |

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(1)          Real property leaseobligations of $1.2 million associated with the discontinued operationsdiscussed in note (6) to our condensed consolidated financialstatements are stated in this table at total contractual amounts. Operatingleases from continuing operations of $6.6 million are also included.

Thefollowing table discloses aggregate information about our derivative financialinstruments as of March 31, 2006, the source of fair value of theseinstruments and their maturities. 

| ** **                           | ** ** | **Fair Value of Contracts at Period-End** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Total**                                                          | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)**                               | ** ** |
| Source of fair value:                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative  financial instruments(1) |       | $                                                                  | 14,185     |   |   | 5,164 |   |   |   | 7,014 |   |   |   | 1,810 |   |   |   | 197 |   |   |
|                                      |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Fairvalue of interest rate swaps at March 31, 2006 was provided by thecounterparties to the underlying contracts using consistent methodologies.

**Critical AccountingPolicies**

Our criticalaccounting policies are as follows:

·       Revenuerecognition;

·       Allowancefor doubtful accounts;

·       Accountingfor income taxes; and

·       Valuationof long-lived assets, including goodwill.

***Revenue******recognition.******  ***Certain of ourinterstate network access and data revenues are based on tariffed accesscharges filed directly with the Federal Communications Commission; theremainder of such revenues are derived from revenue sharing arrangements withother local exchange carriers administered by the National Exchange CarrierAssociation.

The Telecommunications Act allows local exchangecarriers to file access tariffs on a streamlined basis and, if certain criteriaare met, deems those tariffs lawful. Tariffs that have been “deemed lawful” ineffect nullify an interexchange carrier’s ability to seek refunds should theearnings from the tariffs ultimately result in earnings above the authorizedrate of return prescribed by the Federal Communications 

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Commission. Certain of ourtelephone subsidiaries file interstate tariffs directly with the FederalCommunication Commission using this streamlined filing approach. The settlementperiod related to (i) the 2003 to 2004 monitoring period lapses on September 30,2007 and (ii) the 2005 to 2006 monitoring period lapses on September 30,2009. We will continue to monitor the legal status of any pending or futureproceedings that could impact our entitlement to these funds, and may recognizeas revenue some or all of the over-earnings at the end of the settlement periodor as the legal status becomes more certain.

***Allowance******for doubtful accounts.******  ***In evaluatingthe collectibility of our accounts receivable, we assess a number of factors,including a specific customer’s or carrier’s ability to meet its financialobligations to us, the length of time the receivable has been past due andhistorical collection experience. Based on these assessments, we record bothspecific and general reserves for uncollectible accounts receivable to reducethe related accounts receivable to the amount we ultimately expect to collectfrom customers and carriers. If circumstances change or economic conditionsworsen such that our past collection experience is no longer relevant, ourestimate of the recoverability of our accounts receivable could be furtherreduced from the levels reflected in our accompanying consolidated balancesheet.

***Accounting******for income taxes.******  ***As part of theprocess of preparing our consolidated financial statements we are required toestimate our income taxes. This process involves estimating our actual currenttax exposure and assessing temporary differences resulting from differenttreatment of items for tax and accounting purposes as well as estimating anannual effective tax rate for purposes of allocating income tax expense tointerim periods. These differences result in deferred tax assets andliabilities, which are included within our consolidated balance sheets. We mustthen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and to the extent we believe the recovery is not likely,we must establish a valuation allowance. Further, to the extent that weestablish a valuation allowance or increase this allowance in a financialaccounting period, we must include a tax provision, or reduce our tax benefitin our consolidated statement of operations. In performing the assessment,management considers the scheduled reversal of deferred tax liabilities,projected future taxable income, and tax planning strategies. We use ourjudgment to determine our provision or benefit for income taxes, deferred taxassets and liabilities and any valuation allowance recorded against our netdeferred tax assets.

There are various factors that may cause those taxassumptions to change in the near term. We cannot predict whether future U.S.federal income tax laws and regulations might be passed that could have amaterial effect on our results of operations. We assess the impact ofsignificant changes to the U.S. federal and state income tax laws andregulations on a regular basis and update the assumptions and estimates used toprepare our financial statements when new regulation and legislation is enacted.

