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 September 30, 1997
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
P.O. Box 458
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 three-for-one 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 November 5, 1997
----- -------------------------------
Common Stock, par value $.16 per share 6,122,806 Shares
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Income --
For the three months and nine months ended
September 30, 1997 and 1996 ................. 1
Consolidated Balance Sheets --
September 30, 1997 and December 31, 1996 .... 2
Consolidated Statements of Cash Flows --
For the nine months ended
September 30, 1997 and 1996 ................. 3
Notes to Consolidated Financial Statements ........... 4-8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 9-18
3. Quantitative and Qualitative Disclosure
about Market Risks ................................... 18
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote
of Security Holders................................... 19
6. Exhibits and Reports on Form 8-K .............................. 19
SIGNATURES ........................................... 20
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 Nine months Ended
September 30 September 30
OPERATING REVENUE 1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Local network services .......................................... $ 2,447,524 $ 2,189,990 $ 7,019,391 $ 6,461,892
Network access services ......................................... 3,977,512 3,881,491 12,289,743 11,779,710
Long distance network services .................................. 990,697 1,017,651 3,029,052 3,140,650
Directory advertising ........................................... 804,242 730,380 2,315,935 2,204,421
Sales & services ................................................ 3,875,495 2,587,013 10,254,941 8,474,764
Other ........................................................... 453,052 460,630 1,440,236 1,316,450
------------ ------------ ------------ ------------
Total Operating Revenue ...................................... 12,548,522 10,867,155 36,349,298 33,377,887
------------ ------------ ------------ ------------
OPERATING EXPENSE
Network operations .............................................. 1,483,166 1,420,466 4,086,534 4,452,206
Network access .................................................. 399,669 438,371 1,321,399 1,374,388
Depreciation .................................................... 1,932,687 1,836,981 5,733,253 5,400,192
Customer services ............................................... 441,659 434,829 1,288,065 1,289,564
Financial and administrative services ........................... 1,786,155 1,289,267 4,669,925 3,777,213
Directory advertising ........................................... 503,603 473,208 1,510,384 1,373,289
Operating taxes, other than income .............................. 390,556 359,827 1,131,349 1,102,230
Costs of products sold .......................................... 1,855,580 1,230,730 5,059,376 4,038,995
Other ........................................................... 1,714,109 1,314,216 4,886,849 3,801,892
------------ ------------ ------------ ------------
Total Operating Expense ...................................... 10,507,184 8,797,895 29,687,134 26,609,969
------------ ------------ ------------ ------------
Operating Income ........................................ 2,041,338 2,069,260 6,662,164 6,767,918
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction .................... 23,573 9,517 59,416 63,595
Equity in net income of affiliates .............................. 118,579 391,782 177,215 646,564
Interest expense ................................................ (442,586) (660,042) (1,631,740) (1,946,688)
Gain on sale of investments ..................................... 11,970,588 0 11,970,588 0
Other, net ...................................................... (67,802) 55,703 96,064 54,472
------------ ------------ ------------ ------------
Total Other Income (Expense) ................................. 11,602,352 (203,040) 10,671,543 (1,182,057)
------------ ------------ ------------ ------------
Income before minority interest, income taxes
and dividends on utility series preferred stock ...... 13,643,690 1,866,220 17,333,707 5,585,861
MINORITY INTEREST .................................................. 0 26,045 33,478 33,662
------------ ------------ ------------ ------------
Income before income taxes and
dividends on utility series preferred stock .......... 13,643,690 1,892,265 17,367,185 5,619,523
INCOME TAXES AND DIVIDENDS ON
UTILITY SERIES PREFERRED STOCK
Income taxes .................................................... 5,935,169 762,769 7,434,105 2,278,605
Dividends on utility series preferred stock ..................... 16,263 16,263 48,789 48,789
------------ ------------ ------------ ------------
Total Income taxes and dividends
on utility series preferred stock ......................... 5,951,432 779,032 7,482,894 2,327,394
------------ ------------ ------------ ------------
NET INCOME ......................................................... $ 7,692,258 $ 1,113,233 $ 9,884,291 $ 3,292,129
============ ============ ============ ============
Average common shares outstanding ............................... 6,116,389 5,730,736 6,011,467 5,724,994
Earnings per common share ....................................... $ 1.26 $ .19 $ 1.64 $ .58
============ ============ ============ ============
Dividends per common share ...................................... $ .10 $ .10 $ .29 $ .29
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
1997 December 31,
ASSETS (unaudited) 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................... $ 3,530,325 $ 312,125
Accounts receivable ..................................................... 7,376,089 8,454,775
Accounts receivable and notes receivable - affiliated companies ......... 2,240,346 1,028,780
Inventories, lower of cost or market, at average cost ................... 921,487 1,009,904
Prepaid expenses ........................................................ 1,078,574 2,406,465
Other current assets .................................................... 84,664 1,393,336
------------- -------------
TOTAL CURRENT ASSETS ............................................. 15,231,485 14,605,385
------------- -------------
INVESTMENTS
Investments in affiliated companies ..................................... 5,537,509 9,580,320
Other ................................................................... 327,403 327,403
------------- -------------
5,864,912 9,907,723
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant in service .............................................. 113,804,644 110,961,586
Under construction ...................................................... 11,359,217 1,233,340
------------- -------------
125,163,861 112,194,926
Less accumulated depreciation ........................................... 52,675,151 47,207,238
------------- -------------
72,488,710 64,987,688
------------- -------------
OTHER ASSETS
Unamortized software costs .............................................. 31,704 126,825
Accounts receivable-affiliated company .................................. 113,236 101,342
PCS licenses ............................................................ 23,308,301 0
Other ................................................................... 1,716,747 1,826,978
------------- -------------
25,169,988 2,055,145
------------- -------------
TOTAL ASSETS ................................................................. $ 118,755,095 $ 91,555,941
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ........................................................... $ 0 $ 7,140,000
Long-term debt maturing within one year ................................. 1,224,748 1,220,158
Accounts payable ........................................................ 9,161,103 6,499,496
Accounts payable -affiliated companies .................................. 0 196,941
Accrued taxes ........................................................... 4,343,168 493,546
Accrued interest and dividends .......................................... 1,297,465 468,780
Advance billings, customer deposits and other ........................... 1,761,946 2,842,432
------------- -------------
TOTAL CURRENT LIABILITIES ....................................... 17,788,430 18,861,353
------------- -------------
LONG-TERM DEBT ............................................................... 36,604,565 24,888,193
------------- -------------
OTHER LIABILITIES
Deferred income taxes ................................................... 7,066,914 6,545,013
Other ................................................................... 2,321,956 2,453,056
------------- -------------
9,388,870 8,998,069
------------- -------------
MINORITY INTEREST ............................................................ 0 229,973
------------- -------------
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 .............. 975,599 918,508
Outstanding shares, 6,120,414 at September 30, 1997
5,740,674 at December 31, 1996
Additional paid-in capital .............................................. 10,190,943 2,020,656
Unearned ESOP compensation .............................................. (950,740) (950,740)
Retained earnings ....................................................... 43,311,828 35,144,329
------------- -------------
53,527,630 37,132,753
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 118,755,095 $ 91,555,941
