UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 000-20709
D & E Communications, Inc.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
(State or other jurisdiction of
incorporation or organization)
I.R.S. Employer Identification Number: 23-2837108
Brossman Business Complex
124 East Main Street
Ephrata, Pennsylvania 17522
(Address of principal executive offices)
Registrant's Telephone Number: (717) 733-4101
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
(D & E Communications, Inc. is the successor registrant to Denver and Ephrata
Telephone and Telegraph Company by virtue of a share exchange effective
June 7, 1996.)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 9, 1996
----- -----------------------------
Common Stock, par value $.16 per share 5,730,086 Shares
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC.
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Income --
For the three months and six months ended
June 30, 1996 and 1995 ............................ 1
Consolidated Balance Sheets --
June 30, 1996 and December 31, 1995 ............... 2
Consolidated Statements of Cash Flows --
For the three months and six months ended
June 30, 1996 and 1995 ............................ 3
Notes to Consolidated Financial Statements ........... 4-5
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 6-13
PART II. OTHER INFORMATION
2. Changes in Securities................................. 14
4. Submission of Matters to a Vote of Security Holders... 14
6. Exhibits and Reports on Form 8-K ..................... 15
SIGNATURES ........................................... 16
i
<PAGE>
Form 10-Q Part I - Financial Information
Item 1. Financial Statements
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months Ended Six months Ended
June 30 June 30
------------------ -----------------
OPERATING REVENUE 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Local network services ........................... $ 2,159,857 $ 2,047,061 $ 4,271,902 $ 4,065,581
Network access ................................... 3,981,244 3,780,942 7,898,219 7,538,680
Long distance network services ................... 1,013,599 927,536 2,122,999 1,982,626
Directory advertising ............................ 743,723 662,765 1,474,041 1,327,474
Other sales and services ......................... 3,272,934 2,012,666 5,887,752 3,810,026
Miscellaneous .................................... 447,033 415,595 855,818 848,952
------------ ------------ ------------ ------------
Total Operating Revenue .......................... 11,618,390 9,846,565 22,510,731 19,573,339
------------ ------------ ------------ ------------
OPERATING EXPENSE
Network operations ............................... 1,497,670 1,507,928 3,031,739 2,919,779
Network access ................................... 443,860 461,333 936,016 925,602
Depreciation ..................................... 1,781,338 1,687,212 3,563,211 3,340,288
Customer services ................................ 425,805 425,007 854,735 842,569
Financial and administrative services ............ 1,303,107 1,230,141 2,487,947 2,316,413
Directory ........................................ 427,169 375,887 900,081 808,364
Operating taxes, other than income ............... 381,341 368,826 742,403 734,953
Costs of products sold ........................... 1,537,464 878,786 2,711,270 1,504,330
Other expenses ................................... 1,319,741 1,242,900 2,584,670 2,414,808
------------ ------------ ------------ ------------
Total Operating Expense .......................... 9,117,495 8,178,020 17,812,072 15,807,106
------------ ------------ ------------ ------------
Operating Income .............................. 2,500,895 1,668,545 4,698,659 3,766,233
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction ..... 19,499 -- 54,078 --
Equity in net income (loss) of affiliates ........ 183,229 42,490 254,782 (15,348)
Interest expense ................................. (655,854) (616,605) (1,286,646) (1,235,570)
Other, net ....................................... (12,697) (142) (1,231) 18,591
------------ ------------ ------------ ------------
Total Other Income (Expense) ..................... (465,823) (574,257) (979,017) (1,232,327)
------------ ------------ ------------ ------------
Income before minority interest, income taxes and
dividends on utility series preferred stock.... 2,035,072 1,094,288 3,719,642 2,533,906
MINORITY INTEREST ...................................... 6,753 -- 7,616 --
------------ ------------ ------------ ------------
Income before income taxes and
dividends on utility series preferred stock ... 2,041,825 1,094,288 3,727,258 2,533,906
INCOME TAXES AND DIVIDENDS ON
UTILITY SERIES PREFERRED STOCK
Income taxes ..................................... 858,424 433,016 1,515,835 1,016,380
Dividends on utility series preferred stock ...... 16,263 16,263 32,526 33,738
------------ ------------ ------------ ------------
Total Income taxes and dividends
on utility series preferred stock .............. 874,687 449,279 1,548,361 1,050,118
------------ ------------ ------------ ------------
NET INCOME ............................................. $ 1,167,138 $ 645,009 $ 2,178,897 $ 1,483,788
============ ============ ============ ============
Average common shares outstanding ................ 5,725,187 5,706,075 5,722,091 5,703,426
Earnings per common share ........................ $ .20 $ .11 $ .38 $ .26
============ ============ ============ ============
Dividends per common share ....................... $ .10 $ .09 $ .19 $ .18
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
Form 10-Q Part 1 - Financial Information
Item 1. Financial Statements
D & E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................................ $ 125,759 $ 50,911
Accounts receivable ...................................................... 6,612,830 6,151,686
Accounts receivable and note receivable - affiliated companies ........... 814,225 833,064
Inventories, lower of cost or market, at average cost .................... 810,076 778,330
Prepaid expenses ......................................................... 1,548,883 2,226,614
Other current assets ..................................................... 757,391 266,964
------------ ------------
TOTAL CURRENT ASSETS .............................................. 10,669,164 10,307,569
------------ ------------
INVESTMENTS
Investments in affiliated companies ...................................... 9,709,567 8,193,201
Other .................................................................... 1,747,244 2,920,721
------------ ------------
11,456,811 11,113,922
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant in service ............................................... 108,835,046 106,214,967
Under construction ....................................................... 483,534 1,460,604
------------ ------------
109,318,580 107,675,571
Less accumulated depreciation ............................................ 43,747,952 41,410,562
------------ ------------
65,570,628 66,265,009
------------ ------------
OTHER ASSETS
Unamortized software costs ............................................... 190,239 253,653
Accounts receivable - affiliated company ................................. 92,610 119,664
Other..................................................................... 1,007,612 461,464
------------ ------------
1,290,461 834,781
------------ ------------
TOTAL ASSETS ................................................................... $ 88,987,064 $ 88,521,281
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ............................................................ $ 6,680,000 $ 5,530,000
Long-term debt maturing within one year .................................. 370,202 365,612
Accounts payable ......................................................... 6,652,368 6,990,399
Accounts payable - affiliated companies .................................. 262,427 7,233
Accrued taxes ............................................................ 232,503 264,034
Accrued interest ......................................................... 481,483 464,385
Advance billings, customer deposits and other ............................ 1,921,484 3,429,718
------------ ------------
TOTAL CURRENT LIABILITIES ........................................ 16,600,467 17,051,381
------------ ------------
LONG-TERM DEBT ................................................................. 26,141,794 26,137,463
------------ ------------
OTHER LIABILITIES
Deferred income taxes .................................................... 6,580,964 6,673,234
Regulatory liability, net ................................................ 841,885 915,671
Accrued retirement benefits .............................................. 878,794 878,794
Other .................................................................... 267,860 267,702
------------ ------------
8,569,503 8,735,401
------------ ------------
MINORITY INTEREST .............................................................. 264,442 500,000
------------ ------------
PREFERRED STOCK OF UTILITY SUBSIDIARY, par value $100, cumulative, callable at
par, at the option of the Company, authorized 20,000 shares, outstanding:
Series A 4 1/2%, 14,456 shares ..................................... 1,445,600 1,445,600
------------ ------------
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, par value $.16, authorized shares 30,000,000 ............... 916,589 914,812
Outstanding shares, 5,728,680 at June 30, 1996
5,717,577 at December 31, 1995
Additional paid-in capital ............................................... 1,734,358 1,505,688
Unearned ESOP compensation ............................................... (1,196,774) (1,196,774)
Retained earnings ........................................................ 34,511,085 33,427,710
------------- -----------
35,965,258 34,651,436
------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $ 88,987,064 $ 88,521,281
============= ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
Form 10-Q Part 1 - Financial Information
Item 1. Financial Statements
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the six months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................................... $ 2,178,897 $ 1,483,788
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................................... 3,796,909 3,614,412
Deferred income taxes ............................................................ (166,056) (42,630)
Undistributed (earnings) losses of affiliates .................................... (254,782) 15,348
Distribution from affiliates ..................................................... 414,000 184,000
Tax benefits applicable to ESOP .................................................. 10,839 14,662
Loss on retirement of property, plant and equipment .............................. 9,042 36,094
Allowance for funds used during construction ..................................... (54,078) --
Losses applicable to minority interest ........................................... (7,617) --
Changes in operating assets and liabilities
Accounts receivable .............................................................. (461,144) 608,222
Inventories ...................................................................... (31,746) (160,682)
Prepaid expenses ................................................................. 677,731 527,277
Accounts payable ................................................................. (339,541) (928,203)
Accrued taxes and accrued interest ............................................... (14,433) (25,704)
Advance billings, customer deposits and other .................................... (1,508,234) (608,896)
Other, net ....................................................................... (522,389) (50,170)
----------- -----------
Net Cash Provided by Operating Activities ............................. 3,727,398 4,667,518
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................................................... (3,082,248) (2,671,239)
Allowance for funds used during construction ....................................... 54,078 --
Proceeds from sale of assets........................................................ 43,267 77,514
Cost of removal of plant retired ................................................... (48,146) (44,185)
Acquisition of other assets ........................................................ (466,136) --
Increase in investments and advances to affiliates ................................. (2,916,475) (3,157,550)
Decrease in investments and repayments from affiliates ............................. 2,487,524 3,177,732
----------- -----------
Net Cash Used in Investing Activities ................................. (3,928,136) (2,617,728)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ........................................................... (1,049,598) (979,551)
Net proceeds from (payments on) revolving lines of credit .......................... 1,150,000 (1,300,000)
Contributions from minority interest ............................................... 1,500 --
Proceeds from issuance of common stock ............................................. 173,684 235,736
Redemption of Utility Series B 5 1/2% Preferred Stock .............................. -- (128,900)
----------- -----------
Net Cash Provided By (Used in) Financing Activities ................... 275,586 (2,172,715)
----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................................................ 74,848 (122,925)
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD ................................................................. 50,911 139,558
----------- -----------
END OF PERIOD ....................................................................... $ 125,759 $ 16,633
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
(1) RESTRUCTURING AND SHARE EXCHANGE
On June 7, 1996, D & E Communications, Inc (and with its subsidiaries,
"D & E") became the parent company of Denver and Ephrata Telephone and
Telegraph Company ("Telco") pursuant to the terms of that certain Agreement
and Plan of Exchange (the "Plan of Exchange"), whereby each outstanding
Common Share, $0.50 par value, of Telco (the "Telco Common Shares") was
exchanged (the "Share Exchange") for three Common Shares, $0.16 par value,
of D & E (the "D & E Common Shares"). In its effect, the Share Exchange was
similar to a three-for-one split of Telco Common Shares. As an additional
aspect of the reorganizing of Telco into a holding company structure (the
"Restructuring"), Telco dividended to D & E all of the capital stock of its
subsidiaries, Red Rose Communications, Inc. (f/k/a Red Rose Systems, Inc.)