Based on certain assumptions, we had$291.9 million in federal and state net operating loss carry forwards asof December 31, 2005. In February 2005, we completed the offeringwhich resulted in an “ownership change” within the meaning of the U.S. federalincome tax laws addressing net operating loss carry forwards, alternativeminimum tax credits and other similar tax attributes. As a result of suchownership change, there will be specific limitations on our ability to use ournet operating loss carry forwards and other tax attributes. In order to fullyutilize the deferred tax assets, mainly generated by the net operating losses,we will need to generate future taxable income of approximately $219 millionprior to the expiration of the net operating loss carry forwards beginning in2019 to 2025. In addition, as a result of the offering, we have substantiallyreduced our aggregate long term debt and expect a significant reduction in ourannual interest expense. When considered together with our history of producingpositive operating results and other evidence affecting the recoverability ofdeferred tax assets, we expect that future taxable income will more likely thannot be sufficient to recover net deferred tax assets.

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***Valuation******of long-lived assets, including goodwill.******  ***We review ourlong-lived assets, including goodwill, for impairment whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. Several factors could trigger an impairment review such as:

·       significantunderperformance relative to expected historical or projected future operatingresults;

·       significantregulatory changes that would impact future operating revenues;

·       significantnegative industry or economic trends; and

·       significantchanges in the overall strategy in which we operate our overall business.

Goodwill was $481.3 million at March 31,2006. As part of the Berkshire and Bentleyville acquisitions, we have recordedintangible assets related to the acquired companies’ customer relationships of$2.4 million and $1.4 million, respectively. These intangible assets will beamortized over 15 years. The intangible assets are included in Deferred Chargesand Other Assets on the Condensed Consolidated Balance Sheet.

We are required to performan annual impairment review of goodwill as required by Statement of FinancialAccounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.No impairment of goodwill or other long-lived assets resulted from the annualvaluation of goodwill in 2005.

**New AccountingStandards**

No new accountingstandards were issued during the quarter which are expected to impact theCompany.

**Inflation**

We do not believeinflation has a significant effect on our operations.

**Item 3.**                        Quantitativeand Qualitative Disclosures about Market Risk.

As of March 31, 2006, approximately 82% of ourindebtedness bore interest at fixed rates or effectively at fixed rates. Ourearnings are affected by changes in interest rates as our long-termindebtedness under our credit facility has variable interest rates based oneither the prime rate or LIBOR. If interest rates on our variable rateindebtedness (excluding variable rate indebtedness which has its interest rateeffectively fixed under interest rate swap agreements) outstanding at March 31,2006 increased by 10%, our interest expense would have increased, and ourincome from continuing operations before taxes would have decreased, byapproximately $0.2 million for the three months ended March 31, 2006.

We have entered into interest rate swaps to manage ourexposure to fluctuations in interest rates on our variable rate indebtedness.The fair value of these swaps was a net asset of approximately$14.2 million at March 31, 2006. The fair value indicates anestimated amount we would have received to cancel the contracts or transferthem to other parties. In connection with our credit facility, on February 8,2005, we entered into three interest rate swap agreements, with notionalamounts of $130.0 million each, to effectively convert a portion of ourvariable interest rate exposure to fixed rates ranging from 3.76% to 4.11%,plus a 2.0% margin. These swap agreements expire beginning December 31,2007 through December 31, 2009. On April 7, 2005, we entered into twoadditional interest rate swap agreements, one with the notional amount of$50.0 million which will fix the interest rate at 4.69%, plus a 2.0%margin beginning on April 29, 2005 and ending on March 31, 2011 andone with the notional amount of $50.0 million which will fix the interest rateat 4.72%, plus a 2.0% margin, beginning on June 30, 2005 and ending on March 31,2012.

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Our Annual Report on Form 10-Kfor the year ended December 31, 2005 contains information about marketrisks under “Item 7A. Quantitative and Qualitative Disclosures about MarketRisk.”

