FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 000-20709
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
D&E Communications, Inc.
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(exact name of registrant as specified in its charter)
Pennsylvania 23-2837108
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
124 East Main Street; P.O. Box 458
Ephrata, Pennsylvania 17522-0458
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(Address of principal executive offices) (zip code)
Registrant's Telephone Number, including area code (717) 733-4101
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.16 per share
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates on March 6, 1998 (based upon the closing price of such stock as
of such date) was $80,992,556.
The number of shares outstanding of the Registrant's common stock, $.16 par
value, was 7,432,389 at March 6, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement relative to the Registrant's 1998 Annual
Meeting of the Shareholders to be held on April 30, 1998, are incorporated
herein by reference in Part III hereof.
Total number of pages including cover page is 73.
The index to exhibits is found on sequentially numbered page 22.
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TABLE OF CONTENTS
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PART I
Item 1. Business....................................................................... 1
Item 2. Properties..................................................................... 7
Item 3. Legal Proceedings.............................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............................ 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......... 9
Item 6. Selected Financial Data........................................................ 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 11
Item 8. Financial Statements and Supplementary Data.................................... 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................................... 17
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 18
Item 11. Executive Compensation......................................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................................... 18
Item 13. Certain Relationships and Related Transactions................................. 18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 19
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PART I
Item 1. Business.
(a) General Development of Business.
D&E Communications, Inc. is a telecommunications holding
company formed in June 1996, when it became the successor parent company to its
telephone operating subsidiary, Denver and Ephrata Telephone and Telegraph
Company ("Telco"). In 1996, Telco received permission from the Pennsylvania
Public Utility Commission ("PUC") for approval to form a holding company
corporate structure (the "Restructuring"). The general purpose of the
Restructuring was to establish a more appropriate corporate structure for
continued growth and financial strength in a competitive environment. A majority
of the shareholders entitled to vote at the Annual Meeting of Shareholders held
on May 9, 1996 approved the Agreement and Plan of Exchange (the "Plan of
Exchange"). Under the terms of the Plan of Exchange, each of the outstanding
Telco common shares ($0.50 par value) was exchanged for three D&E
Communications, Inc. common shares ($0.16 par value). In effect, the exchange
was similar to a three-for-one split of Telco common shares. In addition, Telco
declared a dividend to D&E Communications, Inc. of all of the capital stock of
its subsidiaries D&E Telephone and Data Systems, Inc. ("TDS"), (f/k/a Red Rose
Communications, Inc.), and D&E Marketing Corp. ("Marketing"). D&E
Communications, Inc. and its subsidiaries (hereinafter collectively referred to
as "D&E") provide telecommunications services for local exchange, long distance,
Internet access and sell related systems equipment to customers in the south
central Pennsylvania area.
During 1997, D&E further expanded its corporate structure to
facilitate the continuing growth in non-regulated business opportunities. D&E
formed D&E Wireless, Inc., ("Wireless") to design, construct and operate a PCS
digital network. Additionally, D&E Investments, Inc. ("Investments") was formed
to hold various PCS licenses acquired by D&E, and D&E Holdings, L.P.
("Holdings") was formed to hold various cellular partnership interests owned by
Telco. Changes after these organizations were formed included the sale of two
cellular partnership interests and the formation of a joint venture, between
subsidiaries of Omnipoint Corporation ("Omnipoint") and Wireless, which began
operations in November 1997.
In addition to the above U.S. activities, D&E provides
telephone and cable television services in Europe through part ownership in two
separate ventures. Monor Telephone Company in Hungary ("MTT") is controlled by
Monor Communications Group ("MCG"), a U.S. corporation in which Marketing has an
investment. During 1997, Marketing acquired an interest in EuroTel L.L.C.,
("EuroTel") a domestic joint venture formed to construct and operate a telephone
network in central Poland. EuroTel acquired 100% ownership in Pilicka Telephone,
("PT") a Polish corporation which has begun construction of a network in a
region south of Warsaw.
(b) Financial Information About Industry Segments.
Financial information about D&E and its subsidiaries is
contained in the consolidated Financial Statements filed herewith. D&E presently
engages in operations in only one industry segment, telecommunications services
and equipment.
(c) Narrative Description of Business.
(1) Overview. Telco, furnishes telephone service through
53,673 access lines to an estimated population in excess of 100,000 in an area
of approximately 227 square miles covering parts of Berks, Lancaster and Lebanon
Counties in the Commonwealth of Pennsylvania. National and international
communications services are also furnished through interconnection with the
facilities of other companies.
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The area served by Telco is mostly rural and suburban in nature, with
an agricultural and farming economic base. In addition, the business elements
include manufacturing, distribution, retail, and service establishments. Of the
53,673 access lines serviced by D&E as of December 31, 1997, service is provided
to 39,403 residential customer lines (73%) and to 14,270 business customer lines
(27%).
The principal categories of service rendered by Telco are:
(i) Local Network Services -- provide local exchange (dial tone),
local private line and public telephone services to
residential and business customers in Telco's franchised
serving area.
(ii) Network Access Services -- provide local exchange carriers and
interexchange carriers, as well as other regional telephone
companies, with the use of Telco's local network facilities
for the completion of long distance calls. Payment for
providing these facilities comes directly from the users or
from settlement pools administered by the National Exchange
Carrier Association, Inc. ("NECA").
(iii) Long Distance Network Services -- provide long distance
service to residential and business customers within the
Capital (south central) Region of Pennsylvania.
Telco constructed and installed, and now maintains, an Enhanced 911
("E911") system in Lancaster County pursuant to an Agreement for Telco to
furnish the County's 911 system with an Automatic Location Identification
("ALI") Network. The E911 backup system, required by the Public Safety Emergency
Act of 1990, is located at Telco's Ephrata Central Office. Under the E911
system, a dispatcher will be provided with the phone number and address of the
caller automatically.
Holdings participates in a cellular joint venture with 360(degrees)
Communications Company, formerly known as Sprint Cellular Company ("360CC"), and
Conestoga Enterprises, Inc. through its 15% interest in Berks and Reading Area
Cellular Enterprises ("BRACE"). BRACE, in conjunction with other
telecommunications companies, provides cellular telephone service in the Reading
metropolitan area. In September 1997, Holdings sold its interests in two other
cellular providers, the joint ventures of Lancaster Area Cellular Enterprises
and the Pennsylvania RSA 12 Limited Partnership.
In 1995, Marketing invested in D&E SuperNet(TM), a partnership which
offers Internet access service and related equipment to customers in south
central Pennsylvania. Marketing owns 50% of D&E SuperNet(TM). Marketing owns
16.5% of MCG which operates a telephone system through MTT in Hungary. Marketing
also owns 33% of EuroTel which is developing a telephone system through PT in
Poland.
TDS sells, installs and maintains telecommunications equipment. In this
capacity, TDS provides service primarily to business customers in central and
eastern Pennsylvania. TDS operates a retail store that specializes in
communications equipment such as telephones and accessories. TDS (d/b/a D&E Long
Distance) provides long distance telephone services on an equal access basis
within the Telco service area and, since mid 1997, throughout the Bell
Atlantic - PA franchise area of Lancaster County. TDS also (d/b/a D&E Computer
Networking Services) provides computer Local and Wide Area Network sales and
services to area businesses.
D&E is participating in a new generation of wireless services known as
Personal Communications Services ("PCS"). PCS is a cellular-like, digital,
wireless communication system with opportunities to provide truly mobile,
portable communications to the business and residential markets. In 1995, TDS
became managing partner in The D and E Group, a partnership formed for the
purpose of participating in PCS spectrum auctions conducted by the Federal
Communications Commission ("FCC"). TDS 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. On February 20, 1997, the shareholders of PCS One,
Inc. approved the Agreement
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and Plan of Merger ("the Merger") as of December 12, 1996, by and between PCS
One, Inc. and D&E whereby PCS One, Inc. merged with and into D&E. The Merger was
completed on March 21, 1997. Upon completion of the merger, D&E dissolved The
D and E Group partnership.
On January 15, 1997, D&E was awarded two PCS licenses in the FCC
spectrum auction for the Harrisburg D Block License and the York-Hanover E Block
License. D&E formed Wireless in 1997 to design, construct and provide PCS
services in the three markets of Lancaster, Harrisburg and York-Hanover. On
November 14, 1997, Wireless formed a joint venture with Omnipoint. The joint
venture D&E/Omnipoint Wireless Joint Venture, L.P. d.b.a. PCS ONE ("PCS ONE")
provides PCS service including mobile phone, answering machine, pager, fax, and
Internet access to the Business Trading Areas of Lancaster, Harrisburg,
York-Hanover and Reading.
(2) Regulatory Matters. A substantial portion of D&E's
operations are subject to regulation at both the federal and state levels. The
Telecommunications Act of 1996 (the "Telecommunications Act"), signed into law
by President Clinton on February 8, 1996, has enormous ramifications throughout
both state and federal jurisdictions and, therefore, affects the strategic
direction of D&E. While the Telecommunications Act encourages development of
advanced technology in the telecommunications industry and entrance of D&E into
new markets, it may also provide these same opportunities to a new set of
competitors and other entrepreneurs, who have not previously been permitted to
compete in Telco's markets. Development of advanced technology is expected to
accelerate as competitors vie for new products and services to attract
customers, thus spurring equipment manufacturers and technology vendors to
explore innovative ways of bringing such products and services to market.
In conjunction with the Telecommunications Act, state regulatory
laws are also being revised. For example, local exchange carriers operating in a
competitive market are now permitted to package dial tone and toll services, a
product mixture formerly prohibited. The lifting of such marketing restrictions
will enable D&E to compete within and beyond its existing franchise territory on
equal footing with new market entrants and with more regulatory freedom than
traditional local exchange carriers currently possess.
The Telecommunications Act also removes entry barriers such as
cross-ownership rules, into other industry segments. The immediate absence of
cross-ownership rules, which formerly prohibited a cable television company and
telephone company owned by the same entity from offering services in the
franchise territory, could encourage mergers and marketing opportunities
throughout the nation. Therefore, the competitive profile of incumbent local
exchange carriers may change. D&E continues to analyze the merits of entering
such new markets, while focusing on continuing to strengthen operations in its
franchise territory.
The Telecommunications Act may also provide long distance
carriers, such as AT&T Communications ("AT&T"), MCI, Sprint and Regional Bell
Operating Companies ("RBOCs"), such as Bell Atlantic, the opportunity to compete
in Telco's traditional service area. The foregoing competitors may have
substantially more resources than D&E. However, Telco is initially afforded some
protection through the Telecommunications Act's rural exemption clauses which
specifically prohibit competitive local exchange carriers from offering service
to Telco's customers until the state public utility commission determines that a
bona fide request from a competitor would not be unduly economically burdensome,
technically infeasible and inconsistent with universal service principles.
(i) Federal. Telco's furnishing of interstate network access services
and certain related matters are subject to regulation by the FCC. Interstate
network access services are transmission and switching services provided by
local telephone companies at each end of a long distance telephone call. These
services provide connections from end-users (telephone subscribers) to the long
distance networks of companies such as AT&T, MCI, Sprint, and others.
Telco currently earns its interstate revenues from settlement pools
administered by NECA. NECA
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comprises approximately 1,438 local telephone companies in the United States --
both large and small. Established at the direction of the FCC, NECA prepares and
files uniform interstate access charge tariffs on behalf of NECA member
companies and collects data from member companies upon which it bases its
redistribution of revenues to the member companies. Telco bills access charges
to both interexchange carriers and end user customers at uniform rates specified
in NECA tariffs, reports the demand unit data to NECA, and receives compensation
from NECA based upon FCC approved settlement formulas. NECA settlements
represent Telco's portion of pooled revenues designed to recover the costs of
providing interstate access services, plus an authorized return on investment.
Telco received approval from the FCC to withdraw from the NECA Traffic Sensitive
Pool and apply its own tariff rates effective July 1, 1994. During 1996 Telco
exceeded 50,000 access lines. Therefore, on July 1, 1997 when the
traffic-sensitive access rates expired under the FCC Small Company Incentive
regulation, Telco was required to follow another method of determining these
rates. Telco elected to rejoin NECA's Traffic Sensitive Pool and effective July
1, 1997, revised its traffic-sensitive access rates to the rates from the NECA
Interstate Access Tariff. The interstate revenues generated through
participating in NECA access rates and settlements are more favorable and prone
to less risk than if Telco had established rates based on its costs.
Pursuant to recently adopted rules, the FCC prescribes the rate of
return on the interstate access services furnished by NECA member companies,
including Telco. Through such rules, the FCC permits Telco to earn up to 11.25%
return on its investment in property, plant and equipment used to furnish
interstate access service. This rate of return serves as a benchmark for
regulation of the interstate access services provided by NECA member companies.
The FCC has also adopted rate of return enforcement rules, which require
telephone companies to target their rates to produce the prescribed return and
to refund, to NECA, earnings in excess of their allowable return.
In June 1994, D&E, through its subsidiary TDS, was granted FCC approval
for its long distance toll reseller, D&E Long Distance. Other aspects of D&E's
interstate operations are also generally subject to the jurisdiction of the FCC.
This federal agency has established and currently enforces regulations governing
the operations of, and services furnished by, telecommunications companies.
(ii) State. D&E's furnishing of local and intrastate services is
subject to regulation by the Public Utility Commission, Harrisburg, Pennsylvania
("PUC"). The majority of services provided by D&E are considered to be local or
intrastate in nature, and are therefore subject to PUC regulation. These
services include local network services, intrastate network access services,
regional and long distance toll services, and other miscellaneous services.
The rates which Telco charges for toll and access are contained in the
tariffs issued by the Pennsylvania Telephone Association ("PTA") -- a trade
association of the state's approximately 38 telephone companies. Telco uses the
PTA toll and access tariffs for rates and rules governing the provision of
intrastate access services furnished to interexchange carriers and for regional
long distance (including WATS/800) services provided to end-users.
The PUC also has established rules pertaining to all jurisdictional
public utilities generally, and to telephone companies specifically, which are
applicable to D&E. The following list provides examples of the primary areas in
which the PUC has established rules which affect D&E:
- Certificates of public convenience.
- Rates and rate making.
- Standards of service and facilities; service outages.
- Billing practices for residential customers.
- Accounting and budgetary matters.
- Registration of securities and obligations.
- Relations with affiliated interests.
- Tariffs for fixed service utilities.
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- Confidentiality of customer information.
- Violations and penalties.
66 Pa. C.S. (sections) 3001 - 3009 (also known as Chapter 30), enacted
on July 8, 1993, allows local exchange carriers to petition the PUC for an
alternative form of regulation other than traditional rate base/rate of return.
In its petition, the local exchange carrier must define and commit to a network
modernization plan promising 100% conversion of its interoffice and distribution
telecommunications network to broadband capability by December 31, 2015.
The petition also allows the local exchange carrier to propose services that are
deemed competitive for deregulation. Local exchange carriers who do not file a
petition and network plan by July 8, 1998, will be subject to a Show Cause
order, which is an order requiring the local exchange carrier to show good
reason why it should not be required to file a petition. D&E is currently
formulating its strategy in this area and plans to file its Chapter 30 petition
by July 8, 1998.
(3) Significant Customers. There are no significant end-users
(telephone subscribers), the loss of whom would have a material adverse effect
on D&E. AT&T, however, is D&E's most significant customer in terms of total
revenue received from a single entity. During each of the last three fiscal
years, AT&T purchased network access services, billing and collection services,
and marketing and sales-referral services from D&E which, in 1997, 1996 and
1995, produced $5,521,000, $5,193,000 and $5,412,000, respectively, in annual
revenues, or approximately 11.4%, 11.7% and 13.2%, respectively, of total
consolidated operating revenues.
Although D&E's revenue stream relies heavily upon services furnished to
AT&T, management believes the chance of losing a significant portion of AT&T
revenues is remote for the following reasons:
D&E provides network access services within its franchised service
area to interexchange carriers such as AT&T, MCI, Sprint and others
who use D&E's switching and transmission facilities for the completion
of long distance calls. Certain long distance carriers have
occasionally (i) limited the use of D&E's facilities by converting the
use of service from switched access service to special access service
("Service Bypass"), or (ii) bypassed the use of D&E's facilities
entirely ("Facility Bypass"), both of which result in less revenue.
Management does not expect the Company's business to be affected
significantly by either Service Bypass or Facility Bypass within the
immediate future. Such bypass normally occurs in metropolitan areas in
which a significant customer represents a large portion of business.
D&E's service area is predominantly rural and suburban in nature and
constitutes a diverse customer mix.
To the extent that AT&T loses market share to other long distance
companies and D&E, therefore, loses revenue from AT&T, management
believes D&E should receive approximately the same revenue from any
other long distance carrier competing with AT&T.
Although AT&T has previously objected to D&E's network access service
rates, D&E and AT&T have negotiated such rates, which have been approved by the
PUC and the FCC. D&E believes that its relations with AT&T are good, and fully
expects to continue doing business with AT&T. Based on three-year data during
the period from 1994 to 1997, the number of access lines grew at an average
annual rate of 4.3%, while AT&T minutes of use declined from 1994 to 1995 and
increased thereafter. A portion of AT&T's decline in D&E's franchised area in
1994 and 1995 can be attributed to, and offset by, D&E Long Distance which began
its operations as a long distance toll reseller in June 1994.
(4) Competition. On December 15, 1995, the PUC ordered an
implementation schedule for intraLATA toll presubscription which took affect for
Telco on December 31, 1997. Regional, or "intraLATA" toll, presubscription
enables consumers to designate a carrier of their choice for all direct-dialed
toll calls made within the same Local Access Transport Area ("LATA").