("Red Rose") and D & E Marketing Corp. ("Marketing"). The preferred stock
of Telco was not exchanged in the Restructuring.
The general purpose of the Restructuring was to establish a more
appropriate corporate structure for the conduct of unregulated business
activities. D & E believes that the Restructuring will better enable D & E
to establish a broader base of income generation which will enhance the
overall financial strength of the enterprise.
(2) BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been
prepared by D & E pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). In the opinion of management, the
financial statements include all adjustments (consisting of normal
recurring adjustments and all adjustments necessary as a result of the
Restructuring) necessary to present fairly the results of operations,
financial position and cash flows of D & E for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. The use of generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Certain items in the financial statements for
the three months and six months ended June 30, 1995 have been reclassified
for comparative purposes and to reflect the three-for-one stock split
effect of the Plan of Exchange. D & E believes that the disclosures made
are adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Telco Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1995.
4
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
(3) INVESTMENTS IN AFFILIATED COMPANIES
D & E is positioning itself to participate in a new generation of
wireless services known as Personal Communications Services ("PCS"). In
1995, Red Rose became managing partner in The D and E Group, a partnership
formed for the purpose of participating in PCS. Red Rose made an initial
capital contribution of $2,000,000 to The D and E Group, which in turn,
became a minority equity investor in PCS One, Inc. Red Rose owns 80% of The
D and E Group. On May 6, 1996, the Federal Communications Commission (FCC)
closed the auction for the C Block of PCS licenses. PCS One, Inc. was the
high bidder for the license to operate in the Lancaster, Pennsylvania
market having submitted a bid of approximately $17,600,000 ($13,200,000 net
after the 25% entrepreneurs' discount). In compliance with FCC rules, PCS
One, Inc. submitted an initial down payment of $660,000 (5% of its winning
bid) in May 1996. The remainder of the down payment, an additional 5%, will
be due shortly after the license is granted by the FCC, which is
anticipated during the third quarter of 1996. The remaining 90 percent of
the net auction price for the license may be paid in installments, with
payments of interest only for the first 6 years and payments of interest
and principal amortized over the remaining 4 years of the 10-year license
term. Interest will be based on the rate for ten-year U.S. Treasury
obligations on the date the license is granted. The D and E Group has
agreed with PCS One, Inc., to finance the purchase price of the license. In
June of 1996, PCS One, Inc. returned $1,180,000 of The D and E Group's
initial $2,500,000 investment.
(4) SUBSEQUENT EVENTS
D & E is pursuing its opportunities in the FCC Auctions of the D, E and
F Blocks of the PCS Spectrum, and, in July, filed a short form application
with the FCC. The FCC will review applications from D & E and others and
establish a list of qualified bidders. Each of these qualified bidders will
need to make an up-front payment by August 12, 1996. Auction bidding is
expected to commence on August 26, 1996.
(5) NOTES PAYABLE AND LONG-TERM DEBT
As a result of the Restructuring, Telco has negotiated amendments,
effective June 7, 1996, to the financial covenants stipulated in each of
the following Senior Note Agreements: 9.18% Senior Note, 7.55% Senior Note
and 6.49% Senior Note. The covenants contained in these note agreements are
calculated based upon consolidated Telco financial data. Prior to the
Restructuring, Telco had two subsidiaries, Red Rose and Marketing with
which it consolidated its operations. As an additional aspect of the
Restructuring, Telco dividended to D & E all the capital stock of these
subsidiaries, leaving Telco with no subsidiaries to consolidate. The
amendments changed the limit on accumulated distributions and restricted
investments from $9,000,000 plus 75% of accumulated consolidated net income
of Telco, to $5,000,000 plus 75% of accumulated consolidated net income of
Telco. The distributions, restricted investments and consolidated net
income are cumulative since June 30, 1991. These Senior Note Agreements of
Telco are guaranteed by D & E.
5
<PAGE>
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Monetary amounts presented in the following discussion are rounded to the
nearest thousand dollars. Certain items in the financial statements for the
three months and six months ended June 30, 1995 have been reclassified for
comparative purposes and to reflect the three-for-one stock split effect of the
Share Exchange.
RESULTS OF OPERATIONS
Net Income. Net income for the three months ended June 30, 1996 was
$1,167,000, about 80.9% more than the net income of $645,000 recorded in the
corresponding period in 1995. The increase occurred primarily due to an increase
in operating revenue of $1,772,000 and an increase in equity in net income of
affiliates of $141,000 partially offset by corresponding increases in operating
expense of $939,000 and income taxes of $425,000. Earnings per common share
totaled $.20, as compared with earnings per common share of $.11 in the second
quarter of last year.
Net income for the six months ended June 30, 1996 was $2,179,000, 46.8%
more than the corresponding period in 1995, which had net income of $1,484,000.
Earnings per common share totaled $.38 for the six months ended June 30, 1996,
as compared with earnings of $.26 per common share for the six months ended June
30, 1995. Net income increased primarily due to increases of $932,000 in
operating income and $270,000 in equity in net income of affiliates partially
offset by a corresponding increase in income taxes of $499,000.
Operating Revenue. Total operating revenue for the second quarter of 1996
was $11,618,000, an increase of $1,772,000 or 18.0%, while year-to-date revenue
totaled $22,511,000, an increase of $2,937,000 or 15.0% from the corresponding
period last year.
Local network services revenue is generated from providing local exchange
and local private line services. Local network revenues for the three months
ended June 30, 1996 increased $113,000 or 5.5% as compared to the same period in
1995. The increase for the first two quarters of 1996, relative to the same
period in 1995, was $206,000 or 5.1%. Revenue for the first six months of 1996,
as well as for the second quarter, was greater primarily as a result of growth
in access lines and an increase in revenue from custom calling features. Access
lines in service at June 30, 1996 increased 4.1% compared to June 30, 1995, such
gain accounts for approximately $75,000 and $121,000 of the increase in local
network revenues for the three and six months ended June 30, 1996 over June 30,
1995, respectively. The increase in revenue from custom calling features for the
three and six months ended June 30, 1996 over June 30, 1995 of $28,000 and
$63,000, respectively, was primarily due to the newly offered Caller
Identification ("Caller ID") Deluxe. This service was initiated in June 1995.
Network access services revenue is received from D & E's subscribers, from
6
<PAGE>
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
local exchange carriers and interexchange carriers ("IXCs") for their use of
local exchange facilities in providing interstate and intrastate long distance
services to their customers and from settlement pools administered by the
National Exchange Carrier Association, Inc. ("NECA"). Revenue in this category
for the second quarter of 1996 amounted to $3,981,000, an increase of $200,000
or 5.3% over the corresponding period in 1995. Revenue in this category for the
first six months of 1996 amounted to $7,898,000, an increase of $360,000 or 4.8%
over the corresponding period in the previous year. The second quarter and
year-to-date increases were primarily due to increases in interstate minutes of
use for approximately $70,000 and $120,000 of revenue, respectively, and
intrastate minutes of use for approximately $109,000 and $299,000 of revenue,
respectively, combined with an increase in access lines for approximately
$37,000 and $68,000, respectively. These increases were partially offset by a
decline in interstate traffic sensitive revenues of approximately $32,000 and
$149,000, respectively. The decline in interstate traffic sensitive revenues was
primarily due to lower interstate traffic sensitive rates, which were filed with
the FCC and, were effective July 1995.
Long distance network services revenue is received from long distance calls
made by residential and business customers within the Capital (south central)
Region of Pennsylvania. Revenue in this category increased $86,000 or 9.3% and
$140,000 or 7.1% in the second quarter and year-to-date of 1996 over the
corresponding periods in 1995, respectively. These increases were primarily due
to an increase in minutes of use.
Directory advertising revenue increased $81,000 or 12.2% and $147,000 or
11.0% for the second quarter of 1996 and year-to-date 1996 over the
corresponding periods in 1995. Revenue in this category increased primarily due
to a rate increase of approximately 4.8% combined with an increase in local and
regional advertisers of approximately 3.2%.
Other sales and services revenue consists primarily of the following
services furnished by Red Rose: sales and service of business telephone systems
and communications products, revenue from premise work and revenue from long
distance services under D and E Long Distance ("DELD"). Also included in this
category is revenue associated with the construction of fiber optic facilities.
Revenue in this category grew $1,260,000 or 62.6% for the second quarter of 1996
over the second quarter of 1995 and year-to-date grew $2,078,000 or 54.5% over
1995 year-to-date. These increases were both generated primarily by a large
system sales contract which began in January 1996 and by the completion of a
contract for the construction of a fiber optic facility. Revenue recorded on
this fiber optic contract for the second quarter of 1996 was $861,000. The
system sales contract is expected to be completed by September 1997 and is
expected to generate revenue of approximately $2,101,000. The corresponding
expense on these two contracts is recorded in "Costs of products sold."