**Item 4.**                        Controlsand Procedures.

As of the end of the period covered by this QuarterlyReport, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our “disclosure controls andprocedures” (as defined in Rule 13a-15(e) of the Exchange Act).Disclosure controls and procedures are controls and other procedures of anissuer that are designed to ensure that information required to be disclosed bythe issuer in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the SEC.

Based upon this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures were effective in ensuring that information required to bedisclosed by us in this Quarterly Report has been timely recorded, processed, summarizedand reported within the time periods specified in the rules of the SEC.

There have been no changes in our “internal controlsover financial reporting” (as defined in Rule 3a-15(f) of theExchange Act) during the period covered by this Quarterly Report that havematerially affected, or that are reasonably likely to materially affect, ourinternal controls over financial reporting. In response to the Sarbanes-OxleyAct, we are continuing a comprehensive review of our disclosure controls andprocedures and will improve such controls and procedures as necessary to assuretheir effectiveness.

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**PART II—OTHERINFORMATION**

**Item 1. LegalProceedings.**

On June 6, 2005, a purported class actioncomplaint was filed in the General Court of Justice, Superior Court Division,of the State of North Carolina by Robert Lowinger on behalf of himself and allother similarly situated persons against the Company, the Company’s Chairmanand Chief Executive Officer, certain of the Company’s current and formerdirectors and certain of the Company’s stockholders. The complaint allegesviolations of Sections 11 and 12(a)(2) and liability under Section 15of the Securities Act, and alleges that the Company’s registration statement onForm S-1 (which was declared effective by the SEC on February 3,2005) and the related prospectus dated February 3, 2005, each relating tothe Company’s initial public offering of common stock, contained certainmaterial misstatements and omitted certain material information necessary to beincluded relating to the Company’s broadband products and access line trends.The plaintiff, who has been a plaintiff in several prior securities cases,seeks rescission rights and unspecified damages on behalf of a purported classof purchasers of the common stock “issued pursuant and/or traceable to theCompany’s IPO during the period from February 3, 2005 through March 21,2005”. The Company removed the action to Federal Court. The plaintiff filed amotion to remand the action to the North Carolina State Court, which was deniedby the Federal Magistrate. The plaintiff has objected to and appealed theMagistrate’s decision to the District Court Judge. The Company has contestedthe appeal and filed a Motion to Dismiss the action. The Magistrate, on February 9,2006, issued a Memorandum and a Recommendation to the District Court Judge thatthe Motion to Dismiss be granted and that the complaint be dismissed withprejudice. The plaintiff has filed a Notice of Objection to the Magistrate’sRecommendation. Both the appeal of denial of the Motion to Remand and theMotion to Dismiss are pending before the District Court Judge. We believe thatthis action is without merit and intends to continue to defend the litigationvigorously.

From time to time, we areinvolved in litigation and regulatory proceedings arising out of ouroperations. Management believes that we are not currently a party to any legalproceedings, the adverse outcome of which, individually or in the aggregate, wouldhave a material adverse effect on our financial position or results ofoperations.

**Item 1A.**                RiskFactors

We have eliminated therisk factor entitled “We rely on a limited number of key suppliers and vendorsto operate our business. If these suppliers or vendors experience problems orfavor our competitors, we could fail to obtain sufficient quantities ofproducts and services we require to operate our business successfully.” From “Item1A. Risk Factors” of our Annual Report on Form 10-K for the yearended December 31, 2005. There have been no other material changes to therisk factors disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-Kfor the year ended December 31, 2005.

**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds.

**Unregistered Salesof Equity Securities**

We did not sell anyunregistered equity securities during the quarter ended March 31, 2006.

**Restrictions onPayment of Dividends**

Under Delaware law, our board of directors may declaredividends only to the extent of our “surplus” (which is defined as total assetsat fair market value minus total liabilities, minus statutory capital) or, ifthere is no surplus, out of our net profits for the then current and/orimmediately preceding fiscal year.