============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
D&E Communications, Inc and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 9,884,291 $ 3,292,130
Adjustments to reconcile net cash provided by
operating activities:
Depreciation and amortization ................................. 6,183,034 5,752,791
Deferred income taxes ......................................... 474,771 25,711
Undistributed (earnings) losses of affiliates ................. (177,215) (646,564)
Distribution from affiliates .................................. 0 718,650
Tax benefits applicable to ESOP ............................... 17,987 16,258
Gain on sale of investments ................................... (11,970,588) 0
Loss on retirement of property, plant and equipment ........... 55,821 14,245
Interest capitalized and AFUDC ................................ (1,103,176) (63,595)
Losses applicable to minority interest ........................ (50,407) (33,662)
Changes in operating assets and liabilities
Accounts receivable and notes receivable ...................... (480,354) (1,180,740)
Inventories ................................................... 88,417 (109,947)
Prepaid expenses .............................................. 1,327,891 1,372,239
Accounts payable .............................................. 1,607,343 (1,584,406)
Accrued taxes and accrued interest ............................ 4,678,307 203,507
Advance billings, customer deposits and other ................. (1,080,486) (1,903,915)
Other, net .................................................... (18,726) 107,498
------------ ------------
Net Cash Provided by Operating Activities ......... 9,436,910 5,980,200
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................ (13,606,239) (4,185,922)
Allowance for funds used during construction ........................ 1,103,176 63,595
Proceeds from sale of assets ........................................ 164,768 69,446
Cost of removal of plant retired .................................... (68,192) (70,102)
Acquisition of other assets ......................................... (1,104,160) (513,158)
Proceeds from sale of investments ................................... 17,897,281 0
Increase in investments and advances to affiliates .................. (3,466,551) (4,673,447)
Decrease in investments and repayments from affiliates .............. 1,529,225 2,695,122
------------ ------------
Net Cash Provided By (Used In) Investing Activities 2,449,308 (6,614,466)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ........................................... (1,693,130) (1,570,865)
Payments on long-term debt .......................................... (162,203) (162,202)
Net proceeds from (payments on) revolving lines of credit ........... (7,140,000) 2,300,000
Net contributions from minority interest ............................ 0 1,500
Proceeds from issuance of common stock .............................. 327,315 258,305
------------ ------------
Net Cash Provided by (Used In) Financing Activities (8,668,018) 826,738
------------ ------------
INCREASE IN CASH
AND CASH EQUIVALENTS ................................................ 3,218,200 192,472
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD ................................................. 312,125 50,911
------------ ------------
END OF PERIOD ....................................................... $ 3,530,325 $ 243,383
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
(1) BASIS OF PRESENTATION
D & E Communications, Inc. is a telecommunications holding company
which became the successor parent company to its telephone operating
subsidiary, Denver and Ephrata Telephone and Telegraph Company ("Telco")
through a Restructuring (the "Restructuring") resulting from that certain
Agreement and Plan of Exchange (the "Plan of Exchange") whereby each
outstanding Common Share, $0.50 par value of Telco was exchanged for three
Common Shares, $0.16 par value of D & E Communications, Inc. in June 1996
(the "Share Exchange"). The accompanying consolidated financial statements
include the accounts of D & E Communications, Inc., Telco, D & E Holdings,
L.P.("Holdings L.P."), Red Rose Communications, Inc. now doing business as
D & E Telephone and Data Systems ("TDS"), D & E Marketing Corp.
("Marketing"), D & E Wireless, Inc. ("Wireless") and D & E Investments,
Inc. ("Investments"),its subsidiary companies, collectively defined as
"D&E".
The accompanying financial statements are unaudited and have been
prepared by D&E pursuant to generally accepted accounting principles and
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) 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. 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 D&E Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
(2) NON-CASH FINANCING AND INVESTING ACTIVITIES
D&E recorded non-cash transactions for shares of common stock issued
in connection with an acquisition and a merger. D&E issued 21,408 shares of
D&E common stock in January 1997 as the deferred portion of the price in
connection with the acquisition of Com Tech Technical Services now doing
business as D & E Computer Networking Services ("Computer Networking ").
Separately, $7,307,000 of the cost incurred in the merger with PCS One,
Inc. ("PCS One") was paid by the issuance of 317,667 shares of D&E common
stock. D&E also assumed a long-term note payable to the Federal
Communications Commission ("FCC") for $11,879,000 as part of the PCS One
merger. See Note 3.
(3) ACQUISITIONS AND DISPOSITIONS OF AFFILIATED COMPANIES
D&E is positioning itself to participate in a new generation of
wireless services known as Personal Communications Services ("PCS"). On
March 21, 1997 D&E merged with PCS One, the owner of the C-Block broadband
PCS license to operate in the Lancaster, Pennsylvania market. The merger
was accounted for as a purchase with no material effect from the merger on
the consolidated net income in 1997. Planning and construction activities
have resulted in operating losses of approximately $450,000 being recorded
by Wireless since completion of the merger. D&E recorded a cost for the
merger with PCS One of $21,123,000. D&E issued 317,667 shares of D&E common
stock to PCS One shareholders. Long-term debt payable to the FCC of
$11,879,000 was assumed and a note payable to The D and E Group of
$1,559,000 was assumed and eliminated in consolidation. D&E dissolved its
80% owned partnership, The D and E Group, which held a minority interest in
PCS One. D&E then formed a subsidiary corporation, Investments, to hold the
Lancaster C-Block license acquired as part of the merger with PCS One. D&E
formed a separate subsidiary, Wireless, in April to design, construct and
operate the PCS network.
On September 4, 1997 Holdings L.P. sold its 50% interest in Lancaster
Cellular Enterprises ("LACE") and on September 5, 1997 Holdings L.P. sold
its 33% interest in Pennsylvania RSA 12 Limited Partnership ("RSA 12") to
Telespectrum, Inc. The funds received, $13,900,000 and $4,000,000
respectively, were used to
5
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
repay short term debt and to provide additional capital for expansion of
the PCS business. The gain on the sale was $11,971,000.
(4) NOTES PAYABLE AND LONG-TERM DEBT
As a result of the Restructuring, Telco negotiated amendments,
effective June 7, 1996, to the financial covenants stipulated in each of
the following Allstate Life Insurance Company ("Allstate") Senior Note
Agreements: 9.18% Senior Note due November 15, 2021, 7.55% Senior Note due
November 15, 2007 and 6.49% Senior Note due January 14, 2004. Prior to the
Restructuring, the covenants contained in these note agreements were
calculated based upon consolidated Telco financial data. In connection with
the Restructuring, Telco transferred all the capital stock of its
subsidiaries to D&E. 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 net income of Telco. The distributions, restricted investments
and net income are cumulative since June 30, 1991. These Senior Note
Agreements of Telco are guaranteed by D&E.
On February 2, 1995, Telco and the other investors in the Monor
Communications Group ("MCG") entered into a Project Completion Agreement
with the Overseas Private Investment Corporation ("OPIC") as a condition to
OPIC's Finance Agreement with Monor Telephone Company ("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. MTT repaid the OPIC loan in October 1997. See Note 6,
Subsequent events.
D&E entered into loan agreements with two local banks during the
second quarter for a general purpose line of credit of $3,000,000 and two
separate $5,000,000 notes for PCS equipment purchases. The new loans are
repayable at interest rates ranging from 8%, to prime, to adjusted LIBOR.
Interim borrowings on these notes during the third quarter 1997 were repaid
on September 5, 1997.
6
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
Marketing issued demand notes payable to HunTel Systems Incorporated
("HunTel")on June 27, 1997 and July 17, 1997 for $667,000 and $433,000,
respectively, each at 8.5% interest. The proceeds from the notes were
provided as partial payment for a one third equity investment in Eurotel, a
U.S. joint venture formed to operate a telephone system in central Poland.
Both notes were repaid on September 8, 1997.
(5) Income taxes
The effective income tax rate was increased due to the provision for a
deferred tax asset valuation allowance of $1,429,000. Management determined
that it is more likely than not that the losses incurred by MCG will not be
realized.