Operating Expense. Total operating expense for the three and six month
periods ended June 30, 1996 was $9,117,000 and $17,812,000, respectively.
These amounts represent increases of $939,000 or 11.5% and $2,005,000 or
7
<PAGE>
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
12.7%, respectively, over the same periods in 1995.
Depreciation expense increased $94,000 or 5.6% and $223,000 or 6.7% in the
second quarter and first six months of 1996 over the corresponding periods in
1995. The majority of these increases were attributable to an increase in plant
in service in 1996 and new depreciation rates that were effective January 1,
1996.
Financial and administrative services expense increased $73,000 and
$172,000 or 5.9% and 7.4% for the three and six month periods ended June 30,
1996, over the corresponding periods in the previous year. The increases were
primarily due to an increase in wages and benefits.
Costs of products sold consists primarily of the material costs of
equipment sales and fiber optic facility construction. The increases of $659,000
and $1,207,000 in the costs of products sold during the three and six month
periods ended June 30, 1996 compared to 1995, were principally due to expenses
associated with the large system sales contract and the completion of a contract
for the construction of a fiber optic facility, as discussed in revenue from
"Other sales and services."
Other expenses primarily includes all operating expenses incurred by Red
Rose and Marketing in the course of their business activities, excluding
material costs and operating taxes other than income taxes. These expenses
increased $77,000 and $170,000 for the three and six month periods ended June
30, 1996, over the comparable periods last year. This increase is primarily
attributable to an increase in sales commissions and expenses associated with
Marketing's investment in Monor Communications Group ("MCG"). A portion of the
sales commission increase was due to the commissions associated with the large
system sales contract discussed in "Other sales and services."
Other Income (Expense). Other income (expense) for the three and six months
ended June 30, 1996 was $466,000 and $979,000, respectively, in net expenses, a
decrease of $108,000 and $253,000 over the same periods in 1995. These decreases
in the second quarter and first six months primarily related to increases in
equity in net income of affiliates of $141,000 and $270,000, respectively.
Equity in net income of affiliates increased primarily due to second quarter and
year-to-date increases in net income from cellular joint ventures of which D & E
recorded increases of $238,000 and $339,000, respectively. This increase was
partially offset by D & E's share of losses from MCG and Red Rose SuperNet
("SuperNet"). D & E indirectly owns 50% of SuperNet through its subsidiary,
Marketing. D & E recorded losses from SuperNet of $26,000 and $52,000 for the
second quarter and year-to-date in 1996. SuperNet is a partnership which sells
Internet access services and related products and began its operations in 1995.
Also, for the three and six months ended June 30, D & E recorded losses
from MCG as follows: $281,000 and $497,000 in 1996, respectively, and $210,000
and $480,000 in 1995, respectively. MCG is a domestic corporate joint venture
8
<PAGE>
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
which owns 89.62% of Monor Telephone Company ("MTT"), which operates a telephone
company in Hungary. Marketing owns 16.2% of MCG at June 30, 1996. The net losses
reported by MCG are directly related to the losses of MTT. These result
primarily from the foreign currency translation and exchange losses. The foreign
currency losses relate to the use by MTT of the Hungarian Forint ("HUF") as the
functional currency for accounting purposes. The MTT business plan reflects
ongoing HUF/U.S. Dollar-devaluation based on Hungarian government estimates of
19%, 12% and 10%, respectively for the years 1997 through 1999. These losses are
expected to be countered by MTT's ability to raise rates to customers in order
to repay the Overseas Private Investment Corporation ("OPIC") loan with devalued
HUFs. The telecommunications rate regulation in Hungary permits MTT to make
certain inflation adjustments based upon the Producer Price Index ("PPI"), and,
in fact, MTT expects to raise rates in January 1997 and up two times per year
subsequent to that increase. Therefore, management has decided the cost of
foreign currency hedging is not currently warranted. The Hungarian government
has been increasingly receptive to the conversion of HUFs to U.S. Dollars, and
MTT has not experienced, and does not expect to experience, any difficulties in
making the necessary currency conversions.
Income Taxes. The federal and state income taxes increased by $425,000 or
98.2% for the second quarter of 1996 and $499,000 or 49.1% for the six months
ended June 30, 1996 over the corresponding periods in 1995. These increases in
income taxes were primarily due to an increase in pre-tax accounting income. The
effective income tax rates for the three and six months ended June 30, 1996 were
42.0% and 40.6%, compared to 39.6% and 40.1% for the corresponding periods last
year.
FINANCIAL CONDITION
Liquidity and Capital Resources. D & E believes that it has adequate
internal and external resources available to meet ongoing operating requirements
including network expansion and modernization and business development. D & E,
as successor to Telco, implemented an Employee Stock Purchase Plan in the second
quarter of 1994 and a Dividend Reinvestment Plan in the fourth quarter of 1994
to raise additional capital to support operating requirements. These plans have
provided $130,000 and $131,000 of additional funds in the second quarter of 1996
and 1995, respectively, and $230,000 and $283,000 during the six month periods
ended June 30, 1996 and 1995, respectively. D & E expects that presently
foreseeable capital requirements will be financed primarily through
internally-generated funds, although additional short- or long-term debt or
equity financing may be needed to fund development activities and to maintain
D & E's capital structure within management's guidelines and, management
believes D & E has the ability to obtain this financing as necessary.
D & E's primary source of funds for the first six months of 1996 and 1995
was cash generated from operating activities. Net cash provided by operating
9
<PAGE>
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
activities was $3,727,000 in 1996, compared with $4,668,000 in 1995. This
decline was primarily due to an increase in net income which was more than
offset by changes in accounts receivable and advance billings on the fiber optic
contract. Also, in the first six months of 1996, cash was used to purchase
telephone equipment and services associated with the large system sales
contract.
D & E's most significant investing activity in the first half of 1996 was
its numerous additions to property, plant and equipment. The most significant
property, plant and equipment purchases, during the first six months of 1996,
were as follows: $551,000 in digital electronic switching equipment, $865,000 in
general purpose computers, $717,000 in aerial cable, $221,000 in buildings and
$231,000 in buried cable.
Another of D & E's significant investing activities includes Marketing's
investments in MCG, advances to MTT and receipts from MTT on those advances.
Marketing invested $1,500,000 in MCG in the first half of 1996. Marketing
advanced MTT an additional $964,000, and received $1,118,000 from MTT in the
first half of 1996 for its advances to MTT.
Also contributing to the fluctuation in the investing activities was a
return of investment of $1,180,000 from PCS One, Inc. to The D and E Group
(owned 80% by Red Rose).
In March 1995, Marketing acquired common stock of MCG by forgiving
$633,000, of its accounts receivable from MCG.
As of June 30, 1996, D & E had unsecured lines of credit ("LOCs") totaling
$13,000,000 with two domestic banks. The outstanding amounts borrowed under
these agreements at June 30, 1996 totaled $6,680,000.
D & E borrowed $6,101,000 on these lines of credit in the first half of
1996 and repaid $4,951,000. A portion of these borrowings was used to invest in
and provide working capital to telephone operations in Hungary as well as
provide additional working capital for D & E. In addition, $1,500,000 was
invested in MCG. A portion of the repayments was possible due to the receipt of
$1,118,000 from MCG on previous advances. Also, $1,594,000 of distributions from
joint ventures and other cash generated from operations were used to make
repayments on the LOCs.
As a result of the Restructuring, Telco has negotiated amendments,
effective June 7, 1996, to the financial covenants stipulated in each of the
following Senior Note Agreements: 9.18% Senior Note, 7.55% Senior Note and 6.49%
Senior Note. The covenants contained in these note agreements are calculated
based upon consolidated Telco financial data. Prior to the Restructuring, Telco
had two subsidiaries, Red Rose and Marketing with which it consolidated its
operations. As an additional aspect of the Restructuring, Telco dividended to
D & E all the capital stock of these subsidiaries, leaving Telco with no
subsidiaries to consolidate. The amendments changed the limit on accumulated
distributions and restricted investments from $9,000,000 plus
10
<PAGE>
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
75% of accumulated consolidated net income of Telco, to $5,000,000 plus 75% of
accumulated consolidated net income of Telco. The distributions, restricted
investments and consolidated net income are cumulative since June 30, 1991.
These Senior Note Agreements of Telco are guaranteed by D & E.
D & E's ratio of total debt to total debt plus capital was 48.0% at June
30, 1996 and December 31, 1995.
OTHER
In 1994, D & E constructed and installed, and now maintains, an enhanced
911 system in Lancaster County pursuant to an Agreement, which was modified on
February 23, 1995, for D & E to furnish the County's 911 system with an
Automatic Location Identification ("ALI") network. D & E estimates that this
Agreement as modified will generate an estimated $9,600,000 of revenue over its
ten-year term. The ALI system is operational and the customer data information
is being loaded into the system. Management anticipates that all initial
information will be loaded by the end of the third quarter of 1996. Revenues
recorded on this contract since its inception have been approximately $2,230,000
of which approximately $438,000 is included in the 1996 year-to-date financial
statements.
On February 1, 1995, Telco redeemed 1,289 outstanding shares of its Series
B 5 1/2% Preferred Stock at its $100 par value per share, plus accrued dividends
thereon.
On February 2, 1995, Telco and the other participating companies of MCG
entered into a Project Completion Agreement with OPIC as a condition to OPIC's
Finance Agreement with MTT. The Finance Agreement provides a credit facility to
MTT in an amount up to $30,000,000. The Project Completion Agreement provides
that Telco will guarantee payments to MTT or MCG in an amount determined by
OPIC, not to exceed $3,333,000, if, in the opinion of OPIC, MTT has insufficient
funds to achieve project completion or to meet its obligations as they become
due and payable. Project Completion is defined to include certain physical
completion tests and legal conditions of the facilities that MTT procures,
constructs and installs and certain operational completion tests. The operations
completion tests include MTT reaching a stipulated number of subscribers and
reaching a certain dollar level of revenues.