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Our credit facilityrestricts our ability to declare and pay dividends on our common stock asfollows:

·       Wemay use all of our available cash accumulated after April 1, 2005 pluscertain incremental funds to pay dividends, but we may not in general paydividends in excess of such amount. “Available cash” is defined in our creditfacility as Adjusted EBITDA (a) minus (i) interest expense, (ii) repaymentsof indebtedness (unless funded by debt or equity), (iii) capitalexpenditures (unless funded by long-term debt, equity or the proceeds fromasset sales or insurance recovery events), (iv) cash taxes, (v) cashconsideration paid for acquisitions (unless funded by debt or equity), (vi) cashpaid to make certain investments, and (vii) certain non-cash itemsexcluded from Adjusted EBITDA and paid in cash and (b) plus certainnon-cash items excluded from Adjusted EBITDA and received in cash. “AdjustedEBITDA” is defined in our credit facility as Consolidated Net Income (which isdefined in our credit facility and includes distributions from investments) (a) plusthe following to the extent deducted from Consolidated Net Income: provisionfor income taxes, interest expense, depreciation, amortization, losses on salesof assets and other extraordinary losses, and certain other non-cash items, and(b) minus, to the extent included in Consolidated Net Income, gains onsales of assets and other extraordinary gains and all non-cash items.

·       Wemay not pay dividends if a default or event of default under our creditfacility has occurred and is continuing or would exist after giving effect tosuch payment, if our leverage ratio is above 5.00 to 1.00 or if we do not haveat least $10 million of cash on hand (including unutilized commitmentsunder our credit facility’s revolving facility).

Our credit facility also permits us to use availablecash to repurchase shares of our capital stock, subject to the same conditions.

See “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Descriptionof Certain Indebtedness—Credit Facility” in our Annual Report on Form 10-Kfor the year ended December 31, 2005 and note 9 of the “Notes to CondensedConsolidated Financial Statements” in this quarterly report for a more detaileddescription of our credit facility and these restrictions.

**Item 3.**                        DefaultsUpon Senior Securities.

Not applicable.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

Not applicable.

**Item 5.**                        OtherInformation.

Not applicable.

**Item 6.**                        Exhibits.

The exhibits filed as part of this Quarterly Reportare listed in the index to exhibits immediately preceding such exhibits, whichindex to exhibits is incorporated herein by reference.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Quarterly Report to be signedon its behalf by the undersigned, thereunto duly authorized, and theundersigned also has signed this Quarterly Report in his capacity as theRegistrant’s Executive Vice President and Chief Financial Officer (PrincipalFinancial Officer).
|                        |   |   | FAIRPOINT  COMMUNICATIONS, INC. |
|------------------------|--------|--------|--------------------------------------|
| Date: May 9, 2006 |   | By:    | /s/ JOHN P. CROWLEY                  |
| * *               |   |   | Name:                                | John P. Crowley |
| * *               |   |   | Title:                               | *Executive Vice President and  Chief Financial Officer* |

 

