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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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 000-20709
D&E Communications, Inc.
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(exact name of registrant as specified in its charter)
Pennsylvania 23-2837108
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(State or other jurisdiction of (I. R. S. Employer
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
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 5, 2001 (based upon the closing price of such stock as
of such date) was $88,616,559.
The number of shares outstanding of the Registrant's common stock, $.16 par
value, was 7,385,006 at March 5, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Registrant's 2001 Annual Meeting
of the Shareholders to be held on April 26, 2001, are incorporated herein by
reference in Part III hereof.
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TABLE OF CONTENTS
PART I
Item 1. Business........................................................... 1
Item 2. Properties......................................................... 6
Item 3. Legal Proceedings.................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders................ 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................ 8
Item 6. Selected Financial Data............................................ 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 10
Item 7A. Quantitative and Qualitative Disclosure About Market Risks......... 19
Item 8. Financial Statements and Supplementary Data........................ 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant................. 20
Item 11. Executive Compensation............................................. 20
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 20
Item 13. Certain Relationships and Related Transactions..................... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 21
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PART I
Item 1. Business.
(a) General Development of Business.
D&E Communications, Inc., a telecommunications holding company, became the
successor parent company to its telephone operating subsidiary, Denver and
Ephrata Telephone and Telegraph Company (D&E Telephone) in June 1996. In
addition, D&E Telephone and Data Systems, Inc. (TDS) became a subsidiary of
D&E Communications, Inc. D&E Communications, Inc., its subsidiaries and
affiliates (hereinafter collectively referred to as D&E) provide
telecommunications services in the south central Pennsylvania area and in
certain areas of Eastern Europe.
During 1997, D&E further expanded its corporate structure to facilitate the
continuing growth in less regulated businesses. D&E formed D&E Wireless,
Inc. (Wireless) to design, construct and operate a Personal Communications
Services (PCS) digital network. D&E Investments, Inc. (Investments) was
originally formed to hold various PCS licenses acquired by D&E, and later
merged with D&E Marketing Corp. (Marketing) to include its foreign
investment activities. Late in 1997, D&E formed a joint venture, between
subsidiaries of Omnipoint Corporation (Omnipoint) and Wireless, to provide
wireless communications services throughout south central Pennsylvania. The
D&E/Omnipoint Wireless Joint Venture, L.P. does business as PCS ONE.
In July 1998, D&E formed D&E Systems, Inc. (D&E CLEC) to provide
competitive telecommunications services outside the D&E Telephone regulated
area. On January 29, 1999, the Pennsylvania Public Utility Commission (PUC)
granted authority to D&E CLEC to operate as a competitive local exchange
carrier (CLEC) within the service territories of Verizon. Subsequently, D&E
CLEC was also certified to operate in Sprint/United Telephone service
areas. D&E CLEC initiated its services during the fourth quarter of 1999.
In October 2000, D&E initiated a new Internet Service Provider (ISP) using
the trade name D&E Jazzd (Jazzd). During 2000, D&E also acquired two
companies that provide computer networking services. On December 31, 2000
TDS merged these operations and renamed the surviving entity D&E Networks,
Inc. (Networks).
In addition to the above U.S. activities, D&E provided telephone and cable
television services in Hungary through its part ownership of Monor
Telephone Company (MTT) from 1994 until it was sold in December 1999. D&E
also has an indirect ownership interest in Pilicka Telephonia S.A.
(Pilicka) in Poland which has constructed and operates a telephone network
in a region south of Warsaw. PenneCom, B.V. (PenneCom), Pilicka's direct
owner, received an offer to buy Pilicka during 1999. A dispute arose under
the Agreement of Sale and such dispute is currently in binding arbitration
by the International Court of Arbitration at the International Chamber of
Commerce.
(b) Financial Information about Industry Segments.
Financial information about D&E and its subsidiaries is contained in the
consolidated Financial Statements included herein. In 1998, D&E adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). The business
of D&E was analyzed by the nature of its products and services, method of
production and delivery of services, regulatory environment and types of
customers serviced. D&E reports four business segments in a format similar
to information provided to management. The segments reported are: (i)
Telecommunication Services, (ii) Telephone & Data Services, (iii) Wireless
Services, and (iv) International Communication Services. See Note 16 to the
financial statements.
(c) Narrative Description of Business.
(1) Overview. D&E Telephone, the Telecommunication Services segment,
furnishes telephone service through 61,098 access lines to an estimated
population in excess of 100,000 in an area of approximately 227 square
miles
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covering parts of Berks, Lancaster and Lebanon Counties in Pennsylvania.
National and international communications services are also furnished
through interconnection with the facilities of other companies.
The area served by D&E Telephone is mostly rural and suburban in nature,
with an agricultural and small business economic base. In addition, the
business elements serviced include manufacturing, distribution, retail and
service establishments. Of the 61,098 access lines serviced by D&E
Telephone as of December 31, 2000, service is provided to 43,917
residential customer lines (72%) and to 17,181 business customer lines
(28%).
The principal categories of service rendered by D&E Telephone are:
(i) Local Network Services - provide local exchange (dial tone), custom
calling features and local private line services to residential and
business customers in D&E Telephone's service area.
(ii) Network Access Services - provide local exchange carriers, wireless
companies and interexchange carriers, with the use of D&E Telephone'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 within
the Capital (south central) Region of Pennsylvania to residential and
business customers.
D&E Telephone constructed, installed and now maintains an Enhanced 911
(E911) system in Lancaster County pursuant to an Agreement for D&E
Telephone 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 D&E Telephone's Ephrata
Central Office. Under the E911 system, a dispatcher is provided with the
phone number and address of the caller automatically. D&E Telephone
extended its contract with Lancaster County until December 31, 2019.
TDS, the Telephone & Data Services segment, 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 D&E
Telephone service area and, since mid-1997, throughout the Verizon -
Pennsylvania franchise area of Lancaster County. Also, TDS d/b/a D&E
Computer Networking Services provides Local and Wide Area Network sales and
services to area businesses that need to connect computers together in
working groups. Through the acquisitions of CompuSpirit and Alternate
Solutions, Inc. during 2000, TDS expanded its presence in its service
territory. On December 31, 2000 TDS merged these operations and renamed the
surviving entity D&E Networks, Inc.
The Wireless Services segment revenues derive from Wireless providing
support services to PCS ONE to design, construct and provide PCS services
in the four markets of Lancaster, Harrisburg, York-Hanover and Reading. In
November 1997, PCS ONE began providing PCS services and equipment with
features such as voice mail, pager, fax, and Internet access. Wireless owns
50% of the joint venture and records its share of equity in the earnings or
losses of PCS ONE on the equity accounting method.
Through Investments, which merged with Marketing, the International
Communication Services segment provides support services to Pilicka in
Europe. Pilicka provides telephone service in a region of Poland through a
system using fixed wireless and wireline technologies. Investments sold its
16% interest in MTT in December 1999, and is in binding arbitration
regarding the sale of its 33% interest in Pilicka. In March 1999,
Investments sold its shares in D&E SuperNet, Inc. in exchange for cash and
shares of OneMain.com, Inc. (OneMain), representing less than 5% of OneMain
shares. During 2000, the OneMain investment was exchanged in a merger with
EarthLink, Inc. (EarthLink) for a combination of cash and EarthLink shares.
D&E holds this investment on the balance sheet as available-for-sale.
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(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 1996 Act) has major ramifications
throughout both federal and state jurisdictions and therefore affects the
strategic direction of D&E. The Congressional intent of the 1996 Act was to
encourage advanced technology and enable competition in heretofore
monopolistic markets. However, in many aspects, even more regulatory
constraints exist today than prior to 1996, especially for incumbent local
exchange carriers (ILECs). While competition is slowly emerging in specific
market segments within limited geographic areas, the transition from a
monopolistic to a competitive market is carefully monitored by the
regulators.
(i) Federal. D&E provides three services subject to regulation by the
Federal Communications Commission (FCC): D&E Telephone, D&E Long Distance
and D&E CLEC.
D&E Telephone, as an ILEC, has interstate revenues mainly derived from
network access services, i.e., transmission and switching services provided
at each end of a toll call that connect telephone subscribers to long
distance companies. D&E Telephone participates in FCC tariffs and
interstate settlement pools administered by NECA. Established at the
direction of the FCC, NECA uses settlement formulas to redistribute
revenues among NECA members. Under FCC rules, D&E Telephone is allowed to
earn up to 11.25% return on its investment in property, plant and equipment
used to furnish interstate service. The FCC rate of return enforcement
rules require telephone companies to refund, to NECA, earnings in excess of
their allowable return.