D & E is positioning itself to participate in a new generation of wireless
services known as PCS. In 1995, Red Rose became managing partner in The D and E
Group, a partnership formed for the purpose of participating in PCS. Red Rose
made an initial capital contribution of $2,000,000 to The D and E Group, which
in turn, became a minority equity investor in PCS One, Inc. Red Rose owns 80% of
The D and E Group. On May 6, 1996, the FCC closed the auction for C Block of PCS
licenses. PCS One, Inc. was the high bidder for the license to operate in the
Lancaster, Pennsylvania market having submitted
11
<PAGE>
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
a bid of approximately $17,600,000 ($13,200,000 net after the 25% entrepreneurs'
discount). In compliance with FCC rules, PCS One, Inc. submitted an initial down
payment of $660,000 (5% of its winning bid) in May 1996. The remainder of the
down payment, an additional 5%, will be due shortly after the license is granted
by the FCC, which is anticipated during the third quarter of 1996. The remaining
90 percent of the net auction price for the license may be paid in installments,
with payments of interest only for the first 6 years and payments of interest
and principal amortized over the remaining 4 years of the 10-year license term.
Interest will be based on the rate for ten-year U.S. Treasury obligations on the
date the license is granted. The D and E Group has agreed with PCS One, Inc. to
finance the purchase price of the license. In June of 1996, PCS One, Inc.
returned $1,180,000 of The D and E Group's initial $2,500,000 investment.
D & E is also pursuing its opportunities in the D, E and F Block Auctions
of the PCS Spectrum and, in July, filed a short-form application with the FCC.
The FCC will review applications from D & E and others and establish a list of
qualified bidders. Each of these qualified bidders will need to make an up-front
payment by August 12, 1996. Auction bidding is expected to commence on August
26, 1996.
On June 7, 1996, D & E became the parent company of Telco pursuant to the
terms of the Plan of Exchange, whereby each of the Telco Common Shares was
exchanged through the Share Exchange for three D & E Common Shares. In its
effect, the Share Exchange was similar to a three-for-one split of Telco Common
Shares. As an additional aspect of the Restructuring, Telco dividended to D & E
all of the capital stock of its subsidiaries, Red Rose and Marketing. The
preferred stock of Telco was not exchanged in the Restructuring.
The general purpose of the Restructuring was to establish a more
appropriate corporate structure for the conduct of unregulated business
activities. D & E believes that the Restructuring will better enable D & E to
establish a broader base of income generation which will enhance the overall
financial strength of the enterprise.
On August 1, 1996 the FCC adopted an order to implement the local
competition provisions of the Telecommunications Act of 1996 ("the 1996 Act").
Ultimately, D & E may face competition in its traditional service area from
companies with greater resources. However, D & E believes that its strength in
technology and marketing position allows the Company to compete effectively in
its local market and that D & E is in a positive strategic position to embrace
new opportunities presented by the 1996 Act.
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements as to the
future performance of various domestic and international investments of D & E,
including Monor Communications Group, Inc., Monor Telephone Company, The
12
<PAGE>
D & E COMMUNICATIONS, INC.
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
D and E Group and PCS One, Inc. Actual results may differ as a result of factors
over which D & E has no control, including but not limited to, uncertainties and
economic fluctuations in the domestic and foreign markets in which the companies
compete, foreign-currency risks and increased competition in domestic markets
due in large part to continued deregulation of the telecommunications industry.
13
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
Effective June 7, 1996, each outstanding Telco Common Share was
exchanged for and converted into three D & E Common Shares. Further
discussion and the terms of such exchange, as well as the constituent
instruments defining the rights to holders thereof, are contained in
D & E's registration statement on Form S-4 filed with the SEC on April 23,
1996 and registration statement on Form 8-B filed with the SEC on May 13,
1996.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Shareholders was held on May 9, 1996.
(c) Matters voted upon:
(1) Election of the following directors to hold office for a three year
term to expire in 1999. Votes for the election of Mr. John Amos were
cast in the following manner: 1,640,821 for and 0 withheld. Votes for
the election of Mr. W. Garth Sprecher were cast in the following
manner: 1,639,612 for and 1,209 withheld. Votes for the election of Mr.
G. William Ruhl were cast in the following manner: 1,640,821 for and 0
withheld.
(2) To approve the restructuring pursuant to the Plan of Exchange whereby
D & E, a Pennsylvania corporation, formed as a subsidiary of Telco,
will become the parent company of Telco. Votes were cast in the
following manner: 1,638,193 for; 102 against; 2,123 abstentions and 0
broker non-votes.
(3) To ratify the Articles of Incorporation and the By-Laws of D & E. Votes
were cast in the following manner: 1,638,323 for; 102 against; 1,993
abstentions and 0 broker non-votes.
(4) To reelect Coopers & Lybrand L.L.P. as D & E's Independent Accountants
in 1996. Votes were cast in the following manner: 1,639,222 for; 202
against; 994 abstentions and 0 broker non-votes.
14
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
<S> <C> <C>
2.1 Agreement and Plan of Exchange Incorporated herein by
Between Denver and Ephrata reference from Amendment
Telephone and Telegraph Company No. 2 to the Registra-
(a Pennsylvania corporation) and tion Statement on Form
D & E Communications, Inc. S-4 (Registration No.
(a Pennsylvania corporation). 333-2960) for D & E,
Exhibit 2.1.
4.1 Fourth Amendment, Consent and Filed herewith.
Waiver to Note Agreement dated
as of November 15, 1991 between
Allstate Life Insurance Company,
Allstate Life Insurance
Company of New York and Denver and
Ephrata Telephone and Telegraph
Company dated as of June 7, 1996,
RE: $10,000,000 9.18% Senior
Notes due November 15, 2021.
4.2 Third amendment, Consent and Filed herewith.
Waiver to Note Agreement dated
as of January 14, 1994 between
Allstate Life Insurance Company, and
Denver and Ephrata Telephone and Telegraph
Company, dated as of June 7, 1996, RE:
$10,000,000 6.49% Senior Notes due January 14, 2004.
10.1 Network Product Purchase Incorporated herein by
Agreement between Northern reference from Telco's
Telecom, Inc. and Denver Quarterly Report on Form
and Ephrata Telephone and 10-Q for the quarterly
Telegraph Company dated period ended March 31, 1996,
May 3, 1996. Exhibit 10.1.
27 Financial Data Schedule. Filed herewith.
</TABLE>
(b) Reports on Form 8-K:
A current report on Form 8-K dated June 11, 1996 was filed by the
Registrant with respect to the effectiveness of the holding company
restructuring.
15
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
D & E COMMUNICATIONS, INC.
(Registrant)
Date: August 9, 1996 By: /s/ Thomas E. Morell
-------------------------
Thomas E. Morell
Chief Financial Officer and Treasurer
(On Behalf of the Registrant and
as Principal Financial Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 9, 1996.
16
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
<S> <C> <C>
2.1 Agreement and Plan of Exchange Incorporated herein by
Between Denver and Ephrata reference from Amendment
Telephone and Telegraph Company No. 2 to the Registra-
(a Pennsylvania corporation) and tion Statement on Form
D & E Communications, Inc. S-4 (Registration No.
(a Pennsylvania corporation). 333-2960) for D & E,
Exhibit 2.1.
4.1 Fourth Amendment, Consent and Filed herewith.
Waiver to Note Agreement dated
as of November 15, 1991 between
Allstate Life Insurance Company,
Allstate Life Insurance
Company of New York and Denver and
Ephrata Telephone and Telegraph
Company dated as of June 7, 1996,
RE: $10,000,000 9.18% Senior Notes
due November 15, 2021.
4.2 Third amendment, Consent and Filed herewith.
Waiver to Note Agreement dated
as of January 14, 1994 between
Allstate Life Insurance Company, and
Denver and Ephrata Telephone and Telegraph
Company, dated as of June 7, 1996, RE:
$10,000,000 6.49% Senior Notes due
January 14, 2004.
10.1 Network Product Purchase Incorporated herein by
Agreement between Northern reference from Telco's
Telecom, Inc. and Denver Quarterly Report on Form
and Ephrata Telephone and 10-Q for the quarterly
Telegraph Company dated period ended
May 3, 1996. March 31, 1996,
Exhibit 10.1.
27 Financial Data Schedule. Filed herewith.
</TABLE>
17
<PAGE>
EXECUTION COPY
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY
FOURTH AMENDMENT, CONSENT AND WAIVER
Dated as of June 7, 1996
to
NOTE AGREEMENTS
Dated as of November 15, 1991
Re:
$10,000,000 9.18% Senior Notes
Due November 15, 2021
<PAGE>
TABLE OF CONTENTS
SECTION HEADING PAGE
Parties............................................................. 1
Recitals............................................................ 1
SECTION 1 AMENDMENT............................................... 2
SECTION 2 WAIVER AND CONSENT...................................... 4
SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY........... 5
SECTION 4 CONDITIONS TO THE EFFECTIVENESS OF THIS FOURTH
AMENDMENT............................................... 6
SECTION 5 PAYMENT OF NOTEHOLDERS' COUNSEL FEES AND
EXPENSES................................................ 7
SECTION 6 MISCELLANEOUS........................................... 7
Signatures.......................................................... 8
EXHIBIT A -- Form of Guaranty Agreement
EXHIBIT B -- Form of Compliance Certificate
i
<PAGE>
FOURTH AMENDMENT, CONSENT AND WAIVER TO NOTE AGREEMENTS
THIS FOURTH AMENDMENT, CONSENT AND WAIVER dated as of June 7, 1996 (the or
this "Fourth Amendment") to the separate and several Note Agreements, each dated
as of November 15, 1991, is by and among DENVER AND EPHRATA TELEPHONE AND
TELEGRAPH COMPANY, a Pennsylvania corporation (the "Company"), ALLSTATE LIFE
INSURANCE COMPANY and ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (each a
"Noteholder" and collectively, the "Noteholders").