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**Exhibit Index**

| Exhibit   No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Description** |
|---------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.1           |       | Agreement and Plan of  Merger, dated as of June 18, 2003, by and among FairPoint, MJD  Ventures, Inc., FairPoint Berkshire Corporation and Berkshire Telephone  Corporation.(1)                                                                                                                                                                                                                |
| 2.2           |       | Agreement and  Plan of Merger, dated as of April 22, 2005, by and among FairPoint, MJD  Ventures, Inc., FairPoint Bentleyville Corporation and Bentleyville  Communications Corporation.(2)                                                                                                                                                                                                    |
| 2.3           | ** ** | Asset Purchase  Agreement, dated as of December 14, 2005, by and among FairPoint, Local  Exchange Company LLC, Cass County Telephone Company Limited Partnership and  LEC Long Distance, Inc.(16)                                                                                                                                                                                              |
| 2.4           |       | Stock Purchase  Agreement, dated February 17, 2006, by and among Southern Illinois  Cellular Corp. and Crosslink Wireless, Inc., Egyptian Communication  Services, Inc., Hamilton County Communications, Inc., HTC Holding  Co., MJD Services Corp., Shawnee Communications, Inc. and Wabash  Independent Networks, Inc. and Alltel Communications, Inc.(16)          |
| 3.1           |       | Eighth Amended  and Restated Certificate of Incorporation of FairPoint.(3)                                                                                                                                                                                                                                                                                                                               |
| 3.2           |       | Amended and  Restated By Laws of FairPoint.(3)                                                                                                                                                                                                                                                                                                                                                           |
| 4.1           |       | Indenture, dated  as of March 6, 2003, by and between FairPoint and The Bank of New York,  relating to FairPoint’s $225,000,000 117¤8%  Senior Notes due 2010.(4)                                                                                                                                                                                                                         |
| 4.2           |       | Supplemental  Indenture, dated as of January 20, 2005, by and between FairPoint and  The Bank of New York, amending the Indenture dated as of March 6, 2003  between FairPoint and The Bank of New York.(3)                                                                                                                                                                                    |
| 4.3           |       | Form of  Initial Senior Note due 2010.(4)                                                                                                                                                                                                                                                                                                                                                           |
| 4.4           |       | Form of  Exchange Senior Note due 2010.(4)                                                                                                                                                                                                                                                                                                                                                          |
| 10.1          |       | Credit Agreement,  dated as of February 8, 2005, by and among FairPoint, various lending  institutions, Bank of America, N.A., CoBank ACB, General Electric Capital  Corporation and Deutsche Bank Trust Company Americas.(3)                                                                                                                                                                       |
| 10.2          |       | First Amendment  to Credit Agreement, dated as of March 11, 2005, among FairPoint,  various lending institutions, Bank of America, N.A., CoBank ACB, General  Electric Capital Corporation and Deutsche Bank Trust Company Americas.(3)                                                                                                                                                             |
| 10.3          |       | Second Amendment  and Consent to Credit Agreement, dated as of April 29, 2005, among  FairPoint, various lending institutions, Bank of America, N.A., CoBank ACB,  General Electric Capital Corporation and Deutsche Bank Trust Company  Americas.(5)                                                                                                                                               |
| 10.4          |       | Third Amendment  to Credit Agreement, dated as of September 14, 2005, among FairPoint,  various lending institutions, Bank of America, N.A., CoBank ACB, General  Electric Capital Corporation and Deutsche Bank Trust Company Americas.(6)                                                                                                                                                         |
| 10.5          |       | Pledge Agreement,  dated as of February 8, 2005, by FairPoint, ST Enterprises, Ltd.,  FairPoint Broadband, Inc., MJD Services Corp., MJD Ventures, Inc.,  C-R Communications, Inc., Comerco, Inc., GTC  Communications, Inc., Ravenswood Communications, Inc.,  Utilities, Inc., FairPoint Carrier Services, Inc. and St. Joe  Communications, Inc.(3) |
| 10.6          |       | Subsidiary  Guaranty, dated as of February 8, 2005, by FairPoint  Broadband, Inc., MJD Ventures, Inc., MJD Services Corp., ST  Enterprises, Ltd. and FairPoint Carrier Services, Inc.(2)                                                                                                                                                                                             |