(6) SUBSEQUENT EVENTS
On October 8, 1997 MTT entered into a loan agreement with Credit
Lyonnais for a general purpose loan of $50,000,000 to repay its OPIC debt
and to provide operating capital. An initial drawdown of $42,000,000 was
made with the remaining $8,000,000 available for subsequent drawdowns
($1,000,000 without conditions and $7,000,000 if certain covenants are met)
until May 31, 1999. The loan is denominated 70% in German marks and 30% in
U.S. dollars, and is repayable in 16 semi-annual installments commencing on
June 30, 1999 and ending on December 31, 2006 with interest at the London
Interbank Offered Rate (LIBOR) plus 1.5%.
On November 3, 1997 D&E entered into an agreement with a subsidiary of
Citizens Utilities Company in which Citizens will purchase up to 1.3
million newly issued shares of D&E Common Stock. The purchase price will
not be less than $20.00 per share or not more than $25.00 per share. The
price will be based on the average market price of D&E stock during the 30
trading days prior to the closing plus 10% of that average price.
Completion of the transaction is subject to satisfaction of the
requirements of the Hart-Scott-Rodino Antitrust Improvements Act.
7
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
(7) STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share." This Statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997. Earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented. D&E currently estimates there will be no impact on its financial
statements upon the adoption of SFAS No. 128.
8
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
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 nine
months ended September 30, 1996 have been reclassified for comparative purposes
and to reflect the Share Exchange.
RESULTS OF OPERATIONS
Net Income. Net income for the three months ended September 30, 1997 was
$7,692,000, up $6,579,000 from the $1,113,000 for the three months ended
September 30, 1996. The increase results primarily from the gain on the sale of
certain cellular investments. This gain was offset by a $1,429,000 tax increase
to provide a valuation allowance on the deferred taxes related to the investment
in MCG. Earnings per share for the three months in 1997 increased to $1.26 from
$.19 in 1996. Excluding $7,901,000 net of tax gain on the sale of cellular
interests and the deferred tax valuation allowance, net income for the quarter
ended September 30, 1997 was $1,220,000 or $.20 per share, up $7,000 from
$1,113,000 or $.19 per share for the same period in 1996. There was a 6.7%
increase in the weighted average number of shares outstanding during this period
primarily due to shares being issued in connection with an acquisition and a
merger.
Net income for the nine months ended September 30, 1997 was $9,884,000, up
$6,592,000 from $3,292,000 recorded in the previous year. Earnings per share for
the nine months ended September 30, 1997 increased to $1.64 from $.58 in 1996.
Excluding $7,901,000 net of tax gain on the sale of cellular interests and the
deferred tax valuation allowance, net income was $3,412,000 or $.57 per share,
up $120,000 from $3,292,000 or $.58 per share for the nine month period ended
September 30,1996. There was a 5.0% increase in the weighted average number of
shares outstanding during this period primarily due to shares being issued in
connection with an acquisition and a merger.
Operating Revenues. Total operating revenues for the three months ended
September 30, 1997 were $12,548,000, up 15.5% from the $10,867,000 recorded for
the same quarter in 1996. For the nine months ended September 30, 1997 operating
revenues were $36,349,000, up 8.9% from the $33,378,000 generated in the same
period of 1996. Three month and nine month growth resulted primarily from the
increased revenues from telephone local network and network access services and
from the computer
9
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
services provided by Com Tech Technical Services ("Computer Networking") which
was acquired in November of 1996.
Local network services revenues are generated from providing local exchange
and local private line services. Local network services revenues for the three
months ended September 30, 1997 were $2,448,000, up 11.8% from $2,190,000 in
1996. For the nine months ended September 30, 1997, local network services
revenues were $7,019,000, up 8.6% from $6,462,000 in 1996. The increase is
primarily due to an increase of approximately 5% in the number of access lines
serviced. A revenue neutral rate adjustment made in May of 1997 increased the
basic area rate while decreasing some long distance rates and other service
rates. Local network services continues to experience part of its growth from
the introduction of custom calling features such as Caller ID Deluxe.
Network access services revenues are received from Telco's subscribers,
from local exchange carriers, interexchange carriers and cellular companies 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"). Revenues in this
category were $3,977,000 for the three months ended September 30, 1997, up 2.5%
from $3,881,000 in 1996. The major changes in the quarter were an increase in
interstate carrier access rates in July 1997 offset by a decrease in NECA
settlements. For the nine months ended September 30, 1997 these revenues were
$12,290,000, up 4.3% from $11,780,000 during the same period in 1996. The
increase in the nine months was primarily due to an increase in the number of
access lines generating approximately $353,000, an increase in the minutes of
use generating approximately $390,000, an increase in interstate access rates in
July 1997 providing approximately $256,000 and an offset of $626,000 from
returning to the NECA traffic sensitive settlement pool in July 1997.
Long distance network services revenues are received from long distance
calls made by customers within the Capital (south central) Region of
Pennsylvania. Revenues in this category for the three months ended September 30,
1997 were $991,000, down 2.7% from $1,018,000 in 1996. For the nine months ended
September 30, 1997, revenues were $3,029,000, down 3.6% from $3,141,000 in 1996.
The decrease in the quarter and year-to-date revenues resulted primarily from
decreases in the minutes of use
10
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
and from a rate decrease. The rate change is one of the provisions within the
revenue neutral rate adjustment made in May of 1997.
Sales & services revenues consist primarily of the services provided by
TDS: sales and service of business telephone systems, computer network systems
and communications products, revenues from work at customers' sites and revenue
from the long distance calling service, D and E Long Distance ("DELD"). Certain
non-regulated Telco services are also included. Revenues in this category for
the three months ended September 30, 1997 were $3,875,000, up 49.8% from
$2,587,000 in 1996. The increase was partially attributable to the increase of
$1,242,000 in telephone and computer system installations. For the nine months
ended September 30, 1997 revenues were $10,255,000, up 21.0% from $8,475,000 in
1996. This increase included an increase of $2,528,000 from telephone and
computer system services, offset by $861,000 reduction related to the sale of a
fiber optic facility constructed for a third party in 1996 which had no
comparative revenue in 1997.
Other revenues were $453,000 for the three months ended September 30, 1997,
down 1.7% from $461,000 in 1996. For the nine months ended September 30, 1997,
revenues in this category were $1,440,000, up 9.4% over the $1,316,000 recorded
during the same period in 1996. The changes in the quarter and year-to-date
amounts were primarily due to a decrease in the quarter and an increase
year-to-date in computer programming services for special applications.
Operating Expenses. Total operating expenses for the three month period
ended September 30, 1997 were $10,507,000, up 19.4% from the $8,798,000 recorded
during the same quarter in 1996. For the nine months ended September 30, 1997
operating expenses were $29,687,000, up 11.6% from $26,610,000 in the prior
year. A major reason for the increase was the operating expenses incurred by
Computer Networking subsequent to its acquisition in November of 1996, which
accounts for $417,000 of the quarterly amount and $1,401,000 of the 1997 nine
month amount.
Network operations expenses are incurred in maintaining Telco's switching
and transmission facilities, including digital central office switching
equipment and outside plant cable and trunk facilities. Network operations
include related employee
11
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
costs, engineering expense, maintenance of land and buildings, testing, general
purpose computers, office equipment, video conferencing and other materials and
supplies. Expenses in this category for the three months ended September 30,
1997 were $1,483,000, up 4.4% from $1,420,000 during the same quarter in 1996.
Expenses for the quarter were up primarily due to an increase in computer
software purchases. For the nine months ended September 30, 1997, these expenses
were $4,087,000, down 8.2% from $4,452,000 during the same period in the prior
year. Expenses year-to-date were down primarily due to a decrease in wages and
benefits payable which was partially attributable to the early retirement
program in December 1996.
Depreciation expense for the three months ended September 30, 1997 was
$1,933,000, up 5.2% from $1,837,000 in 1996. For the nine months ended September
30, 1997 depreciation was $5,733,000, up 6.2% from $5,400,000 during the same
period in 1996. The majority of the increases were attributable to an increase
in plant-in-service in 1997.