RECITALS:
A. The Company and each of the Noteholders have heretofore entered into
separate and several Note Agreements, each dated as of November 15, 1991, as
amended by that certain First Amendment to Note Agreement dated as of January
14, 1994, that certain Second Amendment to Note Agreement dated as of September
27, 1994 and that certain Third Amendment to Note Agreement dated as of
September 1, 1995 (as amended, collectively, the "Original Note Agreements").
The Company has heretofore issued and has outstanding $10,000,000 in aggregate
principal amount of its 9.18% Senior Notes due November 15, 2021 (the "Notes")
pursuant to the Note Agreements. The Noteholders are the holders of 100% of the
principal amount of the Notes outstanding.
B. The Company and D&E Communications, Inc., a Pennsylvania corporation and
Wholly-owned Subsidiary of the Company ("Holdings"), have heretofore entered
into that certain Agreement and Plan of Exchange dated as of February 28, 1996
(the "Exchange Agreement") pursuant to which the Company intends to restructure
the ownership of its capital stock by causing Holdings to become the holding
company of the Company and thereby own all of the issued and outstanding capital
stock of the Company (the "Restructuring").
C. In connection with the Restructuring, the Company's Subsidiaries, Red
Rose Communications, Inc., a Pennsylvania corporation ("Red Rose"), and D&E
Marketing Corp., a Pennsylvania corporation ("Marketing Corp."), will become
wholly-owned subsidiaries of Holdings.
D. The Original Note Agreements prohibit the Company from effectuating the
Restructuring without the consent of the holders of at least 66-2/3% of the
principal amount of the Notes outstanding.
E. In order to consummate the Restructuring, the Company has requested that
the Noteholders enter into this Fourth Amendment.
F. The Company and the Noteholders now desire to amend and/or waive certain
provisions of the Original Note Agreements in the respects, but only in the
respects, hereinafter set forth.
1
<PAGE>
G. Capitalized terms used herein shall have the respective meanings
ascribed thereto in the Original Note Agreements unless herein defined or the
context shall otherwise require.
H. All requirements of law have been fully complied with and all other acts
and things necessary to make this Fourth Amendment a valid, legal and binding
instrument according to its terms for the purposes herein expressed have been
done or performed.
NOW, THEREFORE, upon the full and complete satisfaction of the conditions
precedent to the effectiveness of this Fourth Amendment set forth in ss.4
hereof, and for good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, the Company and the Noteholders do hereby agree as
follows:
SECTION 1. AMENDMENT.
Section 1.1. Section 1 of the Original Note Agreements shall be and is
hereby amended by inserting the following Section 1.4 after Section 1.3:
"Section 1.4. Guaranty of the Notes. The payment by the Company of all
amounts due with respect to the Notes and performance by the Company of its
obligations under this Agreement and the similar Agreements described in
ss.1.3 are absolutely and unconditionally guaranteed by the Guarantor
pursuant to the Guaranty Agreement."
Section 1.2. Section 5.10 of the Original Note Agreements shall be and is
hereby amended in its entirety to read as follows:
"Section 5.10. Dividends, Stock Purchases, Restricted Investments.
(a) The Company will not, and will not permit any Subsidiary to,
directly or indirectly, or through any Subsidiary, declare or make or incur
any liability to make any Distribution and neither the Company nor any of
its Subsidiaries will make or authorize any Restricted Investment, unless,
immediately after giving effect to the proposed Distribution or Restricted
Investment, the aggregate amount of Distributions declared in the case of
dividends or made in the case of other Distributions plus the aggregate
amount of Restricted Investments then held by the Company and its
Subsidiaries (valued immediately after such action as provided in the
definition thereof) during the period from and after June 30, 1991 to and
including the date of declaration in the case of a dividend, the date of
payment in the case of any other Distribution and the date such investment
is committed to in the case of a Restricted Investment would not exceed the
sum of:
(1) $5,000,000 plus
(2) 75% of Consolidated Net Income (or if such Consolidated Net
Income is a deficit figure, then minus 100% of such deficit) for such
period
2
<PAGE>
determined on a cumulative basis commencing on June 30, 1991, to and
including the date of declaration, incurrence or payment, as the case
may be.
(b) Notwithstanding the limitations of paragraph (a) of this ss.5.10,
the Company may redeem or acquire its common stock or warrants, rights or
other options to purchase its common stock in an amount equal to the
aggregate net proceeds received by the Company in cash from the sale after
the date of this Agreement of shares of its common stock or other
Securities converted into common stock of the Company, in any such case
substantially concurrent with such redemption or acquisition.
(c) Any corporation which becomes a Subsidiary after the date of this
Agreement shall be deemed to have made, at the time it becomes a
Subsidiary, all Restricted Investments of such corporation existing
immediately after it becomes a Subsidiary.
(d) The Company will not declare a Distribution on its capital stock
which is payable more than 60 days after the date of declaration thereof.
(e) The Company will not authorize or make a Distribution on its
capital stock and neither the Company nor any Subsidiary will make any
Restricted Investment if after giving effect to the proposed Distribution
or Restricted Investment a Default or an Event of Default would exist."
Section 1.3. Section 6.1(l) of the Original Note Agreements shall be and is
hereby amended by deleting the period at the end thereof and replacing it with a
semi-colon and the word "or".
Section 1.4. Section 6.1 of the Original Note Agreements shall be and is
hereby amended by inserting the following clause (m) after Section 6.1(l):
"(m) Default shall occur in the payment or performance of any
obligations of the Guarantor under the Guaranty Agreement or the Guaranty
Agreement shall cease to be in full force and effect for any reason
whatsoever, including without limitation, a determination by any
governmental body or court that the Guaranty Agreement is invalid, void or
unenforceable insofar as the Guarantor is concerned or the Guarantor shall
contest or deny in writing the validity or enforceability of any of its
obligations under the Guaranty Agreement."
Section 1.5. Section 6.3 of the Original Note Agreements shall be and is
hereby amended by inserting the phrase "or (m)" after the phrase "(a) through
(i), inclusive," in the sixth line of Section 6.3.
3
<PAGE>
Section 1.6. Section 6.4 of the Original Note Agreements shall be and is
hereby amended by inserting the phrase "or (m)" after the phrase "(a) through
(i), inclusive," in the fourth line of Section 6.4.
Section 1.7. Section 8.1 of the Original Note Agreements shall be and is
hereby amended by adding thereto the following definitions in the appropriate
alphabetical order:
"'Guarantor' shall mean D&E Communications, Inc., a Pennsylvania
corporation.
'Guaranty Agreement' shall mean that certain Guaranty Agreement dated
as of June 7, 1996 from the Guarantor to the Purchasers and each other from
time to time holder of the Notes."
SECTION 2. WAIVER AND CONSENT.
Section 2.1. Upon this Fourth Amendment becoming effective as herein
contemplated, the Noteholders:
(a) consent to the issuance by Holdings of up to 5,728,200 shares of
its common stock and exchange of such common stock for all of the
outstanding common stock of the Company pursuant to the Exchange Agreement
(the "Exchange") at an exchange rate of three shares of Holdings common
stock for each share of the Company's common stock outstanding and waive
any Default or Event of Default pursuant to ss.5.11(b) of the Note
Agreements arising solely as a result of such issuance of common stock by
Holdings to a Person other than the Company or a Wholly-owned Subsidiary;
(b) consent to the disposition by the Company of the capital stock of
Holdings held by the Company by means of cancellation of such capital stock
and waive any Default or Event of Default pursuant to (1) ss.5.11(c)(3) of
the Note Agreements arising solely as a result of the Company's failure to
receive cash consideration for such disposition and (2) ss.5.11(c)(4) of
the Note Agreements solely as a result of Holdings continuing to have an
investment in the Company after such disposition; and
(c) upon completion of the Exchange, consent to the Distribution of all
of the capital stock of Red Rose and Marketing Corp. to Holdings and agree
that (1) the fair market value of such capital stock distributed to
Holdings shall not be included in any determination of Distributions for
purposes of ss.5.10(a) of the Note Agreements, (2) the book value of such
capital stock distributed to Holdings shall not be included in any
determination of (i) assets "sold, leased or otherwise disposed of" and
(ii) Consolidated Total Assets for purposes of ss.5.11(d)(1) and (2) of the
Note Agreements and (3) all income attributable to such capital stock
distributed to Holdings shall not be included in any determination of
Consolidated Net Income for purposes of ss.5.11(d)(3) and (4) of the Note
Agreements.
4
<PAGE>
Section 2.2. The Company understands and agrees that the waivers contained
in ss.2.1 pertain only to the Defaults or Events of Default therein described
and to the extent so described and not to any other Defaults or Events of
Default which may exist under, or any others matters arising in connection with,
the Note Agreements or to any rights which the Noteholders have arising by
virtue any such other actions or matters.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Section 3.1. To induce the Noteholders to execute and deliver this Fourth
Amendment, the Company represents and warrants to the Noteholders (which
representations shall survive the execution and delivery of this Fourth
Amendment) that:
(a) the execution and delivery of this Fourth Amendment and compliance
by the Company with all of the provisions of the Note Agreements --
(1) are within the corporate powers of the Company;
(2) will not violate any provisions of any law or any order of
any court or governmental authority or agency and will not conflict
with or result in any breach of any of the terms, conditions or
provisions of, or constitute a default under the Articles of
Incorporation or By-laws of the Company or any indenture or other
agreement or instrument to which the Company is a party or by which it
may be bound or result in the imposition of any Liens or encumbrances
on any property of the Company; and
(3) have been duly authorized by proper corporate action on the
part of the Company (no action by the stockholders of the Company being
required by law, by the Articles of Incorporation or By-laws of the
Company or otherwise) and this Fourth Amendment and the Note Agreements
constitute the legal, valid and binding obligations, contracts and
agreements of the Company enforceable in accordance with their
respective terms;
(b) as of the date hereof and after giving effect to this Fourth
Amendment, no Default or Event of Default has occurred and is continuing;
(c) no approval, consent or withholding of objection on the part of any
regulatory body, state, Federal or local, is necessary in connection with
the execution and delivery by the Company of this Fourth Amendment or
compliance by the Company with any of the provisions of the Note Agreements
other than the issuance of a securities certificate by The Pennsylvania
Public Utility Commission; and
(d) the failure by the Company to receive an issued securities
certificate from The Pennsylvania Public Utilities Commission prior to the
effectiveness of this Amendment will not and
5
<PAGE>
cannot result in the invalidation or avoidence of the obligations of
the Company under the Original Note Agreements or the Notes.