D&E Long Distance operates in the interstate and international arena as a
long distance reseller. In compliance with an FCC ruling, D&E Long Distance
withdrew its interstate tariff in October 2000, electing instead to publish
its interstate toll rates on its Internet website. D&E Long Distance
continues to file its international toll tariffs at the FCC.
D&E CLEC, operating as a CLEC, has the option of filing an FCC tariff for
interstate network access services or negotiating separate contracts with
parties who desire to purchase D&E CLEC services. Since this would entail
negotiating with virtually every long distance carrier operating in the D&E
CLEC local service area, D&E CLEC has elected to file an FCC tariff. D&E
CLEC initiated its services during the fourth quarter of 1999.
(ii) State. D&E has three businesses subject to regulation by the PUC: D&E
Telephone, D&E Long Distance and D&E CLEC.
D&E Telephone is subject to regulation by the PUC for all regulated
intrastate services such as dial tone, calling features, regional toll
calls and intrastate network access. With respect to toll and access, D&E
Telephone previously participated in tariffs under the Pennsylvania
Telephone Association, a state trade association. However, in May 2000, D&E
Telephone elected to file its own state tariffs, thereby withdrawing from
the trade association tariffs. The following notable activities occurred in
2000 involving D&E Telephone:
-- In compliance with state statutes, commonly known as Chapter 30, D&E
Telephone joined in a petition to the PUC in July 1998 for an alternative
form of regulation with a network modernization plan. In response to the
PUC's initial Chapter 30 Order, in January 2000, D&E Telephone filed a
petition for reconsideration. On March 30, 2000, the PUC issued a revised
Order. D&E accepted the PUC Order, and filed an amended Chapter 30 Plan.
Various parties to the litigation filed exceptions to which D&E Telephone
filed a reply. On December 21, 2000, the PUC entered an Order granting the
exceptions in part. Subsequently, D&E Telephone filed a re-modified Chapter
30 Plan on January 22, 2001. The Office of Consumer Advocate and Office of
Trial Staff filed exceptions seeking minor modifications in the Plan to
which D&E Telephone filed a reply. The matter remains pending before the
PUC which is expected to enter an Order by June 30, 2001. Subject to final
regulatory approval, the plan will be adopted along with a new ratemaking
process in which, instead of a rate base/rate of return methodology, prices
are adjusted in accordance with the Gross Domestic Product Price Index with
a productivity offset.
-- In September 1998, the PUC launched a Global Telecommunications
proceeding aimed at settling multiple regulatory issues, such as access
charge reforms needed to establish a universal service fund among ILECs,
CLECs
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and long distance companies. D&E Telephone participated in this proceeding
with 27 other ILECs as the Rural Telephone Company Coalition (RTCC). In
September and November 1999, the PUC entered Orders clarifying and
resolving the issues. Petitions for reconsideration and various court
appeals were filed by many of the parties challenging portions of the PUC's
directives. Petitions for allowance of appeal are currently pending before
the Supreme Court of Pennsylvania. In May 2000, the PUC agreed to a
settlement with the RTCC members. As a result, a statewide Universal
Service Fund was established to compensate rural telephone companies, like
D&E Telephone, for rate reductions in intrastate network access and
regional toll. Immediately thereafter, D&E Telephone received PUC approval
for a revenue neutral rate rebalancing whereby an increase in local
(dialtone) rates was offset with lower intrastate network access charges
and regional toll rates.
-- In October 2000, D&E Telephone received PUC approval to reclassify one
of its exchanges into a rate band with higher local (dialtone) rates. A
reclassification is permitted under D&E Telephone's tariff when, through
the normal course of demographic growth, customers have access to a larger
number of lines within their calling area. The reclassification provided an
annual revenue increase of approximately $125,000.
D&E Long Distance is required to maintain an intrastate toll tariff with
the PUC. This simply assures consumers that rates will not exceed the
highest daytime rate charged by the most prominent long distance company
operating in the state.
D&E CLEC was certified by the PUC in January 1999 to operate in the areas
throughout the state serviced by Verizon. Subsequently, D&E CLEC was fully
certified to operate in the areas throughout Pennsylvania served by
Sprint/United Telephone. D&E CLEC is required to maintain a local exchange
services tariff as well as an intrastate network access services tariff
with the PUC.
(3) Employees. D&E had 670 employees as of December 31, 2000.
(4) Significant Customers. There are no significant telephone subscribers
whose loss 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 and billing and collection services from D&E which
accounted for less than 10% 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 WorldCom, 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 because 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 that 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.
(5) Competition. Competition is emerging in niches in Pennsylvania's local
exchange market, particularly in the service territories of larger ILECs,
like Verizon. CLECs, such as D&E CLEC, are less regulated than ILECs and
offer an alternative for some consumers to traditional telephone companies.
D&E Telephone currently qualifies as a rural telephone company, and has
received a limited suspension until July 2001 from certain interconnection
requirements of the 1996 Act. D&E Telephone has applied for an additional
one-year extension. This suspension
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protects universal service in D&E Telephone's service territory from
non-facilities-based CLECs that might target higher revenue producing
customers and thus erode the subsidy flow to residential consumers. To some
extent, cellular and PCS wireless services also offer a competitive
alternative in the local exchange market.
Network access, a service provided to long distance companies and other
telephone companies by D&E Telephone, also faces competition. Alternative
companies, called competitive access providers, originate and/or terminate
calls without the use of the local telephone company's plant. For the most
part, these competitors are found in major metropolitan areas with a higher
concentration of business customers than are found in D&E Telephone's
service territory.
Various other services, such as directory publication, billing and
collection of long distance toll charges to consumers and telephone system
sales, are open to competition from other suppliers. 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) Financial Information about Foreign and Domestic Operations and Export
Sales.
During 1997, Pilicka, a Polish limited liability company, purchased three
licenses to operate a competitive duopoly telephone network for 15 years in
an area south of Warsaw. The licenses cover an area of 5,000 square miles
with a population of approximately 1.9 million people. Pilicka provides
telephone service to more than 26,000 customers. D&E indirectly owns 33% of
Pilicka. An agreement for the sale of Pilicka led to a dispute which is
currently in binding arbitration with the International Court of
Arbitration at the International Chamber of Commerce, awaiting resolution
of claims for damages.
(e) Special Considerations.
The risk involved in growth in competitive business activities
Although a substantial portion of D&E's operations are subject to
regulation at both the federal and state levels, D&E continues to
experience growth in its competitive businesses. The 1996 Act has major
ramifications throughout both state and federal jurisdictions and therefore
affects the strategic direction of D&E. While the 1996 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 D&E Telephone'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. Inflation has also 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 constantly evaluates opportunities to invest in new ventures to
increase shareholder value. Any new business opportunities are likely to
generate costs in excess of revenue during their development period.
Although management will carefully evaluate the viability of new ventures,
these ventures will most likely operate in competitive environments and are
not assured of becoming viable businesses.
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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. Approximately half of
the building is currently occupied by D&E employees.
D&E also owns its main central office switch facility 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, space is leased to PCS ONE for its switch
and computer equipment.
In addition, D&E owns various other building facilities, containing a total
floor space area of 121,200 square feet, located in several 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, a parking garage and a communications tower site.
D&E has several other leased facilities. The first lease, for a five-year
term ending in 2002, is for 3,400 square feet used as a retail Telestore
location. The second lease, for five years ending in 2003, is for
approximately 3,300 square feet used as a technical support area by D&E
Computer Networking Services. The companies acquired during 2000 lease
three facilities primarily used for office space including 22,000 square
feet on a one year lease ending in 2001, 3,300 square feet on a month to
month lease and 4,800 square feet on a one year lease ending in 2002.
During the first quarter of 2001, D&E agreed to lease approximately 27,300
square feet for a five year term in a different facility beginning in the
spring of 2001 in anticipation of combining and relocating the acquired
businesses.
(b) Network Plant Facilities. D&E owns and operates a network of switching
and transmission facilities that is used to provide local, national and
international telecommunications services to D&E's customers. This network
also provides for advanced custom calling services and customer local area
signaling services (CLASS) as well as Advanced Intelligent Network (AIN)
services.
The switching facilities consist primarily of digital electronic switching
equipment housed in D&E-owned buildings situated at various locations
within the service area. A host DMS-100 switch is located in the central
office in Ephrata and Lititz; 12 remote switching centers or remote line
modules are located in a variety of buildings or controlled environmental
vaults. Other smaller, remote dial tone units, such as access nodes and
digital loop carrier equipment, are contained in weatherproof housings
scattered throughout D&E's service 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) 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.