Previously, all
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direct-dialed intraLATA toll calls were handled by the local exchange carrier.
IntraLATA presubscription required Telco to open its exclusive direct-dial
regional market to long distance competitors, i.e., interexchange carriers and
toll resellers, in the same manner interLATA and interstate toll calls are
offered by a variety of long distance companies today. To the extent that these
competitors are able to gain a significant market share of Telco's intraLATA
toll or a significant portion of service of Telco's franchise territory, such
loss would have a material adverse effect on the Company's operations and
financial condition. However, some portion of this loss may be recouped from the
increased volume of access required by the long distance companies.
Another form of emerging competition will affect the local exchange
market via competitive local exchange carriers ("CLECs") who provide consumers
an alternative to the local telephone company for any and all telecommunications
services. In order to compete with local exchange carriers, CLECs must receive
PUC approval. D&E realizes the potential threat to its own rural and suburban
franchise territory could occur within the next several years as CLECs extend
their applications into territories currently protected under the rural
exemption clauses of the Telecommunications Act. At present, however, Telco is
protected under such rural exemption clauses and, therefore, does not have any
such competition.
Another significant service provided by Telco, which had traditionally
been non-competitive, is network access service provided to long distance
companies and other telephone companies within the local region. Competitive
access service providers, which are capable of originating and/or terminating
calls without the use of the local telephone company's plant, are beginning to
compete with telephone companies in providing network access service in major
metropolitan areas. While there can be no assurance that D&E's revenues will not
be materially adversely affected by competition from such competitive access
service providers, management believes, D&E's business will not be materially
affected by such competitive access service providers because D&E has a diverse
customer mix which D&E services with competitive pricing.
Various other services had been historically provided exclusively by
Telco, but in recent years such markets were opened to competition from other
suppliers. Examples include directory publishing and billing and collection
services. The federal and state regulatory agencies regulate such services less
than in the past, i.e., tariffs showing rates and rules governing the furnishing
of some of these services are no longer required. However, the revenues,
expenses and investments associated with these operations are still a part of
the PUC's rate making formula in the determination of basic local service rates
and are reflected as such in Telco's operations. To compete in open markets, D&E
utilizes a combination of media, such as local newspaper, radio and television
advertising, to highlight D&E's competitive service and pricing differences in
order to attract customers to D&E's products and services.
D&E participates in a cellular joint venture with Conestoga
Enterprises, Inc. and 360CC, which is licensed by the FCC. These carriers
compete with wireless cellular service providers in the respective metropolitan
areas in which they are licensed to serve. PCS also constitutes a potential
source of competition. PCS consists of wireless portable telephone services
which allow customers to place and receive calls, as well as send data
transmissions, from any location, thereby competing with pay phone and cellular
phone services. TDS also faces competition in its D&E Long Distance telephone
service which competes against other long distance carriers such as AT&T,
Sprint, MCI and others.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales. On February 28, 1994, the government of Hungary awarded a
concession to MTT, a Hungarian corporation, to provide local exchange
telecommunications service for a period of twenty-five years in the Monor Region
of Hungary. The Hungarian concession provides that MTT will have the exclusive
right to design, construct and operate this telecommunications network beginning
in 1994 for an eight-year period. The Monor Region is a 750 square mile area
with a population of 240,000 people and is adjacent to the southeast side of
Budapest. MTT provides over 62,000 lines of telephone service and additionally,
provides service to over 26,000 cable television customers. MCG, a Nebraska
corporation, presently owns 89% of MTT. Marketing
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has invested $6,652,000 in MCG since December 1993, resulting in 16.5% ownership
of MCG.
During 1997, Marketing purchased common stock giving it a 33% interest
in EuroTel L.L.C., a U.S. company. EuroTel acquired 100% ownership of PT, a
Polish corporation in July 1997. PT is constructing a telephone network in an
area south of Warsaw where PT has three licenses covering an area with a
population of approximately 1.9 million people. As of December 31, 1997,
Marketing has made loans to EuroTel of $4,555,000 to finance the initial
construction of the network.
Special Considerations.
Growth of unregulated business activities and increased competition may involve
more risk.
A substantial portion of D&E's operations are subject to regulation at
both the federal and state levels. Nonetheless, D&E continues to experience
growth in its unregulated businesses. The Telecommunications Act of 1996 (the
"Telecommunications Act"), signed into law by President Clinton on February 8,
1996, has enormous ramifications throughout both state and federal jurisdictions
and, therefore, affects the strategic direction of D&E. While the
Telecommunications Act encourages development of advanced technology in the
telecommunications industry and entrance of D&E into new markets, it may also
provide these same opportunities to a new set of competitors and other
entrepreneurs, who have not previously been permitted to compete in Telco's
markets.
Effect of exchange rate fluctuations.
D&E has invested in operations in Europe which have experienced
exchange translation losses in converting results from foreign currencies into
U.S. dollars. As provided in the contracts and licenses with the various
ministries of telecommunications, the foreign operations are able to raise rates
as inflation has affected the translation between currencies, there can be no
assurance that the Company's foreign operations will be able to raise rates in
the future to offset some or all of the effects of inflation of the local
currencies. Although there has been no problem moving currency out of foreign
countries, there is no assurance that currency movement controls will not be
enacted in the future.
New business activities.
D&E has committed itself to invest in several new ventures. These new
business opportunities are likely to generate costs in excess of revenue during
their development period. Although management believes in the viability of these
new ventures, they operate in competitive environments and, therefore, are not
assured of becoming viable businesses.
Item 2. Properties.
(a) Land and Buildings. D&E owns its corporate headquarters, a
multi-purpose six-story building, the Brossman Business Complex ("BBC"), located
at 124 East Main Street, Ephrata, Pennsylvania. It consists of approximately
85,900 square feet of floor space. The first and second floors are occupied by a
movie/live theater and a restaurant. Other portions of the building are leased
as office space and conference rooms. Approximately half of the building is
currently occupied by D&E employees.
D&E also owns its main central office switch located at 130 East Main
Street, Ephrata, Pennsylvania. This building consists of approximately 19,600
square feet and contains administrative offices and central office switching
equipment serving customers in the Adamstown, Denver, Akron and Ephrata
exchanges. In addition, it houses the PCS ONE switch and computer equipment.
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In addition, D&E owns eighteen (18) other building facilities,
containing a total floor space area of 121,200 square feet, located in various
communities throughout D&E's service area. These buildings serve a variety of
functions including: exchange central offices, remote switching units, plant
operations center, materials storage, engineering and planning, vehicle
maintenance, retail store, a parking garage and a communications tower site.
(b) Network Plant Facilities. D&E owns and operates a network of
switching and transmission facilities which are used to provide local, national
and international telecommunications services to its customers. This network
also provides for advanced custom calling services and customer local area
signaling services ("CLASS") and is positioned to provide broadband services in
the future.
The switching facilities consist primarily of digital electronic
switching equipment housed in D&E-owned buildings situated at various locations
within the service area. The 100% fully digital switching technology used by D&E
is manufactured by Northern Telecom. Two host DMS-100 switches are located in
Ephrata and Lititz; ten remote switching centers or remote line modules are
located in buildings or controlled environmental vaults at Adamstown, Akron,
Brickerville, Denver, Durlach, Elstonville, Lincoln, Manheim, Reinholds, and
Turnpike 21. Other smaller remote dial tone units, such as access nodes and
digital loop carrier equipment, are contained in weather-proof housings
scattered throughout the territory. D&E has also invested in Signaling System 7,
("SS7") Signaling Transfer Point equipment, SS7 Signaling Control Point
equipment, and Advanced Intelligent Network ("AIN") Service BuilderTM software
which are used to provide AIN services. In addition, this equipment permits D&E
to be a node in the Illuminet telephone network through which other
telecommunications companies can obtain access to the national SS7 network.
Transmission facilities, sometimes referred to as "outside plant,"
consist of cables, wires, terminals and the necessary supporting structures
(poles, conduits, manholes, etc.). The cable plant in service contains mostly
metallic copper conductors and is installed in one of the following methods:
aerial construction on poles, underground in conduit, or directly buried in the
earth. The "outside plant," or "local loop" facilities, connect each end user
(telephone subscriber) with one of D&E's switching units, which in turn are
interconnected with other exchange central offices or the facilities of long
distance companies such as AT&T, MCI, Sprint, and others.
In 1994, D&E completed a four-year fiber optic ring project.
Approximately 431,000 feet of fiber optic cable was installed in order to create
three "self healing" fiber optic rings. This self healing ring technology
provides an uninterruptable communications link to each of D&E's switching
centers and larger digital remote units, thus protecting D&E's customers from
any service outage caused by a break in any major fiber optic cable.
Item 3. Legal Proceedings.
D&E is involved in various legal proceedings arising in the ordinary
course of its business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on D&E's consolidated
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the shareholders during
the fourth quarter of 1997.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock of D&E Communications, Inc, has traded on the NASDAQ
National Market tier of the NASDAQ Stock Market under the symbol DECC since
October 1, 1996. Previously it was traded on the over-the-counter market. The
table below sets forth the high and low bid prices of D&E's Common Stock during
each of the periods indicated, as reported and summarized in the "Pink Sheets"
published by the National Quotation Bureau prior to October 1, 1996. After
October 1, 1996, the bid prices were available daily on the NASDAQ National
Market.
1996 Low High
1st Quarter $ 17.83 $ 23.92
2nd Quarter $ 19.67 $ 19.83
3rd Quarter $ 20.00 $ 24.75
4th Quarter $ 23.50 $ 24.75
1997 Low High
1st Quarter $ 21.50 $ 23.00
2nd Quarter $ 19.00 $ 21.50
3rd Quarter $ 17.25 $ 19.00
4th Quarter $ 16.50 $ 19.25
The amounts shown above reflect the three-for-one share exchange which
occurred when D&E became the holding company of the Denver and Ephrata Telephone
and Telegraph Company (Telco). The approximate number of holders of Common Stock
of D&E, based upon the records maintained by D&E, as of December 31, 1997, was
1,040.
On January 7, 1998, D&E issued 1,300,000 shares of restricted Common
Stock to Southwestern Investments, Inc., a subsidiary of Citizens Utilities
Company (Citizens), for an aggregate sales price of $27 million in a privately
negotiated transaction that was exempt from registration under Section 4(2) and
Rule 506 of the Securities Act of 1933, as amended. (See Management's Discussion
and Analysis of Financial Condition and Results of Operation - Other).
Cash dividends have been declared quarterly on D&E's Common Stock
during the two most recent fiscal years in the annual amount of $0.39 per share.
Dividends are paid as and when declared by D&E's Board of Directors and in
accordance with restrictions set forth in covenants contained in Telco's debt
agreements. For further discussion of such restrictions, see Note 9 to the
Financial Statements.
For further discussion of D&E's intended use of any cash reserves
available to it, see Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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Item 6. Selected Financial Data.
The following table sets forth selected consolidated summary financial
information as of December 31, and for each of the last five fiscal years ended
December 31, 1997. Certain amounts have been reclassified for comparative
purposes.
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
(dollars in thousands, except per-share amounts) (1)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data
Operating Revenues $ 48,484 $ 44,396 $ 40,908 $ 36,777 $ 32,626
Net Income $ 9,565 $ 3,910 $ 3,343 $ 3,244 $ 3,374
Balance Sheet Data
Total Assets $119,961 $ 91,556 $ 88,521 $ 85,175 $ 78,246
Long-Term Debt $ 41,657 $ 24,888 $ 26,137 $ 26,512 $ 26,269
Redeemable Preferred Stock (2) $ -- $ -- $ -- $ 129 $ --
Per-Share Information
Basic Earnings Per
Common Share (3) $ 1.58 $ 0.68 $ 0.59 $ 0.57 $ 0.59
Cash Dividends Declared
Per Common Share (3) $ 0.39 $ 0.39 $ 0.36 $ 0.35 $ 0.33
</TABLE>
(1) The selected financial data for fiscal years 1995 through 1993 are for
Denver and Ephrata Telephone and Telegraph Company, which is now a
subsidiary of D&E Communications, Inc. D&E Communications, Inc., and its
subsidiaries are referred to as (D&E).
(2) The 1,289 outstanding shares of Telco's Series B 5 1/2% Preferred Stock
were redeemed on February 1, 1995, at $100 par value per share plus accrued
dividends.
(3) The per-share data is based upon the weighted average common shares
outstanding and reflects a three-for-one share exchange effective June 7,
1996. Computations of earnings for all years are in accordance with
Statement of Financial Accounting Standards 128, Earnings per Share.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Fiscal Years 1997, 1996 and 1995
On June 7, 1996, D&E Communications, Inc. became the parent company of
Denver and Ephrata Telephone and Telegraph Company (Telco) pursuant to the terms
of the Agreement and Plan of Exchange (the Plan of Exchange), whereby each of
the outstanding Telco common shares, par value $.50, was exchanged for three D&E
common shares, par value $.16 (the D&E Share Exchange). In its effect, the D&E
Share Exchange was similar to a three-for-one split of Telco common shares. For
comparative purposes, all information related to D&E common shares and per-share
amounts for all periods presented have been restated to reflect the D&E Share
Exchange. The following should be read in conjunction with D&E's financial
statements. Monetary amounts presented in the following discussion are in
thousands except earnings per share.
The financial statements have been reported in thousands of dollars and
summarized to reflect the new presentation. Accounts have been reclassified to
reflect the emphasis on more detailed internal management information and
continued emphasis on growth in non-regulated communication services. The
discussion on the results of operations which follows, tracks the historical
method in which these results have been discussed.
RESULTS OF OPERATIONS
Summary
Net income for 1997 was $9,565, 144.6% over 1996 net income of $3,910
primarily as a result of the gain on the sale of cellular partnership interests.
The increase of $5,655 included a net of tax gain of approximately $7,986 from
the cellular sale. This gain was partially offset by additional losses of
approximately $2,000 in recording the results of joint ventures with affiliates
operating in Hungary, Poland and the domestic operations of a Personal
Communications Services (PCS) business. Net income for 1996 was $3,910, 17.0%
more than 1995 net income of $3,343. The 1996 increase in net income was
primarily due to an increase in the equity in net income from affiliates of
$1,196 associated with D&E's Hungarian investment.
During 1997, cash flow changes included an increase from investing
activity, primarily from the proceeds of the cellular interest sale, which was
partially offset by increased net investments in other affiliates and a decrease
from financing activity including the net repayment of debt. In 1996, the
changes were primarily a decrease in funds from operations resulting from a
reduction of accounts payable for equipment purchases and partially offset by an
increase in notes receivable related to the acquisition of a PCS license and the
merger with PCS One, Inc.
Operating Revenues
Consolidated operating revenues for 1997 were $48,484, an increase of
$4,088, or 9.2%, over 1996. Approximately one-third of the growth was from
communication product sales which were primarily related to the November 1996
acquisition of the D&E Computer Networking Services (D&E CNS) business, formerly
known as Com Tech Technical Services. Consolidated operating revenues for 1996
were $44,396,
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an increase of $3,488, or 8.5%, over 1995. Approximately two-thirds of the
revenue growth in 1996 was derived from non-regulated sources, while revenues
from regulated telephone activities also increased. A substantial portion of
D&E's operations are subject to regulation at both the federal and state levels.
The Telecommunications Act of 1996 (the "Telecommunications Act") has enormous
ramifications throughout both state and federal jurisdictions and, therefore,
affects the strategic direction of D&E. While the Telecommunications Act
encourages development of advanced technology in the telecommunications industry
and entrance of D&E into new markets, it may also provide these same
opportunities to a new set of competitors who have not previously been permitted
to compete in Telco's markets.
Communication service revenues include: local network services, network
access services, long distance network services, directory advertising and other
communication services. These categories are discussed separately below.
Local network services revenues are generated by Telco providing local
exchange, local private line and public telephone services. Local network
services revenues increased 9.9% in 1997 to $9,512 from $8,654 in 1996. The 1997
increase was partially from a 4.7% increase in the number of access lines and
increased demand for other features such as Caller ID Deluxe which accounted for
approximately $378 of the increase. A revenue-neutral rate adjustment in May
1997 also increased local network services revenues by approximately $480 while
decreasing revenues for other services. Local network services revenues
increased 4.0% in 1996 to $8,654 from $8,321 in 1995. The 1996 change was
primarily due to a 5% increase in the number of access lines, which accounted
for approximately $266 of the increase; one-time revenues recorded to set up
several new local private line customers, which accounted for $66 of the
increase; and a custom calling features increase of $119, primarily from Caller
ID Deluxe implemented in mid-1995. These increases were offset by a decline in
revenue related to the one-time revenues recorded in 1995 to load customer
records in the Automatic Location Identification (ALI) network used by Lancaster
County's 911 Center.
Network access services revenues are received from Telco's subscribers,
from local exchange carriers (LECs) and interexchange carriers (IXCs) for their
use of local exchange facilities in providing long distance services to their
customers, and from settlement pools administered by the National Exchange
Carrier Association, Inc. (NECA). Revenues in this category increased 5.4% in
1997 to $16,698 from $15,843 in 1996. The 1997 increase was related to the
increased number of access lines, trunks and ports, all handling an increase in
minutes of use which generated $1,193 of the increase. An increase in interstate
Carrier Access Billing System (CABS) rates in July contributed $535 of
additional revenue. Interstate access revenues settled through NECA decreased
$1,196 as a result of Telco reentering the Traffic Sensitive Pool in July 1997.
Network access services revenues increased 3.5% in 1996 to $15,843 from $15,309
in 1995. The increase in 1996 was primarily due to an increase of $406 from the
intrastate minutes of use and increases in the number of access lines and
special access circuits.
During the third quarter of 1996, Telco exceeded 50,000 access lines.