Financial and administrative services expenses for the three months ended
September 30, 1997 were $1,786,000, up 38.5% from $1,289,000 in 1996. For the
nine months ended September 30, 1997 these expenses were $4,670,000, up 23.6%
from $3,777,000 in 1996. Increases in the quarterly and year-to-date amounts are
primarily related to wage and benefit increases, to professional fees related to
the merger with PCS One in 1997 and to costs expensed in connection with the
installation of a new financial data base system.
Directory advertising expenses for the three months ended September 30,
1997 were $504,000, up 6.4% from $473,000 reported in 1996. For the nine months
ended September 30, 1997 expenses were $1,510,000, up 10.0% from $1,373,000
reported during this period in 1996. The increases are primarily related to
increased production costs of the phone directory.
Costs of products sold consists primarily of the material costs of
equipment sales and the costs related to the sale of a fiber optic facility to a
third party in 1996. These costs for the three months ended September 30, 1997
were $1,856,000, up 50.8% over $1,231,000 in 1996. The increase was primarily
from $1,497,000 in telephone and computer system sales. For the nine months
ended September 30, 1997, costs of products sold were
12
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
$5,059,000, up 25.3% from $4,039,000 during the same period in 1996. The
increase from computer system sales of $1,483,000 was partially offset by the
decrease in purchases related to the fiber optic facility sale made in 1996.
Other expenses primarily include all operating expenses incurred by TDS,
Marketing and Wireless in the course of their business activities, excluding
material costs and operating taxes other than income taxes. These expenses for
the three months ended September 30, 1997 were $1,714,000, up 30.4% from
$1,314,000 in 1996. This increase was primarily related to costs recorded by
Computer Networking amounting to $100,000 and Wireless start-up costs of
$491,000. For the nine months ended September 30, 1997, these expenses were
$4,887,000, up 28.5% from $3,802,000 in 1996. This increase was primarily
related to operating costs of Computer Networking amounting to $385,000 and
Wireless amounting to $727,000 plus other PCS development costs.
Other Income (Expense). Other income (expense) for the three months
ended September 30, 1997 was a net income of $11,602,000, up $11,805,000 from a
net expense of $203,000 in 1996. For the three months ended September 30, 1997
the increase is related to a gain of $11,971,000 from the sale of investments,
offset by a decrease in equity in the income of affiliates of approximately
$273,000 and a decrease in interest expense of $217,000 primarily resulting from
capitalized interest on PCS equipment additions. For the nine months ended
September 30, 1997, the net other income was $10,672,000, up $11,854,000 from a
net expense of $1,182,000 in 1996. The increase for the nine months ended
September 30, 1997, resulted from a gain of $11,971,000 from the sale of
investments, a decrease in interest expense of $315,000 combined with the
increase in other net income (primarily interest income)of $152,000 which offset
decreases in equity in the income of affiliates of $469,000.
The gain on sale of investments occurred in September 1997 as a result of
disposing of two cellular partnership interests. The sale was part of a plan to
focus attention on developing a PCS digital wireless service. The cash received
from the sale was used primarily to repay all short term debt and increase cash
and cash equivalents available thereby accounting for the decrease in interest
expense and the increase in interest income in the quarter and nine months
compared to the prior year.
13
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The reduction in equity earnings of European affiliates is primarily
related to the joint venture in Hungary. MCG is a domestic corporate joint
venture that owns approximately 90% of MTT, which operates a telephone company
in Hungary. Marketing owns 16.5% of MCG.
The net losses reported by MCG are directly related to the losses of MTT.
These result primarily from the foreign currency translation losses related to
the strength of the United States dollar in relation to the use by MTT of the
Hungarian Forint ("HUF") as the functional currency for accounting purposes and
the subsequent translation to U.S. dollars for reporting purposes. D&E
anticipates that these losses will continue to be countered by MTT's ability to
raise rates to its customers. Subsequent to September 30, 1997, MTT repaid its
OPIC loan and refinanced its debt in a loan denominated 70% in German marks and
30% in U.S. dollars. The telecommunications rate regulation in Hungary permits
MTT to make certain inflation adjustments based upon the Producer Price Index,
and, in response, MTT raised rates approximately 25% in January 1997. Therefore,
management has decided the cost of foreign currency hedging is not currently
warranted. The Hungarian government has been 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 for the three months ended
September 30, 1997 were $5,935,000, up $5,172,000 from $763,000 in 1996. The
effective income tax rate for the three months ended September 30, 1997 was
43.6% compared to 40.7% for the same quarter in 1996. For the nine months ended
September 30, 1997 taxes were $7,434,000, up $5,155,000 from $2,279,000 in 1996.
The effective income tax rate for the nine months ended September 30, 1997 was
42.9% compared to 40.9% in the prior year. The increased rates were related to a
deferred tax asset valuation allowance which was recorded for $1,429,000 related
to the losses incurred by MCG.
14
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION
Liquidity and Capital Resources. D&E believes that it has adequate internal
and external resources available to meet ongoing operating requirements,
including expansion and modernization of the network, and business development.
D&E expects that foreseeable capital requirements for its existing business will
be financed primarily through internally generated funds and additional debt.
Additional short or long-term debt or equity financing will be needed to fund
new business development activities and to enhance D&E's capital structure.
The sale of partnership interests in two cellular investments provided the
largest single source of funds during the nine months ended September 30, 1997.
The combined payment received, $17,900,000, was used primarily for repayment of
all short term debt, for increased investment in Eurotel, a U.S. joint venture
formed to operate a telephone system in central Poland, and for partial
financing of capital additions.
The primary source of funds, excluding the sale of the cellular partnership
interests, to support ongoing business activities during the nine months ended
September 30, 1997 was $9,437,000 provided by operating activities. The major
working capital changes which affected funds from operations were $1,328,000
provided by a decrease in prepaid expenses, $1,607,000 of increases in accounts
payable primarily from a net increase due to Northern Telecom for PCS equipment
purchases and $4,678,000 in accrued taxes and interest primarily related to the
gain on sale of investments and provision of a deferred tax asset valuation
allowance, less a $480,000 use of funds from accounts receivable increases
related to the growth in business volume and $1,080,000 from decreased customer
advances. Prepaid expense decreases and advance billing decreases primarily
relate to amortization of deferred revenue and production costs of the Donnelley
directory. See Note 2 regarding other non-cash changes to these accounts.
Investing activity consisted primarily of receipts of $17,897,000 provided
from the sale of cellular interests which was the major source of funds used to
repay debt incurred to finance approximately $9,442,000 of PCS equipment under
construction and another $3,474,000 comprised largely of
15
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
telephone plant equipment upgrades. The acquisition of the C-Block broadband PCS
license for the Lancaster, PA market area which was owned by PCS One at the time
of the merger was recorded as a non-cash addition of approximately $21,300,000.
Approximately $766,000 of interest was capitalized during the nine months ended
September 30, 1997 which was primarily related to the PCS license and equipment
under construction. The related Federal Communications Commission
("FCC")financed portion of the purchase price, $11,879,000, interim financing
assumed of $1,559,000 and the issuance of 317,667 shares of common stock were
also recorded as non-cash consideration related to the merger.
The cash and cash equivalents balance at September 30, 1997 was $3,530,000
and $26,000,000 was available on short-term lines of credit including
$10,000,000 which expires on November 15, 1997.
D&E's ratio of total debt to total debt plus capital decreased to 40.8% at
September 30, 1997 from 46.3% at December 31, 1996. This change resulted
primarily from the increase in long-term debt to the FCC for the PCS license
offset by the decrease in short-term debt made possible by the sale of the
cellular interests.