During 2000, D&E installed Asynchronous Transfer Mode (ATM) core backbone
packet switches to gain efficiencies in traffic prioritization and provide
next generation services. This backbone is necessary for the migration from
digital switch to packet switch technology. D&E also completed CLEC
installations in co-located facilities at Verizon's Lancaster and Lebanon,
Pennsylvania rate centers to provide competitive data and dial-tone
services. D&E's Internet service initiated late in 2000 is recognized as a
Cisco powered 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
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exchange central offices or the facilities of long distance companies such
as AT&T, MCI WorldCom, Sprint and others. D&E has upgraded its fiber optic
transport facilities from OC-12 to OC-48, to provide additional capacity
for a growing subscriber base.
D&E uses a fiber-optic ring technology. 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. Additional
equipment was installed to provide customers with the latest high speed
data communication. Digital subscriber line (DSL) service was added to meet
the demands for broadband data services.
Item 3. Legal Proceedings.
In April 1999, PenneCom B.V. (PenneCom), a Netherlands limited liability
company which provides communications services in Central Europe and is
wholly-owned by EuroTel, L.L.C. (EuroTel), a domestic limited liability
company in which D&E Investments, Inc. has a one-third ownership interest,
signed an agreement to sell its shares of Pilicka, a Polish limited
liability company, to Elektrim S.A. (Elektrim), a Polish corporation, for
$140 million in cash and notes. However, a few days before the transaction
was set to close, Elektrim issued written notice that it was repudiating
the purchase agreement, alleging that unspecified actions of
representatives of Pilicka and PenneCom constituted fraudulent inducement,
thereby rendering the purchase agreement void (and of no further effect).
On August 2, 1999, PenneCom filed an arbitration request with the
International Court of Arbitration at the International Chamber of Commerce
seeking specific performance of the agreement as well as compensatory and
punitive damages. On September 27, 1999, Elektrim filed an answer and
counterclaim alleging that its repudiation of the agreement was justified
because, among other things, Pilicka altered its normal course of business,
constituting a "material adverse change." In its counterclaim, Elektrim
requested a dismissal of all claims brought by PenneCom, a declaration that
the agreement was void or that Elektrim was justified in repudiating the
agreement, and a repayment by PenneCom of Elektrim's $10 million deposit.
The discovery, briefing and hearing phases on all liability issues were
completed during 2000. The arbitration panel then ordered that a damages
hearing be held in January 2001. After the conclusion of the damages
hearing, the arbitration panel formally closed the arbitration. PenneCom is
awaiting a ruling, which is expected during the first half of 2001. It is
not possible at this time to predict the outcome of the arbitration.
D&E is involved in other 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 2000.
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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. trades on The NASDAQ Stock
Market under the symbol DECC. 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 daily by the NASDAQ National Market.
1999 Low High
---- ------ ------
First Quarter $14.25 $18.38
Second Quarter $18.38 $22.00
Third Quarter $19.25 $22.38
Fourth Quarter $18.63 $21.00
2000 Low High
---- ------ ------
First Quarter $16.38 $25.00
Second Quarter $14.00 $20.69
Third Quarter $18.00 $27.25
Fourth Quarter $20.50 $27.94
The bid quotations reflect inter-dealer quotations; do not include retail
markups, markdowns, or commissions; and may not necessarily represent
actual transactions. The bid information stated is, to the knowledge of D&E
management, the best approximate value at the time indicated.
The closing price on December 31, 2000, was $22.38. Based on the records
maintained by D&E, the approximate number of holders of D&E common stock,
as of December 31, 2000, was 2,048.
During the two most recent fiscal years, cash dividends on D&E common stock
have been declared quarterly in the annual amount per share of $0.45 in
2000 and $0.39 in 1999. 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 Denver and Ephrata Telephone and Telegraph Company's
(D&E Telephone's) debt agreements. For further discussion of such
restrictions, see Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources.
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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, 2000. Certain amounts have been reclassified for
comparative purposes.
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
(In thousands, except per-share amounts)(1)
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Income Statement Data
Operating revenues............................ $ 73,955 $ 63,527 $ 53,311 $ 48,484 $ 44,396
Operating income.............................. $ 5,759 $ 9,127 $ 7,937 $ 9,020 $ 8,399
Cumulative effect of accounting
change, net of tax......................... ($ 912) $ -- ($ 251) $ -- $ --
Extraordinary loss, net of tax................ $ -- $ -- ($ 7,901) $ -- $ --
Net income (loss)............................. ($ 11,606) $ 8,851 ($ 12,255) $ 9,565 $ 3,910
Balance Sheet Data
Total assets.................................. $124,221 $114,654 $110,077 $119,961 $ 91,556
Long-term debt................................ $ 20,907 $ 21,582 $ 22,657 $ 41,657 $ 24,888
Per-Share Information
Basic income (loss) before accounting
change and extraordinary item.............. ($ 1.45) $ 1.20 ($ 0.55) $ 1.58 $ 0.68
Cumulative effect of accounting change........ ($ 0.12) $ -- ($ 0.03) $ -- $ --
Extraordinary item............................ $ -- $ -- ($ 1.07) $ -- $ --
Net income (loss) per common share(2)......... ($ 1.57) $ 1.20 ($ 1.65) $ 1.58 $ 0.68
Cash dividends declared per common share(2)... $ 0.45 $ 0.39 $ 0.39 $ 0.39 $ 0.39
(1) D&E Communications, Inc. and its subsidiaries are defined and
referenced herein as D&E.
(2) The per-share data is based upon the weighted average common shares
outstanding. Computations of earnings for all years are in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Fiscal Years 2000, 1999 and 1998
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements that
involve substantive risks and uncertainties. When used in this section, the
words "anticipates," "believes," "estimates," "expects," and similar
expressions as they relate to D&E or its management are intended to
identify such forward-looking statements. D&E's actual results, performance
or achievements could differ materially from the results expressed in or
implied by these forward-looking statements. The following should be read
in conjunction with D&E's financial statements. Monetary amounts presented
in the following discussion and the financial statements are in thousands,
except earnings per share.
RESULTS OF OPERATIONS
Summary
D&E's operating revenue increased 16.4% to $73,955 in 2000. The increase
included $7,135 from companies acquired during the year. D&E's 2000 net
loss was $11,606, compared with a net income of $8,851 in 1999. The
decrease was primarily due to an $11,154 after-tax gain from D&E's share of
the sale, by its affiliate in December 1999, of its investment in Monor
Telephone Company (MTT) in Hungary. The net income decrease was also
partially attributable to D&E's sale of D&E SuperNet, Inc. in 1999 to
OneMain.com, Inc. (OneMain). That transaction increased 1999 net income by
$6,001 net of tax. During 2000, the OneMain shares were exchanged for
EarthLink, Inc. shares and the net decrease in investment value reduced
income in the current year by $2,245 net of tax. The equity in net loss of
affiliate from the D&E/Omnipoint Wireless Joint Venture, L.P. (PCS ONE)
increased net income from 1999 to 2000 by approximately $980. The expenses
in connection with D&E's initiation of a competitive local exchange service
in late 1999 and an Internet service in late 2000 accounted for most of the
remaining decrease in net income. A change in accounting principle related
to certain non-recurring fees also contributed $912 after tax to the
decrease in net income in 2000, including $391 from D&E and $521 from D&E's
share of EuroTel, L.L.C.'s (EuroTel) change in accounting principle.
Operating activities generated $15,443, the largest source of cash flows in
2000. Investing activities generated $9,420 from a net decrease in
investment in affiliated companies and $3,056 from the proceeds from the
sale of temporary investments. The major uses of cash were $16,812 for
capital expenditures and $5,955 for two acquisitions. Financing activities
used $5,372 for payment of dividends, acquisition of treasury stock and
repayment of long-term debt.
Business Segments
In 1998, D&E adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). D&E analyzed its business by the nature of its products and services,
the method of production and delivery of services, its regulatory
environment and the types of customers served. D&E has reported four
business segments in a format similar to information provided to
management.
The segments reported are: (i) Telecommunication Services, (ii) Telephone &
Data Services, (iii) Wireless Services and (iv) International Communication
Services. Telecommunication Services is distinguished by services provided
primarily in a regulated market to all residences and businesses in a
geographic service area. Its services are generally delivered through
traditional telephone systems, and its revenues are earned primarily from
volume of usage and lease of facilities. Telephone & Data Services is
distinguished by services provided with minimal geographic and regulatory
restrictions. Customers include residential and business long distance
subscribers. Additionally, Telephone & Data Services customers include
businesses that purchase telephone or computer network systems, which may
be a one-time installation service as opposed to a monthly usage service.
