UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-21666
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
(State or other jurisdiction of
incorporation or organization)
I.R.S. Employer Identification Number: 23-0520190
130 East Main Street, P. O. Box 458
Ephrata, Pennsylvania 17522-0458
(Address of principal executive offices)
Registrant's Telephone Number: (717) 733-4101
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 1996
----- ---------------------------
Common Stock, par value $.50 per share 1,908,191 Shares
Total number of pages including cover page is _____. The index to exhibits is
found on sequentially numbered page _____.
<PAGE>
Form 10-Q
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
PART I. FINANCIAL INFORMATION
<S> <C> <C>
1. Financial Statements
Consolidated Statements of Income --
For the three months ended
March 31, 1996 and 1995 ............................ 1
Consolidated Balance Sheets --
March 31, 1996 and December 31, 1995 ............... 2
Consolidated Statements of Cash Flows --
For the three months ended
March 31, 1996 and 1995 ............................ 3
Notes to Consolidated Financial Statements ........... 4-5
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 6-11
PART II. OTHER INFORMATION
6. Exhibits and Reports on Form 8-K ..................... 12
SIGNATURES ........................................... 13
</TABLE>
i
<PAGE>
Form 10-Q Part I - Financial Information
Item 1. Financial Statements
Denver and Ephrata Telephone and Telegraph Company and Subsidiaries
Consolidated Statements of Income
For the three months ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
OPERATING REVENUES 3/31/96 3/31/95
------- -------
<S> <C> <C>
Local network services ................................ $ 2,112,045 $ 2,018,520
Network access ........................................ 3,916,975 3,757,739
Long distance network services ........................ 1,109,400 1,055,090
Directory advertising ................................. 730,319 664,709
Other ................................................. 408,785 433,356
Revenue from subsidiaries ............................. 2,604,610 1,791,113
------------ ------------
Total Operating Revenues ........................... 10,882,134 9,720,527
------------ ------------
OPERATING EXPENSES
Network operations .................................... 1,534,676 1,411,851
Network access ........................................ 492,156 464,269
Depreciation .......................................... 1,781,873 1,653,076
Customer services ..................................... 428,931 417,562
Financial and administrative services ................. 1,184,839 1,086,272
Directory and other, net .............................. 462,850 436,139
Operating taxes, other than income .................... 361,062 366,127
Costs of subsidiaries products sold ................... 1,173,199 625,544
Other expenses from subsidiaries ...................... 1,264,784 1,161,999
------------ ------------
Total Operating Expenses ........................... 8,684,370 7,622,839
------------ ------------
Operating Income .............................. 2,197,764 2,097,688
------------ ------------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction .......... 34,579 --
Equity in net income (loss) of affiliates ............. 71,553 (57,838)
Interest expense ...................................... (630,793) (618,965)
Other, net ............................................ 11,466 18,733
------------ ------------
Total Other Income (Expense) ....................... (513,195) (658,070)
------------ ------------
Income Before Minority Interest and Income
Taxes......................................... 1,684,569 1,439,618
MINORITY INTEREST ........................................ 864 --
------------ ------------
Income Before Income Taxes ..................... 1,685,433 1,439,618
INCOME TAXES ............................................. 657,412 583,364
------------ ------------
NET INCOME ............................................... 1,028,021 856,254
Preferred Dividend Requirements ....................... 16,263 18,035
------------ ------------
INCOME APPLICABLE TO COMMON SHARES ....................... $ 1,011,758 $ 838,219
============ ============
Average common shares outstanding ..................... 1,906,332 1,900,250
Earnings per common share ............................. $ .53 $ .44
============ ============
Dividends per common share ............................ $ .29 $ .27
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
Form 10-Q Part 1 - Financial Information
Item 1. Financial Statements
Denver and Ephrata Telephone and Telegraph Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
1996 December 31,
ASSETS (unaudited) 1995
-------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .......................................... $ 23,231 $ 50,911
Accounts receivable ................................................ 6,010,833 6,151,686
Accounts receivable and notes
receivable - affiliated companies ................................ 1,035,662 833,064
Inventories, lower of cost or market,
at average cost .................................................. 834,713 778,330
Prepaid expenses ................................................... 2,155,570 2,226,614
Other current assets ............................................... 751,816 266,964
------------- -------------
TOTAL CURRENT ASSETS ........................................ 10,811,825 10,307,569
------------- -------------
INVESTMENTS
Investments in affiliated companies ................................ 8,909,781 8,193,201
Other .............................................................. 2,927,403 2,920,721
------------- -------------
11,837,184 11,113,922
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant in service ......................................... 106,808,739 106,214,967
Under construction ................................................. 1,989,787 1,460,604
------------- -------------
108,798,526 107,675,571
Less accumulated depreciation ...................................... 43,070,156 41,410,562
------------- -------------
65,728,370 66,265,009
------------- -------------
OTHER ASSETS
Unamortized software costs ......................................... 221,946 253,653
Accounts receivable - affiliated company ........................... 125,884 119,664
Other .............................................................. 679,648 461,464
------------- -------------
1,027,478 834,781
------------- -------------
TOTAL ASSETS ............................................................. $ 89,404,857 $ 88,521,281
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ...................................................... $ 5,690,000 $ 5,530,000
Long-term debt maturing within one year ............................ 367,907 365,612
Accounts payable ................................................... 6,833,128 6,997,632
Accrued taxes ...................................................... 758,478 264,034
Accrued interest ................................................... 634,704 464,385
Advance billings, customer deposits and other ...................... 3,174,016 3,429,718
------------- -------------
TOTAL CURRENT LIABILITIES .................................. 17,458,233 17,051,381
------------- -------------
LONG-TERM DEBT ........................................................... 26,139,628 26,137,463
------------- -------------
OTHER LIABILITIES
Deferred income taxes .............................................. 6,616,810 6,673,234
Regulatory liability, net .......................................... 874,710 915,671
Accrued retirement benefits ........................................ 878,794 878,794
Other .............................................................. 258,543 267,702
------------- -------------
8,628,857 8,735,401
------------- -------------
MINORITY INTEREST ........................................................ 500,636 500,000
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred stock, par value $100, cumulative, callable at par, at the
option of the Company, authorized 20,000 shares, outstanding:
Series A 4 1/2%, 14,456 shares ............................... 1,445,600 1,445,600
Common stock, par value $50, authorized shares 5,000,000 ........... 953,717 952,930
Outstanding shares, 1,907,433 at March 31, 1996
1,905,859 at December 31, 1995
Additional paid-in capital ......................................... 1,566,630 1,467,570
Unearned ESOP compensation ......................................... (1,196,774) (1,196,774)
Retained earnings .................................................. 33,908,330 33,427,710
------------- -------------
36,677,503 36,097,036
------------- -------------
TOTAL LIABILITIES, MINORITY INTEREST
AND SHAREHOLDERS' EQUITY ........................................... $ 89,404,857 $ 88,521,281
============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
Form 10-Q Part 1 - Financial Information
Item 1. Financial Statements
Denver and Ephrata Telephone and Telegraph Company and Subsidiaries
Consolidated Statements of Cash Flows
For the three months ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 1,028,021 $ 856,254
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................. 1,896,699 1,791,892
Deferred income taxes ......................................... (97,385) (19,014)
Undistributed (earnings) losses of affiliates ................. (71,553) 57,838
Distribution from affiliates .................................. 230,000 184,000
Tax benefits applicable to ESOP ............................... 5,419 6,132
Loss on retirement of property, plant and equipment ........... 1,756 17,647
Allowance for funds used during construction .................. (34,579) --
Losses applicable to minority interest ........................ (864) --
Changes in operating assets and liabilities
Accounts receivable ........................................... 140,853 603,127
Inventories ................................................... (56,383) (27,214)
Prepaid expenses .............................................. 71,044 219,593
Accounts payable .............................................. (191,198) (261,659)
Accrued taxes and accrued interest ............................ 664,763 383,562
Advance billings, customer deposits and other ................. (255,702) (463,050)
Other, net .................................................... (524,651) (6,133)
----------- -----------
Net Cash Provided by Operating Activities .................. 2,806,240 3,342,975
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................ (1,352,025) (1,302,751)
Allowance for funds used during construction ........................ 34,579 --
Proceeds from sale of assets ........................................ 24,838 33,011
Cost of removal of plant retired .................................... (26,264) (24,714)
Acquisition of other assets ......................................... (159,742) 0
Increase in investments and advances to affiliates .................. (1,557,852) (821,149)
Decrease in investments and repayments from affiliates .............. 494,019 2,477,732
----------- -----------
Net Cash Provided by (Used in) Investing Activities........ (2,542,447) 362,129
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common and preferred stock ............................. (528,126) (491,361)
Net proceeds from (payments on) revolving lines of credit ........... 160,000 (3,335,000)
Contributions from minority interest ................................ 1,500 --
Proceeds from issuance of common stock .............................. 75,153 128,610
Redemption of Series B 5 1/2% Preferred Stock ....................... -- (128,900)
----------- -----------
Net Cash Used in Financing Activities .................... (291,473) (3,826,651)
----------- -----------
DECREASE IN CASH
AND CASH EQUIVALENTS ................................................ (27,680) (121,547)
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD ................................................. 50,911 139,558
----------- -----------
END OF PERIOD ....................................................... $ 23,231 $ 18,011
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Form 10-Q
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been
prepared by Denver and Ephrata Telephone and Telegraph Company and
Subsidiaries ("D and E") pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). In the opinion of management,
the financial statements include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the results of
operations, financial position and cash flows of D and E for the periods
presented. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC
rules and regulations. The use of generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain items in the
financial statements for the three months ended March 31, 1995 have been
reclassified for comparative purposes. D and E believes that the
disclosures made are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in
D and E's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1995.