OTHER
On June 25, 1997, D&E announced that Wireless and Omnipoint entered into a
non-binding memorandum of understanding to form a joint venture to design, build
and market a PCS system in the Lancaster, Harrisburg, York-Hanover and Reading
Basic Trading Areas using Global System Mobility equipment.
On November 3, 1997, D&E entered into an agreement pursuant to which a
subsidiary of Citizens Utilities Company will purchase up to 1.3 million shares
of newly issued D&E Common Stock. Under the Agreement, the purchase price will
be equal to the sum of (i) the average of the closing prices of D&E's Common
Stock on each of the 30 trading days ending on the day of the closing of the
transaction, plus (ii) 10% of that average price. If the purchase price as so
determined is less than $20.00 per share then the purchase price will be equal
to $20.00 per share and if
16
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
the purchase price as so determined is greater than $25.00 per share then the
purchase price will be equal to $25.00 per share. If the purchase price is less
than $25.00 per share, then D&E may elect to reduce the number of shares of
Common Stock it will sell and Citizens will purchase, but to not less than
1,000,000 shares.
The net cash proceeds to D&E, after payment of commissions, will be between
$19,100,000 and $31,225,000, depending on the purchase price and the number of
shares that D&E elects to sell. D&E intends to use the net proceeds of the
transaction primarily for the construction of its PCS wireless communications
system. D&E previously announced that it intends to enter into a joint venture
with Omnipoint Corporation for the construction and operation of a PCS system in
the Lancaster, Harrisburg, York-Hanover and Reading areas.
The investment by Citizens will represent up to 18% of the shares of D&E
Common Stock outstanding. Under the agreement between the parties, Citizens
agrees for one year not to acquire additional shares of D&E's stock without
D&E's consent. If Citizens proposes to sell any shares of D&E Common Stock,
Citizens must first give D&E the opportunity to repurchase them. Citizens has
the right to require D&E to register the Common Stock it is acquiring for public
resale.
D&E continues to prepare for competition in the regional toll area which will
become effective on December 31,1997. D&E expects the result will be a decrease
in long distance toll revenue partially offset by an increase in access
revenues. Therefore, D&E is closely monitoring proceedings before the
Pennsylvania Public Utility Commission dealing with access charge reform and
funding for universal service. Both proceedings are geared to replace the
explicit subsidies embedded in regional toll and intrastate access charges which
support below-cost dial-tone rates. The Pennsylvania Telephone Association,
which represents Telco, has proposed that non-price-cap local exchange carriers,
such as Telco, be permitted to file revenue neutral tariff revisions whereby
regional toll rates would be reduced to competitive rates while residential
dial-tone rates would be adjusted to equal Bell Atlantic PA average local
service rates. Shortfalls or averages would be offset by an interim state access
charge fund. This fund would be eliminated in the year 2001 when federal and
state regulatory agencies implement universal service
17
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
funding for rate-of-return (non-price-cap) local exchange carriers. The targeted
date for resolution of the state access charge reform proceeding is December
1997.
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements as to the
future performance of D&E and its various domestic and international investments
and long-term contracts, including MCG, MTT, Eurotel, Investments and Wireless.
Actual results may differ as a result of factors over which D&E has no control,
including but not limited to, regulatory factors, 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.
Item 3. Quantitative and Qualitative Disclosure
About Market Risks
D&E does not invest excess funds in derivative financial instruments or
other market risk sensitive instruments for the purpose of managing its foreign
currency exchange rate risk or for any other purpose.
18
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part II - Other Information
Item 2. Changes in Securities
See Part I, Item 2, Management's Discussion and Analysis and Results of
Operations regarding a Stock Acquisition Agreement between D&E and
Citizens Utilities.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Identification
No. of Exhibit Reference
--- ---------- ---------
10.1 Stock Acquisition Agreement between
D&E Communications, Inc. and
Southwestern Investments, Inc., a
subsidiary of Citizens Utilities
Company, dated November 3, 1997. Filed herewith.
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K:
A current report on Form 8-K dated September 18, 1997 was filed by the
Registrant with respect to the Assignment and Assumption Agreements regarding
Registrant's assignment of its 50% interest in Lancaster Area Cellular
Enterprises and its 33% interest in Pennsylvania RSA 12 Limited Partnership to
Telespectrum, Inc.
19
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
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: November 12, 1997
By: Thomas E. Morell
----------------------------------
Thomas E. Morell
Vice President, Chief Financial Officer
and Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF November 12, 1997.
20
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Identification
No. of Exhibit Reference
--- ---------- ---------
10.1 Stock Acquisition Agreement between
D & E Communications, Inc. and
Southwestern Investments, Inc., a
subsidiary of Citizens Utilities
Company, dated November 3, 1997. Filed herewith.
27 Financial Data Schedule. Filed herewith.
21
Exhibit 10.1
<PAGE>
STOCK ACQUISITION AGREEMENT
This Stock Acquisition Agreement (the "Agreement") is entered into as of
November 3, 1997, by and between D & E Communications, Inc., a Pennsylvania
corporation (the "Company"), and Southwestern Investments, Inc., a Nevada
corporation and a wholly-owned subsidiary of Citizens Utilities Company (the
"Purchaser").
WHEREAS, the Company desires to sell and the Purchaser desires to purchase
up to 1,300,000 shares of the Company's common stock, par value $0.16 per share
(the "Common Stock"), for the consideration and on the terms set forth herein;
NOW THEREFORE, in consideration of the representations, warranties,
covenants and conditions set forth in this Agreement, the parties to this
Agreement, intending to be legally bound hereby, mutually covenant and agree as
follows:
1. Transaction.
1.1. Sale and Issuance. At the Closing (as hereafter defined), the
Purchaser shall purchase from the Company and the Company shall issue and sell
to the Purchaser 1,300,000 shares of Common Stock in consideration of the
Purchase Price (as hereafter defined) per share, in cash; provided, that if the
Purchase Price is less than $25.00 per share then the Company may elect in its
discretion to reduce the number of shares of Common Stock it will sell and the
Purchaser will purchase, but to not less than 1,000,000 shares. The "Purchase
Price" shall be a per share price equal to the sum of (i) the average of the
closing prices of the Common Stock on the NASDAQ National Market System on each
of the thirty (30) trading days ending on the day prior to the Closing (the
"Average Price") plus (ii) 10% of the Average Price; provided, that if the
Purchase Price as so determined is less than $20.00 per share then the Purchase
Price shall be equal to $20.00 per share and if the Purchase Price as so
determined is greater than $25.00 per share then the Purchase Price shall be
equal to $25.00 per share. The Company and the Purchaser shall jointly determine
and confirm with each other in writing the Purchase Price after the close of
regular hours trading on the NASDAQ National Market on the day prior to the
Closing and the Company shall then advise the Purchaser in writing of the number
of shares of Common Stock that it intends to sell to the Purchaser at the
Closing. The amount equal to the number of shares to be sold by the Company at
the Closing multiplied by the Purchase Price shall be the "Aggregate Purchase
Price."
1.2. Payment and Delivery. The Purchaser shall deliver the Aggregate
Purchase Price to the Company at the Closing by wire transfer of immediately
available funds pursuant to written instructions to be provided by the Company
at least two days prior to the Closing. Upon evidence of receipt of such funds,
the Company shall promptly deliver to the Purchaser a stock certificate
representing the number of shares of Common Stock purchased by Purchaser.
<PAGE>
1.3. Closing. The consummation of the transfer and delivery of the Common
Stock to the Purchaser and the receipt of the Aggregate Purchase Price by the
Company will constitute the "Closing." Unless otherwise mutually agreed to by
the parties, the purchase and sale provided for in this Agreement shall take
place at the offices of the Company at 130 East Main Street, Ephrata,
Pennsylvania, at 10:00 a.m. (local time) on the later of (i) December 1, 1997,
or (ii) the date that is two business days following the termination of the
applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act
of 1976. Failure to consummate the purchase and sale provided for in this
Agreement on the date, time and at the place determined pursuant to this Section
1.3 will not result in the termination of this Agreement and will not relieve
any party of any obligation under this Agreement.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchaser as follows:
2.1. Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of Pennsylvania
and has all requisite corporate power and authority to own and lease its
properties, to carry on its business as presently conducted and to perform the
transaction contemplated hereby.