Therefore, on July 1, 1997, when the current traffic-sensitive access rates
expired under the FCC Small Company Incentive regulation, Telco was required to
follow another method of determining these rates. Accordingly, Telco rejoined
NECA's Traffic Sensitive Pool and effective July 1, 1997, revised its
traffic-sensitive access rates to the rates from the NECA Interstate Access
Tariff. The interstate revenues generated through participating in NECA were
more favorable and prone to less risk than if Telco had established rates based
on its costs.
Long distance network services revenues are received from long distance
calls made by Telco customers within the Capital (south central) Region of
Pennsylvania as well as D&E Long Distance customers' calls worldwide. During
1997, long distance network services revenues decreased 0.6% to $5,964 in 1997
from $5,997 in 1996, partially as a result of a small decrease in the minutes of
use and partially from a rate decrease which was part of a revenue neutral rate
adjustment in May 1997. Long distance network services revenues increased by
6.3% to $5,997 in 1996 from $5,640 in 1995. The 1996 increase was related to an
increase of 4.0% in the long distance minutes of use.
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Directory advertising revenues, received from advertisement space sold
in the telephone directory, increased 8.2% to $3,182 in 1997 from $2,940 in
1996, compared to a 10.1% increase in 1996 from $2,670 in 1995. The increases
were primarily due to rate increases in local billings and in billings for
advertisers located outside Telco's regulated area.
Other communication services revenues include equipment rentals,
repairs, paging, billing and collection services for other communication
companies and consulting services provided primarily to the D&E/Omnipoint
Wireless Joint Venture, L.P. (PCS ONE). Communication services revenues
increased 18.2% to $3,121 in 1997 from $2,640 in 1996. Approximately $365 of the
increase was related to consulting services provided to PCS ONE by D&E Wireless,
Inc. (Wireless) and other increases in services such as paging, voice mail and
repairs. Communication services revenues increased 3.7% to $2,640 in 1996 from
$2,547 in 1995 primarily from increased equipment rentals for paging and other
communications equipment.
Communication products sold includes primarily telephone systems and
computer Local and Wide Area Network sales. Communication products sold revenues
increased 19.3% to $8,565 in 1997 from $7,181 in 1996. The 1997 increase was
primarily attributable to the acquisition of D&E CNS (formerly known as Com Tech
Technical Services) in November 1996. The increase was net of an offsetting
revenue decrease of $817 related to the construction of a fiber optic facility
for a third party which was completed in 1996. Communication products sold in
1996 increased 37.2% to $7,181 from $5,236 in 1995 partially from the
acquisition of D&E CNS and partially from equipment sales related to the
construction of the fiber optic facility.
Miscellaneous revenues include amounts earned from pole attachment
rentals, the rental of real estate facilities, services provided to Lancaster
County in implementing and maintaining the 911 Center at Telco's Manheim Central
Office and other miscellaneous services. Miscellaneous revenues increased 26.4%
to $1,442 in 1997 from $1,141 in 1996 and decreased 3.7% in 1996 from $1,185 in
1995. During 1997 D&E received a one-time $250 payment for agreeing to the
assignment of a long-term directory publishing contract.
Operating Expenses
Consolidated operating expenses for 1997 were $39,464, an increase of
$3,467, or 9.6%, over 1996 operating expenses of $35,997. Total operating
expenses for 1996 increased by $3,541, or 10.9%, over 1995 operating expenses of
$32,456.
Communication service expenses include: network operations expenses,
network access, directory advertising and other communication services costs.
These categories are discussed separately below.
Network operations expenses are incurred in maintaining D&E's switching
and transmission facilities, including digital central office switching
equipment and outside plant cable and trunk facilities. Network operations
include related employee costs, engineering expense, maintenance of land and
buildings, testing, general purpose computers, office equipment,
videoconferencing and other materials and supplies. Expenses in this category
decreased 5.9% to $5,722 in 1997 from $6,079 in 1996. The 1997 decrease was
primarily due to a decrease in wages and benefits offset by increased costs in
Wireless related to the startup of the PCS network. Network operations expenses
increased 3.0% in 1996 to $6,079 from $5,905 in 1995. The 1996 increase was
primarily due to increased wages and benefits.
Directory advertising increased 9.7% to $2,016 in 1997 from $1,838 in
1996 and increased 9.1% in 1996 from $1,685 in 1995. The increases in both years
were related to the increased size and costs to publish the telephone directory.
Other communication services costs increased 85.9% to $766 in 1997 from
$412 in 1996 and were relatively unchanged in 1996 compared to 1995. The primary
increase in 1997 related to the initiation of
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communication services provided to PCS ONE in operating its wireless network.
Communication service costs will increase at a faster rate in the future as more
services are provided to affiliated companies.
Cost of communication products sold increased $788 to $5,816, or 15.7%,
in 1997 and $1,319 to $5,028, or 35.6%, in 1996. The increase in 1997 was
primarily attributable to the acquisition of the D&E CNS business in late 1996.
The increase in 1996 was related to the installation of a major communication
system on a local college campus and was partially offset by a decrease related
to construction of a fiber optic facility that was started in 1995 and completed
in 1996.
Depreciation expense increased $752 to $8,466, or 9.8%, in 1997 and
$456 to $7,714, or 6.3%, in 1996. The increase in both years was primarily
attributable to an increase in telephone plant in service.
Marketing and customer services expense in 1997 increased $150 to
$3,365, or 4.7%, primarily due to increased wages and benefits, partially
related to sales and customer services in connection with D&E CNS. Marketing and
customer services expense in 1996 increased $144 to $3,215, or 4.7%, primarily
due to an increase in postage and supplies expenses combined with an increase in
wages and benefits.
General and administrative services expense increased $1,622 to
$10,762, or 17.8%, in 1997 and $1,355 to $9,140, or 17.4%, in 1996. The 1997
increase was primarily related to legal, planning and training costs related to
the Wireless business and to increased wage and benefit costs. The 1996 increase
was primarily due to an increase in wages and benefits, a one-time charge of
$354 for an early retirement program implemented during the fourth quarter and
the costs to list D&E's stock on the NASDAQ National Market.
Operating Income
Operating income for 1997 was $9,020, or $621 above the $8,399 recorded
in 1996. Operating income in 1996 was $53 less than the 1995 operating income of
$8,452.
Other Income (Expense)
Other income (expense), net for 1997 was an income of $8,539, an
increase of $10,365 over 1996. The 1997 increase was principally attributable to
the $11,971 gain on the sale of partnership interests in two cellular
investments. This income was partially offset by equity in the net loss of
affiliates. These losses were attributable to: (i) operating losses of $1,560
principally attributable to exchange translation losses from the Monor
Communications Group (MCG) investment in Monor Telephone Company (MTT) in
Hungary; (ii) operating losses of $407 related to the Eurotel L.L.C. (Eurotel)
investment in Pilicka Telephone (PT) in Poland; and, (iii) losses of $989
resulting from PCS ONE in south central Pennsylvania. During 1997 MTT arranged
financing with Credit Lyonnais for $50 million denominated in German marks and
U.S. dollars and repaid a $30 million U.S. dollar-denominated loan from the
Overseas Private Investment Corporation (OPIC). This new debt was intended
partially to reduce the level of exchange translation exposure while providing
funds for expansion.
Interest expense decreased $418 or 16.1% to $2,173 in 1997, primarily
as a result of funds from the sale of cellular interests being used to repay
bank borrowings. Short-term borrowing increased $139 or 5.7% to $2,591 in 1996,
to finance capital additions and expansion into new business areas.
Minority Interest
The 20% minority partner's interest in The D and E Group was recorded
for the first time in 1996 and ended with the merger between D&E and PCS One,
Inc. in March 1997.
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Income Taxes
The federal and state income taxes increased $5,295, or 198.5%, in 1997
and increased $500, or 23.1%, in 1996. The increases in 1997 and in 1996 were
primarily due to the increase in pre-tax income with the significant increase in
1997 resulting from the gain on the sale of cellular interests . In 1997, taxes
increased partially from D&E increasing its valuation allowance on the deferred
tax assets related to the equity loss in investments, as a result of revised
estimates on the realizability of loss carryforwards. The effective tax rates
were 45.3%, 40.1% and 38.9% for 1997, 1996 and 1995, respectively.
Effects of Inflation
It is the opinion of management that the effects of inflation on
operating expenses over the past three years have been immaterial and have been
partially offset by growth in operating and other revenues. Management
anticipates that this trend will continue in 1998.
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 expects that presently
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 may be needed to fund new business
development activities and to enhance D&E's capital structure within
management's guidelines. On January 7 1998, D&E issued 1,300,000 shares of
Common Stock to Southwestern Investments, Inc., a subsidiary of Citizens
Utilities Company (Citizens), for an aggregate sales price of $27 million in a
privately negotiated transaction that was exempt from registration under Section
4(2) and Rule 506 of the Securities Act of 1933, as amended. See Note 15 to the
Financial Statements.
D&E's primary source of funds in 1997 was from an investing activity
which generated $17,897 from the sale of cellular interests. Net cash provided
by operating activities was $10,721 in 1997 and $8,061 in 1996. The increase in
1997 was primarily from an increase in accounts payable largely related to
equipment purchased from Nortel. In 1996, the decreases in cash flow compared to
1995 resulted from a reduction of accounts payable to Nortel of $1,889 for
equipment purchases and an increase in receivables in the form of a short-term
note receivable from PCS One, Inc. for $1,559 related to the purchase of a PCS
license.
D&E's most significant investing activity in 1997 was the sale of
cellular interests for $17,897. The net increase in investments and advances to
affiliates was $16,584. D&E invested $6,108 in capital expenditures during 1997
compared with $6,349 of capital additions in 1996. The major capital additions
in both years were for switching equipment, computers and software, and poles
and cable purchases to continually upgrade the telephone operating system. There
were expenditures expected to be included with capital expenditures for PCS
network capital additions which, after formation of PCS ONE, were included in
the investment in and advances to affiliates. Approximately $6,360 of capital
additions net of related accounts payable were included in investment in
affiliates. Accounts receivable from affiliated companies also included
significant additions of approximately $3,939 for PCS ONE and $4,555 advances to
Eurotel for startup activities of PT in Poland.
As of December 31, 1997, D&E had unsecured lines of credit totaling
$16,000 with three domestic banks. The outstanding amounts borrowed under these
agreements at the end of the year totaled $6,000. During February 1998, one of
the banks increased its line of credit by $2,000, resulting in unsecured lines
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of credit totaling $18,000. A portion of these funds, in both years, was used to
invest in and provide working capital to telephone operations in Hungary, as
well as to provide additional working capital for D&E. In 1997, investments and
advances were also made to Wireless for development of a PCS business and to
Eurotel to finance startup costs of PT.
Maturities of long-term debt over the next five years are $1,063
annually 1998 through 2000, $926 in 2001 and $1,504 in 2002. D&E believes it
will have adequate resources to meet these obligations as they become payable.
For further information regarding the interest rates on the unsecured lines of
credit and the long-term debt and for current maturities of long-term debt
during the next five years, see Note 9 to the Financial Statements.
As a result of the restructuring associated with the D&E Share
Exchange, Telco negotiated amendments, effective June 7, 1996, to the financial
covenants contained in each of its three Senior Note Agreements. The amendments
changed the limit on accumulated distributions and restricted investments from
$9,000 plus 75% of accumulated consolidated net income of Telco, to $5,000 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 declined to 44.0%
at December 31, 1997, compared to 46.3% at December 31, 1996. In January 1998,
after the sale of 1,300,000 shares of D&E Common Stock to Citizens, the debt
ratio dropped to 31.3%. See Note 15 to the Financial Statements.
OTHER
During 1997, D&E entered into commitments with an equipment
manufacturer to purchase up to $8 million of equipment for the PCS switch and
network facilities. This commitment was fulfilled, and the additional PCS
equipment requirements are currently arranged directly by PCS ONE.
On October 8, 1997, MTT entered into a loan agreement with Credit
Lyonnais for a general purpose loan of $50 million to repay its OPIC debt and to
provide operating capital. An initial drawdown of $42 million was made with the
remaining $8 million available for subsequent drawdowns ($1 million without
conditions and $7 million if certain covenants are met) until May 31, 1999. The
loan is denominated 70% in German marks and 30% in U.S. dollars. It is repayable
in 16 semiannual installments commencing on June 30, 1999, and ending on
December 31, 2006, with interest at the London Interbank Offered Rate (LIBOR)
plus 1.5%. The D&E guarantee required by OPIC was not required by Credit
Lyonnais.
On November 3, 1997, D&E entered into an agreement pursuant to which a
subsidiary of Citizens would purchase up to 1.3 million shares of newly issued
D&E Common Stock. Under the agreement, the purchase price was equal to the
average closing prices of D&E Common Stock on each of the 30 trading days ending
on the day of the closing plus 10% of that average price. The price range was
limited to a minimum of $20.00 and a maximum of $25.00. Upon approval of the
Department of Justice in December 1997, the agreement terms were set at $20.781
per share for 1.3 million shares or $27,015. The closing occurred on January 7,
1998. The investment by Citizens represented 17.5% of the combined shares
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 acquired for public resale. D&E intends to
use the net proceeds of the transaction primarily for increasing its investment
in PCS ONE.
On November 14, 1997, Wireless and subsidiaries of Omnipoint
Corporation formed PCS ONE for the purpose of developing, managing and operating
Personal Communications Services in the Lancaster,
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Harrisburg, York-Hanover and Reading Basic Trading Areas. Under the conditions
of the 50/50 Limited Partnership Agreement, the venture will operate for an
initial period of 10 years with provisions for subsequent 10-year agreement
terms.
In compliance with the Pennsylvania Public Utility Commission directive
for regional toll competition, Telco opened its central office switches to equal
access for other long distance carriers on December 31, 1997. Although D&E
proactively introduced toll discount programs in conjunction with the
competition start date, D&E expects the result will be a decrease in long
distance network service revenue partially offset by an increase in network
access services revenues.
During a one-year period of reconsideration and waiver of the C-Block
license interest, the Federal Communications Commission (FCC) reviewed the
repayment terms for C-Block license note agreements. In December 1997, the FCC
offered C-Block license holders several options as alternatives to the original
payment terms. In February 1998, the FCC further delayed the timing for D&E to
elect one of the FCC options for its C-Block Lancaster License. At the present
time, D&E is still reviewing its options for the Lancaster License.
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of D&E's
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. D&E has addressed the issue by
identifying the programs that need to be modified and has completed most of the
revisions. The billing system software modification is complete, and the
majority of other programs' modifications are nearing completion. The cost of
completing the modifications has been immaterial to the current operations, and
management believes the changes will be completed without material impact on its
financial condition or interruption to ongoing business activities.
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements as to
year 2000 remediation, the future performance of D&E and its various domestic
and international investments, the effects of inflation and long-term contracts,
including the Lancaster County 911 system, MCG, MTT, Eurotel, PT, and PCS ONE.
Actual results may differ as a result of factors over which D&E has no control,
including, but not limited to regulatory changes and 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.
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.
Item 8. Financial Statements and Supplementary Data.
Information called for by this Item is set forth beginning on page F-1.
See Index to Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required under this Item is incorporated by reference
from the material captioned "Management and Directors" in D&E's definitive proxy
statement to be filed.
Item 11. Executive Compensation.
The information required under this Item is incorporated by reference
from the material captioned "Executive Compensation" in D&E's definitive proxy
statement to be filed.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required under this Item is incorporated by reference
from the material captioned "Security Ownership of Certain Beneficial Owners and
Management" in D&E's definitive proxy statement to be filed.
Item 13. Certain Relationships and Related Transactions.
The information required under this Item is incorporated by reference
from the material captioned "Certain Relationships and Related Transactions" in
D&E's definitive proxy statement to be filed.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this Annual Report
on Form 10-K in the following manner:
(1) The consolidated financial statements of the Company and its
subsidiaries filed as part of this report are listed in the attached Index to
Financial Statements.
(2) All schedules are omitted because the required information is
not present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements.
(3) The exhibits filed as part of this Report are listed in the
Index to Exhibits.
(b) There was one current report on Form 8-K filed by the Registrant
during the last quarter of 1997. On December 2, 1997, a Form 8-K was filed
reporting the formation of a partnership between D&E Wireless, Inc. a subsidiary
of D&E Communications, Inc. and Omnipoint Venture Partner I, LLC and Omnipoint
Holdings, LP. The joint venture was formed to design, build, and market a PCS
system in the Lancaster, Harrisburg, York-Hanover, and Reading Basic Trading
Areas.
(c) Exhibits. See Index to Exhibits.
(d) Financial statement schedules of subsidiaries not consolidated and
50% or less owned. No information called for by this Item 14 (d) is required.
19
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
- ------ -------------- ---------
<S> <C> <C>
2. Plan of acquisition, reorganization, arrangement,
liquidation or succession:
2.1 Agreement and Plan of Exchange Incorporated herein by reference from
Between Denver and Ephrata Telephone and Exhibit 2.1 to Amendment No. 2 to the
Telegraph Company (a Pennsylvania Registration Statement on Form S-4
corporation) and D&E Communications, Inc. (Registration No. 333-2960) filed by
(a Pennsylvania corporation). D&E on April 23, 1996.
2.2 Agreement and Plan of Merger, as amended, Incorporated herein by reference from
between D&E Communications, Inc. Exhibit B to Amendment No. 1 to the
(a Pennsylvania corporation) and PCS One, Inc. Registration Statement on Form S-4
(a New Jersey corporation). (Registration No. 333-18659) filed by
D&E on January 21, 1997.