(2) SUBSEQUENT EVENTS
The Board of Directors of D and E (the "Board") has proposed
reorganizing D and E into a holding company structure (the "Restructuring")
pursuant to an Agreement and Plan of Exchange ("Plan of Exchange"), whereby
D & E Communications, Inc. ("Holding Company") will become the parent
company of D and E. Under the terms of the Plan of Exchange, each of the
outstanding D and E Common Shares ($0.50 par value) (the "D and E Common
Shares") will be exchanged (the "Share Exchange") for three Holding Company
Common Shares ($0.16 par value) (the "Holding Company Common Shares"). In
its effect, the Share Exchange will be similar to a three-for-one split of
D and E Common Shares. As an additional aspect of the Restructuring,
D and E intends to dividend all of the capital stock of its subsidiaries,
Red Rose Systems, Inc. ("Red Rose") and D & E Marketing Corp.
("Marketing"), to the Holding Company after the exchange. The pro forma
earnings per Holding Company Common Share as a result of the Restructuring
are $0.18 and $0.15 for the first quarter of 1996 and 1995, respectively.
On January 26, 1996, the Board proposed, and on February 27, 1996, the
Board adopted and approved the Restructuring pursuant to the Plan of
Exchange. On April 26, 1996, the Pennsylvania Public Utility Commission
approved the Restructuring pursuant to the Plan of Exchange. On May 9,
1996, the shareholders of D and E approved the Restructuring pursuant to
the Plan of Exchange. The Share Exchange will be effective upon the filing
of Articles of Exchange in the Department of State in the Commonwealth of
4
<PAGE>
Form 10-Q
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
Pennsylvania.
The general purpose of the Restructuring is to establish a more
appropriate corporate structure for the conduct of unregulated business
activities. D and E believes that the Restructuring will better enable
D and E to establish a broader base of income generation which will enhance
the overall financial strength of the enterprise.
D and E is positioning itself to participate in a new generation of
wireless services known as PCS. In 1995, Red Rose became managing partner
in The D and E Group, a partnership formed for the purpose of participating
in PCS. Red Rose made an initial capital contribution of $2,000,000 to The
D and E Group, which in turn, is a minority equity investor in PCS One,
Inc. On May 6, 1996, the FCC closed the C Block Auction, and shortly
thereafter released a public notice listing the winning bidders. PCS One,
Inc. was the high bidder for the license to operate in the Lancaster,
Pennsylvania market having submitted a bid of approximately $17,600,000
($13,200,000 net after the 25% entrepreneurs' discount). In compliance with
FCC rules, PCS One, Inc. must submit an initial down payment of $660,000
(5% of its winning bid) by May 14, 1996. The remainder of the down payment,
an additional 5%, will be due shortly after the license is granted by the
FCC, which is anticipated during the third quarter of 1996. The remaining
90 percent of the net auction price for the license may be paid in
installments, with payments of interest only for the first 6 years and
payments of interest and principal amortized over the remaining 4 years of
the 10-year license term. Interest will be based on the rate for ten-year
U.S. Treasury obligations on the date the license is granted.
5
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Monetary amounts presented in the following discussion are rounded to
the nearest thousand dollars.
RESULTS OF OPERATIONS
Net Income. Net income for the three months ended March 31, 1996 was
$1,028,000, about 20.1% more than the net income of $856,000 recorded in the
corresponding period in 1995. The increase occurred primarily due to an increase
in equity in net income of affiliates of $129,000 and an increase in operating
revenues of $1,162,000 offset by a corresponding increase in operating expenses
of $1,062,000. Earnings per common share totaled $.53, as compared with earnings
per common share of $.44 in the first quarter of last year.
Operating Revenues. Total operating revenues for the first quarter of
1996 were $10,882,000, an increase of $1,162,000 or 12.0%, over the
corresponding period last year.
Local network services revenues are generated from providing local
exchange and local private line services. Local network revenues for the
three months ended March 31, 1996 increased $94,000 or 4.6% as compared to the
same period in 1995. This increase was primarily due to a 2.9% growth in
subscribers and revenues generated by a new service, Caller ID Deluxe, which was
implemented June 1, 1995.
Network access services revenues are received from D and E's
subscribers, from local exchange carriers and interexchange carriers ("IXCs")
for their use of local exchange facilities in providing interstate and
intrastate long distance services to their customers and from settlement pools
administered by the National Exchange Carrier Association, Inc. ("NECA").
Revenues in this category for the first three months of 1996 amounted to
$3,917,000, an increase of $159,000 or 4.2% over the corresponding period in
1995. This increase was primarily due to an increase in interstate minutes of
use for approximately $49,000 and intrastate minutes of use for approximately
$190,000 combined with an increase in access lines for approximately $32,000,
partially offset by a decline in interstate traffic sensitive revenues of
approximately $118,000. The decline in interstate traffic sensitive revenues was
due to lower interstate traffic sensitive rates, which were filed with the
Federal Communications Commission (FCC) and, were effective July 1995.
Long distance network services revenues are received from long distance
calls made by residential and business customers within the Capital
(southcentral) Region of Pennsylvania. Long distance network services revenues
increased by $54,000 or 5.1% in the first quarter of 1996 primarily due to an
increase in minutes of use.
Directory advertising revenues increased $66,000 or 9.9% for the first
quarter of 1996 due primarily to a rate increase of approximately 4.8% combined
with an increase in local and regional advertisers of approximately 3.2%.
Revenue from subsidiaries consists primarily of the following services
furnished by Red Rose: sales and service of business telephone systems and
6
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
communications products, revenues from premise work and revenues from the long
distance calling service, D and E Long Distance ("DELD"). Revenue from
subsidiaries grew $813,000 or 45.4% for the first quarter of 1996 over the first
quarter of 1995. This increase was primarily generated by a large system sales
contract which began in January 1996. The contract is expected to be completed
by September 1997 and is expected to generate revenues of approximately
$2,101,000, of which $654,000 was recorded in the first quarter of 1996.
Operating Expenses. Total operating expenses for the three month period
ended March 31, 1996 were $8,684,000 which represents an increase of $1,062,000
or 13.9% over the same period in 1995.
Network operations expenses are incurred in maintaining D and 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, video
conferencing and other materials and supplies. Network operations expense
increased $123,000 or 8.7% during the first quarter of 1996. The increase is
primarily due to an increase in wages and benefits.
Depreciation expense increased $129,000 or 7.8% in the first quarter of
1996 over the corresponding period in 1995. The majority of the increase in
depreciation expense was attributable to an increase in plant in service during
the first quarter of 1996 and new depreciation rates that were effective January
1, 1996.
Financial and administrative services expense increased $99,000 or 9.1% for
the three month period over the corresponding period in the previous year. The
increase was primarily due to an increase in wages and benefits.