The two acquisitions made during 2000, which provide computer networking
services, were added to the Telephone & Data Services segment. Wireless
Services is distinguished by its marketing methods, service delivery,
customer base and
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regulatory environment. The International Communication Services segment
records income from equity in earnings of affiliates that operate in Europe
under unique regulatory environments.
2000 compared to 1999
Operating Revenues
Consolidated operating revenues for 2000 totaled $73,955, an increase of
$10,428, or 16.4%, over 1999. The increase was made up of $7,135 from newly
acquired companies, $1,759 from support services provided to various
affiliated joint ventures and $1,534 from other sources.
Telecommunication Services segment revenues increased 5.3% to $42,080 in
2000 from $39,944 in 1999. The increase was primarily related to a steady
growth in the number of access lines and continued increases in network
access services.
- Local network services revenues increased 7.6% to $12,287 in 2000 from
$11,417 in 1999. The increase in 2000 was partially related to a 3.6%
increase in the number of access lines, which increased revenues
approximately $317. Revenues generated by custom calling features, such as
caller ID services, grew by $174 in 2000 over 1999.
- Network access services revenues increased 8.5% to $19,938 in 2000 from
$18,372 in 1999. The increase in 2000 was attributable to several factors,
including increased numbers of access lines, minutes of use, circuits and
client ports, for an increase of $1,811. The increase was primarily due to
an increase in minutes-of-use call volumes. Rate decreases primarily from
certain Interstate Carrier Access Billing System (CABS) settlements
accounted for a $204 decline in access revenues.
- Directory advertising revenues increased 13.0% to $3,701 in 2000 from
$3,274 in 1999. The increase in 2000 was primarily related to an expanded
directory and final settlement of the revenue from the prior year's
directory.
Telephone & Data Services segment revenues increased 31.5% to $23,152 in
2000 from $17,612 in 1999.
- Revenues from newly acquired companies added $7,135 to 2000 revenues.
- Revenues decreased $413 from computer network installations, repairs and
modifications.
- Telephone cabling and system installations decreased $1,169 from the
prior year.
- The decrease was partially offset by additional long distance service
revenues. Minutes of use was 13% higher in 2000, accounting for an increase
of approximately $208.
Wireless Services segment revenues increased 36.8% to $8,863 in 2000 from
$6,480 in 1999. The increase resulted from the continued growth of PCS ONE
operations. Revenues were recorded for support services to PCS ONE on a
cost reimbursement basis.
International Communication Services segment revenues were $1,606 in 2000,
compared with $1,274 in 1999. Support services to the European venture were
recorded on a cost reimbursement basis.
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Operating Expenses
Consolidated operating expenses for 2000 totaled $68,196, an increase of
$13,796, or 25.4%, over 1999 operating expenses of $54,400.
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
expenses 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 increased 29.1% to $9,780 in 2000 from $7,578 in 1999. The
2000 increase was primarily related to the expansion of new competitive
local exchange and Internet services initiated in late 1999 and 2000. These
expenses include wages, benefits and training plus the cost of providing
computers, software and office furnishings for an expanded staff.
Network access expense decreased 11.9% to $2,613 in 2000 from $2,967 in
1999. Rate decreases were offset by Universal Service Fund increases and
increases related to the addition of a competitive local exchange service
implemented late in 1999.
Directory advertising expense increased 8.8% to $2,448 in 2000 from $2,250
in 1999. The increase was related to the additional costs of publishing a
larger telephone directory, required by an increasing number of telephone
lines in service.
Other communication services costs increased in 2000 to $13,058 from $8,411
in 1999. These costs increased $2,815 primarily from the addition of
acquired companies. Providing support services to PCS ONE and other
affiliates increased the expense by $1,792.
Cost of communication products sold increased 6.6% to $9,005 in 2000 from
$8,445 in 1999. An increase in costs of $1,606 in 2000 was attributable to
the business generated by the newly acquired companies and was partially
offset by a $1,031 decrease in telephone system and computer networking
sales volume.
Depreciation expense increased 24.1% to $12,129 in 2000 from $9,771 in
1999. The increase was largely due to an increase in property, plant and
equipment in service. Amortization expense increased $866 as a result of
additional goodwill related to the acquired companies.
Marketing and customer services expense in 2000 increased 39.7% to $6,894
from $4,936 in 1999. The addition of acquired companies increased expenses
by $660, and the launch of a new Internet service increased these expenses
by $479. The remainder of the increase was attributable to wages and
benefits involved in providing customer service to the expanding base of
D&E Telephone residential customers, to D&E Telephone and Data Systems,
Inc. computer networking and telephone systems customers, and to D&E
Systems competitive local exchange business customer base.
General and administrative services expense increased 22.2% to $12,269 in
2000 from $10,042 in 1999. The addition of acquired companies increased
expense by $940 and the launch of a new Internet service increased general
and administrative expenses by $552. The 2000 grant, in addition to the
prior year's 1999 grant under the 1999 Long-Term Incentive Plan, increased
expenses by $386 in 2000. Pennsylvania capital stock taxes decreased $212
from a lower tax rate.
Operating Income
Operating income for 2000 was $5,759, or 36.9% below the $9,127 recorded in
1999.
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Other Income (Expense)
Other income (expense), net for 2000 was a loss of $18,004, compared with
an income of $3,832 in 1999. The primary reasons for this change were:
- Losses resulting from PCS ONE, with maturing operations in 2000, were
reduced by $1,047.
- D&E's share in the equity of EuroTel decreased $11,803 due to the sale
of MTT which benefited 1999 income. EuroTel losses decreased $927 in 2000
from 1999 primarily from reduced operating expenses and interest expense
before recording a $521 cumulative effect of an accounting change.
- Gain on the sale of D&E SuperNet, Inc. to OneMain was $9,093 in 1999.
Losses of $3,378 were recorded in 2000 on the exchange of OneMain for
EarthLink, Inc. shares due to the acquisition of OneMain by EarthLink, Inc.
- Interest expense decreased $39, as a result of principal repayments and
a larger amount of interest related to increased construction being
capitalized. Interest income increased $242 as a result of higher cash
balances invested and additional advances to EuroTel.
Income Taxes
Federal and state income taxes decreased $5,659 to a benefit of $1,616 in
2000 from an expense of $4,043 in 1999. The change was primarily the result
of lower pre-tax income due to gains in 1999 from the sales of D&E SuperNet
shares and the MTT investment. The effective tax rates were 13.2% in 2000
and 31.2% in 1999.
Accounting Changes
In the fourth quarter of 2000, D&E adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101), retroactive to January 1, 2000, as
required by the SEC. SAB 101 provides guidance on recognition of certain
non-recurring fees and associated incremental direct expenses over the
expected term of the customer relationship. As of January 1, 2000, the
total cumulative effect of noncash deferred net revenues was $658, which
was recorded as a change in accounting principle, net of income taxes of
$267. Similarly, D&E's share of EuroTel's deferred net revenue included in
the cumulative change was $521.
During 2000, D&E adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), which provides guidance for determining the fair value of derivative
instruments. D&E had no impact on its results of operations as a result of
adopting SFAS 133.
During 1999, D&E adopted AICPA Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
which provides guidance for determining whether computer software costs
should be expensed as incurred or capitalized and amortized. As a result of
adopting the new standard, D&E's 1999 net income increased by $345 net of
income taxes.
1999 compared to 1998
Operating Revenues
Consolidated operating revenues for 1999 totaled $63,527, an increase of
$10,216, or 19.2%, over 1998. The increase was made up of $3,183 from
telephone services, $3,349 from support services provided to various
affiliated joint ventures and $3,684 from communication products sold.
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Telecommunication Services segment revenues increased 7.4% to $39,944 in
1999 from $37,209 in 1998. The increase was primarily related to a steady
growth in the number of access lines and continued increases in network
access services.
- Local network services revenues increased 10.7% to $11,417 in 1999 from
$10,314 in 1998. The 1999 increase was partially related to a 4.3% increase
in the number of access lines, which increased revenues approximately $359.
Local private network revenues and line connection charges increased by
$453 as a result of PCS ONE and others contributing to the increased number
of lines. Revenues generated by pay-per-use calling features and caller ID
services grew by $97 in 1999 over 1998.
- Network access services revenues increased 7.8% to $18,372 in 1999 from
$17,049 in 1998. The 1999 increase was largely attributable to increased
access lines, minutes of use, circuits and client ports for an increase of
$868. The increase was primarily due to an increase in minutes-of-use call
volumes. Rate decreases primarily from certain Interstate Carrier Access
Billing System (CABS) settlements accounted for a $376 drop in access
revenues.