2.3 Amendment No. 1 to the Agreement and Plan of Incorporated herein by reference from
Merger between D&E Communications, Inc, Exhibit C to Amendment No. 1 to the
(a Pennsylvania corporation) and PCS One, Inc. Registration Statement on Form S-4
(a New Jersey corporation). (Registration No. 333-18659) filed by
D&E on January 21, 1997.
2.4 D&E Shareholder Agreement, dated as of March Incorporated herein by reference from
21, 1997, by and between D&E and various Exhibit 99.01 to the Form 8-K Current
shareholders of D&E. Report filed by D&E on April 7, 1997.
2.5 Assignment and Assumption Agreement regarding Incorporated herein by reference from
D&E's assignment of its 50% interest in Lancaster Exhibit 2.01 to the Form 8-K Current
Cellular Enterprises to Telespectrum, Inc. Report filed by D&E on September 18,
1997.
2.6 Assignment and Assumption Agreement regarding Incorporated herein by reference from
D&E's assignment of its 33% interest in Pennsylvania Exhibit 2.02 to the Form 8-K Current
RSA 12 Limited Partnership to Telespectrum, Inc. Report filed by D&E on September 18,
1997.
3. Articles of Incorporation and By-laws:
3.1 Amended and Restated Articles of Incorporated herein by reference from
Incorporation Exhibit A to D&E's definitive proxy
statement for its 1997 Annual Meeting
of Shareholders filed April 2, 1997.
3.2 By-Laws Incorporated herein by reference from
Exhibit 3.2 to D&E's Registration
Statement on Form 10 filed by D&E on
April 30, 1993.
20
<PAGE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
<S> <C>
4. Instruments defining the rights of security holders,
including debentures:
4.1 Form of D&E Common Stock Certificate, Incorporated herein by reference from
par value $0.16 per share. Exhibit 4.1 to D&E's 1996 Annual
Report on Form 10-K.
4.2 Note Agreement between Allstate Life Incorporated herein by reference from
Company, Allstate Life Insurance Company Exhibit 4.1 to D&E's Registration
of New York, and Denver and Ephrata Telephone and Statement on Form 10 filed by D&E
Telegraph Company, dated as of November 15, 1991, on April 30, 1993.
Re: $10,000,000 9.18% Senior Notes due November
15, 2021.
4.3 First Amendment to Note Agreement dated as of Incorporated herein by reference from
November 15,1991 between Allstate Life Insurance Exhibit 4.2 to D&E's 1993 Annual
Company, Allstate Life Insurance Company of Report on Form 10-K.
New York, and Denver and Ephrata Telephone and
Telegraph Company, dated as of January 14, 1994,
due November 15, 2021, Re: $10,000,000
9.18% Senior Notes due November 15, 2021.
4.4 Note Agreement between Allstate Life Insurance Incorporated herein by reference from
Company and Denver and Ephrata Telephone and Exhibit 4.3 to D&E's 1993 Annual
Telegraph Company, dated as of January 14, 1994, Report on Form 10-K.
Re: $10,000,000 6.49% Senior Notes due
January 14, 2004.
4.5 Second Amendment to Note Agreement dated Incorporated herein by reference from
as of November 15,1991 between Allstate Life Exhibit 4.3 to D&E's Registration
Insurance Company, Allstate Life Insurance Statement on Form S-3 filed by D&E
Company of New York, and Denver and Ephrata on October 31, 1994.
Telephone and Telegraph Company, dated as of
September 27, 1994, Re: $10,000,000 9.18%
Senior Notes due November 15, 2021.
4.6 First Amendment to Note Agreement dated as of Incorporated herein by reference from
January 14, 1994 between Allstate Life Insurance Exhibit 4.5 to D&E's Registration
Company and Denver and Ephrata Telephone and Statement on Form S-3 filed by D&E
Telegraph Company, dated as of September 27, on October 31, 1994.
1994, Re: $10,000,000 6.49% Senior Notes due
January 14, 2004.
4.7 Second Amendment to Note Agreement dated as of Incorporated herein by reference from
January 14, 1994 between Allstate Life Insurance Exhibit 4.6 to D&E's 1995 Annual
Company and Denver and Ephrata Telephone and Report on Form 10-K.
Telegraph Company, dated as of September 1, 1995,
Re: $10,000,000 6.49% Senior Notes due
January 14, 2004.
21
<PAGE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
- ------ -------------- ----------
4.8 Third Amendment to Note Agreement dated Incorporated herein by reference from
as of November 15,1991 between Allstate Life Exhibit 4.7 to D&E's 1995 Annual
Insurance Company, Allstate Life Insurance Report on Form 10-K.
Company of New York, and Denver and Ephrata
Telephone and Telegraph Company, dated as of
September 1, 1995, Re: $10,000,000 9.18%
Senior Notes due November 15, 2021.
4.9 Fourth Amendment, Consent and Waiver of Note Incorporated herein by reference from
Agreement dated as of November 15, 1991 between Exhibit 4.1 to D&E's Quarterly
Allstate Life Insurance Company, Allstate Life Report on Form 10-Q for the
Insurance Company of New York and Denver and quarterly period ended June 30, 1996.
Ephrata Telephone and Telegraph Company dated as
of June 7, 1996, RE: $10,000,000 9.18% Senior
Notes due November 15, 2021.
4.10 Third Amendment, Consent and Waiver to Note Incorporated herein by reference from
Agreement dated as of January 14, 1994 between Exhibit 4.2 to D&E's Quarterly
Allstate Life Insurance Company and Denver and Report on Form 10-Q for the
Ephrata Telephone and Telegraph Company dated as quarterly period ended June 30, 1996.
of June 7, 1996, RE: $10,000,000 6.49% Senior
Notes due January 14, 2004.
4.11 Installment Payment Plan Note between D&E Incorporated herein by reference from
Investments, Inc. and the Federal Communications Exhibit 10.3 to D&E's Quarterly
Commission dated as of March 28, 1997, Re: Report on Form 10-Q for the
$11,878,574 7.00% note due September 17, 2006. quarterly period ended March 31, 1997.
4.12 Security Agreement dated March 28, 1997 between Incorporated herein by reference from
D&E Investments, Inc. and the Federal Communications Exhibit 10.4 to D&E's Quarterly
Commission Re: the Installment Payment Plan Note due Report on Form 10-Q for the
September 17, 2006. quarterly period ended March 31, 1997.
4.13 Fifth Amendment to Note Agreement dated as of Incorporated herein by reference from
November 15, 1991 between Allstate Life Insurance Exhibit 10.5 to D&E's Quarterly
Company, Allstate Life Insurance Company of New Report on Form 10-Q for the
York, and Denver and Ephrata Telephone and quarterly period ended March 31, 1997.
Telegraph Company, dated as of April 1, 1997, Re:
$10,000,000 9.18% Senior Notes due November
21, 2021.
4.14 Fourth Amendment to Note Agreement dated as of Incorporated herein by reference from
January 14, 1994 between Allstate Life Insurance Exhibit 10.6 to D&E's Quarterly
Company and Denver and Ephrata Telephone and Report on Form 10-Q for the
Telegraph Company dated as of April 1, 1997, Re: quarterly period ended March 31,
$10,000,000 6.49% Senior Notes due January 1997.
14, 2004.
22
<PAGE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
<S> <C> <C>
None of the other long-term debt of D&E and its
consolidated subsidiaries exceeds 10 percent of
the total assets of D&E and its subsidiaries on
a consolidated basis. The Company will furnish a copy
of the instrument relating to any such long-term debt
to the Commissionupon request.
9. Voting Trust Agreement.
9.1 Voting Trust Agreement Among Shareholders Incorporated herein by reference from
of Denver and Ephrata Telephone and Telegraph Exhibit 9.1 to D&E's 1995 Report
Company and Kay William Shober, Anne Brossman on Form 10-K.
Sweigart, W. Garth Sprecher, Ronald E. Frisbie and
John Amos as Voting Trustees, dated as of
November 19, 1992. ("Voting Trust Agreement")
9.2 Amendment to the Voting Trust Agreement Incorporated herein by reference from
dated as of December 31, 1995. Exhibit 9.2 to D&E's 1995 Annual
Report on Form 10-K.
10. Material Contracts
10.1 Denver and Ephrata Telephone and Telegraph Company Filed herewith.
Executive Incentive Plan as revised January 1998.
10.2 AT&T Communications Standard Agreement for Incorporated herein by reference from
the Provision of Telecommunications Services and Exhibit 10.2 to D&E's Registration
Facilities between AT&T Communications of Statement on Form 10 filed by D&E
Pennsylvania, Inc. and Denver and Ephrata Telephone on April 30, 1993.
and Telegraph Company;
Article 1 General Provisions, effective
May 25, 1984;
Article 8-2 Billing and Collection Services
effective April 1, 1992;
10.3 Telecommunications Services and Facilities Incorporated herein by reference from
Agreement between the Bell Telephone Company of Exhibit 10.3 to D&E's Registration
Pennsylvania and Denver and Ephrata Telephone and Statement on Form 10 filed by D&E
Telegraph Company, effective January 1, 1986; and on April 30, 1993.
Amendment to Telecommunications Services and
Facilities Agreement and the IntraLATA Compensation
Agreement, dated May 7, 1992;
Appendix 1 IntraLATA Telecommunications
Services, effective January 1, 1986;
Appendix 2 Ancillary Services, effective
January 1, 1986;
Appendix 5 Jointly Provided Feature Group A
Compensation effective July 24, 1986; and
Appendix 7 Extended Area Service, effective
October 1, 1988.
23
<PAGE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
10.4 IntraLATA Compensation Agreement between Incorporated herein by reference from
the Pennsylvania Non-Bell Telephone Companies and Exhibit 10.4 to D&E's Registration
Denver and Ephrata Telephone and Telegraph Statement on Form 10 filed by D&E
Company, effective January 1, 1986; and Amendment to on April 30, 1993.
Telecommunications Services and Facilities Agreement
and the IntraLATA Compensation Agreement,
dated May 7, 1992.
10.5 Agreement between Donnelley Directory, Incorporated herein by reference from
a division of The Reuben H. Donnelley Corporation Exhibit 10.5 to D&E's Registration
Statement and Denver and Ephrata Telephone and Statement on Form 10 filed by D&E
Telegraph Company, dated April 19, 1991. Portions of on April 30, 1993.
this exhibit have been omitted pursuant to a request
for confidential treatment and have been separately
filed with the Commission.
10.6 Agreement for the Distribution of Interstate Incorporated herein by reference from
Access Revenues between the National Exchange Exhibit 10.6 to D&E's Registration
Carrier Association, Inc. and Denver and Ephrata Statement on Form 10 filed by D&E
Telephone and Telegraph Company, effective May 25, 1984. on April 30, 1993.
10.7 Agreement for the Provision of Enhanced Incorporated herein by reference from
9-1-1 Services between the County of Exhibit 10.1 to D&E's Quarterly
Lancaster and Denver and Ephrata Report on Form 10-Q for the
Telephone and Telegraph Company, quarterly period ended June 30, 1994.
effective upon approval of the
Pennsylvania Public Utility Commission
which occurred May 18, 1994
Attachment #1 Request for Proposal
as Amended;
Attachment #2 Best and Final Offer,
April 28, 1994;
Attachment #3 Clarifications to RFP;
Attachment #4 Lancaster County
Resolution #74, September 22, 1993;
Attachment #5 Lancaster County
Resolution #32, May 5, 1994;
Attachment #6 Addenda, Errata,
Bulletins to Contract Documents;
Attachment #7 Facility Lease; and
Attachment #8 Tariffed Local Exchange
Carrier Services.
10.8 Amendment 1 to Exhibit A of Appendix Incorporated herein by reference from
1 of the Telecommunications Services Exhibit 10.2 to D&E 's Quarterly
and Facilities Agreement signed Report on Form 10-Q for the
June 23, 1994. quarterly period ended September 30,
1994.
24
<PAGE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
10.9 Modification to the Agreement for the Provision Incorporated herein by reference from
of Enhanced 9-1-1 Services between the County of Exhibit 10.9 to D&E's 1994 Annual
Lancaster and Denver and Ephrata Telephone and Report on Form 10-K.
Telegraph Company, February 23, 1995.
10.10 Affiliated Interest Agreement between Denver Incorporated herein by reference from
and Ephrata Telephone and Telegraph Company Exhibit 10.10 to D&E's 1995 Annual
and D&E Marketing Corp. Report on Form 10-K.
10.11 Affiliated Interest Agreement between Denver Incorporated herein by reference from
and Ephrata Telephone and Telegraph Company Exhibit 10.11 to D&E's 1995 Annual
and Red Rose Systems, Inc. Report on Form 10-K.
10.12 Sales Agreement between Denver and Incorporated herein by reference from
Ephrata Telephone and Telegraph Exhibit 10.13 to D&E's 1995 Annual
Company and Northern Telecom Inc. Report on Form 10-K.*
10.13 Network Production Purchase Agreement Incorporated herein by reference from
between Northern Telecom, Inc. and Denver Exhibit 10.1 to D&E's Quarterly
and Ephrata Telephone and Telegraph Company Report on Form 10-Q for the
dated May 3, 1996. quarterly period ended March 31,
1996.*
10.14 Affiliated Interest Agreement between D&E Incorporated herein by reference from
Communications, Inc. and Denver and Ephrata Exhibit 10.21 to D&E's 1996 Annual
Telephone and Telegraph Company and Red Report on Form 10-K.
Rose Communications, Inc.
10.15 D&E Shareholder Agreement, Exhibit D to the Incorporated herein by reference from
Agreement and Plan of Merger by and between Exhibit B to Amendment No. 1 to the
D&E Communications, Inc. and PCS One, Inc. Registration Statement on Form S-4
(Registration No. 333-18659) filed by
D&E on January 21, 1997.
10.16 D&E Communications, Inc. Officer Incentive Filed herewith.
Plan as revised January 1998.
10.17 Network Product Purchase Agreement Incorporated herein by reference from
between Northern Telecom, Inc. and Exhibit 10.1 to D&E's Quarterly
D&E Communications, Inc., dated April 10, 1997. Report on Form 10-Q for the
quarterly period ended March 31,
1997.
10.18 Federal Communications Commission, Radio Incorporated herein by reference from
Station Authorization of a Personal Communication Exhibit 10.2 to D&E's Quarterly
Service-Broadband for the C-Block in Lancaster, PA Report on Form 10-Q for the
issued March 28, 1997 to D&E Investments, Inc. quarterly period ended March 31,
1997.
25
<PAGE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
10.19 Stock Acquisition Agreement between Incorporated herein by reference from
D&E Communications, Inc. and Southwestern Exhibit 10.1 to D&E's Quarterly
Investments, Inc., a subsidiary of Citizens Utilities Report on Form 10-Q for the
Company, dated November 3, 1997. quarterly period ended September 30,
1997.
10.20 Limited Partnership Agreement by and among Incorporated herein by reference from
D&E Wireless, Inc., Omnipoint Venture Exhibit 2.01 to the Form 8-K Current
Partner I, L.L.C. and Omnipoint Holdings, Inc. Report filed by D&E on December 2,
1997.
10.21 Affiliated Interest Agreement between D&E Filed herewith.
Telephone Company and D&E Wireless, Inc.
21. Subsidiaries of the Registrant
21.1 List of all subsidiaries of D&E. Filed herewith.
23 Consents
23.1 Consent of Coopers & Lybrand, L.L.P. Filed herewith.
27. Financial Data Schedule.
27.1 Financial Data Schedule. Filed herewith.
</TABLE>
- -------------------------
* Confidential treatment received with respect to portions thereof.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned in the capacities designated and on the dates
indicated, thereunto duly authorized.
D&E Communications, Inc.
Date March 30, 1998 By /s/ Anne B. Sweigart
-------------- -----------------------------------
Anne B. Sweigart
President, Chairman of the
Board, and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date March 30, 1998 By /s/ Anne B. Sweigart
-------------- -----------------------------------
Anne B. Sweigart
President, Chairman of the
Board, and Chief
Executive Officer
Date March 30, 1998 By /s/ Robert M. Lauman
--------------- -----------------------------------
Robert M. Lauman
Executive Vice President and
Chief Operating Officer
Member of the Board of Directors
Date March 30, 1998 By /s/ Thomas E. Morell
-------------- -----------------------------------
Thomas E. Morell
Vice President, Chief Financial
Officer and Treasurer
(Chief Accounting Officer)
Date March 30, 1998 By /s/ John Amos
-------------- -----------------------------------
John Amos
Member of the Board of Directors
Date March 30, 1998 By /s/ Thomas H. Bamford
-------------- -----------------------------------
Thomas H. Bamford
Member of the Board of Directors
Date March 30, 1998 By /s/ Paul W. Brubaker
-------------- -----------------------------------
Paul W. Brubaker
Member of the Board of Directors
<PAGE>
Date March 30, 1998 By /s/ Ronald E. Frisbie
-------------- ----------------------------------
Ronald E. Frisbie
Member of the Board of Directors
Date March 30, 1998 By /s/ G. William Ruhl
-------------- ----------------------------------
G. William Ruhl
Senior Vice President, Member of
the Board of Directors
Date March 30, 1998 By /s/ Steven B. Silverman
-------------- -----------------------------------
Steven B. Silverman
Member of the Board of Directors
Date March 30, 1998 By /s/ W. Garth Sprecher
-------------- -----------------------------------
W. Garth Sprecher
Vice President and Secretary,
Member of the Board of Directors
Date March 30, 1998 By /s/ D. Mark Thomas
-------------- -----------------------------------
D. Mark Thomas
Member of the Board of Directors
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Item 8 D&E Communications, Inc.
and Subsidiaries.