Costs of subsidiaries' products sold consist primarily of the material
costs of equipment sales. The increase of $548,000 in these costs during the
three month period ended March 31, 1996 compared to 1995, was principally due to
expenses associated with the large system sales contract, discussed in "Revenue
from subsidiaries" found on pages 6 and 7 of this quarterly report.
Other expenses from subsidiaries include all operating expenses incurred by
Red Rose and Marketing in the course of their business activities, excluding
material costs, and operating taxes other than income taxes. These expenses
increased $103,000 or 8.8% for the three month period, over the comparable
period last year. This increase is primarily attributable to an increase in
sales commissions. A portion of the sales commission increase was due to the
commission associated with the large system sales contract.
Other income (expense) for the three months ended March 31, 1996 was
$513,000 in net expenses, a decrease of $145,000 over the same period in 1995.
This decrease primarily related to an increase in equity in net income of
affiliates of $129,000 and the allowance for funds used during construction
("AFUDC") of $35,000 recorded in the first quarter of 1996. In the past, AFUDC
had been required for long-term plant under construction and now, as of
September 1995, D and E is required to record AFUDC on short-term, as well as
long-term, plant under construction in accordance with the new regulations
issued by the Federal Communications Commission. Equity in net income of
7
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
affiliates increased primarily due to an increase in D and E's share of net
income from cellular joint ventures of $101,000 and a decrease in the net loss
from Monor Communications Group, Inc. ("MCG") of $55,000.
MCG is a domestic corporate joint venture which owns 89.47% of Monor
Telephone Company ("MTT"), which operates a telephone company in Hungary.
Marketing owns 16.19% of MCG. The net loss reported by MCG is directly related
to the losses of MTT. These result primarily from the foreign currency
translation and exchange losses. The foreign currency losses relate to the use
by MTT of the Hungarian Forint ("HUF") as the functional currency for accounting
purposes. The MTT business plan reflects ongoing HUF/U.S. Dollar-devaluation
based on Hungarian government estimates of 18%, 10% and 10%, respectively for
the years 1996 through 1998. These losses are expected to be countered by MTT's
ability to raise rates to customers in order to repay the Overseas Private
Investment Corporation ("OPIC") loan with devalued HUFs. The telecommunications
rate regulation in Hungary permits MTT to make certain inflation adjustments
based upon the Producer Price Index ("PPI"), and, in fact, MTT raised rates
approximately 10% in July of 1995 and 25% in January of 1996. Therefore,
management has decided the cost of foreign currency hedging is not currently
warranted. The Hungarian government has been increasingly receptive to the
conversion of HUFs to U.S. Dollars, and MTT has not experienced, and does not
expect to experience, any difficulties in making the necessary currency
conversions.
Income Taxes. The federal and state income taxes for the quarter ended
March 31, 1996 increased by $74,000 or 12.7% over the corresponding period in
1995. This increase in income taxes was primarily due to an increase in pre-tax
accounting income. The effective income tax rate for the first three months of
1996 was 39.0%, compared to 40.5% for the corresponding period last year. The
decline in the effective income tax rate was primarily due to the decline in the
Pennsylvania state income tax rate from 10.99% to 9.99% in June 1995.
FINANCIAL CONDITION
Liquidity and Capital Resources. D and 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 and E
implemented an Employee Stock Purchase Plan in the second quarter of 1994 and a
Dividend Reinvestment Plan in the fourth quarter of 1994 to raise additional
capital to support operating requirements. These plans have provided $100,000
and $152,000 of additional funds in the three months ended March 31, 1996 and
1995, respectively. D and E expects that presently foreseeable capital
requirements will be financed primarily through internally-generated funds,
although additional short- or long-term debt or equity financing may be needed
to fund development activities and to maintain D and E's capital structure
within management's guidelines.
D and E's primary source of funds for the first quarter of 1996 and 1995
was cash generated from operating activities. Net cash provided by operating
activities was $2,806,000 in 1996, compared to $3,343,000 in 1995. The primary
reason for such decrease was an increase in other assets, including deferred
costs associated with the large system sales contract discussed in "Revenue
8
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
from subsidiaries" on pages 6 and 7 of this quarterly report.
D and E's most significant investing activity was its numerous additions to
property, plant and equipment. The most significant property, plant and
equipment purchases, during the first three months of 1996, were as follows:
$368,000 in digital electronic switching equipment, $255,000 in general purpose
computers, $174,000 in aerial cable and $138,000 in buildings.
Another of D and E's significant investing activities includes D & E
Marketing's investments in MCG, advances to MTT and receipts from MTT on those
advances. Marketing invested $833,000 in MCG in the first quarter of 1996 and
anticipates investing an additional $167,000 in MCG in the second quarter of
1996. Marketing advanced MTT an additional $596,000, and received $433,000 from
MTT in the first quarter of 1996 for its advances to MTT.
In March 1995, Marketing acquired common stock of MCG by forgiving
$633,000, of its accounts receivable from MCG.
As of March 31, 1996, D and E had unsecured lines of credit totaling
$13,000,000 with two domestic banks. The outstanding amounts borrowed under
these agreements at the end of the quarter totaled $5,690,000.
D and E borrowed $2,711,000 on these lines of credit in the first quarter
of 1996. A portion of these funds was used to invest in and provide working
capital to telephone operations in Hungary as well as provide additional working
capital for D and E. In addition, $833,000 was invested in MCG. These borrowings
were offset by payments on the line of credit of $2,551,000. A portion of the
repayments were possible due to $433,000 received from MCG on previous advances,
a $230,000 distribution from cellular joint ventures and other cash generated
from operations.
Under covenants contained in D and E's debt agreements, of which the 8.95%
ESOP Note is the most restrictive with regards to tangible net worth, at March
31, 1996, D and E must maintain a minimum tangible net worth of at least
$29,700,000. D and E is also restricted from paying dividends and making certain
investments in excess of the aggregate of $9,000,000 (of which $4,000,000 is
only applicable to restricted investments) plus 75% of consolidated net income
(or minus 100% of a net loss), determined on a cumulative basis from June 30,
1991. In addition, the debt agreements contain restrictions relating to, among
other things, mortgages and liens, sales of capital assets and investments in
fixed assets.
D and E's ratio of total debt to total debt plus capital declined to 46.7%
at March 31, 1996, compared to 47.0% at December 31, 1995.
OTHER
In 1994, D and E constructed and installed, and now maintains, an enhanced
911 system in Lancaster County pursuant to an Agreement, which was modified on
February 23, 1995, for D and E to furnish the County's 911 system with an
Automatic Location Identification ("ALI") network. D and E estimates that this
Agreement as modified will generate an estimated $9,000,000 of revenue over
9
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
its ten-year term. The ALI system is operational and the customer data
information is being loaded into the system. Management anticipates that all
initial information will be loaded by the end of the third quarter of 1996.
On February 1, 1995, D and E redeemed 1,289 outstanding shares of its
Series B 5 1/2% Preferred Stock at its $100 par value per share, plus accrued
dividends thereon.
On February 2, 1995, D and E and the other participating companies of MCG
entered into a Project Completion Agreement with OPIC as a condition to OPIC's
Finance Agreement with MTT. The Finance Agreement provides a credit facility to
MTT in an amount up to $30,000,000. The Project Completion Agreement provides
that D and E will guarantee payments to MTT or MCG in an amount determined by
OPIC, not to exceed $3,333,000, if, in the opinion of OPIC, MTT has insufficient
funds to achieve project completion or to meet its obligations as they become
due and payable. Project Completion is defined to include certain physical
completion tests and legal conditions of the facilities that MTT procures,
constructs and installs and certain operational completion tests. The operations
completion tests include MTT reaching a stipulated number of subscribers and
reaching a certain dollar level of revenues.