- Directory advertising revenues increased 5.5% to $3,274 in 1999 from
$3,104 in 1998. The increase in 1999 was primarily related to an expanded
directory.
Telephone & Data Services segment revenues increased 36.6% to $17,612 in
1999 from $12,890 in 1998.
- Increased revenues from computer network installations, repairs and
modifications generated $2,288 of the increase.
- Telephone cabling and system installations increased $1,451 from the
prior year.
- The increase was partially from additional long distance service
revenues. Minutes of use was 17% higher in 1999, accounting for
approximately $275 of the increase.
Wireless Services segment revenues increased 77.3% to $6,480 in 1999, from
$3,654 in 1998. The increase resulted from the growth of PCS ONE operations
after its first full year of service in 1998. Revenues were recorded
primarily for support services to PCS ONE on a cost reimbursement basis.
International Communication Services segment revenues were $1,274 in 1999,
compared with $681 in 1998. Support services to the European ventures were
recorded on a cost reimbursement basis since 1998.
Operating Expenses
Consolidated operating expenses for 1999 totaled $54,400, an increase of
$9,026, or 20.0%, over 1998 operating expenses of $45,374.
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
expenses 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 increased 9.4% to $7,578 in 1999 from $6,926 in 1998. The
1999 increase is primarily related to increased wages, benefits and
training plus the cost of providing computers, software and office
furnishings for an expanded staff.
Network access expense increased 0.2% to $2,967 in 1999 from $2,961 in
1998. Minor changes of increased minutes of use, rate decreases and
Universal Service Fund increases, all netted to this small expense
increase.
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Directory advertising expense increased 7.1% to $2,250 in 1999 from $2,101
in 1998. The increase was related to the additional costs of publishing a
larger telephone directory, required by an increasing number of telephone
lines in service.
Other communication services costs increased in 1999 to $8,411 from $5,048
in 1998. These costs increased primarily from providing support services to
PCS ONE, which expanded operations from 1998, its first full year of
operations.
Cost of communication products sold increased 53.7% to $8,445 in 1999 from
$5,496 in 1998. The increase in 1999 is attributable to increased telephone
system and computer networking sales volume.
Depreciation expense increased 4.3% to $9,771 in 1999 from $9,372 in 1998.
The increase was largely due to an increase in property, plant and
equipment in service.
Marketing and customer services expense in 1999 increased 38.9% to $4,936
from $3,555 in 1998. The 1999 increase was partially attributable to wages
and benefits involved in providing customer service to the expanding base
of D&E Telephone residential customers and to D&E Telephone and Data
Systems, Inc. computer networking and telephone systems customers.
Additionally, expansion of the corporate marketing department in
preparation for operating in a competitive environment resulted in
increased wages and expenses for an aggressive marketing campaign to expand
services beyond D&E Telephone's regulated service area.
General and administrative services expense increased 1.3% to $10,042 in
1999 from $9,915 in 1998. The increase in 1999 was partially from wage and
benefit increases. Addition of the 1999 Long-Term Incentive Plan increased
expenses by $333 in 1999. The Public Utility Realty Tax (PURTA) decreased
$214 as a result of an additional assessment made during 1998.
Operating Income
Operating income for 1999 was $9,127, or 15.0% over the $7,937 recorded in
1998.
Other Income (Expense)
Other income (expense), net for 1999 was income of $3,832, compared with
expense of $10,699 in 1998. The primary reasons for this change were:
- Losses resulting from PCS ONE, which completed its second full year of
operations in 1999, grew by $2,422.
- D&E's share in the equity of EuroTel increased $11,803 related to the
sale of MTT. Equity in EuroTel was reduced by an estimated cost of $512 for
taxes to be assessed on the repatriation of a portion of the proceeds in
January 2000. EuroTel losses increased $3,477 in 1999 primarily from
operating expenses and interest expense increases. Operating results from
the indirect investment in MTT in Hungary, prior to its disposition,
increased by $1,584 due to more profitable operating results and more
favorable currency translation rates in 1999. Operating losses related to
the indirect investment in Pilicka Telephone (Pilicka) in Poland increased
by $314 due to the initiation of services early in 1998 and continuing
development in 1999.
- Gain on the sale of D&E SuperNet, Inc. to OneMain was $9,093.
- Gain on the sale of partnership interests in cellular investments of
$1,659 in 1998 was not repeated in 1999.
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- As a result of the sales of partnership interests during 1998, equity in
income of cellular investments decreased $90.
- Interest expense decreased $556, primarily as a result of the debt
canceled upon returning a PCS license in 1998. Interest income increased
$144 related to additional advances to EuroTel offset by less interest
income from D&E SuperNet.
Income Taxes
Federal and state income taxes increased $2,767 to $4,043 in 1999 from
$1,276 in 1998. The increase was primarily the result of higher pre-tax
income due to 1999 sales of D&E SuperNet shares and the MTT investment. The
effective tax rates were a positive 31.2% in 1999 and a negative 46.2% in
1998.
Accounting Changes and Extraordinary Item
During 1999, D&E adopted AICPA Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
which provides guidance for determining whether computer software costs
should be expensed as incurred or capitalized and amortized. As a result of
adopting the new standard, D&E's 1999 net income increased by $345 net of
income taxes.
During 1998, D&E adopted AICPA Statement of Position No. 98-5, "Reporting
on the Costs of Start-up Activities," which provides guidance on accounting
for start-up activities and organization costs and requires these costs to
be expensed as incurred. As a result of adopting this new standard, D&E
expensed organization costs of $421, which was recorded as a cumulative
effect of a change in accounting principle, net of income taxes of $170.
The Federal Communications Commission (FCC) offered holders of C-Block PCS
licenses several alternatives to the original payment terms for licenses
financed by the FCC. Under the terms of the Amnesty Option selected, D&E
returned the full license spectrum, reducing the license asset by $21,417.
In return, the FCC canceled the principal and accrued interest payable on
the financed portion of the license cost, thereby reducing liabilities by
$13,296. The resulting loss was reported as an extraordinary item of
$7,901, net of the related income tax benefits.
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 2001.
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. D&E had
$3,527 in available cash and $8,667 of restricted temporary investments at
December 31, 2000. However, additional short- or long-term debt or equity
financing will be needed, and management has initiated a search for
additional debt financing to fund new business development activities and
to enhance D&E's capital structure within management's guidelines.
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During 2000, the primary source of funds was $15,443 provided by operating
activities. During 1999, the primary source of funds was $17,824 provided
by operating activities. Investing activities generated $9,420 cash in 2000
from the decrease in investment in affiliated companies. Additionally, a
net decrease in temporary investments provided cash of $3,056 from
investing activities.
D&E invested $16,812 in capital expenditures during 2000, compared with
$13,923 of capital additions in 1999. The major capital additions in both
years were for digital switching and circuit equipment, computers and
software, and poles and cable purchases to continually upgrade the
telephone operating system. The 2000 capital additions also included the
final 10% of the cost to complete construction of a building addition used
by the Lancaster County 911 emergency control center and the beginning of
construction on a new office building to accommodate employee growth.
During 2000, two businesses were acquired for a combination of stock and
cash. The cash portion of the payments made in 2000 was $5,955. Financing
activities used $5,372, primarily for an increase in dividend payments and
continued repurchase of treasury stock.
As of December 31, 2000, D&E had unsecured lines of credit totaling $20,000
with two domestic banks. There were no outstanding amounts borrowed under
these agreements during the year or at the end of the year. In January
2001, D&E began to draw on one of its lines primarily to fund office
construction costs and the addition to computer hardware and software
upgrades related to implementation of a new billing system. As of December
31, 2000, D&E had $8,667 of investments restricted in accordance with terms
of a pledge of collateral D&E agreed to provide to a bank for a loan made
to PenneCom B.V. (PenneCom) in December 1999. The collateral restriction
will be in force until the loan is repaid, which management anticipates
will be repaid with proceeds from the arbitration related to the sale of
Pilicka and/or refinanced prior to December 31, 2001.
Maturities of long-term debt over the next five years are $917 in 2001,
$906 in 2002, $910 in 2003, $10,928 in 2004 and $855 in 2005. Maturities in
2004 include the total principal balance of a note for $10,000 which is due
in January 2004. D&E believes it will have adequate resources or the
ability to refinance its debt 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 10 to the financial
statements.