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| 10.7  |   | Form of Swingline  Note.(3)                                                                                                                       |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8  |   | Form of RF  Note.(3)                                                                                                                              |
| 10.9  |   | Form of B  Term Note.(3)                                                                                                                          |
| 10.10 |   | Amended and  Restated Tax Sharing Agreement, dated as of November 9, 2000, by and  among FairPoint and its Subsidiaries.(7)                       |
| 10.11 |   | Nominating  Agreement, dated as of February 8, 2005.(3)                                                                                           |
| 10.12 |   | Affiliate  Registration Rights Agreement, dated as of February 8, 2005.(3)                                                                        |
| 10.13 |   | Employment  Agreement, dated as of March 17, 2006, by and between FairPoint and  Eugene B. Johnson.*                                         |
| 10.14 |   | Employment  Agreement, dated as of January 20, 2000, by and between FairPoint and  Walter E. Leach, Jr.(9)                              |
| 10.15 |   | Letter Agreement,  dated as of December 15, 2003, by and between FairPoint and Walter E.  Leach, Jr.(10)                                     |
| 10.16 |   | Letter Agreement,  dated as of November 11, 2002, by and between FairPoint and Peter G.  Nixon.(4)                                                |
| 10.17 |   | Letter Agreement,  dated as of November 13, 2002, by and between FairPoint and Shirley J.  Linn.(4)                                               |
| 10.18 |   | Letter Agreement,  dated as of May 16, 2005, by and between FairPoint and John P.  Crowley.(12)                                                   |
| 10.19 |   | FairPoint 1995  Stock Option Plan.(13)                                                                                                                 |
| 10.20 |   | FairPoint Amended  and Restated 1998 Stock Incentive Plan.(13)                                                                                         |
| 10.21 |   | FairPoint Amended  and Restated 2000 Employee Stock Incentive Plan.(10)                                                                                |
| 10.22 |   | FairPoint 2005  Stock Incentive Plan.(3)                                                                                                               |
| 10.23 |   | FairPoint Annual  Incentive Plan.(3)                                                                                                                   |
| 10.24 |   | Form of  Restricted Stock Agreement.(8)                                                                                                           |
| 10.25 |   | Form of  Director Restricted Stock Agreement.(14)                                                                                                 |
| 10.26 |   | Restricted Stock  Agreement, dated as of September 21, 2005, by and between FairPoint and  John P. Crowley.(15)                                   |
| 10.27 |   | Form of  Director Restricted Unit Agreement.(14)                                                                                                  |
| 21    |   | Subsidiaries of  FairPoint.(16)                                                                                                                        |
| 31.1  |   | Certification as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                             |
| 31.2  |   | Certification as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                             |
| 32.1  |   | Certification  required by 18 United States Code Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.*† |
| 32.2  |   | Certification  required by 18 United States Code Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.*† |
| 99.1  |   | Risk Factors.*                                                                                                                                         |

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*                    Filedherewith.

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†                    Pursuant toSecurities and Exchange Commission Release No. 33-8238, thiscertification will be treated as “accompanying” this Quarterly Report on Form 10-Qand not “filed” as part of such report for purposes of Section 18 of theSecurities Exchange Act of 1934, or otherwise subject to the liability of Section 18of the Securities Exchange Act of 1934 and this certification will not bedeemed to be incorporated by reference into any filing under the Securities Actof 1933 or the Securities Exchange Act of 1934, except to the extent that theregistrant specifically incorporates it by reference.

(1)          Incorporated byreference to the Registration Statement on Form S-4 of FairPoint,declared effective as of July 22, 2003.

(2)          Incorporated byreference to the Quarterly Report on Form 10-Q of FairPoint for thequarter ended March 31, 2005.

(3)          Incorporated byreference to the Annual Report on Form 10-K of FairPoint for theyear ended December 31, 2004.

(4)          Incorporated byreference to the Annual Report on Form 10-K of FairPoint for theyear ended December 31, 2002.

(5)          Incorporated byreference to the Current Report on Form 8-K of FairPoint filed on May 4,2005.

(6)          Incorporated byreference to the Current Report on Form 8-K of FairPoint filed on October 3,2005.

(7)          Incorporated byreference to the Quarterly Report on Form 10-Q of FairPoint for theperiod ended September 30, 2000.

(8)          Incorporated byreference to the Registration Statement on Form S-1 of FairPoint,declared effective as of February 3, 2005.

(9)          Incorporated byreference to the Annual Report on Form 10-K of FairPoint for theyear ended December 31, 1999.

(10)   Incorporated by reference tothe Annual Report on Form 10-K of FairPoint for the year ended December 31,2003.

(11)   Incorporated by reference tothe Annual Report on Form 10-K of FairPoint for the year ended December 31,2004.

(12)   Incorporated by reference tothe Current Report on Form 8-K of FairPoint filed on May 24,2005.

(13)   Incorporated by reference tothe Registration Statement on Form S-4 of FairPoint, declaredeffective as of August 9, 2000.

(14)   Incorporated by reference tothe Current Report on Form 8-K of FairPoint filed on June 20,2005.

(15)   Incorporated by reference tothe Current Report on Form 8-K of FairPoint filed on September 23,2005.

(16)   Incorporated by reference tothe Annual Report on Form 10-K of FairPoint for the year ended December 31,2005.

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