D and E is positioning itself to participate in a new generation of
wireless services known as PCS. In 1995, Red Rose became managing partner in The
D and E Group, a partnership formed for the purpose of participating in PCS. Red
Rose made an initial capital contribution of $2,000,000 to The D and E Group,
which in turn, is a minority equity investor in PCS One, Inc. On May 6, 1996,
the FCC closed the C Block Auction, and shortly thereafter released a public
notice listing the winning bidders. PCS One, Inc. was the high bidder for the
license to operate in the Lancaster, Pennsylvania market having submitted a bid
of approximately $17,600,000 ($13,200,000 net after the 25% entrepreneurs'
discount). In compliance with FCC rules, PCS One, Inc. must submit an initial
down payment of $660,000 (5% of its winning bid) by May 14, 1996. The remainder
of the down payment, an additional 5%, will be due shortly after the license is
granted by the FCC, which is anticipated during the third quarter of 1996. The
remaining 90 percent of the net auction price for the license may be paid in
installments, with payments of interest only for the first 6 years and payments
of interest and principal amortized over the remaining 4 years of the 10-year
license term. Interest will be based on the rate for ten-year U.S. Treasury
obligations on the date the license is granted.
The Board has proposed the Restructuring pursuant to the Plan of Exchange,
whereby Holding Company will become the parent company of D and E. Under the
terms of the Plan of Exchange, each of the outstanding D and E Common Shares
will be exchanged for three Holding Company Common Shares. In its effect, the
Share Exchange will be similar to a three-for-one split of D and E Common
Shares. As an additional aspect of the Restructuring, D and E intends to
dividend all of the capital stock of its subsidiaries, Red Rose and Marketing,
to the Holding Company after the exchange. The pro forma earnings per Holding
Company Common Share as a result of the Restructuring are $0.18 and $0.15 for
the first quarter of 1996 and 1995, respectively.
On January 26, 1996, the Board proposed, and on February 27, 1996, the
Board adopted and approved the Restructuring pursuant to the Plan of Exchange.
On April 26, 1996, the Pennsylvania Public Utility Commission approved the
10
<PAGE>
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Restructuring pursuant to the Plan of Exchange. On May 9, 1996, the shareholders
of D and E approved the Restructuring pursuant to the Plan of Exchange. The
Share Exchange will be effective upon the filing of Articles of Exchange in the
Department of State in the Commonwealth of Pennsylvania.
The general purpose of the Restructuring is to establish a more appropriate
corporate structure for the conduct of unregulated business activities. D and E
believes that the Restructuring will better enable D and E to establish a
broader base of income generation which will enhance the overall financial
strength of the enterprise.
D and E has added to its network Signaling Transfer Point ("STP") equipment
and Service Control Point ("SCP") equipment in each of its Lititz and Ephrata
Central Offices. D and E has also invested in an Advanced Intelligent Network
("AIN") ServiceBuilderTM. This will more than double D and E's existing
Signaling System 7 ("SS7") Network and will enable D and E to provide AIN
services in its territory as well as nationally. In addition, this equipment
permits D and E to be a node in the Independent Telephone Network through which
other telecommunications companies can obtain access to the national SS7
network.
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements as to the
future performance of various domestic and international investments of D and E
and, upon consummation of the Share Exchange, Holding Company, including Monor
Communications Group, Inc. and Monor Telephone Company. Actual results may
differ as a result of factors over which neither D and E nor Holding Company has
any control, including but not limited to, uncertainties and economic
fluctuations in the domestic and foreign markets in which the companies compete,
foreign-currency risks and increased competition in domestic markets due in
large part to continued deregulation of the telecommunications industry.
11
<PAGE>
Form 10-Q
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Identification
No. of Exhibit Reference
------- -------------- ---------
2.1 Agreement and Plan of Exchange Incorporated herein by
Between Denver and Ephrata reference from Amendment
Telephone and Telegraph Company No. 2 to the Registra-
(a Pennsylvania corporation) and tion Statement on Form
D & E Communications, Inc. S-4 (Registration No.
Pennsylvania corporation). 333-2960) for D & E
Communications, Inc.,
Exhibit 2.1.
10.1 Network Product Purchase Filed herewith.
Agreement between Northern
Telecom, Inc. and Denver
and Ephrata Telephone and
Telegraph Company dated
May 3, 1996.
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed in the quarter ended March
31, 1996.
12
<PAGE>
Form 10-Q
DENVER AND EPHRATA TELEPHONE AND TELEGRAPH COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENVER AND EPHRATA TELEPHONE
AND TELEGRAPH COMPANY
(Registrant)
Date: May 10, 1996 By: /s/ Thomas E. Morell
-------------------------
Thomas E. Morell
Chief Financial Officer and Treasurer
(On Behalf of the Registrant and
as Principal Financial Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MAY 10, 1996.
13
<PAGE>
INDEX TO EXHIBITS
Exhibit Identification
No. of Exhibit Reference
- - ------- -------------- ---------
2.1 Agreement and Plan of Exchange Incorporated herein by
Between Denver and Ephrata reference from Amendment
Telephone and Telegraph Company No. 2 to the Registra-
(a Pennsylvania corporation) and tion Statement on Form
D & E Communications, Inc. S-4 (Registration No.
(a Pennsylvania corporation). 333-2960) for D & E
Communications, Inc.,
Exhibit 2.1.
10.1 Network Product Purchase Filed herewith.
Agreement between Northern
Telecom, Inc. and Denver
and Ephrata Telephone and
Telegraph Company dated
May 3, 1996.
27 Financial Data Schedule. Filed herewith.
14
<PAGE>
EXHIBIT 10.1
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 1
NETWORK PRODUCTS PURCHASE AGREEMENT
Northern Telecom Inc., a Delaware corporation having offices at 4001 East Chapel
Hill-Nelson Highway, Research Triangle Park, North Carolina 27709 ("Nortel") and
Denver and Ephrata Telephone and Telegraph Company, a Pennsylvania corporation,
having its principal offices and place of business at 130 East Main Street,
Ephrata, Pennsylvania 17522-0458 ("Buyer") agree as follows:
1. SCOPE
1.1 Certain terms used in this Agreement shall be defined as set
forth in Exhibit A.
1.2 The terms and conditions of this Agreement shall apply to the
purchase by Buyer and the sale by Nortel of Equipment and
Services and the licensing of Software furnished in connection
with such Equipment. The terms and conditions contained in a
Product Attachment shall modify and/or supplement the other
terms and conditions of this Agreement, only with respect to
the Product Line and Services described in the Product
Attachment.
1.3 All Products and Services obtained by Buyer pursuant to this
Agreement shall be obtained by Buyer solely for initial use by
Buyer in its internal business to provide services available
through its networks, and not as stock in trade or inventory
which is intended for resale by Buyer to any third party as
new and unused material. All such Products shall be installed
in the United States.
1.4 As of the date of execution of this Agreement, the Sales
Agreement between Buyer and Nortel effective January 1, 1987
shall be terminated in its entirety, except for those terms and
conditions which survive any such termination.
2. TERM
2.1 This Agreement shall be in effect during the period that any
Product Attachment is in effect. Each Product Attachment shall
be in effect during its Product Attachment Term. This
Agreement or any part thereof may be terminated in accordance
with the express provisions of this Agreement concerning
termination or by written agreement of the parties.
2.2 The termination of this Agreement or any part thereof shall
not affect the obligations of either party thereunder which
have not been fully performed with respect to any accepted
Order, unless such Order is expressly terminated in accordance
with this Agreement or by written agreement of the parties.
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 2
3. ORDERING
All purchases pursuant to this Agreement shall be made by means of
Orders issued from time to time by Buyer and accepted by Nortel in
writing within fifteen (15) days. Otherwise, any such Order shall be
deemed to be void. All Orders shall reference this Agreement and the
applicable Product Attachment and shall be governed solely by the terms
and conditions set forth herein as modified and/or supplemented
pursuant to Section 1.2 by the terms and conditions of any applicable
Product Attachments.
4. PRICES
4.1 The prices, charges, and fees applicable to Orders shall be
set forth in the appropriate Product Attachments and may be
revised in accordance with the provisions stated therein.
Buyer shall pay transportation charges, including insurance,
in accordance with the applicable Product Attachment.
4.2 Buyer shall not sell, lease or otherwise transfer such
Products or any portion thereof or allow any liens or
encumbrances to attach to such Products or any portion thereof
prior to payment in full to Nortel of the total of all such
prices, charges, and fees.
5. TERMS OF PAYMENT
5.1 The amounts payable for Products and/or Services may be
invoiced by Nortel to Buyer in accordance with the applicable
Product Attachments. All amounts payable and properly invoiced
pursuant to this Agreement shall be paid by Buyer to Nortel
within thirty (30) days from the date of Nortel's invoice in
accordance with the payment instructions contained in such
invoice.