As a result of the restructuring associated with the exchange of D&E shares
for D&E Telephone shares, D&E Telephone 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
distribution of dividends and restricted investments from $9,000 plus 75%
of D&E Telephone's accumulated consolidated net income to $5,000 plus 75%
of D&E Telephone's accumulated consolidated net income. The distributions,
restricted investments and consolidated net income are cumulative since
June 30, 1991. These Senior Note Agreements of D&E Telephone are guaranteed
by D&E. D&E's ratio of total debt to total debt plus capital increased to
27.7% at December 31, 2000, compared to 24.5% at December 31, 1999.
OTHER
In April 1999, PenneCom, a Netherlands limited liability company which
provides communications services in Central Europe and is wholly-owned by
EuroTel, a domestic limited liability company in which D&E Investments,
Inc. has a one-third ownership interest, signed an agreement to sell its
shares of Pilicka, a Polish limited liability company, to Elektrim S.A.
(Elektrim), a Polish corporation, for $140 million in cash and notes.
However, a few days before the transaction was set to close, Elektrim
issued written notice that it was repudiating the purchase agreement,
alleging that unspecified actions of representatives of Pilicka and
PenneCom constituted fraudulent inducement, thereby rendering the purchase
agreement void (and of no further effect). On August 2, 1999, PenneCom
filed an arbitration request with the International Court of Arbitration at
the International Chamber of Commerce seeking specific performance of the
agreement as well as compensatory and punitive damages. On September 27,
1999, Elektrim filed an answer and counterclaim alleging that its
repudiation of the agreement was
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justified because, among other things, Pilicka altered its normal course of
business, constituting a "material adverse change." In its counterclaim,
Elektrim requested a dismissal of all claims brought by PenneCom, a
declaration that the agreement was void or that Elektrim was justified in
repudiating the agreement, and a repayment by PenneCom of Elektrim's $10
million deposit. The discovery, briefing and hearing phases on all
liability issues were completed during 2000. The arbitration panel then
ordered that a damages hearing be held in January 2001. After the
conclusion of the damages hearing, the arbitration panel formally closed
the arbitration. PenneCom is awaiting a ruling, which is expected during
the first half of 2001. It is not possible at this time to predict the
outcome of the arbitration.
D&E became party to a loan agreement between a domestic bank and PenneCom
in December 1999. As an inducement to the bank to lend up to $50,000 to
PenneCom, D&E pledged $8,667 of investments as security on the loan, along
with similar amounts by the other investors in EuroTel. PenneCom used the
loan primarily to refinance higher interest debt. Management anticipates
the loan will be repaid with proceeds from the arbitration and/or
refinanced prior to December 31, 2001.
In compliance with state statutes, commonly known as Chapter 30, D&E
Telephone joined in a petition to the Pennsylvania Public Utility
Commission (PUC) in July 1998 for an alternative form of regulation. In
response to the PUC's initial Chapter 30 Order, in January 2000, D&E
Telephone filed a petition for reconsideration. On March 30, 2000, the PUC
issued a revised Order. D&E accepted the PUC Order and filed an amended
plan to accelerate network modernization. Various parties to the litigation
filed exceptions to which D&E Telephone filed a reply. On December 21,
2000, the PUC entered an Order granting the exceptions in part.
Subsequently, D&E Telephone filed a re-modified Chapter 30 Plan on January
22, 2001. The Office of Consumer Advocate and Office of Trial Staff filed
exceptions seeking minor modifications, to which D&E Telephone filed a
reply. The matter remains pending before the PUC, which is expected to
enter an Order by June 30, 2001. Subject to final regulatory approval, the
plan will be adopted along with a new ratemaking process in which, instead
of a rate base/rate of return methodology, prices are adjusted in
accordance with the Gross Domestic Product Price Index with a productivity
offset.
On February 25, 2000, Omnipoint Corporation merged into a wholly-owned
subsidiary of VoiceStream Wireless Holding Corporation, with Omnipoint
Corporation as the surviving entity. The result was that Omnipoint
Corporation became a wholly-owned subsidiary of VoiceStream Wireless
Holding Corporation.
On May 17, 2000, PCS ONE entered into a financing agreement with a bank to
provide a $70,000 credit facility. The joint venture partners have no
guarantee requirement in connection with this agreement. D&E and its joint
venture partner must maintain contributed capital plus certain additional
allowable deposit and license acquisition costs at a level of 66.7% of the
funds borrowed. On December 31, 2000, D&E and VoiceStream have contributed
$42,848, making $57,500 of the facility available. Approximately $40,000 of
the proceeds were used to repay a vendor loan agreement under which D&E was
jointly and severally liable to contribute up to a total of $50,000 equity
to PCS ONE in the event that PCS ONE was unable to meet its obligations as
they came due.
On October 28, 1998 and October 30, 2000, D&E announced that its Board of
Directors authorized the repurchase of up to $2,000 and $1,000 worth,
respectively, of D&E common stock. The repurchased shares will be held as
treasury shares available for issuance in connection with future stock
dividends and stock splits, employee benefit plans, executive compensation
plans and for issuance under D&E's Dividend Reinvestment Plan. Based on
these authorizations, D&E had acquired 102,700 shares of its common stock
as of December 31, 2000. Separately, the Board of Directors authorized the
acquisition of 123,500 shares outside of the open market repurchase
program.
On January 7, 1998, D&E closed on an agreement pursuant to which a
subsidiary of Citizens Communications Company (Citizens) purchased 1.3
million shares of newly issued D&E common stock. The price was $20.781 per
share for 1.3 million shares, or $27,015. The investment by Citizens
initially represented 17.5%, and was 17.6% at December 31, 2000, of the
combined shares outstanding. 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 for public sale the
common stock Citizens acquired. Additionally, in connection with this
agreement, D&E
18
21
issued warrants to acquire 65,000 shares of common stock at $20.78 per
share. These warrants expire on January 7, 2003. None of these warrants has
been exercised.
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements as to 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, EuroTel, Pilicka 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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risks.
D&E does not invest 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.
19
22
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 "Directors", "Identification of Executive Officers",
and "Section 16(A) Beneficial Ownership Reporting Compliance" in D&E's
definitive proxy statement which will be filed within 120 days after the
end of the fiscal year covered by this report.
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 which will be filed within 120 days after the end of the fiscal
year covered by this report.
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 "Security Ownership of Management" in D&E's definitive proxy statement
which will be filed within 120 days after the end of the fiscal year
covered by this report.
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 which will be filed within 120 days after
the end of the fiscal year covered by this report.
20
23
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) Reports on Form 8-K. There was one current report on Form 8-K filed by
the Registrant during the last quarter of 2000. On October 30, 2000, a Form
8-K was filed reporting that the D&E Board of Directors authorized the
repurchase of up to $1,000,000 worth of the shares of its common stock.
(c) Exhibits. See Index to Exhibits.
(d) Financial statement schedules of subsidiaries not consolidated and 50%
or less owned. The information called for by this Item (14) is set forth on
pages F-1 through F-57. See Index to Financial Statements.
21
24
INDEX TO EXHIBITS
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
2. Plan of acquisition, reorganization,
arrangement, liquidation or succession:
2.1 Agreement and Plan of Exchange Between Incorporated herein by reference from Exhibit
Denver and Ephrata Telephone and 2.1 to Amendment No. 2 to the Registration
Telegraph Company (a Pennsylvania Statement on Form S-4 (Registration No.
corporation) and D&E Communications, Inc. 333-2960) filed by D&E on April 23, 1996.
(a Pennsylvania corporation).
2.2 D&E Shareholder Agreement, dated as of Incorporated herein by reference from Exhibit
March 21, 1997, by and between D&E and 99.01 to the Form 8-K
various shareholders of D&E. Current Report filed by D&E on April 7, 1997.
3. Articles of Incorporation and By-laws:
3.1 Amended and Restated Articles of Incorporated herein by reference from Exhibit
Incorporation 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.
4. Instruments defining the rights of
security holders, including debentures:
None of the 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 Commission upon request.
9. Voting Trust Agreement.
9.1 Voting Trust Agreement Among Shareholders Incorporated herein by reference from Exhibit
of Denver and Ephrata Telephone and 9.1 to D&E's 1995 Report on Form 10-K.
Telegraph Company and Kay William Shober,
Anne Brossman 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 Exhibit
dated as of December 31, 1995. 9.2 to D&E's 1995 Annual Report on Form 10-K.
22
25
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
10. Material Contracts
10.1 Denver and Ephrata Telephone and Telegraph Incorporated herein by reference from Exhibit
Company Executive Incentive Plan as revised 10.1 to D&E's 1997 Annual Report of Form 10-K.
January 1998.*
10.2 AT&T Communications Standard Agreement Incorporated herein by reference from Exhibit
for the Provision of Telecommunications 10.2 to D&E's Registration Statement on
Services and Facilities between AT&T Form 10 filed by D&E on April 30, 1993.