2.2. Authorization. All corporate action on the part of the Company and its
Board of Directors and shareholders necessary for the authorization, execution,
delivery and performance of the obligations of the Company under this Agreement,
including the authorization, issuance and sale of the Common Stock to the
Purchaser, has been taken. This Agreement constitutes the valid and legally
binding obligation of the Company enforceable against the Company in accordance
with its terms.
2.3. Validity. The Common Stock, when issued, sold and delivered in
accordance with the terms of this Agreement, will be duly and validly issued,
fully paid and nonassessable.
2.4. Capitalization. The authorized capital stock of the Company consists
of 30,000,000 shares of Common Stock, par value of $0.16 per share, and
20,000,000 shares of Preferred Stock, without par value. As of October 24, 1997,
there were 6,121,956 shares of Common Stock issued and outstanding. As of the
date hereof, other than this Agreement, there are no options, warrants, calls or
other commitments outstanding that obligate the Company to issue or sell any
shares of capital stock, other than pursuant to the Company's Dividend
Reinvestment Plan and Employee Stock Purchase Plan, and except that the Company
is obligated to issue certain warrants to purchase Common Stock to Boles Knop &
Company in consideration of their arranging certain equity and/or debt financing
for the Company.
2.5. No Conflict. The execution, delivery and performance of this Agreement
will not result in a violation of or default under, or result in the imposition
of any lien pursuant to, (i) the Company's Articles of Incorporation or By-laws
as in effect prior to the transaction contemplated hereby, or (ii) any material
mortgage, indenture, agreement, instrument or contract to which the Company is a
party.
-2-
<PAGE>
2.6. Accuracy of Public Information. All documents filed by the Company
with the Securities and Exchange Commission were true and correct in all
material respects as of the date thereof and, as of the date thereof, did not
omit to state any material fact required to be stated therein or necessary in
order to make the statements made therein not misleading.
2.7. No Material Adverse Change. Since December 31, 1996, there has not
been any material adverse change in the business, properties, financial
condition or results of operation of the Company and its consolidated
subsidiaries, taken as a whole.
3. Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants to the Company as follows:
3.1. Organization and Standing. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of Delaware and
has all requisite corporate power and authority to perform the transaction
contemplated hereby. The Purchaser was not organized for the purpose of
purchasing the Common Stock.
3.2. Authorization, Execution and Delivery. All corporate action on the
part of the Purchaser and its Board of Directors and shareholders necessary for
the authorization, execution, delivery and performance of the obligations of the
Purchaser under this Agreement, has been taken. The Agreement constitutes a
valid and legally binding obligation of the Purchaser enforceable against the
Purchaser in accordance with its terms.
3.3. Enforceability. The execution, delivery and performance of this
Agreement will not result in a violation of or default under, or result in the
imposition of any lien pursuant to (i) the Purchaser's Certificate of
Incorporation or By-laws as in effect immediately prior to the Closing, or (ii)
any material mortgage, indenture, agreement, instrument or contract to which the
Purchaser is a party.
3.4. Securities Matters.
3.4.1. The Purchaser understands that, upon issuance, the Common Stock
will not be registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any applicable state securities laws in reliance on
exemptions from the registration requirements therein, and that the
Company's reliance on such exemptions is predicated on the Purchaser's
representations set forth herein and otherwise in connection with the offer
and sale of the Common Stock.
3.4.2. The Common Stock is being acquired by the Purchaser for
investment for its own account, not as a nominee or agent, and not with a
view to the sale or distribution of all or any part thereof, and the
Purchaser has no present intention of selling, granting participation in or
otherwise distributing the same in violation of applicable securities laws.
The Purchaser represents that it does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to the
Common Stock, in violation of applicable securities laws.
-3-
<PAGE>
3.4.3. The Purchaser (i) has been afforded, prior to the execution of
the Agreement, the opportunity to ask questions of, and to receive answers
from, the Company's executive officers, and to obtain any additional
information, to the extent the Company has such information or could have
acquired it without unreasonable effort or expense, necessary to make an
informed investment decision with respect to the purchase of the Common
Stock, (ii) has not relied upon any representation, warranty or statement,
other than those expressly set forth in this Agreement and the public
documents filed by the company with the Securities and Exchange Commission,
(iii) has such knowledge and experience in financial and business matters
as to be capable of evaluating the merits, risks and suitability of its
investment and can bear the economic risks of this investment, and (iv)
acknowledges and understands that the Company has relied upon the
representations made by the Purchaser in the Agreement and otherwise in
connection with the offer and sale of the Common Stock, and (v) represents
and warrants that Purchaser's representations herein are true, complete and
accurate as of the date of this Agreement.
3.4.4. The Purchaser understands that the Common Stock may not be
sold, transferred or otherwise disposed of without registration of such
Common Stock under the Securities Act and any applicable state securities
laws, or the availability of exemptions from the registration provisions
thereunder, and that in the absence of an effective registration statement
covering the Common Stock or available exemptions from registration, the
Common Stock must be held indefinitely.
3.4.5. The Purchaser is aware that the Common Stock to be issued
hereunder may not be sold pursuant to Rule 144 promulgated under the
Securities Act unless all the conditions of that Rule are satisfied.
3.5. Conditions. The obligation of each party hereto to consummate the
transactions contemplated hereby shall be subject to the following conditions:
(i) the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") shall have expired or been terminated,
(ii) no action, suit or proceeding relating to the transaction contemplated
hereby shall be pending or threatened, and (iii) the representations and
warranties herein of the other party hereto shall be true and correct in all
material respects as of the Closing Date. (The Company and the Purchaser agree
to cooperate in the preparation of the required notifications under the HSR Act,
to file such notifications as promptly as reasonably practicable, and to use
their reasonable best efforts to obtain termination of the waiting period under
the HSR Act.)
3.6. Transfer; Legends. The Common Stock acquired by the Purchaser pursuant
to this Agreement may not be sold, transferred or otherwise disposed of except
pursuant to an effective registration statement under the Securities Act and any
applicable state securities laws or pursuant to an opinion of counsel
satisfactory to the Company that such registration is not required. All
certificates evidencing the Common Stock acquired by the Purchaser pursuant to
this Agreement shall bear the following legend:
These securities have not been registered under the Securities
Act of 1933, as amended, or any state securities laws (the
"Acts") and may not be sold, offered for sale, transferred or
otherwise disposed
-4-
<PAGE>
of except pursuant to an effective registration statement as to
the securities under the Acts or pursuant to an opinion of
counsel satisfactory to the Company that such registration is not
required.
4. Confidentiality. All information provided by the Company to the
Purchaser in connection with this Agreement shall be subject to the existing
Confidentiality Agreement between the parties hereto.
5. Standstill Agreement. For a period of one year from the date of this
Agreement, the Purchaser and its representatives shall not, directly or
indirectly, nor shall the Purchaser cause any person or entity controlled by it
to: (i) acquire, agree to acquire or make any offer or proposal to acquire,
directly or indirectly, by purchase, tender or exchange offer or otherwise, any
securities of the Company except by way of stock dividends or other
distributions made on a pro rata basis to all shareholders of the Company; (ii)
solicit proxies or consents or become a "participant" in a "solicitation" (as
such terms are defined in Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of proxies or consents with respect to
securities of the Company with regard to any matter; (iii) seek to advise,
encourage or influence any person with respect to the voting of any securities
of the Company, or induce, attempt to induce or in any manner assist any other
person in initiating any stockholder proposal or a tender or exchange offer for
securities of or any change of control of the Company, or for the purpose of
convening a stockholders' meeting of the Company; (iv) make any public
announcement or make any written or oral proposal or invitation to discuss any
possibility, intention, plan or arrangement, relating to a tender or exchange
offer for securities of the Company or a business combination (or other similar
transaction which would result in a change of control), sale of assets,
liquidation or other extraordinary corporate transaction between the Purchaser
or any of its affiliates and the Company or take any action which might require
the Purchaser to make a public announcement regarding any of the foregoing.