5.2 Overdue payments, excluding those which are the subject of a
good faith dispute, shall be subject to interest charges,
calculated daily commencing on the 31st day after the date of
the invoice, at one and one half percent (1-1/2%) per month or
such lesser rate as may be the maximum permissible rate under
applicable law.
6. TAXES
Buyer shall at Nortel's direction promptly reimburse Nortel or pay
directly to the applicable government or taxing authority all taxes and
charges arising hereunder, including, without limitation, penalties and
interest, except for taxes computed upon the net income of Nortel.
Buyer's obligations pursuant to this Section 6 shall survive any
termination of this Agreement.
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 3
7. RISK OF LOSS, TITLE
7.1 Risk of loss or damage to Products shall pass to Buyer upon
delivery to the loading dock at the installation site or other
delivery location specified by Buyer in its Order, and Buyer
shall keep such Products fully insured for the total amount
then due Nortel for such Products.
7.2 Good title to Equipment furnished hereunder which shall be
free and clear of all liens and encumbrances shall vest in
Buyer upon full payment by Buyer of the total prices, charges
and fees payable by Buyer for such Equipment and any related
Software or Services furnished by Nortel in connection with
such Equipment.
7.3 Buyer shall receive a license to use Software subject to the
terms set forth in Exhibit B.
8. TESTING, TURNOVER AND ACCEPTANCE
8.1 If Nortel installs any Products furnished hereunder, the
rights and obligations of the parties with respect to testing,
turnover and acceptance of such Products shall be as set forth
in the applicable Product Attachment.
8.2 If Nortel does not install Products furnished hereunder,
Nortel shall prior to delivery of the Products perform such
factory tests as Nortel determines to be appropriate in order
to confirm that such Products shall be in accordance with the
applicable Specifications. Buyer shall be deemed to have
accepted the Products upon completion of such tests.
8.3 In the event that Buyer places Products into
revenue-generating service, such Products shall be deemed to
have been accepted by Buyer without limitation or restriction.
9. DISCLAIMERS OF WARRANTIES AND REMEDIES
THE WARRANTIES AND REMEDIES SET FORTH IN EXHIBIT D AND IN ANY PRODUCT
ATTACHMENT CONSTITUTE THE ONLY WARRANTIES OF NORTEL WITH RESPECT TO THE
PRODUCTS AND SERVICES AND BUYER'S EXCLUSIVE REMEDIES IN THE EVENT SUCH
WARRANTIES ARE BREACHED. THEY ARE IN LIEU OF ALL OTHER WARRANTIES,
WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. NORTEL SHALL NOT BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL
DAMAGES OF ANY NATURE
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 4
WHATSOEVER, BEFORE OR AFTER THE PLACING OF ANY PRODUCT
INTO SERVICE.
10. LIABILITY FOR PERSONAL INJURY, PROPERTY DAMAGE AND PATENT
INFRINGEMENT
10.1 A party hereto shall defend the other party against any suit,
claim, or proceeding brought against the other party for
direct damages due to personal injuries (including death) or
damage to tangible property which allegedly result from the
negligence or willful misconduct of the defending party in the
performance of this Agreement. The defending party shall pay
all litigation costs, reasonable attorney's fees, settlement
payments and such direct damages awarded or resulting from any
such suit, claim or proceeding.
10.2 Nortel shall defend Buyer against any suit, claim or
proceeding brought against Buyer alleging that any Products,
excluding Vendor Items, furnished hereunder infringe any
United States patent. Nortel shall pay all litigation costs,
reasonable attorney's fees, settlement payments and any
damages awarded or resulting from any such suit, claim or
proceeding. With respect to Vendor Items, Nortel shall assign
any rights with respect to infringement of U.S. patents
granted to Nortel by the supplier of such Vendor Items to the
extent of Nortel's right to do so. In addition, Nortel shall
indemnify Buyer with respect to the cost of defending any
infringement claim brought in the U.S. by any third party
against Buyer [Redacted - Confidential Treatment Requested].
10.3 The party entitled to defense pursuant to Section 10.1 or 10.2
shall promptly advise the party required to provide such
defense of the applicable suit, claim, or proceeding and shall
cooperate with such party in the defense or settlement
thereof. The party required to provide such defense shall have
sole control of the defense of the applicable suit, claim, or
proceeding and of all negotiations for its settlement or
compromise.
10.4 If an injunction is obtained against Buyer's use of any
Products as a result of any suit, claim, or proceeding
described in Section 10.2, Nortel shall at Nortel's option use
its reasonable efforts to either:
10.4.1 procure for Buyer the right to continue using the
portions of the Products enjoined from use; or
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 5
10.4.2 replace or modify the same with equivalent or better
Products so that Buyer's use is not subject to any
such injunction.
10.5 If Nortel cannot perform under Section 10.4.1 or 10.4.2, Buyer
shall have the right to return the infringing Products to
Nortel upon written notice to Nortel, and in the event of such
return, neither party shall have any further liabilities or
obligations under this Agreement on account of such
infringement or return, except during the first year of the
Term, Nortel shall refund to Buyer the purchase price of such
Products and after the first year of the Term, Nortel shall
refund the depreciated value of such Products carried on
Buyer's books at the time of such return, less any outstanding
monies due Nortel hereunder.
10.6 The obligations of Nortel hereunder with respect to any suit,
claim, or proceeding described in Section 10.2 shall not apply
with respect to Products which are (a) manufactured or
supplied by Nortel in accordance with any design or any
special instruction furnished by Buyer, (b) used by Buyer in a
manner or for a purpose not contemplated by this Agreement,
(c) located by Buyer outside the United States, or (d) used by
Buyer in combination with other products not provided by
Nortel, including, without limitation, any software developed
solely by Buyer through the permitted use of Products
furnished hereunder, provided the infringement arises from
such combination or the use thereof. Buyer shall indemnify and
hold Nortel harmless against any loss, cost, expense, damage,
settlement or other liability, including, but not limited to,
attorneys' fees, which may be incurred by Nortel with respect
to any suit, claim, or proceeding described in this Section
10.6.
10.7 Notwithstanding the above, Nortel shall have no obligation or
liability with regard to any patent infringement suit, claim,
or proceeding that may be made or brought against Buyer (i)
alleging that method of use claims in such patent are
infringed by any service offering and/or by any use by Buyer
of Products furnished hereunder to make such service offering
available or (ii) resulting in a settlement payment, or award
of damages, or accounting of profits, where such settlement,
award, or accounting is based on the revenues or profits
earned or other value obtained by Buyer from its use of such
Products and/or is based on the lost revenues or profits of
third parties arising from Buyer's use of such Products.
10.8 If Nortel determines that any Products are or may become the
subject of a suit, claim, or proceeding as described in
Section 10.7, Nortel may provide Buyer with notice to that
effect. Nortel shall have no liability to Buyer pursuant to
Section 10.2, 10.4, or 10.5 with respect to Buyer's use of
such Products which occurs subsequent to such notice. In
addition to its obligations pursuant to Section 10.3, if Buyer
becomes aware that any Products may become the subject of any
such suit, claim, or proceeding
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 6
before receiving any such notice from Nortel, Buyer shall
provide Nortel with notice to that effect.
10.9 After receipt of notice from Nortel pursuant to Section 10.8,
Buyer shall have the option to return to Nortel the applicable
Products identified in such notice and Nortel shall refund the
depreciated value (as carried on the books of Buyer) of the
returned Products to Buyer as more fully set forth in Section
10.5.
10.10 The provisions of Sections 10.2 through 10.9 state the entire
liability of Nortel and its suppliers and the exclusive remedy
of Buyer with respect to any suits, claims, or proceedings of
the nature described in Section 10.2.
10.11 Each party's respective obligations pursuant to this Section
shall survive any termination of this Agreement.