SECTION 4. CONDITIONS TO THE EFFECTIVENESS OF THIS FOURTH AMENDMENT.
Section 4.1. This Fourth Amendment shall become effective on the date (the
"Effective Date") when each and every one of the following conditions shall have
been satisfied:
(a) executed counterparts of this Fourth Amendment, duly executed by
the Company and the holders of at least 66-2/3% of the outstanding
principal amount of the Notes, shall have been delivered to the
Noteholders;
(b) Holdings shall have executed and delivered to each of the
Noteholders the Guaranty Agreement, substantially in the form attached
hereto as Exhibit A;
(c) all approvals and consents of any regulatory body, Federal, state
or local, other than the issuance of a securities certificate from The
Pennsylvania Public Utilities Commission, shall have been obtained and
evidence of such approvals and consents satisfactory to the Noteholders
shall have been provided to the Noteholders;
(d) the Noteholders shall have received from the Company a certificate
dated the Effective Date, signed by the President or a Vice President of
the Company, to the effect that (1) the representations and warranties of
the Company set forth in ss.3 hereof are true and correct on and with
respect to the Effective Date and (2) the Company has performed all of its
obligations hereunder which are to be performed on or prior to the
Effective Date;
(e) the Noteholders shall have received from Holdings a certificate
dated the Effective Date, signed by the President or a Vice President of
Holdings, to the effect that (1) the representations and warranties of
Holdings set forth in ss.5 of the Guaranty Agreement are true and correct
on and with respect to the Effective Date and (2) Holdings has performed
all of its obligations under the Guaranty Agreement which are to be
performed on or prior to the Effective Date;
(f) the Noteholders shall have received from the Company a Compliance
Certificate, substantially in the form attached hereto as Exhibit B, dated
the Effective Date, and signed by the Chief Financial Officer of the
Company;
(g) the Noteholders shall have received from Buchanan Ingersoll, P.C.,
independent counsel for the Company and Holdings, their opinion dated the
Effective Date, as to the matters set forth in ss.3.1(a) and 3.1(c) hereof
and to such other matters as the Noteholders may reasonably request, which
opinion shall be in scope, form and substance satisfactory to the
Noteholders;
(h) the Noteholders shall have received, in form and substance
reasonably satisfactory
6
<PAGE>
to the Noteholders, such documents and evidence with respect to the
Company as they may reasonably request in order to establish the
existence and good standing of the Company and the authorization of the
Company to enter into this Fourth Amendment; and
(i) The Noteholders shall have received, in form and substance
reasonably satisfactory to the Noteholders, such documents and evidence
with respect to Holdings as they may reasonably request in order to
establish the existence and good standing of Holdings and the authorization
of Holdings to enter into the Guaranty Agreement.
SECTION 5. PAYMENT OF NOTEHOLDERS' COUNSEL FEES AND EXPENSES.
Section 5.1. The Company agrees to pay upon demand, the reasonable fees and
expenses of Chapman and Cutler, special counsel to the Noteholders, in
connection with the negotiation, preparation, approval, execution and delivery
of this Fourth Amendment and the Guaranty Agreement.
SECTION 6. MISCELLANEOUS.
Section 6.1. This Fourth Amendment shall be construed in connection with
and as part of the Original Note Agreements, and all terms, conditions and
covenants contained in the Original Note Agreements shall be and remain in full
force and effect.
Section 6.2. Any and all notices, requests, certificates and other
instruments executed and delivered after the execution and delivery of this
Fourth Amendment may refer to the Original Note Agreements without making
specific reference to this Fourth Amendment but nevertheless all such references
shall include this Fourth Amendment unless the context otherwise requires.
Section 6.3. The descriptive headings of the various Sections or parts of
this Fourth Amendment are for convenience only and shall not affect the meaning
or construction of any of the provisions hereof.
Section 6.4. This Fourth Amendment shall be governed by and construed in
accordance with Pennsylvania law.
7
<PAGE>
The execution hereof by you shall constitute a contract between us for the
uses and purposes hereinabove set forth, and this Fourth Amendment may be
executed in any number of counterparts, each executed counterpart constituting
an original but all together only one agreement.
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH
COMPANY
By /s/ Thomas E. Morell
-------------------------
Its Chief Financial Officer and Treasurer
Accepted and agreed to:
ALLSTATE LIFE INSURANCE COMPANY
By /s/ Patricia W. Wilson
---------------------------
By /s/ Steven M. Laude
---------------------------
Its Authorized Signatories
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
By /s/ Patricia W. Wilson
---------------------------
By /s/ Steven M. Laude
---------------------------
Its Authorized Signatories
[Fourth Amendment, Consent and Waiver]
8
<PAGE>
FORM OF GUARANTY AGREEMENT
EXHIBIT A
(to Fourth Amendment, Consent and Waiver to Note Agreement)
<PAGE>
FORM OF COMPLIANCE CERTIFICATE
Allstate Life Insurance Company Allstate Life Insurance Company of New York
Allstate Plaza West Allstate Plaza West
Northbrook, Illinois 60062-6287 Northbrook, Illinois 60062-6287
Re: $10,000,000 9.18% Senior Notes
Due November 15, 2021
Ladies and Gentlemen:
This certificate is delivered to you in compliance with the requirements of
ss.4.1(f) of that certain Fourth Amendment, Consent and Waiver dated as of June
7, 1996 (the "Fourth Amendment") to the separate and several Note Agreements,
each dated as of November 15, 1991, as amended by that certain First Amendment
to Note Agreement dated as of January 14, 1994, that certain Second Amendment to
Note Agreement dated as of September 27, 1994 and that certain Third Amendment
to Note Agreement dated as of September 1, 1995 (as amended, collectively, the
"Original Note Agreements") by and among Denver and Ephrata Telephone and
Telegraph Company, a Pennsylvania corporation (the "Company"), and each of you.
The Original Note Agreements as amended by the Fourth Amendment are hereinafter
collectively referred to as the "Note Agreements." The terms which are
capitalized herein shall have the same meanings as set forth in the Note
Agreements.
The Company represents and warrants to each of you that on the date hereof
and after giving effect to the Restructuring (as defined in the Fourth
Amendment):
The terms used in the following tests shall have the respective meanings
set forth in and section references noted refer to the Note Agreements:
ss.5.6 1. (a) Consolidated Tangible Net Worth is $40,500,205
-----------
(b) 50% of Consolidated Net Income for
each of the elapsed fiscal quarters
on a cumulative basis ending after
September 30, 1993 is $ 4,483,878
-----------
(c) $22,000,000 plus (b) is $26,483,878
-----------
EXHIBIT B
<PAGE>
(d) (a) minus (c) is (must not be less than $0) $14,016,327
-----------
ss.5.7. 2. (a) During the 12 month period immediately
preceding the date hereof the Company
and its Subsidiaries have been free of all
Consolidated Current Debt for a period of
60 consecutive days
false
-----
If the above statement is true the amount for
item (b) shall be deemed to be $0.
(b) The average of the aggregate unpaid principal
amount of Consolidated Current Debt outstanding
on the last day of each month of the fiscal
year most recently ended is
$ 4,881,792
-----------
(c) Consolidated Funded Debt plus (b) is $31,389,327
-----------
(d) Consolidated Tangible Net Worth is $40,500,205
-----------
(e) 55% of the sum of (c) plus (d) is $39,539,243
-----------
(f) (e) minus (c) is (must not be less than $0) $ 8,149,916
-----------
Unless otherwise indicated, the figures used hereinabove are taken from the
books of the Company as of March 31, 1996 and are true, correct and complete,
and there have been no material changes in the financial condition of the
Company between such date and the date hereof which would substantially affect
any of the
2
<PAGE>
computations set forth above.
IN WITNESS WHEREOF, the undersigned have set his/her signature this 7th day
of June, 1996.
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH
COMPANY
By /s/ Thomas E. Morell
---------------------------------
Its Chief Financial Officer
3
<PAGE>
EXECUTION COPY
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY
THIRD AMENDMENT, CONSENT AND WAIVER
Dated as of June 7, 1996
to
NOTE AGREEMENT
Dated as of January 14, 1994
Re:
$10,000,000 6.49% Senior Notes
Due January 14, 2004
TABLE OF CONTENTS
SECTION HEADING PAGE
Parties.................................................................. 1
Recitals................................................................. 1
SECTION 1. AMENDMENT.................................................... 2
SECTION 2. WAIVER AND CONSENT........................................... 4
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................ 5
SECTION 4. CONDITIONS TO THE EFFECTIVENESS OF THIS THIRD
AMENDMENT.................................................... 6
SECTION 5. PAYMENT OF NOTEHOLDER'S COUNSEL FEES AND EXPENSES............ 7
SECTION 6. MISCELLANEOUS................................................ 7
SIGNATURES............................................................... 8
EXHIBIT A -- Form of Guaranty Agreement
EXHIBIT B -- Form of Compliance Certificate
i
<PAGE>
THIRD AMENDMENT, CONSENT AND WAIVER TO NOTE AGREEMENT
THIS THIRD AMENDMENT, CONSENT AND WAIVER dated as of June 7, 1996 (the or
this "Third Amendment") to the Note Agreement, dated as of January 14, 1994, is
by and between DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY, a
Pennsylvania corporation (the "Company") and ALLSTATE LIFE INSURANCE COMPANY
(the "Noteholder").