Communications of Pennsylvania, Inc.
and Denver and Ephrata Telephone 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 Exhibit
Agreement between the Bell Telephone 10.3 to D&E's Registration Statement on
Company of Pennsylvania and Denver and Form 10 filed by D&E on April 30, 1993.
Ephrata Telephone and Telegraph Company,
effective January 1, 1986; and 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.
10.4 IntraLATA Compensation Agreement between Incorporated herein by reference from Exhibit
the Pennsylvania Non-Bell Telephone 10.4 to D&E's Registration Statement on
Companies and Denver and Ephrata Telephone Form 10 filed by D&E on April 30, 1993.
and Telegraph Company, effective January
1, 1986; and Amendment to 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 Exhibit
a division of The Reuben H. Donnelley 10.5 to D&E's Registration Statement on
Corporation Statement and Denver and Form 10 filed by D&E on April 30, 1993
Ephrata Telephone and Telegraph Company,
dated April 19, 1991. Portions of 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 Incorporated herein by reference from Exhibit
Interstate Access Revenues between the 10.6 to D&E's Registration Statement on
National Exchange Carrier Association, Form 10 filed by D&E on April 30, 1993.
Inc. and Denver and Ephrata Telephone
and Telegraph Company, effective
May 25, 1984.
23
26
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
10.7 Agreement for the Provision of Enhanced Incorporated herein by reference from Exhibit
9-1-1 Services between the County of 10.7 to D&E's Annual Report on Form 10-K
Lancaster and Denver and Ephrata Telephone for the year ended December 31, 1999.
and Telegraph Company, 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 Modification #2 to the Agreement for Incorporated herein by reference from Exhibit
the Provision of Enhanced 9-1-1 Services 10.1 to D&E's Quarterly Report on Form 10-Q
between the County of Lancaster and D&E for the quarter ended September 30, 1999.
Telephone Company, signed July 14, 1999.
10.9 D&E Shareholder Agreement, Exhibit D to Incorporated herein by reference from Exhibit
the Agreement and Plan of Merger by and B to Amendment No. 1 to the Registration
between D&E Communications, Inc. and Statement on Form S-4 (Registration No.
PCS One, Inc. 333-18659) filed by D&E on January 21, 1997.
10.10 D&E Communications, Inc. Officer Incentive Incorporated herein by reference from Exhibit
Plan as revised January 1998.* 10.16 to D&E's 1997 Annual Report on Form 10-K.
10.11 Stock Acquisition Agreement between D&E Incorporated herein by reference from Exhibit
Communications, Inc. and Southwestern 10.1 to D&E's Quarterly Report on Form 10-Q
Investments, Inc., a subsidiary of for the quarter ended September 30, 1997.
Citizens Utilities Company, dated
November 3, 1997.
10.12 Limited Partnership Agreement by and Incorporated herein by reference from Exhibit
among D&E Wireless, Inc., Omnipoint 2.01 to the Form 8-K Current Report filed by
Venture Partner I, L.L.C. and Omnipoint D&E on December 2, 1997.
Holdings, Inc.
24
27
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
21. Subsidiaries of the Registrant
21.1 List of all subsidiaries of D&E. Filed herewith.
23 Consents
23.1 Consent of PricewaterhouseCoopers LLP, Philadelphia, PA Filed herewith.
23.2 Consent of PricewaterhouseCoopers LLP, Rome, Italy Filed herewith.
27. Financial Data Schedule.
27.1 Financial Data Schedule. Filed herewith.
- -------------
* Indicates a plan or agreement relating to executive compensation.
25
28
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 23, 2001 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 23, 2001 By /s/ Anne B. Sweigart
------------------------------------
Anne B. Sweigart
President, Chairman of the Board,
and Chief Executive Officer
Date March 23, 2001 By /s/ Robert M. Lauman
------------------------------------
Robert M. Lauman
Executive Vice President and
Chief Operating Officer
Member of the Board of Directors
Date March 23, 2001 By /s/ Thomas E. Morell
------------------------------------
Thomas E. Morell
Vice President, Chief Financial
Officer and Treasurer
(Chief Accounting Officer)
Date March 23, 2001 By /s/ John Amos
------------------------------------
John Amos
Member of the Board of Directors
Date March 23, 2001 By /s/ Thomas H. Bamford
------------------------------------
Thomas H. Bamford
Member of the Board of Directors
Date March 23, 2001 By /s/ Paul W. Brubaker
------------------------------------
Paul W. Brubaker
Member of the Board of Directors
26
29
Date March 23, 2001 By /s/ Ronald E. Frisbie
------------------------------------
Ronald E. Frisbie
Member of the Board of Directors
Date March 23, 2001 By /s/ Robert A. Kinsley
------------------------------------
Robert A. Kinsley
Member of the Board of Directors
Date March 23, 2001 By /s/ G. William Ruhl
------------------------------------
G. William Ruhl
Senior Vice President, Member of
the Board of Directors
Date March 23, 2001 By /s/ Steven B. Silverman
------------------------------------
Steven B. Silverman
Member of the Board of Directors
Date March 23, 2001 By /s/ W. Garth Sprecher
------------------------------------
W. Garth Sprecher
Vice President and Secretary,
Member of the Board of Directors
Date March 23, 2001 By /s/ D. Mark Thomas
------------------------------------
D. Mark Thomas
Member of the Board of Directors
27
30
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, 2000, 1999 and 1998. F - 2
Consolidated Balance Sheets as of December 31, 2000 and 1999. F - 3
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998. F - 4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998. F - 5
Notes to Consolidated Financial Statements F - 6
Item 14(d) D&E/Omnipoint Wireless Joint Venture, L.P.
Cover Page. F - 23
Table of Contents. F - 24
Report of Independent Accountants. F - 25
Balance Sheets as of December 31, 2000 and 1999. F - 26
Statements of Operations For the Years Ended December 31,
2000, 1999 and 1998. F - 27
Statement of Changes in Partners' Capital For the Years
Ended December 31, 2000, 1999 and 1998. F - 28
Statements of Cash Flows For the Years Ended December 31,
2000, 1999 and 1998. F - 29
Notes to Financial Statements. F - 30
Item 14 (d) EuroTel L.L.C.
Cover Page. F - 38
Report of Independent Accountants. F - 39
Consolidated Balance Sheets as of December 31, 2000 and 1999. F - 40
28
31
Page
------
Consolidated Statements of Operations For the Years
Ended December 31, 2000, 1999 and 1998. F - 41
Consolidated Statements of Members' Equity (Deficit)
and Comprehensive Income (Loss) For the Years Ended
December 31, 2000, 1999 and, 1998. F - 42
Consolidated Statements of Cash Flows For the Years
Ended December 31, 2000, 1999 and, 1998. F - 43
Notes to Consolidated Financial Statements. F - 44
29
32
Report of Independent Accountants
To the Board of Directors and Shareholders
of D&E Communications, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of D&E
Communications, Inc. and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2, the Company changed its method of accounting for the
recognition of certain non-recurring fees and associated incremental direct
expenses in 2000 and changed its method of accounting for computer software
costs in 1999.
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
March 8, 2001
F-1
33
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
For the years ended December 31, 2000, 1999 and 1998
(In thousands, except per-share amounts)
2000 1999 1998
-------- -------- --------
OPERATING REVENUES
Communication service revenues ........................... $ 60,701 $ 50,574 $ 44,122
Communication products sold .............................. 11,798 11,668 7,973
Other .................................................... 1,456 1,285 1,216
-------- -------- --------
Total operating revenues .............................. 73,955 63,527 53,311
OPERATING EXPENSES
Communication service expenses ........................... 27,899 21,206 17,036
Cost of communication products sold ...................... 9,005 8,445 5,496
Depreciation and amortization ............................ 12,129 9,771 9,372
Marketing and customer services .......................... 6,894 4,936 3,555
General and administrative services ...................... 12,269 10,042 9,915
-------- -------- --------
Total operating expenses .............................. 68,196 54,400 45,374
-------- -------- --------
Operating income ................................... 5,759 9,127 7,937
OTHER INCOME (EXPENSE)
Equity in net losses of affiliates ....................... (14,822) (4,956) (11,398)
Interest expense ......................................... (1,779) (1,818) (2,374)
Gain (loss) on investments ............................... (3,378) 9,093 1,659
Other, net ............................................... 1,975 1,513 1,414
-------- -------- --------
Total other income (expense) .......................... (18,004) 3,832 (10,699)
-------- -------- --------
Income (loss) before income taxes, dividends on
utility preferred stock, cumulative effect of
accounting change and extraordinary item ........ (12,245) 12,959 (2,762)
INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK
Income taxes ............................................. (1,616) 4,043 1,276
Dividends on utility preferred stock ..................... 65 65 65
-------- -------- --------
Total income taxes and dividends on
utility preferred stock ............................ (1,551) 4,108 1,341
-------- -------- --------
Income (loss) before cumulative effect of
accounting change and extraordinary item ..... (10,694) 8,851 (4,103)
Cumulative effect of change in accounting
principle, net of income tax benefit of $267, $0
and $170 .............................................. (912) -- (251)
Extraordinary loss on early extinguishment of
debt, net of income tax benefit of $220................ -- -- (7,901)
-------- -------- --------
NET INCOME (LOSS) ........................................... ($11,606) $ 8,851 ($12,255)
======== ======== ========
Average common shares outstanding ........................ 7,371 7,385 7,416
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before accounting change and
extraordinary item .................................... ($1.45) $ 1.20 ($0.55)
Cumulative effect of accounting change ................... (0.12) -- (0.03)
Extraordinary item ....................................... -- -- (1.07)
-------- -------- --------
Net income (loss) per common share .................... ($1.57) $ 1.20 ($1.65)
======== ======== ========
Dividends per common share ............................... $ 0.45 $ 0.39 $ 0.39
======== ======== ========
See notes to consolidated financial statements.