11. REMEDIES AND LIMITATION OF LIABILITY
11.1 Nortel shall have the right to suspend its performance by
written notice to Buyer and forthwith remove and take
possession of all Products that shall have been delivered to
Buyer, if, prior to payment to Nortel of any amounts due
pursuant to this Agreement with respect to such Products,
Buyer shall (a) become insolvent or bankrupt or cease, be
unable, or admit in writing its inability, to pay all debts as
they mature, or make a general assignment for the benefit of,
or enter into any arrangement with, creditors, (b) authorize,
apply for, or consent to the appointment of, a receiver,
trustee, or liquidator of all or a substantial part of its
assets or have proceedings seeking such appointment commenced
against it which are not terminated within ninety (90) days of
such commencement, or (c) file a voluntary petition under any
bankruptcy or insolvency law or under the reorganization or
arrangement provisions of the United States Bankruptcy Code or
any similar law of any jurisdiction or have proceedings under
any such law instituted against it which are not terminated
within ninety (90) days of such commencement.
11.2 In the event of any material breach of this Agreement which
shall continue for thirty (30) or more days after written
notice of such breach (including a reasonably detailed
statement of the nature of such breach) shall have been given
to the breaching party by the aggrieved party, the aggrieved
party shall be entitled at its option to avail itself of any
and all remedies available at law or equity, except as
otherwise provided in this Agreement.
11.3 Nothing contained in Section 11.2 or elsewhere in this
Agreement shall make Nortel liable for any incidental,
indirect, consequential or special damages of any nature
whatsoever for any breach of this Agreement whether the claims
for such damages
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 7
arise in tort, contract, or otherwise, or shall increase the
liability of Nortel under Section 9 or 10 or Exhibit D beyond
that prescribed therein.
11.4 Nortel shall not be liable for any additional costs, expenses,
losses or damages resulting from errors, acts or omissions of
Buyer, including, but not limited to, inaccuracy,
incompleteness or untimeliness in the provision of information
by Buyer to Nortel or fulfillment by Buyer of any of its
obligations under this Agreement. Buyer shall pay Nortel the
amount of any such costs, expenses, losses or damage incurred
by Nortel.
11.5 Any action for breach of this Agreement or to enforce any
right hereunder shall be commenced within two (2) years after
the cause of action accrues or it shall be deemed waived and
barred, except any action for nonpayment by Buyer of any
prices, charges, or fees payable hereunder may be brought by
Nortel at any time permitted by applicable law.
11.6 The limitations on Nortel's liability and other obligations
set forth in Sections 9, 10, and 11 shall survive any
termination of this Agreement.
12. FORCE MAJEURE
If the performance by a party of any of its obligations under this
Agreement shall be interfered with by reason of any circumstances
beyond the reasonable control of that party, including without
limitation, unavailability of supplies or sources of energy, power
failure, breakdown of machinery, or labor difficulties, including
without limitation, strikes, slowdowns, picketing or boycotts, then
that party shall be excused from such performance for a period equal to
the delay resulting from the applicable circumstances and such
additional period as may be reasonably necessary to allow that party to
resume its performance. With respect to labor difficulties as described
above, a party shall not be obligated to accede to any demands being
made by employees or other personnel.
13. CONFIDENTIAL INFORMATION
13.1 Each party which receives the other party's Confidential
Information shall use reasonable care to hold such
Confidential Information in confidence and not disclose such
Confidential Information to anyone other than to its employees
and employees of its affiliates with a need to know. A party
that receives the other party's Confidential Information shall
not reproduce such Confidential Information, except to the
extent reasonably required for the performance of its
obligations pursuant to this Agreement and in connection with
any permitted use of such Confidential Information.
13.2 Buyer shall take reasonable care to use Nortel's Confidential
Information only for study, operating, or maintenance purposes
in connection with Buyer's use of Products furnished by
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 8
Nortel pursuant to this Agreement.
13.3 Nortel shall take reasonable care to use Buyer's Confidential
Information only to perform Nortel's obligations to provide
Products and/or Services to Buyer, provided Nortel may use any
of Buyer's Confidential Information for the development,
manufacture, marketing and maintenance of new products and/or
services and/or changes or modifications to the existing
Products and/or Services, which Nortel may, in either case,
provide to third parties without restriction.
13.4 The obligations of either party pursuant to this Section 13
shall not extend to any Confidential Information which
recipient can demonstrate through written documentation was
already known to the recipient prior to its disclosure to the
recipient, was known or generally available to the public at
the time of disclosure to the recipient, becomes known or
generally available to the public (other than by act of the
recipient) subsequent to its disclosure to the recipient, is
disclosed or made available in writing to the recipient by a
third party having a bona fide right to do so, or is required
to be disclosed by process of law, provided that the recipient
shall notify the disclosing party promptly upon any request or
demand for such disclosure.
13.5 The parties' obligations pursuant to this Section 13 shall
survive any termination of this Agreement.
14. BUYER'S RESPONSIBILITIES
14.1 All sites at which the Products shall be delivered or
installed shall be prepared by Buyer in accordance with
Nortel's standards, including, without limitation,
environmental requirements.
14.2 Buyer shall provide Nortel-designated personnel access to the
Products during the times deemed necessary by Nortel to
install, maintain and service the Products in accordance with
Nortel's obligations. Nortel personnel shall comply with
Buyer's reasonable site and security regulations, provided
Nortel receives written notice of any such regulations
reasonably in advance of the arrival of Nortel's personnel at
the site.
14.3 Buyer shall provide reasonable working space and facilities,
including heat, light, ventilation, telephones, electrical
current, trash removal and other necessary utilities for use
by Nortel-designated maintenance personnel, and adequate
secure storage space, if required by Nortel, for Products and
materials. Buyer shall also provide adequate security for the
Products while on Buyer's site.
14.4 Buyer shall obtain all necessary governmental permits
applicable to Buyer in connection with the installation,
operation, and maintenance of Products furnished hereunder,
excluding any applicable permits required in the normal course
of Nortel's doing business.
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 9
14.5 Any information which Nortel reasonably requests from Buyer
and which is necessary for Nortel to properly install or
maintain the Products shall be provided by Buyer to Nortel in
a timely fashion and in a form reasonably specified by Nortel.
15. HAZARDOUS MATERIALS
15.1 Prior to issuing any Order for Services to be performed at
Buyer's facilities, Buyer shall identify and notify Nortel in
writing of the existence of all Hazardous Materials which
Nortel may encounter during the performance of such Services,
including, without limitation, any Hazardous Materials
contained within any equipment to be removed by Nortel.
15.2 If Buyer breaches its obligations pursuant to Section 15.1,
(a) Nortel may discontinue the performance of the appropriate
Services until all the applicable Hazardous Materials have
been removed or abated to Nortel's satisfaction by Buyer at
Buyer's sole expense, and (b) Buyer shall defend, indemnify
and hold Nortel harmless from any and all damages, claims,
losses, liabilities and expenses, including, without
limitation, attorneys' fees, which arise out of Buyer's breach
of such obligations. Buyer's obligations pursuant to this
Section 15.2 shall survive any termination of this Agreement.
16. SUBCONTRACTING
Nortel may subcontract any of its obligations under this Agreement, but
no such subcontract shall relieve Nortel of primary responsibility for
performance of its obligations.
17. REGULATORY COMPLIANCE
In the event of any change in the Specifications or Nortel's
manufacturing or delivery processes for any Products as a result of the
imposition of requirements by any government, Nortel may upon notice to
Buyer, increase its prices, charges and fees to cover the added costs
and expenses directly and indirectly incurred by Nortel as a result of
such change.
18. GENERAL
18.1 If any of the provisions of this Agreement shall be invalid or
unenforceable under applicable law and a party deems such
provisions to be material, that party may terminate this
Agreement upon notice to the other party. Otherwise, such
invalidity or unenforceability shall not invalidate or render
this Agreement unenforceable, but this Agreement shall be
construed as if not containing the particular invalid or
unenforceable provision and the rights and obligations of the
parties shall be construed and enforced accordingly.
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 10
18.2 A party shall not release without the prior written approval
of the other party any advertising or other publicity relating
to this Agreement wherein such other party may reasonably be
identified. In addition each party shall take reasonable
precautions to keep the existence and the contents of this
Agreement confidential so long as this Agreement remains in
effect and for a period of three (3) years thereafter, except
as may be reasonably required to enforce this Agreement or by
law.
18.3 The construction, interpretation and performance of this
Agreement shall be governed by the laws of the State of North
Carolina, except for its rules with respect to the conflict of
laws.