6. Twenty Percent Ownership Limit. For accounting reasons, the Purchaser
currently desires that aggregate number of shares of Common Stock beneficially
owned by it be less than twenty percent (20%) of the aggregate number of shares
of Common Stock outstanding without its consent. If the Company intends to
repurchase shares of Common Stock and as a result of such repurchases the
Purchaser would beneficially own twenty percent (20%) or more of the shares of
Common Stock outstanding after such repurchases, then before effecting such
repurchases the Company shall first offer in writing to purchase shares of
Common Stock from the Purchaser at a price and on such other terms as the
Company intends to repurchase shares of Common Stock from third parties, such
that after all such repurchases from third parties, the aggregate number of
shares of Common Stock beneficially owned by the Purchaser is less than twenty
percent (20%) of the aggregate number of shares of Common Stock outstanding. If
the Purchaser does not accept such offer of the Company to purchase within ten
(10) business days after it is received by the Purchaser, then the Company shall
have the right to effect repurchases from third parties at the price and on such
other terms as were offered to the Purchaser.
-5-
<PAGE>
7. Right of First Refusal. If the Purchaser proposes to sell, transfer or
otherwise convey (a "transfer") all or part of the Common Stock held by it, the
Purchaser shall notify the Company in writing of its intention, including the
number of shares to be sold, the identity of the proposed purchaser, the
proposed purchase price and the other terms of the sale. The Company shall
thereupon have the right to purchase all or part of the shares proposed in the
notice to be sold at the price and on the same terms as set forth in said
notice. If the Company decides to exercise its right of first refusal, it shall
deliver a written notice to such effect to the Purchaser within ten (10)
business days after receiving notice from the Purchaser. The Company shall
consummate such purchase not later than thirty (30) days after giving its notice
to the Purchaser. If the Company declines to exercise its right to purchase the
shares of Common Stock proposed to be sold by the Purchaser, the Purchaser may,
for a period of ninety (90) days, transfer such shares to the person, at the
price and on the other terms set forth in its notice to the Company; provided,
however, that it shall be a condition of the Purchaser's right to transfer such
shares (other than a transfer in a registered public offering in which the
transferee acquires beneficial ownership of less than 200,000 shares) that the
purchaser thereof agree to be bound by Sections 5 and 7 of this Agreement. All
certificates evidencing the Common Stock acquired by the Purchaser pursuant to
this Agreement shall bear the following legend:
The sale, transfer or other disposition of the shares of Common
Stock represented by this certificate is subject to the terms and
conditions of a Stock Acquisition Agreement dated as of October
__, 1997, by and between ___________ and __________, a copy of
which is on file at the Company's registered office.
8. Registration Rights. The parties agree that they shall be bound by the
registration rights provision attached hereto as Exhibit A.
9. No Pre-Closing Acquisitions. The Company covenants and agrees that from
the date of this Agreement through the Closing, it shall not purchase nor shall
it permit any of its subsidiaries or employee benefit plans to purchase any
shares of Common Stock, except that the Company's Dividend Reinvestment Plan and
Employee Stock Purchase Plan may continue to purchase newly issued shares
directly from the Company but not in the open market.
10. Termination. If the Closing has not occurred by March 31, 1997, this
Agreement shall terminate and be of no further force or effect, and neither
party shall have any liability to the other except for any damages suffered by a
party as a result of a breach of this Agreement by the other party.
11. Miscellaneous.
11.1. Governing Law. The Agreement shall be governed by and construed under
the laws of the Commonwealth of Pennsylvania without regard to any
jurisdiction's conflicts of laws provisions.
-6-
<PAGE>
11.2. Entire Agreement. This Agreement constitutes the entire agreement of
the parties and no party shall be liable or bound to any other party in any
manner by any warranties, representations or covenants except as specifically
set forth herein. The terms of this Agreement shall inure to the benefit of and
be binding upon the respective successors and assigns of the parties except to
the extent assignability is limited herein.
11.3. Assignability. Neither party shall assign, or otherwise transfer any
interest in this Agreement to any other person or entity without the prior
written consent of the other party.
11.4. No Third-Party Beneficiaries. Nothing in the Agreement shall be
construed to give any person other than the parties hereto any legal or
equitable right, remedy or claim under this Agreement. The Agreement shall be
for the sole and exclusive benefit of the parties hereto.
11.5. Counterparts; Facsimile. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same agreement. Delivery of executed
signature pages by facsimile transmission will constitute effective and binding
execution and delivery.
11.6. Titles and Subtitles. The titles and subtitles used in the Agreement
are used for convenience only and are not to be considered in construing or
interpreting the Agreement.
11.7. No Presumption. There will be no presumption against any party on the
ground that such party was responsible for preparing this Agreement or any part
of it.
11.8. Publicity. Except as otherwise required by law, neither the Company
nor the Purchaser shall issue a press release or make any other public
announcement regarding the transactions contemplated by this Agreement without
the consent of the other, which consent shall not be unreasonably withheld.
12. Notices. Any notice required or permitted under this Agreement shall be
given in writing and shall be deemed effectively given upon (i) personal
delivery, (ii) facsimile transmission, with confirmed receipt, or (iii) delivery
by overnight courier, charges prepaid at the following addresses:
-7-
<PAGE>
If to the Company at:
D & E Communications, Inc.
130 East Main Street
Ephrata, PA 17522
Attention: Chief Executive Officer
Telephone: (717) 738-8430
Telecopy: (717) 733-7461
If to the Purchaser:
Southwestern Investments, Inc.
Administration Offices
High Ridge Park
Stamford, CT 06905
Attention: Chief Executive Officer
Telephone: (203) 329-4612
Telecopy: (203) 614-4651
IN WITNESS WHEREOF, the parties have executed the Agreement as of November
3, 1997.
D & E COMMUNICATIONS, INC.
By: s/ G. William Ruhl
Title: Senior Vice President
SOUTHWESTERN INVESTMENTS, INC.
By: s/ Robert J. DeSantis
Title: Vice President, Treasurer & Chief Financial Officer
-8-
<PAGE>
EXHIBIT A
Registration Rights
1. In connection with your (for purposes of this Exhibit A, the terms "you"
and "your" shall refer to the Purchaser) purchase from D & E Communications,
Inc. ("D & E") of up to 1,300,000 shares of the Common Stock of D & E (the
"Registrable Securities"), D & E covenants and agrees to prepare and file with
the Securities and Exchange Commission (the "Securities Commission") a
registration statement covering all or such number of shares of the Registrable
Securities which you may designate, at a time within the consecutive ten-year
period commencing with the date hereof (the "Term") which, subject to the other
provisions hereof, is mutually agreeable to both of us, but in no event earlier
than 20 days or later than 60 days from the date of receipt by D & E of a
written demand from you requesting that a registration statement with respect to
all or a portion of the Registrable Securities (the "Offered Securities") be
filed with the Securities Commission under the Securities Act of 1933, as
amended (the "Securities Act"). D & E shall use its best efforts to cause such
registration statement to become effective to permit the sale of the Offered
Securities. You understand and agree that the Offered Securities may only be
registered at such time as you are prepared to sell such shares and that any
sale of the Offered Securities may only be effected through underwriters of
recognized standing.