Report of Independent Accountants. F - 1
Consolidated Statements of
Operations for the years ended
December 31, 1997, 1996 and 1995. F - 2
Consolidated Balance Sheets
as of December 31, 1997 and 1996. F - 3
Consolidated Statements of
Cash Flows for the years ended
December 31, 1997, 1996 and 1995. F - 4
Consolidated Statements of
Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995. F - 5
Notes to Consolidated Financial Statements. F - 6
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
D&E Communications, Inc.
Ephrata, Pennsylvania
We have audited the accompanying consolidated balance sheets of D&E
Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of D&E
Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- -----------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 6, 1998
F - 1
<PAGE>
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
For the years ended December 31, 1997, 1996 and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES
Communication service revenues ........................... $ 38,477 $ 36,074 $ 34,487
Communication products sold .............................. 8,565 7,181 5,236
Other .................................................... 1,442 1,141 1,185
-------- -------- --------
Total operating revenues .............................. 48,484 44,396 40,908
OPERATING EXPENSES
Communication service expenses ........................... 11,055 10,900 10,633
Cost of communication products sold ...................... 5,816 5,028 3,709
Depreciation and amortization ............................ 8,466 7,714 7,258
Marketing and customer services .......................... 3,365 3,215 3,071
General and administrative services ...................... 10,762 9,140 7,785
-------- -------- --------
Total operating expenses .............................. 39,464 35,997 32,456
-------- -------- --------
Operating income ................................... 9,020 8,399 8,452
OTHER INCOME (EXPENSE)
Allowance for funds used during construction ............. 77 76 27
Equity in net income (loss) of affiliates ................ (1,661) 754 (441)
Interest expense ......................................... (2,173) (2,591) (2,452)
Gain on sale of investments .............................. 11,971 -- --
Other, net ............................................... 325 (65) (10)
-------- -------- --------
Total other income (expense) .......................... 8,539 (1,826) (2,876)
-------- -------- --------
Income (loss) before minority interest, income taxes
and dividends on utility series preferred stock .. 17,559 6,573 5,576
MINORITY INTEREST .............................................. 33 75 --
-------- -------- --------
Income before income taxes and dividends
on utility series preferred stock ............... 17,592 6,648 5,576
INCOME TAXES AND DIVIDENDS ON
UTILITY SERIES PREFERRED STOCK
Income taxes ............................................. 7,962 2,667 2,167
Dividends on utility series preferred stock .............. 65 71 66
-------- -------- --------
Total income taxes and dividends on
utility series preferred stock .................. 8,027 2,738 2,233
-------- -------- --------
NET INCOME ..................................................... $ 9,565 $ 3,910 $ 3,343
======== ======== ========
Weighted average common shares outstanding ............... 6,040 5,728 5,708
Earnings per common share ................................ $ 1.58 $ 0.68 $ 0.59
======== ======== ========
Dividends per common share ............................... $ 0.39 $ 0.39 $ 0.36
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F - 2
<PAGE>
D & E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ........................... $ 61 $ 315
Accounts receivable ................................. 6,824 8,471
Accounts receivable - affiliated companies .......... 4,630 609
Inventories, lower of cost or market, at average cost 891 1,010
Prepaid expenses .................................... 3,286 2,406
Other ............................................... 454 1,484
--------- ---------
TOTAL CURRENT ASSETS ............................. 16,146 14,295
--------- ---------
INVESTMENTS
Investments and advances in affiliated companies .... 15,690 10,000
Other ............................................... 359 327
--------- ---------
16,049 10,327
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant in service .......................... 116,655 110,962
Under construction .................................. 800 1,233
--------- ---------
117,455 112,195
Less accumulated depreciation ....................... 54,654 47,207
--------- ---------
62,801 64,988
--------- ---------
OTHER ASSETS
Accounts receivable - affiliated company ............ 113 101
PCS licenses and other assets ....................... 23,320 --
Other ............................................... 1,532 1,845
--------- ---------
24,965 1,946
--------- ---------
TOTAL ASSETS ........................................ $ 119,961 $ 91,556
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ............................................ $ -- $ 7,140
Long-term debt maturing within one year .................. 1,063 1,220
Accounts payable ......................................... 8,285 6,560
Accounts payable-affiliated companies .................... -- 197
Accrued taxes ............................................ 617 494
Accrued interest and dividends ........................... 1,290 469
Advance billings, customer deposits and other ............ 3,100 2,781
--------- ---------
TOTAL CURRENT LIABILITIES ............................. 14,355 18,861
--------- ---------
LONG-TERM DEBT ............................................. 41,657 24,888
--------- ---------
OTHER LIABILTIES
Deferred income taxes .................................... 6,863 6,545
Other .................................................... 2,615 2,453
--------- ---------
9,478 8,998
--------- ---------
MINORITY INTEREST .......................................... -- 230
--------- ---------
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 ..................... 1,446 1,446
--------- ---------
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, par value $.16, authorized shares 30,000,000 977 919
Outstanding shares: 6,128,672 at December 31, 1997
5,740,674 at December 31, 1996
Additional paid-in capital ............................... 10,341 2,021
Unearned ESOP Compensation ............................... (695) (951)
Retained earnings ........................................ 42,402 35,144
--------- ---------
53,025 37,133
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $ 119,961 $ 91,556
========= =========
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996, and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 9,565 $ 3,910 $ 3,343
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 8,486 7,743 7,296
Deferred income taxes ................................... 389 (265) (350)
Undistributed (earnings) losses from affiliates ......... 1,661 (754) 441
Distribution from affiliates ............................ 234 1,052 460
Tax benefits applicable to ESOP ......................... 17 22 24
Gain on sale of investments in affiliated companies ..... (11,971) -- --
Loss on retirement of property, plant and equipment ..... 64 37 24
Allowance for funds used during construction ............ (77) (76) (27)
Losses applicable to minority interest .................. (50) (75) --
Changes in operating assets and liabilities:
Accounts receivable and notes receivable ................ 88 (2,206) (266)
Inventories ............................................. 119 (141) (149)
Prepaid expenses ........................................ (880) (180) (48)
Accounts payable ........................................ 1,899 (1,013) 1,929
Accrued taxes and accrued interest ...................... 945 234 120
Advance billings, customer deposits and other ........... 319 (609) 839
Other, net .............................................. (87) 382 (170)
-------- -------- --------
Net Cash Provided By Operating Activities ............. 10,721 8,061 13,466
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ....................................... (6,108) (6,349) (7,865)
Allowance for funds used during construction ............... 77 76 27
Proceeds from sale of assets ............................... 243 98 233
Cost of removal of plant retired ........................... (57) (99) (94)
Acquistion of other assets ................................. (2,482) (676) --
Proceeds from sale of investments in affiliated companies... 17,897 -- --
Increase in investments and advances to affiliates ......... (19,957) (5,144) (6,870)
Decrease in investments and repayments from affiliates ..... 3,373 4,570 3,653
-------- -------- --------
Net Cash Used In Investing Activities ................. (7,014) (7,524) (10,916)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock .................................. (2,220) (2,093) (1,978)
Payments on long-term debt ................................. (1,017) (162) (162)
Net proceeds from (payments on) revolving lines of credit... (1,140) 1,610 (1,270)
Net contributions from minority interest ................... -- 2 500
Proceeds from issuance of common stock ..................... 416 367 400
Redemption of Series B 5 1/2% preferred stock .............. -- -- (129)
-------- -------- --------
Net Cash Used in Financing Activities .................. (3,961) (276) (2,639)
-------- -------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ....................................... (254) 261 (89)
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR .......................................... 315 54 143
-------- -------- --------
END OF YEAR ................................................ $ 61 $ 315 $ 54
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1997, 1996 and 1995
(dollars and shares in thousands)
<TABLE>
<CAPTION>
Additional Unearned
Common Paid-in ESOP Retained
Shares Stock Capital Compensation Earnings
------ ------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ............... 5,698 $ 912 $ 1,012 ($1,431) $32,134
Net Income ............................. 3,343
Reduction of ESOP trust loan ........... 234
Tax benefits from dividends paid to ESOP 24
Dividends
Common stock - $.36 per share ....... (2,074)
Common stock issued for Employee
Stock Purchase Plan and Dividend
Reinvestment Plan .............. 20 3 494
------- ------- ------- ------- -------
Balance, December 31, 1995 ............. 5,718 915 1,506 (1,197) 33,427
------- ------- ------- ------- -------
Net Income ............................. 3,910
Reduction of ESOP trust loan ........... 246
Tax benefits from dividends paid to ESOP 22
Dividends
Common stock - $.39 per share ....... (2,215)
Common stock issued for acquisition .... 1 -- 29
Common stock issued for Employee
Stock Purchase Plan and Dividend
Reinvestment Plan .............. 22 4 486
------- ------- ------- ------- -------
Balance, December 31, 1996 ............. 5,741 919 2,021 (951) 35,144
------- ------- ------- ------- -------
Net Income ............................. 9,565
Reduction of ESOP trust loan ........... 256
Tax benefits from dividends paid to ESOP 17
Dividends
Common stock - $.39 per share ....... (2,324)
Common stock issued for acquisitions ... 362 54 7,802
Common stock issued for Employee
Stock Purchase Plan and Dividend
Reinvestment Plan .............. 26 4 518
------- ------- ------- ------- -------
Balance, December 31, 1997 ............. 6,129 $ 977 $10,341 ($ 695) $42,402
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts are presented in thousands.)
1. Nature of Business:
Description:
D&E Communications, Inc. and its subsidiaries (D&E) form a diversified
telecommunications company which operates predominantly in one main business
segment, communication products and services. D&E provides telecommunications
services and equipment to customers in the south central Pennsylvania market.
D&E's services consist of local and long distance telephone services,
including enhanced custom calling features. In providing network services, D&E
offers digital switching and signaling, as well as call transport and private
line network services. In addition, D&E offers computer services for Local and
Wide Area Networks and related equipment. Sales of communication equipment and
services include telephone systems and data communications. D&E provides
services for directory advertising and local billing and collection.
Additionally, D&E provides consulting services in providing communications
support to its affiliated companies. D&E has partnership interests in PCS ONE
(see Note 6), which provides Personal Communications Services (PCS) and related
equipment for digital wireless voice and data communications. D&E also has an
equity investment in D&E SuperNet (formerly known as Red Rose SuperNet), which
provides Internet access services and related equipment. D&E has made
international investments through its domestic corporate joint ventures in two
telecommunications companies located in Hungary and Poland.
Regulatory Environment and Competition:
A substantial portion of D&E's operations are subject to regulation at both
the federal and state levels by the Federal Communications Commission (FCC) and
the Pennsylvania Public Utility Commission (PUC). In 1996, the FCC implemented
The Telecommunications Act of 1996 (the 1996 Act) which mandates significant
telecommunications access reform to encourage competition in the local exchange
market. The implementation of the 1996 Act and, subsequently in 1997, the
development of the Universal Service fund have provided comprehensive changes to
federal and state regulations which govern telecommunications. D&E's local
exchange company currently qualifies as a rural telephone company and thereby is
exempt from certain provisions of the 1996 Act. On December 31, 1997, D&E
implemented equal access in the regional toll market allowing long distance
companies to offer in-region toll services.
D&E expects to experience an increasing amount of competitive pressures,
while at the same time being presented with opportunities in new markets. No
estimate can be made of the financial impacts of these changes.
Concentrations of Credit Risk:
Financial instruments that subject D&E to concentrations of credit risk
consist primarily of trade receivables and notes receivable. Concentrations of
credit risk with respect to trade receivables other than AT&T are limited due to
the large number of customers in D&E's customer base. For the years ended
December 31, 1997, 1996 and 1995, revenues generated from services provided to
AT&T, primarily network access and billing and collection, were $5,521, $5,193
and $5,412, respectively. At December 31, 1997 and 1996, accounts receivable
from AT&T totaled $923 and $859, respectively.
2. Significant Accounting Policies:
Principles of Consolidation:
The accompanying consolidated financial statements are presented for D&E
Communications, Inc. and its subsidiaries. The subsidiaries included in the
consolidated financial statements are Denver and Ephrata Telephone and Telegraph
Company (Telco); D&E Marketing Corp. (Marketing); D&E Telephone and Data
Systems, Inc. (formerly Red Rose Communications, Inc.); and the D&E partnership,
The D & E Group, which ended its operations in March 1997. Additionally in 1997
D&E formed three new wholly-owned subsidiaries:
F-6
<PAGE>
D&E Wireless, Inc. (Wireless); D&E Investments, Inc. (Investments); and D&E
Holdings, L.P. (Holdings).
The accounts of Telco are reported using generally accepted accounting
principles applicable to regulated entities. Long-term debt represents the
obligations of Telco and Investments. The preferred stock is the account of
Telco. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Investments in partnership joint ventures and domestic corporations are
accounted for under the equity method of accounting, due to D&E's ability to
exercise significant influence over the operating and financial policies of
these entities. Investments in other entities are accounted for under the cost
method.
Reclassifications:
For comparative purposes, certain amounts have been reclassified to conform
to the current-year presentation.
Use of Estimates:
The preparation of financial statements under generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts or certain disclosures. Actual results could differ from those
estimates.
Revenue Recognition:
Revenues are generally recognized when services are rendered or products
are delivered to customers. Long-term contracts are accounted for using the
percentage-of-completion method, with revenues recognized in the proportion of
costs incurred to total estimated costs at completion.
D&E receives a portion of its interstate access revenues from settlement
pools in which it participates with other telephone companies through the
National Exchange Carrier Association, Inc. (NECA). These pools were established
at the direction of the FCC and are funded by access service charges which the
FCC regulates. Revenues earned through this pooling process are initially
recognized based on estimates. D&E has finalized all NECA pool settlements
through 1995.
D&E elected to rejoin the NECA Traffic Sensitive Pool in December 1996 and
accordingly on July 1, 1997, implemented NECA interstate access rates.
Previously, D&E offered its own rates for traffic-sensitive network access
services.
Prepaid Directory:
Directory advertising revenues and costs are deferred and amortized over
the twelve-month period related to the directory publication.
Depreciation:
Depreciation on property, plant and equipment is computed using the
straight-line method of depreciation over the estimated useful lives of 28 years
for buildings, 3 to 32 years for equipment, and 12 to 45 years for outside plant
facilities. Depreciation as a percentage of average depreciable plant in service
amounted to 7.1% in 1997 and 1996 and 7.0% in 1995.
When depreciable telephone property is retired, the original cost of the
asset, net of salvage, is charged to accumulated depreciation. Any gains or
losses on disposition are amortized over the service lives of the remaining
assets. When other depreciable property is retired, the gain or loss is
recognized as an element of other income. The costs of maintenance and repairs
are charged to operating expense.
PCS License Costs:
PCS license costs are accounted for in accordance with recently agreed-upon
industry practices. Accordingly, interest incurred for such licenses is
capitalized during the build-out phase and amortized over a period of 40 years,
beginning with the commencement of service to customers in November 1997.
F-7
<PAGE>
Intangible Assets:
The cost in excess of the fair value of net assets acquired is recorded as
goodwill. Amortization expenses for goodwill, organization costs and other
intangibles are recorded on a straight-line basis over the shorter period of the
estimated useful life or 40 years.
In January 1996, D&E adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." D&E reviews assets and certain intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. A determination of
impairment (if any) is made based on estimates of future cash flows.
Capitalized Interest:
The cost of funds used to finance construction projects is capitalized as a
part of the construction costs. Additionally, capitalized interest on regulated
telephone construction projects is recorded as Allowance for Funds Used During
Construction (AFUDC), a non-cash element of other income. Interest costs related
to PCS licenses and non-regulated construction projects are reflected as a cost
of assets and a reduction of interest expense. Interest costs capitalized on
assets were $1,052 for 1997, $77 for 1996 and $27 for 1995.
Income Taxes:
D&E files a consolidated federal income tax return. Income taxes are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires the use of the
asset and liability method of accounting for income taxes. Deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates that will be in effect when those differences are expected to
reverse. A valuation allowance is established for any deferred tax asset for
which realization is not likely.
Earnings per Common Share:
D&E calculates earnings per share in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share." This
Statement establishes standards for reporting basic and diluted earnings per
share. D&E's basic and diluted earnings per share are the same for all periods
presented.
Earnings per common share are calculated by dividing net income by the
weighted average number of common shares outstanding. Common shares outstanding
were restated for prior years to present the effects of the share exchange,
which was similar to a three-for-one stock split (see Note 12). For comparative
purposes, all information related to D&E common shares and per-share data have
been restated.
3. Cash Flow Information:
D&E considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Cash paid for income taxes and interest expense for the years ended
December 31 are as follows:
1997 1996 1995
---- ---- ----
Interest expense............ $ 2,243 $ 2,515 $ 2,424
Income taxes................ 8,308 2,716 2,198
The 1997 increase in income taxes is the result of the sale of cellular
partnership investments (see Note 7).
In March 1997, D&E had non-cash investing activities relating to the merger
of PCS One, Inc. and D&E. As a result of the merger, D&E issued $7,305 of Common
Stock in exchange for all of the outstanding shares of PCS One, Inc. and assumed
a note payable to the FCC for $11.9 million (see Note 5). D&E issued $580 of
Common Stock in connection with a business acquisition (see Note 5), payable in
two installments: $29 in November 1996 and $551 in January 1997.