RECITALS:
A. The Company and the Noteholder have heretofore entered into that certain
Note Agreement, dated as of January 14, 1994, as amended by that certain First
Amendment to Note Agreement dated as of September 27, 1994 and that certain
Second Amendment to Note Agreement dated as of September 1, 1995 (as amended,
the "Original Note Agreement"). The Company has heretofore issued and has
outstanding $10,000,000 in aggregate principal amount of its 6.49% Senior Notes
due January 14, 2004 (the "Notes") pursuant to the Note Agreement. The
Noteholder is the holder of 100% of the principal amount of the Notes
outstanding.
B. The Company and D&E Communications, Inc., a Pennsylvania corporation and
Wholly-owned Subsidiary of the Company ("Holdings"), have heretofore entered
into that certain Agreement and Plan of Exchange dated as of February 28, 1996
(the "Exchange Agreement") pursuant to which the Company intends to restructure
the ownership of its capital stock by causing Holdings to become the holding
company of the Company and thereby own all of the issued and outstanding capital
stock of the Company (the "Restructuring").
C. In connection with the Restructuring, the Company's Subsidiaries, Red
Rose Communications, Inc., a Pennsylvania corporation ("Red Rose"), and D&E
Marketing Corp., a Pennsylvania corporation ("Marketing Corp."), will become
wholly-owned subsidiaries of Holdings.
D. The Original Note Agreement prohibits the Company from effectuating the
Restructuring without the consent of the holders of at least 66-2/3% of the
principal amount of the Notes outstanding.
E. In order to consummate the Restructuring, the Company has requested that
the Noteholder enter into this Third Amendment.
F. The Company and the Noteholder now desire to amend and/or waive certain
provisions of the Original Note Agreement in the respects, but only in the
respects, hereinafter set forth.
G. Capitalized terms used herein shall have the respective meanings
ascribed thereto in the Original Note Agreement unless herein defined or the
context shall otherwise require.
1
<PAGE>
H. All requirements of law have been fully complied with and all other acts
and things necessary to make this Third Amendment a valid, legal and binding
instrument according to its terms for the purposes herein expressed have been
done or performed.
NOW, THEREFORE, upon the full and complete satisfaction of the conditions
precedent to the effectiveness of this Third Amendment set forth in ss.4 hereof,
and for good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the Company and the Noteholder do hereby agrees as follows:
SECTION 1. AMENDMENT.
Section 1.1. Section 1 of the Original Note Agreement shall be and is
hereby amended by inserting the following Section 1.3 after Section 1.2:
"Section 1.3. Guaranty of the Notes. The payment by the Company of all
amounts due with respect to the Notes and performance by the Company of its
obligations under this Agreement are absolutely and unconditionally
guaranteed by the Guarantor pursuant to the Guaranty Agreement."
Section 1.2. Section 5.10 of the Original Note Agreement shall be and is
hereby amended in its entirety to read as follows:
"Section 5.10. Dividends, Stock Purchases, Restricted Investments.
(a) The Company will not, and will not permit any Subsidiary to,
directly or indirectly, or through any Subsidiary, declare or make or incur
any liability to make any Distribution and neither the Company nor any of
its Subsidiaries will make or authorize any Restricted Investment, unless,
immediately after giving effect to the proposed Distribution or Restricted
Investment, the aggregate amount of Distributions declared in the case of
dividends or made in the case of other Distributions plus the aggregate
amount of Restricted Investments then held by the Company and its
Subsidiaries (valued immediately after such action as provided in the
definition thereof) during the period from and after June 30, 1991 to and
including the date of declaration in the case of a dividend, the date of
payment in the case of any other Distribution and the date such investment
is committed to in the case of a Restricted Investment would not exceed the
sum of:
(1) $10,000,000 plus
(2) 75% of Consolidated Net Income (or if such Consolidated
Net Income is a deficit figure, then minus 100% of such deficit) for such
period determined on a cumulative basis commencing on June 30, 1991, to
and including the date of declaration, incurrence or payment, as the case
may be.
2
<PAGE>
(b) Notwithstanding the limitations of paragraph (a) of this ss.5.10,
the Company may redeem or acquire its common stock or warrants, rights or
other options to purchase its common stock in an amount equal to the
aggregate net proceeds received by the Company in cash from the sale after
the date of this Agreement of shares of its common stock or other
Securities converted into common stock of the Company, in any such case
substantially concurrent with such redemption or acquisition.
(c) Any corporation which becomes a Subsidiary after the date of this
Agreement shall be deemed to have made, at the time it becomes a
Subsidiary, all Restricted Investments of such corporation existing
immediately after it becomes a Subsidiary.
(d) The Company will not declare a Distribution on its capital stock
which is payable more than 60 days after the date of declaration thereof.
(e) The Company will not authorize or make a Distribution on its
capital stock and neither the Company nor any Subsidiary will make any
Restricted Investment if after giving effect to the proposed Distribution
or Restricted Investment a Default or an Event of Default would exist."
Section 1.3. Section 6.1(k) of the Original Note Agreement shall be and is
hereby amended by deleting the period at the end thereof and replacing it with a
semi-colon and the word "or".
Section 1.4. Section 6.1 of the Original Note Agreement shall be and is
hereby amended by inserting the following clause (l) after Section 6.1(k):
"(l) Default shall occur in the payment or performance of any
obligations of the Guarantor under the Guaranty Agreement or the Guaranty
Agreement shall cease to be in full force and effect for any reason
whatsoever, including without limitation, a determination by any
governmental body or court that the Guaranty Agreement is invalid, void or
unenforceable insofar as the Guarantor is concerned or the Guarantor shall
contest or deny in writing the validity or enforceability of any of its
obligations under the Guaranty Agreement."
Section 1.5. Section 6.3 of the Original Note Agreement shall be and is
hereby amended by inserting the phrase "or (l)" after the phrase "(a) through
(h), inclusive," in the sixth line of Section 6.3.
Section 1.6. Section 6.4 of the Original Note Agreement shall be and is
hereby amended by inserting the phrase "or (l)" after the phrase "(a) through
(h), inclusive," in the fourth line of Section 6.4.
3
<PAGE>
Section 1.7. Section 8.1 of the Original Note Agreement shall be and is
hereby amended by adding thereto the following definitions in the appropriate
alphabetical order:
"'Guarantor' shall mean D&E Communications, Inc., a Pennsylvania
corporation."
'Guaranty Agreement' shall mean that certain Guaranty Agreement dated as of
June 7, 1996 from the Guarantor to the Purchaser and each other from time to
time holder of the Notes."
SECTION 2. WAIVER AND CONSENT.
Section 2.1. Upon this Third Amendment becoming effective as herein
contemplated, the Noteholder:
(a) consents to the issuance by Holdings of up to 5,728,200 shares of
its common stock and exchange of such common stock for all of the
outstanding common stock of the Company pursuant to the Exchange Agreement
(the "Exchange") at an exchange rate of three shares of Holdings common
stock for each share of the Company's common stock outstanding and waives
any Default or Event of Default pursuant to ss.5.11(b) of the Note
Agreement arising solely as a result of such issuance of common stock by
Holdings to a Person other than the Company or a Wholly-owned Subsidiary;
(b) consents to the disposition by the Company of the capital stock of
Holdings held by the Company by means of cancellation of such capital stock
and waives any Default or Event of Default pursuant to (1) ss.5.11(c)(3) of
the Note Agreement arising solely as a result of the Company's failure to
receive cash consideration for such disposition and (2) ss.5.11(c)(4) of
the Note Agreement solely as a result of Holdings continuing to have an
investment in the Company after such disposition; and
(c) upon completion of the Exchange, consents to the Distribution of
all of the capital stock of Red Rose and Marketing Corp. to Holdings and
agrees that (1) the fair market value of such capital stock distributed to
Holdings shall not be included in any determination of Distributions for
purposes of ss.5.10(a) of the Note Agreement, (2) the book value of such
capital stock distributed to Holdings shall not be included in any
determination of (i) assets "sold, leased or otherwise disposed of" and
(ii) Consolidated Total Assets for purposes of ss.5.11(d)(1) and (2) of the
Note Agreement and (3) all income attributable to such capital stock
distributed to Holdings shall not be included in any determination of
Consolidated Net Income for purposes of ss.5.11(d)(3) and (4) of the Note
Agreement.
Section 2.2. The Company understands and agrees that the waivers contained
in ss.2.1 pertain only to the Defaults or Events of Default therein described
and to the extent so described and not to any other Defaults or Events of
Default which may exist under, or any others matters arising in connection with,
the Note Agreement or to any rights which the Noteholder has arising by virtue
any such other actions or matters.