2. D & E shall furnish you such numbers of copies of a printed prospectus,
including a preliminary prospectus and any amendments or supplements thereto, in
conformity with the requirements of the Securities Act, and such other documents
as you may reasonably request in order to facilitate the sale of the Offered
Securities. D & E shall also register or qualify the Offered Securities covered
by such registration statement under such securities or blue sky laws of such
jurisdictions as you shall reasonably request. D & E shall keep effective and
maintain any such registration statement until you have sold or disposed of all
of the Offered Securities, but in no event for a period beyond six months from
the effective date of such registration statement, and from time to time during
such six-month period D & E shall amend or supplement the prospectus used in
connection therewith to the extent necessary in order to comply with Securities
Act, it being understood that on notice to you, D & E shall have the right to
suspend the sale of any offered Securities, with the further understanding that
in the event D & E so suspends such sale during said six-month period, the
period of such suspension shall be added onto the said six-month period at the
end thereof.
3. D & E may include other shares of D & E's Common Stock or other of D &
E's securities in such registration statement filed pursuant to the
aforementioned demand. D & E shall be required to file only three registration
statements relating to the Registrable Securities.
4. Nothing herein shall restrict D & E's ability to file any registration
statement or prospectus or prospectus supplement in respect of the offering and
sale of other shares of D & E's Common Stock or other of D & E's other
securities at any time or from time to time or to otherwise offer or sell any
other shares of D & E's Common Stock or other of D & E's other securities.
<PAGE>
5. Notwithstanding the foregoing, D & E shall have no obligation to prepare
and file such registration statement covering any of the Offered Securities, if
(a) at the time of the receipt of the demand, a registration statement covering
any of D & E's securities is (i) is expected to be filed by D & E within 60
days, (ii) is then in effect or (iii) became effective within the six-month
period immediately preceding such demand, or it is prohibited from so doing
pursuant to agreements with underwriters, or (b) promptly after receipt of such
demand, D & E furnishes to you (i) an opinion of its counsel to the effect that
such registration would require the disclosure of an event or information which
the Company does not then desire to disclose, and (ii) a certificate signed by
the President of the Company stating that in the reasonable, good faith judgment
of the Board of Directors disclosure of such event or information would have a
material adverse effect on the Company (the Company will advise you of the
nature of such event or information upon receipt of a signed confidentiality
agreement reasonably satisfactory to the Company); provided, that in such event,
D & E's obligation to prepare and file a registration statement shall be
deferred for not more than three (3) months.
6. Additionally, if D & E at any time during the Term proposes to register
any of its securities under the Securities Act for sale to the general public,
on any form upon which the Offered Securities may be registered, D & E will at
each such time during the Term give prompt notice to you of its intention. Upon
your written request given within 30 days after D & E has given such notice, D &
E will cause each of the Offered Securities which you have requested be
registered under the Securities Act, to be included in such registration
statement, all to the extent requisite to permit the sale by you of the Offered
Securities so to be registered. If the securities to be so registered for sale
by D & E are to be distributed by or through a firm of underwriters of
recognized standing, then the Offered Securities to be registered shall be
included in such underwriting on the same terms as other securities of the same
class which are included in such underwriting, provided that if, in the written
opinion of the managing underwriter or underwriters, the total amount of such
securities to be so registered, when added to such Offered Securities, will
exceed the maximum amount of D & E's securities which can be marketed without
otherwise materially and adversely affecting the entire offering, then D & E
shall exclude from such underwriting (a) first, all securities, other than the
Offered Securities, being sold for the account of other than D & E, (b) next,
the number of Offered Securities, as is necessary in the opinion of the managing
underwriter to reduce the size of the offering, and (c) last, the number of
securities for the account of D & E which in the opinion of the managing
underwriter can or should be excluded.
7. You agree that you are acquiring the Common Stock shares for investment
only and without any intention on your part to sell or otherwise distribute any
of such shares, that no transfer of said shares will be made without
registration under the Securities Act or an opinion of Counsel for you that such
transfer is pursuant to an exemption under the Securities Act and that the
certificates representing said shares shall be endorsed with the following
legend:
These securities have not been registered under the Securities
Act of 1933, as amended, or any state securities laws (the
"Acts") and may not be sold, offered for sale, transferred or
otherwise disposed
-2-
<PAGE>
of except pursuant to an effective registration statement as to
the securities under the Acts or pursuant to an opinion of
counsel satisfactory to the Company that such registration is not
required.
8. The costs and expenses of the registration and qualification of Offered
Securities under the Securities Act and state securities acts and of all other
actions which D & E is required to take or effect pursuant to paragraph 1 of the
Agreement, shall be paid by you (including, without limitation, all registration
and filing fees, printing expenses, auditing costs and expenses, and the
reasonable fees and disbursements of counsel for D & E and your counsel). With
respect to such of the Registrable Securities which you desire to have
registered pursuant to paragraph 6 of this Agreement, such fees, expenses and
disbursements (other than your share of registration and filing fees and
underwriters commissions based on the number of shares requested by you, and
disbursements of your counsel and any extraordinary expenses, such as but not
limited to, expense of securing approval of regulatory authorities, all of which
shall be paid by you in full) shall be paid by D & E.
9. You shall have the right to assign and transfer the registration rights
set forth in paragraphs 1 and 6 hereof to one person (the "Assignee"), but only
in connection with a single sale of all of the Registrable Securities (or such
of such shares that you have not heretofore sold pursuant to registrations under
said paragraphs) to a purchaser or purchasers who represent(s) to D & E that the
purchaser or purchasers (is)(are) acquiring the shares for investment only and
not with a view to the sale or other distribution thereof and an acknowledgment
and agreement that (i) any sale or transfer of the acquired shares may only be
effected pursuant to a registration under the Act or with an opinion of D & E's
counsel that such transfer is being made pursuant to an exemption under the Act,
(ii) that any sale or other transfer may only be made through underwriters of
recognized standing, (iii) that the legend referenced in paragraph 7 shall
remain on the certificates for the shares transferred by you to such person and
(iv) that all of the restrictions and limitations set forth in paragraphs 1
through 8 of this agreement shall apply with full force and effect and be
binding on the Assignee.
-3-
<TABLE> <S> <C>
<ARTICLE> OPUR1
<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>
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<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 72,488,710
<OTHER-PROPERTY-AND-INVEST> 5,864,912
<TOTAL-CURRENT-ASSETS> 15,231,485
<TOTAL-DEFERRED-CHARGES> 348,028
<OTHER-ASSETS> 24,821,960
<TOTAL-ASSETS> 118,755,095
<COMMON> 975,599
<CAPITAL-SURPLUS-PAID-IN> 10,190,943
<RETAINED-EARNINGS> 42,361,088
<TOTAL-COMMON-STOCKHOLDERS-EQ> 53,527,630
0
1,445,600
<LONG-TERM-DEBT-NET> 36,604,565
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 25,952,552
<TOT-CAPITALIZATION-AND-LIAB> 118,755,095
<GROSS-OPERATING-REVENUE> 36,349,298
<INCOME-TAX-EXPENSE> 7,434,105
<OTHER-OPERATING-EXPENSES> 29,687,134
<TOTAL-OPERATING-EXPENSES> 37,121,239
<OPERATING-INCOME-LOSS> 6,662,164
<OTHER-INCOME-NET> 12,303,283
<INCOME-BEFORE-INTEREST-EXPEN> 11,564,820
<TOTAL-INTEREST-EXPENSE> 1,631,740
<NET-INCOME> 9,884,291
48,789
<EARNINGS-AVAILABLE-FOR-COMM> 9,884,291
<COMMON-STOCK-DIVIDENDS> 1,734,779
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 9,436,910
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