18.4 Neither party may assign or transfer this Agreement or any of
its rights hereunder without the prior written consent of the
other party, such consent not to be unreasonably withheld,
except Nortel may assign or transfer all or any part of this
Agreement or of its rights hereunder to any Affiliate without
Buyer's consent.
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 11
18.5 Notices and other communications shall be transmitted in
writing by certified United States Mail, postage prepaid,
return receipt requested, by guaranteed overnight delivery, or
by facsimile addressed to the parties as follows:
To Buyer: Denver and Ehprata Telephone and Telegraph Company
130 East Main Street
P.O. Box 458
Ephrata, Pennsylvania 17522-0458
Attention: Mr. Greg Strunk
To Nortel: Northern Telecom Inc.
4001 East Chapel Hill-Nelson Highway
Research Triangle Park, North Carolina 27709
Attention: Vice President, Marketing - IOC/CNG
Facsimile: (919) 992-5985
In addition, notices submitted by Buyer to Nortel specific to
any Product Attachment shall be delivered to the address
stated in the applicable Product Attachment along with a copy
submitted to Nortel at the address stated above.
Any notice or communication sent under this Agreement shall be
deemed given upon receipt, as evidenced by the United States
Postal Service return receipt Mail if given by certified
United States Mail, on the following business day if sent by
guaranteed overnight delivery, or on the transmission date if
given by facsimile during the receiving party's normal
business hours.
The address information listed for a party in this Section or
any Product Attachment may be changed from time to time by
that party by giving notice to the other as provided above.
18.6 In the event of a conflict between the provisions of this
Agreement which are not contained in a Product Attachment and
the provisions of a Product Attachment, the provisions of the
Product Attachment shall prevail with respect to the Product
Line and Services described in that Product Attachment.
18.7 All headings used herein are for index and reference purposes
only, and shall not be given any substantive effect. This
Agreement has been created jointly by the parties, and no rule
of construction requiring interpretation against the drafter
of this Agreement shall apply in its interpretation.
18.8 Buyer shall not export any technical data received from Nortel
pursuant to this Agreement, or release any such technical data
with the knowledge or intent that such
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 12
technical data will be exported or transmitted to any country
or to foreign nationals of any country, except in accordance
with applicable U.S. law concerning the exporting of such
technical data. Buyer shall obtain all authorizations from the
U.S. government in accordance with applicable law prior to
exporting or transmitting any such technical data as described
above.
18.9 Any changes to this Agreement may only be effected if agreed
upon in writing by duly authorized representatives of the
parties hereto. No agency, partnership, joint venture, or
other similar business relationship shall be or is created by
this Agreement.
18.10 This Agreement, including all Product Attachments and Exhibits
constitutes the entire agreement of the parties with respect
to the subject matter hereof.
NORTHERN TELECOM INC. DENVER AND EPHRATA TELEPHONE
AND TELEGRAPH COMPANY
By: /s/ Cynthia C. Hemme By: /s/ Mr. Robert M. Lauman
------------------------- -----------------------------------
(Signature) (Signature)
Name: Cynthia C. Hemme Name: Mr. Robert M. Lauman
------------------------ -----------------------------------
(Print) (Print)
Title: Title: Executive Vice Pres & Chief Oper Officer
------------------------ ----------------------------------------
Date: Date: 5/3/96
------------------------- ----------------------------------------
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 1
EXHIBIT A
DEFINITIONS
As used in the Agreement (as defined below), the following initially capitalized
terms shall have the following meanings:
"Affiliate" shall mean Nortel's parent corporation, Northern Telecom Limited and
any corporation controlled directly or indirectly by Northern Telecom Limited
through the ownership or control of shares or other securities in such
corporation.
"Agreement" shall mean the Agreement to which this Exhibit is attached, and all
Exhibits and Product Attachments.
"Confidential Information" shall mean all information, including, without
limitation, specifications, drawings, documentation, know-how and pricing
information, of every kind or description which may be disclosed by either party
or an Affiliate to the other party in connection with this Agreement, provided
the disclosing party shall clearly mark any such information which is disclosed
in writing as the confidential property of the disclosing party and the
disclosing party shall identify the confidential nature of any such information
which it orally discloses at the time of such disclosure and shall provide a
written summary of the orally disclosed information to the recipient within
fifteen (15) days of such disclosure.
"Equipment" shall mean the hardware listed or otherwise identified in, or
pursuant to, any Product Attachment.
"Exhibits" shall mean Exhibits A, B, C, and D attached hereto, and any
additional Exhibits which Nortel and Buyer subsequently agree in writing shall
be incorporated into, and made a part of the Agreement by reference.
"Hazardous Materials" shall mean any pollutants or dangerous, toxic or hazardous
substances (including, without limitation, asbestos) as defined in, or pursuant
to, the OSHA Hazard Communication Standard (29 CFR Part 1910, Subpart Z), the
Resource Conservation and Recovery Act of 1976 (42 USC Section 6901, et seq.),
the Toxic Substances Control Act (15 USC Section 2601, et seq.), the
Comprehensive Environmental Response Compensation and Liability Act (42 USC
Section 9601, et seq.), and any other federal, state or local environmental law,
ordinance, rule or regulation.
"Order" shall mean a written purchase order issued by Buyer to Nortel. Each
Order shall specify on the face of the Order the types and quantities of
Products and/or Services to be furnished by Nortel pursuant to the Order, the
applicable prices, charges and/or fees with respect to such Products and/or
Services, Buyer's facility to which the Products are to be delivered, the
delivery and/or completion
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 2
schedule, and any other information which may be required to be included in an
Order in accordance with the provisions of this Agreement.
"Product Attachments" shall mean any Product Attachments which the parties agree
in writing shall be incorporated into, and made a part of, this Agreement.
"Product Attachment Term" shall mean the period specified in a Product
Attachment during which that Product Attachment shall be in effect.
"Product Line" shall mean the Products described in and which may be furnished
pursuant to a specific Product Attachment.
"Products" shall mean any Equipment and/or Software which may be provided under
this Agreement.
"Services" shall mean all services listed or otherwise identified in, or
pursuant to, any Product Attachment which may be purchased from or provided by
Nortel and which are associated with the Product Line described in that Product
Attachment.
"Software" shall mean (a) programs in machine-readable code or firmware which
(i) are owned by, or licensed to, Nortel or any of its Affiliates, (ii) reside
in Equipment memories, tapes, disks or other media, and (iii) provide basic
logic operating instructions and user-related application instructions, and (b)
documentation associated with any such programs which may be furnished by Nortel
to Buyer from time to time.
"Specifications" shall mean, with respect to any Product Line, the
specifications identified in the applicable Product Attachment, provided Nortel
shall have the right at its sole discretion to modify, change or amend such
specifications at any time.
"Third Party Software Vendor" shall mean any supplier of programs contained in
the Software which is not an Affiliate.
"Vendor Items" shall mean, with respect to a Product Line, those portions of the
Product which are identified in the applicable Product Attachment as Vendor
Items.
"Warranty Period" shall mean, with respect to a Product Line, the Warranty
Period specified in the applicable Product Attachment.
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 1
EXHIBIT B
SOFTWARE LICENSE
1. Buyer acknowledges that the Software may contain programs which have
been supplied by, and are proprietary to, Third Party Software Vendors.
In addition to the terms and conditions herein, Buyer shall abide by
any additional terms and conditions provided by Nortel to Buyer with
respect to any Software provided by any Third Party Software Vendor.
2. Upon Buyer's payment to Nortel of the applicable fees with respect to
any Software furnished to Buyer pursuant to this Agreement, Buyer shall
be granted a personal, non-exclusive, paid-up license to use the
version of the Software furnished to Buyer only in conjunction with
Buyer's use of the Equipment with respect to which such Software was
furnished for the life of that Equipment as it may be repaired or
modified. Buyer shall be granted no title or ownership rights to the
Software, which rights shall remain in Nortel or its suppliers.
3. As a condition precedent to this license and to the supply of Software
by Nortel pursuant to the Agreement, Nortel requires Buyer to give
proper assurances to Nortel for the protection of the Software.