F-8
<PAGE>
4. Property, Plant and Equipment:
Property, plant and equipment, which is stated at cost, is summarized as
follows at December 31:
1997 1996
---- ----
Land and buildings................. $ 29,704 $ 29,250
Digital switching equipment........ 35,450 32,716
Outside plant facilities........... 38,115 36,975
Telecommunications equipment
for rental...................... 3,226 3,123
Computers and office equipment..... 6,746 5,600
Other equipment.................... 3,414 3,298
Telephone plant under construction. 800 1,233
--------- ---------
Total property, plant and equipment 117,455 112,195
Less: Accumulated depreciation..... 54,654 47,207
--------- ---------
Property, plant and equipment, net. $ 62,801 $ 64,988
========= =========
5. Merger and Acquisition:
On March 21, 1997, PCS One, Inc. merged with and into D&E Communications,
Inc. in accordance with the terms of the merger agreement dated December 12,
1996. Additionally, on January 31, 1997, the FCC approved the transfer of the
C-Block broadband PCS license for the Lancaster, PA, Basic Trading Area (the
Lancaster License) to D&E.
Pursuant to terms of the agreement, D&E issued $7,305 of Common Stock in
exchange for all outstanding shares of PCS One, Inc. and acquisition of the
Lancaster License. Additionally, D&E assumed an obligation to the FCC for an
$11.9 million note payable (FCC Note). The merger was accounted for under the
purchase method of accounting. The 1997 pro forma results of PCS One, Inc. are
not significant to D&E's consolidated results of operations or financial
condition.
In November 1996, D&E acquired Com Tech Technical Services (Com Tech), a
domestic partnership, which was later renamed D&E Computer Networking Services.
This division specializes in computer network engineering and installation for
Local and Wide Area Networks. The acquisition was financed by 22,536 shares of
D&E Common Stock. All of such shares are unregistered but have certain
registration rights. The acquisition was accounted for under the purchase method
of accounting. The 1996 pro forma results of Com Tech operations are not
significant to D&E's consolidated results of operations or financial condition.
6. Formation of Wireless Partnership:
On November 14, 1997, Wireless signed an agreement with Omnipoint Venture
Partner I, L.L.C. to form a new limited partnership named D&E/Omnipoint Wireless
Joint Venture, L.P., doing business as PCS ONE. Wireless contributed net assets
of $6,381, consisting of PCS digital switching and wireless network equipment,
in exchange for a 50% partnership interest. PCS ONE was formed for the purpose
of providing PCS wireless communications services and equipment to customers in
the Lancaster, Harrisburg, York-Hanover and Reading Basic Trading Areas. No gain
or loss was recorded on the contribution of assets. Additionally, under the
terms of the agreement, D&E will contribute its PCS licenses and the FCC Note to
PCS ONE, pending FCC approval on the transfer of PCS licenses, which is
anticipated during 1998. In addition to the Lancaster License, D&E acquired
additional broadband PCS licenses in April 1997 for two Basic Trading Areas, the
D-Block License in Harrisburg and the E-Block License in York-Hanover, PA. Under
the terms of the agreement, the joint venture will operate for an initial period
of 10 years, with provisions for subsequent renewals.
7. Sale of Cellular Partnerships:
In July 1997, D&E established its wholly-owned subsidiary, Holdings, to
manage its investments in cellular partnerships. In September 1997, Holdings
sold its 50% partnership interest in Lancaster Area Cellular Enterprises (LACE)
and its 33.3% limited partnership interest in the Pennsylvania RSA 12 Limited
Partnership. The proceeds from the sale of cellular partnership investments of
$17,897 generated a gain of $11,971, or $7,986 net of income taxes.
F-9
<PAGE>
8. Investments in Affiliated Companies:
Equity Investees:
D&E has a 16.5% investment in Monor Communications Group (MCG), a domestic
corporation that owns 88.7% of Monor Telephone Company (MTT), a
telecommunications company in Hungary. In 1994, the Hungarian government awarded
an exclusive concession to MTT for an eight-year period, which allows MTT to
operate a telecommunications network in the Monor region of Hungary.
Additionally, MTT is permitted to provide telecommunications services in this
region for a period of twenty-five years.
In January 1997, D&E purchased a 33.3% investment in Eurotel L.L.C., a
domestic corporate joint venture. Eurotel owns 100% of Pilicka Telephone (PT), a
development-stage corporation which will design, construct and operate a
telecommunications network in central Poland.
The equity investments in MCG and Eurotel are subject to the risks of
foreign currency translation changes, which are included in the earnings results
of MTT and PT.
In November 1997, D&E acquired a 50% partnership interest in PCS ONE (see
Note 6). D&E has a 50% equity investment in D&E SuperNet, a partnership joint
venture that offers Internet access services and related equipment.
D&E owns 15% of Berks and Reading Area Cellular Enterprises (BRACE), a
domestic joint venture. BRACE is a 39% limited partner in the Reading SMSA
Limited Partnership, which provides cellular telecommunications services in the
Reading area.
D&E provides communications consulting and administrative services to its
affiliated companies. Amounts owed to D&E for services performed for MCG, MTT,
Eurotel and PT at December 31, 1997 and 1996, were $617 and $657, respectively.
These amounts represent either short-term or long-term accounts receivable due
from affiliates. The accounts receivable for PCS ONE at December 31, 1997, for
working capital provided and services performed is $3,939.
In 1997, D&E loaned $4,555 to Eurotel under the terms of a financing
agreement for PT to develop and construct its telephone network and obtain
additional working capital. The loan has an interest rate of 15%.
Under the terms of the D&E SuperNet partnership agreement, D&E will advance
funds for additional working capital up to a maximum of $650 at prevailing
interest rates. On December 31, 1997 and 1996, amounts owed to D&E under this
note agreement were $585 and $420, respectively.
F-10
<PAGE>
Summarized financial information for MCG, PCS ONE and other affiliates is
presented as follows:
MCG
1997 1996 1995
---- ---- ----
At December 31:
Current assets.......... $14,333 $ 5,106 $ 3,629
Noncurrent assets....... 50,236 60,451 59,673
Current liabilities..... 4,638 7,140 5,836
Noncurrent liabilities.. 53,645 39,015 37,848
Minority interest....... 1,119 1,639 1,706
Years ended December 31:
Net sales............... $14,403 $11,732 $ 5,508
Loss on foreign currency
translation............. (4,647) (4,972) (4,950)
Net loss................ (9,633) (5,340) (9,302)
PCS ONE
1997
----
At December 31:
Current assets.......... $ 8,179
Noncurrent assets....... 18,846
Current liabilities..... 12,087
Years ended December 31:
Net sales............... $ 174
Net loss................ (1,979)
Other Affiliates
1997 1996 1995
---- ---- ----
At December 31:
Current assets.......... $ 3,051 $ 1,071 $ 640
Noncurrent assets....... 18,079 14,602 12,061
Current liabilities..... 16,278 802 461
Noncurrent liabilities.. 2,542 -- --
Years ended December 31:
Net sales............... $ 1,760 $ 5,236 $ 4,282
Income from joint venture 1,982 3,856 2,556
Net income.............. 288 4,692 3,256
The summary of changes for D&E's investments in affiliates is as follows:
Investments in Affiliates
1997 1996 1995
---- ---- ----
Equity income (loss).... ($ 1,661) $ 754 ($ 441)
Investments............. 8,625 1,690 2,504
Sale of investments..... (5,926) -- --
Distributions........... (234) (1,052) (460)
--------- -------- ---------
Total activity.......... $ 804 $ 1,392 $ 1,603
========= ======== =========
Majority-Owned Subsidiary:
Effective with and related to the merger of PCS One, Inc. (see Note 5),
D&E's majority-owned subsidiary, The D and E Group ended its operations on March
20, 1997. Prior to that time, D&E had an 80% controlling partnership interest.
The D and E Group owned 9.17% of PCS One, Inc., which was a domestic
development-stage enterprise formed to acquire PCS licenses in the FCC spectrum
auction for C-Block Licenses.
F-11
<PAGE>
9. Notes Payable and Long-Term Debt:
Notes payable consist of amounts borrowed under unsecured lines of credit
that D&E has established with domestic banks. D&E had lines of credit totaling
$16 million at December 31, 1997. These lines of credit are payable on demand
and provide D&E with the option to borrow at prevailing interest rates. At
December 31, 1997 and 1996, notes payable outstanding under the lines of credit
totaled $6,000 and $7,140, respectively, with an average weighted interest rate
of 6.5% and 6.3%, respectively.
In January 1998, D&E issued 1.3 million shares of D&E Common Stock in
exchange for $27 million (see Note 15). D&E used $6 million of the proceeds to
refinance short-term debt. In recognition of this refinancing, $6 million of
short-term debt has been reclassified to long-term debt on the consolidated
balance sheet as of December 31, 1997.
Long-term debt at December 31 consisted of the following:
1997 1996
---- ----
8.95% ESOP Note due 2001............ $ 695 $ 951
6.49% Senior Notes due 2004 ........ 10,000 10,000
7.00% FCC Note due 2006............. 11,879 --
7.55% Senior Notes due 2007......... 4,546 5,000
9.18% Senior Notes due 2021......... 9,600 10,000
Other............................... 6,000 157
-------- --------
42,720 26,108
Less current maturities............. 1,063 1,220
-------- --------
Total long-term debt................ $ 41,657 $ 24,888
======== ========
In July 1992, D&E borrowed $2,080 from a local bank to finance the purchase
of 240,000 shares of D&E's Common Stock for the Employee Stock Ownership Plan
(the ESOP Note). The loan is guaranteed by D&E as to principal and interest.
Interest is payable quarterly and principal payments of $208 are due annually
through December 15, 2001.
In January 1994, D&E issued $10 million of 6.49% Senior Notes to an
insurance company, due on January 14, 2004. Interest is payable semiannually
with the total principal balance due at maturity.
In March 1997, D&E assumed an $11.9 million note payable to the FCC at an
interest rate of 7%, due on December 31, 2006. The FCC Note is collateralized by
the Lancaster PCS License. Interest of 7% is payable quarterly with annual
principal and interest payments of $3,432 commencing on December 31, 2002, and
continuing for four years.
Also in March 1997, the FCC established an extended waiver period which
suspended all interest payments under the C-Block note agreements. During this
time the FCC reconsidered the terms of repayment for the note agreements of all
C-Block License holders.
In February 1993, D&E issued $5 million of 7.55% Senior Notes to an
insurance company, due on November 15, 2007. Interest is payable semiannually,
with annual principal payments of $455 commencing on November 15, 1997, and
continuing for eleven years.
In November 1991, D&E issued $10 million of 9.18% Senior Notes to an
insurance company, due on November 15, 2021. Interest is payable semiannually,
with annual principal payments of $400 commencing on November 15, 1997, and
continuing for twenty-five years.
Under covenants contained in D&E's Senior Note Agreements, the maximum
amount of consolidated debt balance should not exceed 50% of the sum of
consolidated debt plus consolidated tangible net worth. At December 31, 1997 and
1996, D&E was in compliance with the debt covenants.
Based on the borrowing rate currently available to D&E for bank loans, the
fair market value of long-term debt is $45,796.
Maturities of long-term debt for each year ending December 31, 1998 through
2002, are as follows:
Year Aggregate Amount
---- ----------------
1998 $ 1,063
1999 1,063
2000 1,063
2001 926
2002 1,504
F-12
<PAGE>
10. Commitments:
During 1997, MTT arranged new financing with Credit Lyonnais for a $50
million note denominated in German marks and U.S. dollars and subsequently
repaid a $30 million U.S.-dollar-denominated loan from the Overseas Private
Investment Corporation (OPIC). As a result, D&E is no longer obligated to
provide a guarantee of up to $3.3 million for the MTT debt, as a condition which
had existed under the OPIC Finance Agreement with MTT.
Under the terms of the PCS ONE limited partnership agreement, D&E has
agreed to provide funding to PCS ONE for up to $1 million per year provided that
the total accumulated funding does not exceed $5 million. D&E may be requested
to lend amounts above the $1 million annually under the terms of the limited
partnership agreement.
The PCS licenses held by D&E have certain FCC obligations related to
achieving PCS network build-out requirements and certain coverage area
commitments.
In May 1994, D&E entered into an agreement to construct, install and
maintain an enhanced 911 system for Lancaster County, PA. In addition, D&E
serves as the administrator of the Automatic Location Identification (ALI)
information network, a database for Lancaster County telephone numbers, names
and addresses which help to identify the location of a 911 caller. The ten-year
agreement will expire in July 2004.
11. Income Taxes:
The provision for income taxes consists of the following:
1997 1996 1995
---- ---- ----
Current:
Federal.............. $ 6,780 $ 2,153 $ 1,932
State................ 793 779 585
------- ------- --------
7,573 2,932 2,517
Deferred:
Federal.............. 289 (188) (249)
State................ 100 (77) (101)
------- ------- --------
389 (265) (350)
------- ------- --------
Total income taxes...... $ 7,962 $ 2,667 $ 2,167
======= ======= ========
The effective income tax rate on consolidated pre-tax earnings differs from
the federal income tax statutory rate for the following reasons:
1997 1996 1995
---- ---- ----
Federal statutory rate............... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal
tax benefits..................... 1.3 6.7 6.0
Benefit of rate differential applied to
temporary differences............ (0.4) (1.2) (1.4)
Accelerated depreciation.......... -- -- (0.2)
Valuation allowance............... 10.5 -- --
Other, net........................ (0.1) 0.6 0.5
---- ---- -----
Effective income tax rate............ 45.3% 40.1% 38.9%
==== ==== ====
Approximately $1,902 of state net operating loss carryforwards remained at
December 31, 1997. These carryforwards are due to the operations of D&E's
subsidiaries and will expire in the years 1998 through 2000. The benefit of
these carryforwards is dependent on the taxable income of these subsidiaries
during the carryforward period. A valuation allowance has been provided because
realization of tax carryforwards is not likely.
F-13
<PAGE>
The significant components of the net deferred income tax liability were as
follows at December 31:
1997 1996
---- ----
Deferred tax liabilities:
Depreciation..................... $ 7,402 $ 7,846
Other, net....................... 170 621
------- -------
7,572 8,467
Deferred tax assets:
Employee benefits................ (702) (803)
Net operating loss carryforward.. (125) (130)
Equity in net loss of affiliates. (1,859) (1,053)
------- -------
(2,686) (1,986)
Valuation allowance................. 1,977 64
------- -------
Deferred income taxes............... $ 6,863 $ 6,545
======= =======
In 1997, D&E increased its valuation allowance on the deferred tax assets
related to the equity loss in investments, as a result of revised estimates on
the realizability of loss carryforwards. The amount of the deferred tax asset
could change if estimates of future taxable income during the carryforward
period are revised. The valuation allowance at December 31, 1997 and 1996, is
$1,977 and $64, respectively. During 1997, D&E's subsidiaries applied $1,000 of
net operating loss carryforwards to offset their state income tax liability.
12. Restructuring:
On June 7, 1996, D&E Communications, Inc. became the parent company to its
telephone operating subsidiary, Telco, as a result of a D&E Share Exchange. In
the share exchange, each of the outstanding Telco common shares, par value $.50,
was exchanged for three D&E common shares, par value $.16. The effect of the D&E
Share Exchange was similar to a three-for-one stock split of Telco common
shares. For comparative purposes, all information related to D&E common shares
and per-share amounts for all periods presented have been restated to reflect
the D&E Share Exchange. The preferred stock of Telco was not exchanged in the
restructuring.
13. Shareholders' Equity:
D&E has an Employee Stock Purchase Plan (ESPP), which provides eligible D&E
employees the opportunity to purchase shares of D&E's Common Stock through
payroll deductions. There are 276,439 shares of Common Stock reserved for
issuance pursuant to the ESPP. The total number of shares purchased pursuant to
the ESPP during 1997 and 1996 was 6,763 and 6,523, respectively.
D&E offers a Dividend Reinvestment and Stock Purchase Plan (DRP) to its
shareholders. The DRP provides all shareholders of D&E's Common Stock the
opportunity to purchase additional shares of Common Stock by: 1) reinvesting all
cash dividends paid on their shares of Common Stock; 2) making optional cash
purchases of Common Stock, up to a maximum of $5 per quarter, while continuing
to receive cash dividends; or 3) both reinvesting all cash dividends and making
such optional cash purchases. There are 246,010 shares of Common Stock reserved
for issuance pursuant to the DRP. The total number of shares purchased through
the DRP during 1997 and 1996 was 19,242 and 15,446, respectively.
Shares for the ESPP and DRP may be purchased by participants at fair market
value, which is defined as the average of the high and low per-share sale price
as reported by the NASDAQ National Market on the day of the purchase. If no
shares were traded on the day of purchase, then the prices on the previous day
are used to compute the per-share price. D&E is listed on the NASDAQ National
Market as DECC.
At December 31, 1997 and 1996, the outstanding shares of Common Stock
include 2,983,765 and 3,158,106 shares, respectively, held in a voting trust,
certain trustees of which are officers of D&E.
F-14
<PAGE>
14. Employee Benefit Plans:
Employees' Retirement Plan:
D&E's pension plan is a noncontributory defined benefit plan computed on an
actuarial basis covering all eligible employees. Pension benefits are based upon
length of service and the employee's compensation as the average of the highest
three years for the ten-year period prior to retirement. Accrued benefits are
vested after five years of participation in the plan. Assets of the pension plan
consist primarily of stocks and bonds.