4
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Section 3.1. To induce the Noteholder to execute and deliver this Third
Amendment, the Company represents and warrants to the Noteholder (which
representations shall survive the execution and delivery of this Third
Amendment) that:
(a) the execution and delivery of this Third Amendment and compliance
by the Company with all of the provisions of the Note Agreement--
(1) are within the corporate powers of the Company;
(2) will not violate any provisions of any law or any order
of any court or governmental authority or agency and will not conflict
with or result in any breach of any of the terms, conditions or
provisions of, or constitute a default under the Articles of
Incorporation or By-laws of the Company or any indenture or other
agreement or instrument to which the Company is a party or by which it
may be bound or result in the imposition of any Liens or encumbrances on
any property of the Company; and
(3) have been duly authorized by proper corporate action on
the part of the Company (no action by the stockholders of the Company
being required by law, by the Articles of Incorporation or By-laws of the
Company or otherwise) and this Third Amendment and the Note Agreement
constitute the legal, valid and binding obligations, contracts and
Agreement of the Company enforceable in accordance with their respective
terms;
(b) as of the date hereof and after giving effect to this Third
Amendment, no Default or Event of Default has occurred and is continuing;
(c) no approval, consent or withholding of objection on the part of any
regulatory body, state, Federal or local, is necessary in connection with
the execution and delivery by the Company of this Third Amendment or
compliance by the Company with any of the provisions of the Note Agreement
other than the issuance of a securities certificate by The Pennsylvania
Public Utility Commission; and
(d) the failure by the Company to receive an issued securities
certificate from The Pennsylvania Public Utilities Commission prior to the
effectiveness of this Amendment will not and cannot result in the
invalidation or avoidance of the obligations of the Company under the
Original Note Agreement or the Notes.
5
<PAGE>
SECTION 4. CONDITIONS TO THE EFFECTIVENESS OF THIS THIRD AMENDMENT.
Section 4.1. This Third Amendment shall become effective on the date
(the "Effective Date") when each and every one of the following conditions shall
have been satisfied:
(a) executed counterparts of this Third Amendment, duly executed by the
Company and the Noteholder, shall have been delivered to the Noteholder;
(b) Holdings shall have executed and delivered to the Noteholder the
Guaranty Agreement, substantially in the form attached hereto as Exhibit A;
(c) all approvals and consents of any regulatory body, Federal, state
or local, other than the issuance of a securities certificate from The
Pennsylvania Public Utilities Commission, shall have been obtained and
evidence of such approvals and consents satisfactory to the Noteholder
shall have been provided to the Noteholder;
(d) the Noteholder shall have received from the Company a certificate
dated the Effective Date, signed by the President or a Vice President of
the Company, to the effect that (1) the representations and warranties of
the Company set forth in ss.3 hereof are true and correct on and with
respect to the Effective Date and (2) the Company has performed all of its
obligations hereunder which are to be performed on or prior to the
Effective Date;
(e) the Noteholder shall have received from Holdings a certificate
dated the Effective Date, signed by the President or a Vice President of
Holdings, to the effect that (1) the representations and warranties of
Holdings set forth in ss.5 of the Guaranty Agreement are true and correct
on and with respect to the Effective Date and (2) Holdings has performed
all of its obligations under the Guaranty Agreement which are to be
performed on or prior to the Effective Date;
(f) the Noteholder shall have received from the Company a Compliance
Certificate, substantially in the form attached hereto as Exhibit B, dated
the Effective Date, and signed by the Chief Financial Officer of the
Company;
(g) the Noteholder shall have received from Buchanan Ingersoll, P.C.,
independent counsel for the Company and Holdings, their opinion dated the
Effective Date, as to the matters set forth in ss.3.1(a) and 3.1(c) hereof
and as to such other matters as the Noteholder may reasonably request,
which opinion shall be in scope, form and substance satisfactory to the
Noteholder;
(h) the Noteholder shall have received, in form and substance
reasonably satisfactory to the Noteholder, such documents and evidence with
respect to the Company as it may reasonably request in order to establish
the existence and good standing of the Company and the authorization of the
Company to enter into this Third Amendment; and
6
<PAGE>
(i) The Noteholder shall have received, in form and substance
reasonably satisfactory to the Noteholder, such documents and evidence with
respect to Holdings as it may reasonably request in order to establish the
existence and good standing of Holdings and the authorization of Holdings
to enter into the Guaranty Agreement.
SECTION 5. PAYMENT OF NOTEHOLDER'S COUNSEL FEES AND EXPENSES.
Section 5.1. The Company agrees to pay upon demand, the reasonable fees and
expenses of Chapman and Cutler, special counsel to the Noteholder, in connection
with the negotiation, preparation, approval, execution and delivery of this
Third Amendment and the Guaranty Agreement.
SECTION 6. MISCELLANEOUS.
Section 6.1. This Third Amendment shall be construed in connection with and
as part of the Original Note Agreement, and all terms, conditions and covenants
contained in the Original Note Agreement shall be and remain in full force and
effect.
Section 6.2. Any and all notices, requests, certificates and other
instruments executed and delivered after the execution and delivery of this
Third Amendment may refer to the Original Note Agreement without making specific
reference to this Third Amendment but nevertheless all such references shall
include this Third Amendment unless the context otherwise requires.
Section 6.3. The descriptive headings of the various Sections or parts of
this Third Amendment are for convenience only and shall not affect the meaning
or construction of any of the provisions hereof.
Section 6.4. This Third Amendment shall be governed by and construed in
accordance with Pennsylvania law.
7
<PAGE>
The execution hereof by you shall constitute a contract between us for the uses
and purposes hereinabove set forth, and this Third Amendment may be executed in
any number of counterparts, each executed counterpart constituting an original
but all together only one agreement.
Denver and Ephrata Telephone and
Telegraph Company
By /s/ Thomas E. Morell
---------------------------------
Its Chief Financial Officer and Treasurer
Accepted and agreed to:
Allstate Life Insurance Company
By /s/ Patricia W. Wilson
---------------------------------
By /s/ Steven M. Laude
---------------------------------
Its Authorized Signatories
[Third amendment, consent and waiver]
<PAGE>
Form of Guaranty Agreement
Exhibit A
(to Third Amendment, consent and waiver to Note Agreement)
<PAGE>
COMPLIANCE CERTIFICATE
Allstate Life Insurance Company
Allstate Plaza West
Northbrook, Illinois 60062-6287
Re: $10,000,000 6.49% Senior Notes
Due January 14, 2004
Ladies and Gentlemen:
This certificate is delivered to you in compliance with the requirements of
ss.4.1(f) of that certain Third Amendment, Consent and Waiver dated as of June
7, 1996 (the "Third Amendment") to that certain Note Agreement, dated as of
January 14, 1994, as amended by that certain First Amendment to Note Agreement
dated as of September 27, 1994 and that certain Second Amendment to Note
Agreement dated as of September 1, 1995 (as amended, the "Original Note
Agreement") by and between Denver and Ephrata Telephone and Telegraph Company, a
Pennsylvania corporation (the "Company"), and you. The Original Note Agreement
as amended by the Third Amendment is hereinafter collectively referred to as the
"Note Agreement." The terms which are capitalized herein shall have the same
meanings as set forth in the Note Agreement.
The Company represents and warrants to each of you that on the date hereof
and after giving effect to the Restructuring (as defined in the Third
Amendment):
The terms used in the following tests shall have the respective meanings
set forth in and section references noted refer to the Note Agreement:
ss.5.6 1. (a) Consolidated Tangible Net Worth is $40,500,205
-----------
(b) 50% of Consolidated Net Income for each
of the elapsed fiscal quarters on a
cumulative basis ending after
September 30, 1993 is $ 4,483,878
-----------
(c) $22,000,000 plus (b) is $26,483,878
-----------
(d) (a) minus (c) is (must not be
less than $0) $14,016,327
-----------
EXHIBIT B
<PAGE>
ss.5.7. 2. (a) During the 12 month period immediately
preceding the date hereof the Company
and its Subsidiaries have been free of all
Consolidated Current Debt for a period
of 60 consecutive days false
-----
If the above statement is true the amount
for item (b) shall be deemed to be $0.
(b) The average of the aggregate unpaid
principal amount of Consolidated Current
Debt outstanding on the last day of each
month of the fiscal year most recently
ended is $ 4,881,792
-----------
(c) Consolidated Funded Debt plus (b) is $31,389,327
-----------
(d) Consolidated Tangible Net Worth is $40,500,205
-----------
(e) 55% of the sum of (c) plus (d) is $39,539,243
-----------
(f) (e) minus (c) is (must not be less
than $0) $ 8,149,916
-----------
Unless otherwise indicated, the figures used hereinabove are taken from the
books of the Company as of March 31, 1996 and are true, correct and complete,
and there have been no material changes in the financial condition of the
Company between such date and the date hereof which would substantially affect
any of the computations set forth above.
2
<PAGE>
In Witness Whereof, the undersigned have set his/her signature this 7th day
of June, 1996.
Denver and Ephrata Telephone and
Telegraph Company
By /s/ Thomas E. Morell
---------------------------------
Its Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF INCOME, BALANCE SHEETS AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 65,570,628
<OTHER-PROPERTY-AND-INVEST> 11,456,811
<TOTAL-CURRENT-ASSETS> 10,669,164
<TOTAL-DEFERRED-CHARGES> 264,165
<OTHER-ASSETS> 1,026,296
<TOTAL-ASSETS> 88,987,064
<COMMON> 916,589
<CAPITAL-SURPLUS-PAID-IN> 1,734,358
<RETAINED-EARNINGS> 34,511,085
<TOTAL-COMMON-STOCKHOLDERS-EQ> 35,965,258
0
1,445,600
<LONG-TERM-DEBT-NET> 26,141,794
<SHORT-TERM-NOTES> 6,680,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 370,202
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 18,384,210
<TOT-CAPITALIZATION-AND-LIAB> 88,987,064
<GROSS-OPERATING-REVENUE> 22,510,731
<INCOME-TAX-EXPENSE> 1,515,835
<OTHER-OPERATING-EXPENSES> 17,812,072
<TOTAL-OPERATING-EXPENSES> 19,327,907
<OPERATING-INCOME-LOSS> 3,182,824
<OTHER-INCOME-NET> 315,245
<INCOME-BEFORE-INTEREST-EXPEN> 3,498,069
<TOTAL-INTEREST-EXPENSE> 1,286,646
<NET-INCOME> 2,178,897
32,526
<EARNINGS-AVAILABLE-FOR-COMM> 2,178,897
<COMMON-STOCK-DIVIDENDS> 1,106,361
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 3,727,398
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