Accordingly, all Software supplied by Nortel under or in implementation
of the Agreement shall be treated by Buyer as the exclusive property,
and as proprietary and a TRADE SECRET, of Nortel and/or its suppliers,
as appropriate, and Buyer shall: a) hold the Software, including,
without limitation, any methods or concepts utilized therein in
confidence for the benefit of Nortel and/or its suppliers, as
appropriate; b) not provide or make the Software available to any
person except to its employees on a 'need to know' basis; c) not
reproduce, copy, or modify the Software in whole or in part except as
authorized by Nortel; d) not attempt to decompile, reverse engineer,
disassemble, reverse translate, or in any other manner decode the
Software; e) issue adequate instructions to all persons, and take all
actions reasonably necessary to satisfy Buyer's obligations under this
license; and f) forthwith return to Nortel, or with Nortel's consent
destroy, any magnetic tape, disc, semiconductor device or other memory
device or system and/or documentation or other material, including, but
not limited to all printed material furnished by Nortel to Buyer which
shall be replaced, modified or updated.
4. The obligations of Buyer hereunder shall not extend to any information
or data relating to the Software which is now available to the general
public or becomes available by reason of acts or failures to act not
attributable to Buyer.
5. Buyer shall not assign this license or sublicense any rights herein
granted to any other party without Nortel's prior written consent.
6. Buyer shall indemnify and hold Nortel and its suppliers, as
appropriate, harmless from
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 2
any loss or damage resulting from a breach of this Exhibit B. The
obligations of Buyer under this Exhibit B shall survive the termination
of the Agreement and shall continue if the Software is removed from
service.
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 1
EXHIBIT C
STORAGE
If Buyer notifies Nortel prior to the scheduled shipment date of Products that
Buyer does not wish to receive such Products on the date agreed by the parties,
or the installation site or other delivery location is not prepared in
sufficient time for Nortel to make delivery in accordance with such date, or
Buyer fails to take delivery of any portion of such Products, Nortel may place
the applicable Products in storage. In that event Buyer shall be liable for all
additional costs thereby incurred by Nortel. Delivery by Nortel of any Products
to a storage location as provided above shall be deemed to constitute delivery
of the Products to Buyer for purposes of this Agreement, including, without
limitation, provisions for payment, invoicing, passage of risk of loss, and
commencement of the Warranty Period.
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 1
EXHIBIT D
LIMITED WARRANTIES AND REMEDIES
1. Nortel warrants that the Equipment supplied hereunder will under normal
use and service be free from defective material and faulty workmanship
and will conform to the applicable Specifications for the Warranty
Period specified in the Product Attachment with respect to such
Equipment. The foregoing warranty shall not apply to items normally
consumed in operation, such as, but not limited to, lamps and fuses or
to Vendor Items. Any installation Services performed by Nortel with
respect to such Equipment shall be free from defects in workmanship for
the Warranty Period set forth in the applicable Product Attachment.
2. Nortel's sole obligation and Buyer's exclusive remedy under the
warranty set forth in Section 1 above shall be limited to the
replacement or repair, at Nortel's option and expense, of the defective
Equipment, or correction of the defective installation Services.
Replacement Equipment may be new or reconditioned at Nortel's option.
3. Nortel warrants that any Software licensed by Nortel to Buyer under
this Agreement shall function during the Warranty Period of the
Equipment with respect to which such Software is furnished without any
material, service-affecting nonconformance to the applicable
Specifications, provided that Buyer shall have paid all Software
support fees specified in the applicable Product Attachment. If the
Software fails to so function, Buyer's sole remedy and Nortel's sole
obligation under this warranty is for Nortel to correct such failure
through, at Nortel's option, the replacement or modification of the
Software or such other actions as Nortel reasonably determines to be
appropriate.
4. Unless otherwise stated in a Product Attachment, (a) Nortel's
warranties in Section 3 above shall only apply to the portion of the
Software actually developed by Nortel or its Affiliates, (b) all other
Software shall be provided by Nortel "AS IS", (c) Nortel shall assign
to Buyer on a nonexclusive basis any warranty on such other Software
provided to Nortel by the developer of such other Software to the
extent of Nortel's legal right to do so.
5. The obligations and remedies set forth in Sections 1, 2, and 3 above
shall be conditional upon: the Equipment not having been altered or
repaired, the Software not having been modified, and the Products not
having been installed outside the United States; any defect or
nonconformance not being the result of mishandling, abuse, misuse,
improper storage, improper performance of installation, other services,
maintenance or operation by other than Nortel (including use in
conjunction with any product which is incompatible with the applicable
Equipment or Software or of inferior performance), and/or any error,
act, or
<PAGE>
Agreement No. NPPAD&E9501
Network Product Purchase Agreement
Page 2
omission of Buyer described in Section 11.4; the Product not having
been damaged by fire, explosion, power failure, power surge, or other
power irregularity, lightning, failure to comply with all applicable
environmental requirements for the Products specified by Nortel or any
other applicable supplier, such as but not limited to temperature or
humidity ranges, or any act of God, nature or public enemy; and written
notice of the defect having been given to Nortel within the applicable
Warranty Period.
6. The performance by Nortel of any of its obligations described in
Section 2 or 3 of this Exhibit D shall not extend the applicable
Warranty Period except to the extent specified in the applicable
Product Attachment.
7. Upon expiration of the applicable Warranty Period for Equipment
furnished hereunder, repair and replacement Service for such Equipment
shall be available to Buyer from Nortel in accordance with Nortel's
then-current terms, conditions and prices. Such repair and replacement
Service and notice of any discontinuance of such repair and replacement
Service shall be available for a minimum period set forth in the
Product Attachment applicable to such Equipment. This provision shall
survive the expiration of this Agreement.
8. Unless Nortel elects to repair or replace defective Equipment at
Buyer's facility, all Equipment to be repaired or replaced, whether in
or out of warranty, shall be packed by Buyer in accordance with
Nortel's instructions stated in the applicable Product Attachment and
shipped at Buyer's expense and risk of loss to a location designated by
Nortel. Replacement Equipment shall be returned to Buyer at Nortel's
expense and risk of loss. Buyer shall ship the defective Equipment to
Nortel within thirty (30) days of receipt of the replacement Equipment.
In the event Nortel fails to receive such defective Equipment within
such thirty (30) day period, Nortel shall invoice Buyer for the
replacement Equipment at the then-current price in effect therefor.
9. With respect to any Vendor Item furnished by Nortel to Buyer pursuant
to this Agreement, Nortel shall assign to Buyer on a nonexclusive basis
any warranty granted by the party that supplied such Vendor Item to
Nortel to the extent of Nortel's right to do so.
10. Neither Nortel nor Nortel's suppliers, as appropriate, shall have any
responsibility for warranties offered by Buyer to any of its customers.
Buyer shall indemnify Nortel and Nortel's suppliers, as appropriate,
with respect thereto.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF INCOME, BALANCE SHEETS AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 65,728,370
<OTHER-PROPERTY-AND-INVEST> 11,837,184
<TOTAL-CURRENT-ASSETS> 10,811,825
<TOTAL-DEFERRED-CHARGES> 432,907
<OTHER-ASSETS> 594,571
<TOTAL-ASSETS> 89,404,857
<COMMON> 953,717
<CAPITAL-SURPLUS-PAID-IN> 1,566,630
<RETAINED-EARNINGS> 33,908,330
<TOTAL-COMMON-STOCKHOLDERS-EQ> 35,231,903
0
1,445,600
<LONG-TERM-DEBT-NET> 26,139,628
<SHORT-TERM-NOTES> 5,690,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 367,907
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 20,529,819
<TOT-CAPITALIZATION-AND-LIAB> 89,404,857
<GROSS-OPERATING-REVENUE> 10,882,134
<INCOME-TAX-EXPENSE> 657,412
<OTHER-OPERATING-EXPENSES> 8,684,370
<TOTAL-OPERATING-EXPENSES> 9,341,782
<OPERATING-INCOME-LOSS> 1,540,352
<OTHER-INCOME-NET> 118,462
<INCOME-BEFORE-INTEREST-EXPEN> 1,658,814
<TOTAL-INTEREST-EXPENSE> 630,793
<NET-INCOME> 1,028,021
16,263
<EARNINGS-AVAILABLE-FOR-COMM> 1,011,758
<COMMON-STOCK-DIVIDENDS> 547,401
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 2,806,240
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.53
</TABLE>