Net pension expense for D&E is summarized as follows:
1997 1996 1995
---- ---- ----
Service cost - benefits earned
during the period.......... $ 498 $ 563 $ 361
Interest cost on projected
benefit obligation......... 1,252 1,078 1,024
Actual return on assets....... (1,788) (1,212) (2,331)
Net amortization
and deferral............... 939 384 1,385
------ ------ ------
Net periodic pension
expense.................... $ 901 $ 813 $ 439
====== ====== ======
The following assumptions were used for determining net periodic pension
expense:
1997 1996 1995
---- ---- ----
Discount rate.................... 7.5% 7.0% 8.5%
Rates of increase in
compensation levels........... 4.5% 4.5% 4.5%
Expected long-term rate of
return on assets.............. 9.75% 9.75% 9.75%
The following table summarizes the pension plan's funded status as reported
in the consolidated balance sheets at December 31:
1997 1996
---- ----
Actuarial present value of benefit
obligations:
Vested benefit obligation ......... ($14,688) ($12,800)
======== ========
Accumulated benefit obligation..... ($16,267) ($14,400)
======== ========
Plan assets at fair value.......... $14,312 $ 12,910
Projected benefit obligation....... (18,919) (16,698)
-------- --------
Plan assets less than projected
benefit obligation.............. (4,607) (3,788)
Unrecognized net loss ............. 2,528 1,782
Prior service cost ................ 332 387
Unrecognized net asset............. (64) (128)
Adjustment required to recognize
minimum liability............... (144) --
-------- --------
Total pension liability............ ($1,955) ($1,747)
======== ========
At December 31, 1997 and 1996, the discount rate used in determining the
projected benefit obligation was 7.0% and 7.5%, respectively.
The accrued pension liability at December 31, 1997, amounted to $1,955. The
current portion of $87 is included in accounts payable. The long-term portion of
$1,868 is reflected in other liabilities. The adjustment required to recognize
the minimum liability resulted in $144 being recorded as an intangible asset.
Voluntary Retirement Program:
In October 1996, D&E offered a supplemental early retirement plan to
certain eligible salaried and hourly employees. Ten employees elected to
participate in this offer effective December 31, 1996. As a result, D&E recorded
additional operating expense of $354, with a per-share effect of $.06, related
to the additional pension plan expense.
Employees' 401(k) Savings Plan:
D&E also has an employee savings plan available to all eligible employees
(Savings Plan). Participating employees may contribute a portion of their
compensation to the Savings Plan, and D&E makes matching contributions up to a
specified level. D&E may also make discretionary profit-sharing contributions.
D&E's contribution amounted to $168 in 1997, $165 in 1996 and $155 in 1995.
F-15
<PAGE>
Employee Stock Ownership Plan:
In July 1992, D&E established the Employee Stock Ownership Plan (ESOP)
covering all eligible employees. Unallocated shares are held in a "suspense
account" in the ESOP's trust fund until allocated to participants' accounts. D&E
makes quarterly contributions to the ESOP, which, along with the dividends on
unallocated shares, are used to repay the ESOP Note. As principal payments on
the ESOP Note are made, unallocated shares held in the suspense account are
released and allocated among the accounts of participants. Participants have a
legal right to their allocated accounts upon vesting. Dividends on shares
allocated to participants' accounts are allocated to such accounts in the form
of stock released from the suspense account.
Both unallocated and allocated shares of the ESOP are considered
outstanding for purposes of calculating earnings per share. The ESOP Note is
reflected as long-term debt with a corresponding reduction in shareholders'
equity for the unearned ESOP compensation, which represents D&E's payment of
future compensation expenses. D&E's principal and interest payments on the ESOP
Note, offset by unallocated dividends, are reported as compensation and interest
expense. The common shares allocated are measured based upon the fair value of
the shares committed to be released. Dividends on the unallocated shares held by
the ESOP are charged to retained earnings.
Information related to the ESOP is summarized as follows:
1997 1996 1995
---- ---- ----
Compensation expense.......... $178 $173 $171
Interest expense.............. 72 88 104
Dividends on
unallocated shares........... (42) (53) (60)
D&E shares held by the ESOP are summarized as follows at December 31:
1997 1996
------- -------
Unallocated..................... 80,267 109,729
Allocated....................... 148,553 124,790
Postretirement Health Care Benefits:
D&E provides certain basic health care benefits to eligible individuals who
retired between the period of December 31, 1972, and July 1, 1992. Those
benefits are provided by the Employee Benefit Plan Trust, a self-insured plan,
and by individual policies from an insurance company. Additionally, an insurance
company provides specific and aggregate stop-loss coverage, the costs of which
are based on benefits paid during the year.
Effective July 1992, retiree health care benefits were discontinued for
active employees in conjunction with the establishment of the ESOP benefit plan.
As a result, the annual accruals represent the estimated cost of health care
benefits for certain eligible retired employees determined on an actuarial
basis. Those costs amounted to $90 in 1997, $94 in 1996 and $112 in 1995.
15. Subsequent Events:
On November 3, 1997, D&E entered into an agreement with Southwestern
Investments, Inc., a subsidiary of Citizens Utilities Company (Citizens). Under
the terms of the agreement, Citizens would purchase up to 1.3 million shares of
D&E Common Stock. In December 1997, Citizens received approval from the
Department of Justice for the purchase of D&E Common Stock. On January 7, 1998,
D&E issued 1.3 million shares of D&E Common Stock in consideration for $27
million. All such shares are unregistered but have certain registration rights.
Under the terms of the agreement, Citizens has certain restrictions relating to
future purchases or sales of D&E Common Stock. Additionally, in connection with
this agreement, D&E issued warrants to acquire 65,000 shares of Common Stock at
$20.78 per share.
As a result of the issuance of D&E Common Stock to Citizens, the pro forma
effect for 1997 is a diluted earnings per share amount of $1.30.
In February 1998, D&E increased its unsecured lines of credit to a total of
$18 million with domestic banks.
During a period of reconsideration and waiver of payments for C-Block
License interest costs, the FCC reviewed the repayment terms for C-Block License
note agreements. In December 1997, the FCC offered C-Block License holders
several options as alternatives to the original payment terms. In February 1998,
the FCC issued an extension of time for C-Block License holders to elect an
option. At the present time, D&E is still reviewing its options for the
Lancaster License.
F-16
<PAGE>
EXHIBIT 10.1
DENVER AND EPHRATA TELEPHONE
AND TELEGRAPH COMPANY
EXECUTIVE INCENTIVE PLAN DOCUMENT
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY
Plan Document Page 1
- -------------------------------------------------------------------------------
EXECUTIVE INCENTIVE PLAN
------------------------
The Board of Directors of D & E Communications, Inc. has established this
Executive Incentive Plan. The purpose of the plan is to meet and exceed goals
and to promote a superior level of performance. Through payment of incentive
compensation beyond base salaries, the plan provides reward for meeting and
exceeding goals as well as recognition of individual achievements for plan
participants.
SECTION I - DEFINITIONS
-----------
Various terms used in the plan are defined as follows:
o Award Calculation: Award expressed as a percent of a participant's salary
at the beginning of the plan year.
o Award Distribution: Award expressed in cash.
o Base Salary: The base salary at the beginning of the plan year, excluding
any bonuses, contributions to employee benefit programs, or other
compensation not designated as salary.
o Board of Directors: The Board of Directors of D & E Communications, Inc.
o C.E.O.: Chief Executive Officer of the Company.
o C.O.O.: Chief Operating Officer of the Company.
o Plan Participants: Full-time Executives of the Company as listed in
Appendix A.
o Plan Year: A fiscal year.
o Planned Achievements: Those objectives and goals which are required to
activate a portion of the awards under the plan based on individual
performance.
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY
Plan Document Page 2
- -------------------------------------------------------------------------------
SECTION II - ELIGIBILITY TO PARTICIPATE
--------------------------
To be eligible for an award under the plan, a plan participant must be in active
full-time service of the Company at the start and close of the plan year. If a
plan participant voluntarily leaves the employ of the Company during the plan
year, he/she is not eligible to receive an award. However, if the active
full-time service with the Company of a participant in the plan is terminated by
death, disability, retirement, or if a participant is on an approved leave of
absence, the C.E.O. may recommend an award to such a participant based on the
proportion of the plan year that he/she was in active service with the Company.
The plan participants for the plan year are set forth in Appendix A.
SECTION III - ACTIVATING THE PLAN
-------------------
The operation of the plan is predicated on attaining and exceeding performance
goals. The goals will consist of internally measured achievements. The corporate
goals for each plan year will be approved by the Board of Directors while the
executive goals will be approved by the C.E.O. and C.O.O. The corporate goals
for the plan year are set forth in Appendix B.
SECTION IV - CALCULATION OF AWARDS
---------------------
o Executive Awards
----------------
The executive award is based on corporate performance and individual
performance. Depending upon levels of corporate performance, awards are 60%
automatic and 40% based on individual performance. The individual portion
is calculated based upon the completion and evaluation of set goals by the
C.O.O. Appendix C outlines the manner in which these awards are calculated
and range between 0% of base salary to 30% of base salary.
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY
Plan Document Page 3
- -------------------------------------------------------------------------------
SECTION V - DISTRIBUTION OF AWARDS
----------------------
Distribution of awards will be made during the first quarter following the plan
year. Distributions must be approved by the Board of Directors. In the event of
death, any approved award as outlined in Section II for distribution will become
payable to the designated beneficiary of the participant as recorded under the
Company's group life insurance program, or in the absence of a valid
designation, to the participant's estate. Distribution of awards will be in
cash.
SECTION VI - PLAN ADMINISTRATION
-------------------
The Board of Directors shall, with respect to the plan, have full power and
authority to construe, interpret and manage, control and administer this plan,
and to pass and decide upon cases in conformity with the objectives of the plan
under such rules as the Board may establish.
Subject to the provisions of the plan, the C.O.O. will determine the award for
the executives.
Any decision made or action taken by the Company, the Board of Directors, the
C.E.O., or the C.O.O. arising out of, or in connection with the administration,
interpretation, and effect of the plan shall be at their absolute discretion and
will be conclusive and binding on all parties.
No member of the Board, the C.E.O., or the C.O.O. shall be liable for any act or
action hereunder, whether of omission or commission, by a plan participant or
employee or by any agent to whom duties in connection with the administration of
the plan have been delegated in accordance with the provision of the plan.
Any member of the Board who is also an officer of the Company shall neither vote
on (a) the determination of participants, (b) any award decisions, (C) goal(s)
concerning the plan, and (d) any other matter affecting individual interest
under the plan, nor shall his or her presence be counted in determining whether
a quorum is present at any meeting at which a vote on any of the subjects
enumerated above is taken.
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY
Plan Document Page 4
- -------------------------------------------------------------------------------
SECTION VII -
AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION
--------------------------------------------------
The Company reserves the right, by and through its Board of Directors to amend,
modify, suspend, reinstate or terminate all or any part of the plan at the end
of any plan year. The C.E.O. will give prompt written notice to each participant
of any amendment, suspension or termination or any material modification of the
plan. The Board also reserves the right to withhold or amend award payments
based on performance or circumstances deemed to be highly unusual.
SECTION VIII - EFFECTIVE DATE OF THE PLAN
--------------------------
The initial effective date of the plan shall be January 1.
SECTION IX - UNUSED FUNDS
------------
Funds that were approved for distribution, but that were not totally used based
on individual performance of plan participants cannot be held over for
distribution in future years. All unused funds will be retained by the Company.
SECTION X - EMPLOYER RELATION WITH PARTICIPANTS
-----------------------------------
Neither establishment nor the maintenance of the plan shall be construed as
conferring any legal rights upon any participant or any person for a
continuation of employment, nor shall it interfere with the right of an employer
to discharge any participant or otherwise deal with him/her without regard to
the existence of the plan.
SECTION XI - GOVERNING LAW
-------------
Except to the extent pre-empted under federal law, the provisions of the plan
shall be construed, administered and enforced in accordance with the domestic
internal law of the State of Pennsylvania.
In the event of relevant changes in the Internal Revenue Code, related rulings
and regulations or changes imposed by other regulatory agencies affecting the
continued appropriateness of the plan and awards made thereunder, the Board may,
at its sole discretion, accelerate or change the manner of payments of any
unpaid awards or amend the provisions of the plan.
EXHIBIT 10.16
D&E COMMUNICATIONS, INC.
OFFICER INCENTIVE PLAN DOCUMENT
<PAGE>
D & E COMMUNICATIONS, INC.
Plan Document Page 1
- -------------------------------------------------------------------------------
OFFICER INCENTIVE PLAN
----------------------
The Board of Directors of D & E Communications, Inc., has established this
Officer Incentive Plan. The purpose of the plan is to meet and exceed goals and
to promote a superior level of performance. Through payment of incentive
compensation beyond base salaries, the plan provides reward for meeting and
exceeding goals as well as recognition of individual achievements for plan
participants.
SECTION I - DEFINITIONS
-----------
Various terms used in the plan are defined as follows:
o Award Calculation: Award expressed as a percent of a participant's salary
at the beginning of the plan year.
o Award Distribution: Award expressed in cash.
o Base Salary: The base salary at the beginning of the plan year, excluding
any bonuses, contributions to employee benefit programs, or other
compensation not designated as salary.
o Board of Directors: The Board of Directors of D & E Communications, Inc.
o C.E.O.: Chief Executive Officer of the Company.
o C.O.O.: Chief Operating Officer of the Company.
o Plan Participants: Full-time Officers of the Company as listed in Appendix
A.
o Plan Year: A fiscal year.
o Planned Achievements: Those objectives and goals which are required to
activate a portion of the awards under the plan based on individual
performance.
<PAGE>
D & E COMMUNICATIONS, INC.
Plan Document Page 2
- -------------------------------------------------------------------------------
SECTION II - ELIGIBILITY TO PARTICIPATE
--------------------------
To be eligible for an award under the plan, a plan participant must be in active
full-time service of the Company at the start and close of the plan year. If a
plan participant voluntarily leaves the employ of the Company during the plan
year, he/she is not eligible to receive an award. However, if the active
full-time service with the Company of a participant in the plan is terminated by
death, disability, retirement, or if a participant is on an approved leave of
absence, the C.E.O. may recommend an award to such a participant based on the
proportion of the plan year that he/she was in active service with the Company.
The plan participants for the plan year are set forth in Appendix A.
SECTION III - ACTIVATING THE PLAN
-------------------
The operation of the plan is predicated on attaining and exceeding performance
goals. The goals will consist of internally measured achievements. The corporate
goals for each plan year will be approved by the Board of Directors. The
corporate goals for the plan year are set forth in Appendix B.
SECTION IV - CALCULATION OF AWARDS
o Officer Awards
The actual calculation of the Officer awards are based on levels of
corporate performance. Appendix C outlines the manner in which these awards
are calculated and range between 0% of base salary to 55% of base salary.
<PAGE>
D & E COMMUNICATIONS, INC.
Plan Document Page 3
- -------------------------------------------------------------------------------
SECTION V - DISTRIBUTION OF AWARDS
----------------------
Distribution of awards will be made during the first quarter following the plan
year. Distributions must be approved by the Board of Directors. In the event of
death, any approved award as outlined in Section II for distribution will become
payable to the designated beneficiary of the participant as recorded under the
Company's group life insurance program, or in the absence of a valid
designation, to the participant's estate. Distribution of awards will be in
cash.
SECTION VI - PLAN ADMINISTRATION
-------------------
The Board of Directors shall, with respect to the plan, have full power and
authority to construe, interpret and manage, control and administer this plan,
and to pass and decide upon cases in conformity with the objectives of the plan
under such rules as the Board may establish.
Subject to the provisions of the plan, the Board will determine the award for
the Officers.
Any decision made or action taken by the Company, the Board of Directors, the
C.E.O., or the C.O.O. arising out of, or in connection with the administration,
interpretation, and effect of the plan shall be at their absolute discretion and
will be conclusive and binding on all parties.
No member of the Board, the C.E.O., or the C.O.O. shall be liable for any act or
action hereunder, whether of omission or commission, by a plan participant or
employee or by any agent to whom duties in connection with the administration of
the plan have been delegated in accordance with the provision of the plan.
Any member of the Board who is also an officer of the Company shall neither vote
on (a) the determination of participants, (b) any award decisions, (c) goal(s)
concerning the plan, and (d) any other matter affecting individual interest
under the plan, nor shall his or her presence be counted in determining whether
a quorum is present at any meeting at which a vote on any of the subjects
enumerated above is taken.
<PAGE>
D& E COMMUNICATIONS, INC.
Plan Document Page 4
- -------------------------------------------------------------------------------
SECTION VII -
AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION
--------------------------------------------------
The Company reserves the right, by and through its Board of Directors to amend,
modify, suspend, reinstate or terminate all or any part of the plan at the end
of any plan year. The C.E.O. will give prompt written notice to each participant
of any amendment, suspension or termination or any material modification of the
plan. The Board also reserves the right to withhold or amend award payments
based on performance or circumstances deemed to be highly unusual.
SECTION VIII - EFFECTIVE DATE OF THE PLAN
--------------------------
The initial effective date of the plan shall be January 1.
SECTION IX - EMPLOYER RELATION WITH PARTICIPANTS
-----------------------------------
Neither establishment nor the maintenance of the plan shall be construed as
conferring any legal rights upon any participant or any person for a
continuation of employment, nor shall it interfere with the right of an employer
to discharge any participant or otherwise deal with him/her without regard to
the existence of the plan.
SECTION X - GOVERNING LAW
-------------
Except to the extent pre-empted under federal law, the provisions of the plan
shall be construed, administered and enforced in accordance with the domestic
internal law of the State of Pennsylvania.
In the event of relevant changes in the Internal Revenue Code, related rulings
and regulations or changes imposed by other regulatory agencies affecting the
continued appropriateness of the plan and awards made thereunder, the Board may,
at its sole discretion, accelerate or change the manner of payments of any
unpaid awards or amend the provisions of the plan.
<PAGE>
Exhibit 10.21
AFFILIATED INTEREST AGREEMENT
between
D&E TELEPHONE COMPANY
and
D&E WIRELESS, INC.
November 11, 1997
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
TABLE of CONTENTS
INTRODUCTION..................................................................1
Section 1.0 SERVICES........................................................2
1.1 EXECUTIVE OFFICERS..............................................2
1.2 ADMINISTRATIVE..................................................2
1.3 ENGINEERING.....................................................3
1.4 SUPPORT, OPERATIONS AND MAINTENANCE EMPLOYEES...................3
1.5 EMPLOYEE SERVICES...............................................3
1.6 MARKETING, ADVERTISING AND PUBLIC RELATIONS.....................4
1.7 ACCOUNTING......................................................4
1.8 CORPORATE SECRETARIAL...........................................4
1.9 TREASURY........................................................4
1.10 PURCHASING......................................................5
1.11 INSURANCE.......................................................5
1.12 INFORMATION SYSTEMS.............................................5
1.13 CHARGES AND RATES...............................................5
1.14 CONSULTATIVE AND PROFESSIONAL SERVICES..........................5
Section 2.0 SALES AND SERVICE ASSISTANCE...................................5
Section 3.0 COMPENSATION...................................................6
Section 4.0 D&E WIRELESS RESPONSIBILITY TO D&E TELEPHONE...................6
Section 5.0 D&E TELEPHONE'S DUTY TO PROVIDE SERVICE TO THE PUBLIC..........6
Section 6.0 TERM OF AGREEMENT..............................................7
Section 7.0 RELEASE........................................................7
Section 8.0 INDEMNIFICATION................................................7
Section 9.0 SEVERABILITY...................................................7
Section 10.0 NONASSIGNABILITY...............................................9
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
AFFILIATED INTEREST AGREEMENT
between
D&E TELEPHONE COMPANY
and
D&E WIRELESS, INC.
-----------
INTRODUCTION
This Agreement, dated November 11, 1997, is between DENVER AND EPHRATA
TELEPHONE AND TELEGRAPH COMPANY (hereinafter "D&E Telephone"), a Pennsylvania
corporation and D & E WIRELESS, INC. (hereinafter "D&E Wireless"), a
Pennsylvania corporation, and is for purposes of setting forth various services
to be provided by D&E Telephone to D&E Wireless.
WHEREAS, D&E Telephone is an operating public utility which provides
telecommunications services within portions of Lancaster, Lebanon and Berks
Counties in the Commonwealth of Pennsylvania and is subject to Pennsylvania
Public Utility Commission jurisdiction; and
WHEREAS, D&E Wireless is a telecommunications company providing
wireless personal communications service in portions of Pennsylvania pursuant to
authority granted by the Federal Communications Commission; and
WHEREAS, D&E Telephone and D&E Wireless are wholly-owned subsidiaries
of D&E Communications, a holding company incorporated in the Commonwealth of
Pennsylvania; and
WHEREAS, D&E Telephone renders telecommunications services through its
own staff and facilities and through interconnections with the facilities of
other companies; and
WHEREAS, D&E Telephone is able to provide services and equipment to
assist in the furtherance of the business purposes of D&E Wireless;
1
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
NOW WHEREFORE, in consideration of the mutual promises expressed
herein, and intending to be legally bound hereby, D&E Telephone and D&E Wireless
agree as follows:
Section 1.0 SERVICES. Subject to the terms and conditions of this
Agreement, D&E Telephone and D&E Wireless shall make available
to each other, as needed, the services listed in this Section,
paragraphs 1.1 through 1.14 for the duration of this
Agreement. Either party, with the consent of the other party,
may engage a nonaffiliated company or person to provide any
services covered by this Section.
1.1 EXECUTIVE OFFICERS. Upon request of D&E Wireless, D&E
Telephone shall make certain of its qualified
employees available to become officers of D&E
Wireless. Such employees may be appointed by the
board of directors of D&E Wireless to positions of
president, vice president, secretary, chief financial
officer and treasurer or assistants and to such other
positions within D&E Wireless as the board may
designate.
1.2 ADMINISTRATIVE. As requested, D&E Telephone shall
make qualified employees available to perform or
assist in the performance of management and
supervisory duties on behalf of D&E Wireless. In
order to render such service and to promote the
efficient and economic operation of D&E Wireless,
such employees shall keep themselves informed on all
aspects of D&E Wireless's operations. Such personnel
shall make recommendations for operating
expenditures, additions to and improvements of
property, plant and equipment, and any other aspect
of operations within the scope of their
responsibilities. As requested, such personnel shall
also assist D&E Wireless in the conduct of,
proceeding before, and in its compliance with the
requirements of local, state, and federal regulatory
bodies having jurisdiction over D&E Wireless in its
business operations.
2
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
1.3 ENGINEERING. As requested, D&E Telephone shall advise
and provide engineering services to D&E Wireless in
planning, operating, maintenance, technical, and
construction functions. As requested, D&E Telephone
engineering personnel and consultants shall assist
D&E Wireless by reviewing operating procedures, and
preparing and reviewing surveys, maps, charts,
operating statistics, reports and pertinent technical
data. D&E Telephone personnel shall assist D&E
Wireless in the proper maintenance and protection of
its properties and by such periodic inspections as
may be requested. Such engineering services may also
include the conduct of field investigations as
necessary to obtain engineering information and, when
required, the preparation of studies, reports,
designs and drawings, cost estimates, and
specifications for implementation of D&E Wireless
services or the construction of additions to or
improvements of D&E Wireless properties.
1.4 SUPPORT, OPERATIONS AND MAINTENANCE EMPLOYEES. As
requested, D&E Telephone shall furnish support,
operations and maintenance employees for D&E
Wireless, including hourly employees, as well as
salaried employees and shall supervise such employees
to assure the proper performance of their duties and
the efficient operation of D&E Wireless's facilities.
1.5 EMPLOYEE SERVICES. As requested, D&E Telephone shall
assist D&E Wireless in the procurement of qualified
personnel, in the establishment of appropriate rates
of pay and in negotiations with bargaining programs
for supervision of training and educational
assistance, and shall advise D&E Wireless on federal,
state, and local regulations affecting personnel. As
requested, D&E Telephone shall recommend and
administer group insurance, benefit and pension plans
for the benefit of D&E Wireless. It may also assist
in the establishment of accident prevention and other
programs relating to employee health and welfare.
3
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
1.6 MARKETING, ADVERTISING AND PUBLIC RELATIONS. As
requested, D&E Telephone shall recommend procedures
to promote good customer and public relations and
assist in marketing, advertising, and promotional
efforts of D&E Wireless.
1.7 ACCOUNTING. As requested, D&E Telephone shall keep
the general books of account of D&E Wireless,
including records supplemental thereto, and prepare
annual financial statements and analyses of accounts
of D&E Wireless and special accounting and financial
reports required by D&E Wireless. Also, D&E Telephone
shall prepare reports on the costs incurred for
property and improvements and will establish
accounting records as requested. Upon request, D&E
Telephone shall prepare, or assist in the preparation
of federal, state, and local tax returns for and to
the extent required by D&E Wireless.
1.8 CORPORATE SECRETARIAL. Upon request, D&E Telephone
shall maintain documents of D&E Wireless, such as
minute books, charters, bylaws, contracts, deeds and
other corporate records and shall administer an
orderly program of records retention. It shall
perform other corporate secretarial functions as
required, including preparation of notices of
stockholder and director meetings and keeping the
minutes thereof. D&E Telephone shall review, and may
assist in the preparation of, documents required by
D&E Wireless such as deeds, easements, contracts,
licenses, charters, franchises, permits and
regulatory reports.
1.9 TREASURY. If requested by D&E Wireless, D&E Telephone
shall coordinate financial arrangements with the
financial community to arrange and provide for
furnishing of D&E Wireless's entire capital needs
from other than internally generated sources.
Further, either party may, at the other party's
request and contingent upon the availability of
funds, make capital advances to the other at
prevailing interest rates and payable upon demand to
be utilized in satisfying short-term bank loans and
other corporate purposes.
4
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
D&E Telephone, upon request, shall assist D&E
Wireless in cash management, collection policies, and
the development of investment programs.
1.10 PURCHASING. Upon request, D&E Telephone shall
endeavor to arrange for the purchase of equipment,
materials, supplies and services in volume on a basis
advantageous to D&E Wireless.
1.11 INSURANCE. Upon request, D&E Telephone shall review
the insurance coverage of D&E Wireless, recommend the
types and limits of insurance adequate for its
protection, and assist in the placement of such
insurance. As required by D&E Wireless, it shall
supervise investigation procedures and review claims
and proposals for settlement.
1.12 INFORMATION SYSTEMS. D&E Telephone shall make
available to D&E Wireless such electronic data
processing services, including system analysis and
programming, that may be requested by D&E Wireless.
1.13 CHARGES AND RATES. D&E Telephone, as requested, shall
advise and assist in the preparation and collection
of charges and rates for D&E Wireless services and
render advice with respect to the procedure therefor.
1.14 CONSULTATIVE AND PROFESSIONAL SERVICES. Upon request,
D&E Telephone in addition shall make available to D&E
Wireless such technical, advisory, consultative,
legal, and professional services as may be necessary
to assist D&E Wireless in its corporate operations
and in achieving its business purposes, goals, and
commitments.
Section 2.0 SALES AND SERVICE ASSISTANCE. Consistent with the provisions
of Section 1 of this Agreement, D&E Telephone shall make
available to D&E Wireless such personnel, services, and
equipment as may be requested to
5
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
assist D&E Wireless in its sales, rentals, and service
activities relating to the provision of wireless equipment,
systems and services for business and residential subscribers
and relating to its other business endeavors.
Section 3.0 COMPENSATION. In consideration for the services and equipment
provided by D&E Telephone to D&E Wireless under Section 1 and
Section 2, unless subject to applicable tariff, D&E Wireless
shall pay the market rate when a market exists for such
services and equipment. Otherwise, D&E Wireless shall pay the
cost incurred by D&E Telephone for such services and
equipment, including the salary, wages, fee, and fringe
benefit costs of D&E Telephone attributable to rendering said
services, and including any rental expense for equipment, plus
reimbursement for interest, taxes, carrying costs, and
depreciation where D&E Telephone incurs such costs. To the
extent that in D&E Telephone's rendition of services or
provision of equipment to D&E Wireless, an element of cost
cannot be directly assigned to one party or the other, then
the cost shall be allocated between the parties in accordance
with generally accepted accounting principles.
3.1 The foregoing costs shall be incurred by D&E
Telephone consistent with such cost accounting
requirements as may be imposed by the Pennsylvania
Public Utility Commission relating to transactions
between a regulated telephone company and its
affiliate.
Section 4.0 D&E WIRELESS RESPONSIBILITY TO D&E TELEPHONE. As
requested, D&E Wireless, from time to time, may transfer, sell
or lease property and equipment to D&E Telephone for use by it
in its business endeavors. If such property and equipment is
transferred, sold or leased for use in a regulated activity of
D&E Telephone, then such transfer, sale or lease shall be
accomplished consistent with such cost accounting requirements
as may be imposed by the Pennsylvania Public Utility
Commission relating to transactions between a regulated
telephone company and its affiliate.
6
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
Section 5.0 D&E TELEPHONE'S DUTY TO PROVIDE SERVICE TO THE PUBLIC. D&E
Telephone's obligations under this Agreement shall remain
subordinate to and shall not interfere with its duty to
provide public utility service to the public pursuant to the
Public Utility Code, 66 Pa. C.S.ss.ss. 101 et seq.
Section 6.0 TERM OF AGREEMENT. After execution, this Agreement shall take
effect upon the obtaining of any required regulatory approvals
including that of the Pennsylvania Public Utility Commission.
This Agreement shall continue in full force and effect until
terminated upon ninety (90) days written notice effective when
sent. If there is a material breach of a term or condition by
a party, then this Agreement may be terminated by the other
party upon five (5) days written notice effective when sent.
In the event that D&E Telephone and D&E Wireless shall cease
to be affiliates subject to majority ownership or control of
D&E Communications, Inc., then D&E Telephone shall have the
right to terminate this Agreement upon five (5) days written
notice effective when sent.
Section 7.0 RELEASE. Neither D&E Telephone nor D&E Wireless shall be
liable to the other for any special, incidental or
consequential damages of any nature or for any reason, even if
advised of the possibility of such damages, nor, except to the
extent explicitly provided for herein, for any claims of any
nature against the other by any third party.
Section 8.0 INDEMNIFICATION. To the extent not prohibited by law, and
except as otherwise provided herein, each party shall
indemnify and hold harmless the other party from and against
any loss, costs, claim, injury or liability asserted by any
person not a party hereto against the indemnified party, its
directors, officers, employees, or agents which relates to or
arises out of the negligent or intentional acts of the
indemnifying party or its employees, agents or contractors
taken in connection with the actions under this Agreement.
Section 9.0 SEVERABILITY. In the event that one or more of the provisions
contained herein shall, for any reason, be held to be
unenforceable in any respect, such
7
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
unenforceability shall not affect any other provision of this
Agreement, but this Agreement shall be construed as if the
unenforceable provision had not been contained herein.
8
<PAGE>
Affiliated Interest Agreement
D&E Telephone and D&E Wireless
Section 10.0 NONASSIGNABILITY. Neither party shall assign any right or
duties stated under this Agreement without the written consent
of the other party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
in their respective corporate names by their duly authorized officers and
attested to by their secretaries, as of the date first above written.
By: By:
DENVER AND EPHRATA TELEPHONE D & E WIRELESS, INC.
AND TELEGRAPH COMPANY
/s/ G. William Ruhl /s/ Robert L. Quaranta
- ----------------------------- ------------------------------
G. William Ruhl Robert L. Quaranta
Chief Executive Officer Chief Executive Officer
Attest:
Attest:
/s/ W. Garth Sprecher /s/ W. Garth Sprecher
- ----------------------------- ------------------------------
W. Garth Sprecher W. Garth Sprecher
Vice President & Corporate Secretary Corporate Secretary
9
<PAGE>
AFFIDAVIT
COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF LANCASTER :
:
G. WILLIAM RUHL, being duly sworn according to law, deposes
and says that he is Chief Executive Officer of DENVER AND EPHRATA TELEPHONE AND
TELEGRAPH COMPANY; that he does verify this document to be a true and correct
copy of the original Agreement between the DENVER AND EPHRATA TELEPHONE AND
TELEGRAPH COMPANY and D & E WIRELESS, INC.
/s/ G. William Ruhl
----------------------------
G. William Ruhl
Sworn and subscribed
before me this 11th day
----
of November , 1997
-----------
/s/ Audrey L. Wingenroth
- ---------------------------------
Notary Public
My commission expires: February 24, 2001
<PAGE>
AFFIDAVIT
COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF LANCASTER :
:
ROBERT L. QUARANTA, being duly sworn according to law, deposes
and says that he is Chief Executive Officer of D & E WIRELESS, INC.; that he
does verify this document to be a true and correct copy of the original
Agreement between the DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY and
D & E WIRELESS, INC.
/s/ Robert L. Quaranta
-----------------------------
Robert L. Quaranta
Sworn and subscribed
before me this 13th day
----
of November , 1997
-----------
/s/ James E. Brubaker
- -----------------------------------
Notary Public
My commission expires: September 8, 1999
Exhibit 21.1
D&E Communications, Inc.
Subsidiaries of the Company
as of December 31, 1997
- --------------------------------------------------------------------------------
The following is a listing of all subsidiaries of the Registrant, the state of
incorporation of each, and the names under which subsidiaries do business.
<TABLE>
<CAPTION>
State of Doing Business
Subsidiary Incorporation Under Name of
---------- ------------- --------------
<S> <C> <C>
Denver and Ephrata Telephone
and Telegraph Company Pennsylvania D&E Telephone Company
D&E Telephone and Data D&E Telephone and Data
Systems, Inc. Pennsylvania Systems, Inc.,
D&E Long Distance,
D&E Telestore, and
D&E Computer Networking
Services
D&E Marketing Corp. Pennsylvania D&E Marketing Corp.
D&E Wireless, Inc. Pennsylvania D&E Wireless, Inc.
D&E Investments, Inc. Nevada D&E Investments, Inc.
D&E Holdings, L.P. Pennsylvania D&E Holdings, L.P.
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
D&E Communications, Inc. on Form S-3 (File No. 33-85896) and Form S-8 (File No.
33-78592), of our report dated March 6, 1998, on our audits of the consolidated
financial statements of the D&E Communications, Inc. as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
which report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
March 27, 1998
<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>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 62,801,059
<OTHER-PROPERTY-AND-INVEST> 16,048,547
<TOTAL-CURRENT-ASSETS> 16,146,316
<TOTAL-DEFERRED-CHARGES> 196,165
<OTHER-ASSETS> 24,769,117
<TOTAL-ASSETS> 119,961,204
<COMMON> 976,921
<CAPITAL-SURPLUS-PAID-IN> 10,341,571
<RETAINED-EARNINGS> 41,706,516
<TOTAL-COMMON-STOCKHOLDERS-EQ> 53,025,008
0
1,445,600
<LONG-TERM-DEBT-NET> 41,656,859
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,062,545
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 22,771,192
<TOT-CAPITALIZATION-AND-LIAB> 119,961,204
<GROSS-OPERATING-REVENUE> 48,483,532
<INCOME-TAX-EXPENSE> 7,962,349
<OTHER-OPERATING-EXPENSES> 39,463,805
<TOTAL-OPERATING-EXPENSES> 47,426,154
<OPERATING-INCOME-LOSS> 9,019,727
<OTHER-INCOME-NET> 10,746,166
<INCOME-BEFORE-INTEREST-EXPEN> 19,765,893
<TOTAL-INTEREST-EXPENSE> 2,173,496
<NET-INCOME> 9,564,996
65,052
<EARNINGS-AVAILABLE-FOR-COMM> 9,564,997
<COMMON-STOCK-DIVIDENDS> 2,324,665
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 9,280,541
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.58
</TABLE>