F-2
34
D & E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2000 and 1999
(In thousands)
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .............................................. $ 3,527 $ 1,674
Temporary investments, including $8,667 and $0 restricted .............. 8,670 11,726
Accounts receivable .................................................... 12,290 7,787
Accounts receivable - affiliated companies ............................. 5,714 2,956
Inventories, lower of cost or market, at average cost .................. 2,080 1,302
Prepaid expenses ....................................................... 2,661 1,088
Other .................................................................. 575 310
--------- ---------
TOTAL CURRENT ASSETS ................................................ 35,517 26,843
--------- ---------
INVESTMENTS
Investments and advances in affiliated companies ....................... -- 14,190
Investments available-for-sale ......................................... 2,518 6,371
--------- ---------
2,518 20,561
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
In service ............................................................. 147,263 131,753
Under construction ..................................................... 7,913 4,092
--------- ---------
155,176 135,845
Less accumulated depreciation .......................................... 79,321 69,949
--------- ---------
75,855 65,896
--------- ---------
OTHER ASSETS
Other .................................................................. 10,331 1,354
--------- ---------
TOTAL ASSETS .............................................................. $ 124,221 $ 114,654
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt maturing within one year ................................ $ 917 $ 1,007
Accounts payable and accrued liabilities ............................... 18,975 9,662
Accrued taxes .......................................................... 387 324
Accrued interest and dividends ......................................... 431 439
Advance billings, customer deposits and other .......................... 3,672 1,224
--------- ---------
TOTAL CURRENT LIABILITIES ........................................... 24,382 12,656
--------- ---------
LONG-TERM DEBT ............................................................ 20,907 21,582
--------- ---------
OTHER LIABILITIES
Equity in losses of affiliates in excess of investments and advances.... 11,435 --
Deferred income taxes .................................................. 6,696 9,785
Other .................................................................. 3,993 861
--------- ---------
22,124 10,646
--------- ---------
PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 4 1/2%,
par value $100, cumulative, callable at par at the option
of the Company, authorized 20,000 shares,
outstanding 14,456 shares .............................................. 1,446 1,446
--------- ---------
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, par value $.16, authorized shares 30,000,000 ............. 1,214 1,194
Outstanding shares: 7,372,054 at December 31, 2000
7,339,362 at December 31, 1999
Additional paid-in capital ............................................. 39,374 37,026
Unrealized gain (loss) on investments .................................. 467 (539)
Unearned ESOP compensation ............................................. -- (153)
Retained earnings ...................................................... 18,366 33,281
Treasury stock at cost: 226,194 shares at December 31, 2000
146,112 shares at December 31, 1999 ............ (4,059) (2,485)
--------- ---------
55,362 68,324
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................ $ 124,221 $ 114,654
========= =========
See notes to consolidated financial statements.
F - 3
35
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
(In thousands)
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................. ($11,606) $ 8,851 ($12,255)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt.......... -- -- 7,901
Depreciation and amortization .............................. 12,129 9,771 9,809
Deferred income taxes ...................................... (3,369) 2,309 1,230
Equity in net losses of affiliates ......................... 15,334 4,956 11,398
Tax benefits applicable to ESOP ............................ 3 8 12
(Gain) loss on investments ................................. 3,378 (9,093) (1,659)
Loss on retirement of property, plant and equipment ........ 12 24 43
Changes in operating assets and liabilities:
Accounts receivable ........................................ (2,051) (678) (45)
Inventories ................................................ (599) (274) (137)
Prepaid expenses ........................................... (1,471) 2,570 (372)
Accounts payable and accrued liabilities ................... 1,862 1,738 (1,899)
Accrued taxes and accrued interest ......................... 44 (177) (2)
Advance billings, customer deposits and other .............. 1,533 (2,200) 323
Other, net ................................................. 244 19 (518)
-------- -------- --------
Net Cash Provided By Operating Activities ............... 15,443 17,824 13,829
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of proceeds from sales and
removal costs .............................................. (16,812) (13,923) (7,735)
Proceeds from sale of temporary investments ................... 54,001 38,321 24,000
Purchase of temporary investments ............................. (50,945) (35,241) (38,805)
Acquisition of businesses, net of cash acquired of $18 ........ (5,955) -- --
Proceeds from sale of investments ............................. 2,073 2,476 2,375
Increase in investments and advances to affiliates ............ (37,006) (31,940) (31,591)
Decrease in investments and repayments from affiliates ........ 46,426 22,252 28,800
-------- -------- --------
Net Cash Used In Investing Activities ................... (8,218) (18,055) (22,956)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ..................................... (3,094) (2,690) (2,701)
Payments on long-term debt .................................... (1,005) (854) (6,855)
Proceeds from issuance of common stock ........................ 301 303 26,253
Purchase of treasury stock .................................... (1,574) (2,046) (439)
-------- -------- --------
Net Cash Provided By (Used In) Financing Activities ..... (5,372) (5,287) 16,258
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. 1,853 (5,518) 7,131
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR ..... ................ 1,674 7,192 61
-------- -------- --------
END OF YEAR ................................................... $ 3,527 $ 1,674 $ 7,192
======== ======== ========
See notes to consolidated financial statements.
F - 4
36
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 2000, 1999 and 1998
(In thousands)
2000 1999 1998
Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- -------- --------
COMMON STOCK
Balance at beginning of year ............................ 7,485 $ 1,194 7,460 $ 1,190 6,129 $ 977
Common stock issued for acquisitions .................... 93 15 -- -- -- --
Common stock issued in private placement ................ -- -- -- -- 1,300 208
Common stock issued for Employee Stock Purchase, Long-
Term Incentive and Dividend Reinvestment Plans ....... 30 5 25 4 31 5
-------- -------- -------- -------- -------- --------
Balance at end of year .................................. 7,608 1,214 7,485 1,194 7,460 1,190
-------- -------- -------- -------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ............................ 37,026 36,546 10,341
Common stock issued for acquisitions .................... 1,753 -- --
Common stock issued in private placement ................ -- -- 25,697
Common stock issued for Employee Stock Purchase, Long-
Term Incentive and Dividend Reinvestment Plans ....... 595 480 508
-------- -------- --------
Balance at end of year .................................. 39,374 37,026 36,546
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year ............................ (539) -- --
Unrealized loss on investments .......................... (1,269) (539) --
Reclassification adjustment for losses included in
net loss ............................................. 2,275 -- --
-------- -------- --------
Balance at end of year .................................. 467 (539) --
-------- -------- --------
UNEARNED ESOP COMPENSATION
Balance at beginning of year ............................ (153) (429) (695)
Reduction of ESOP trust loan ............................ 153 276 266
-------- -------- --------
Balance at end of year .................................. -- (153) (429)
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of year ............................ 33,281 27,294 42,402
Net income (loss) ....................................... (11,606) 8,851 (12,255)
Tax benefits from dividends paid to ESOP ................ 3 8 12
Dividends on common stock: $.45, $.39, $.39 per share ... (3,312) (2,872) (2,865)
-------- -------- --------
Balance at end of year .................................. 18,366 33,281 27,294
-------- -------- --------
TREASURY STOCK
Balance at beginning of year ............................ (146) (2,485) (38) (439) -- --
Treasury stock acquired ................................. (80) (1,574) (108) (2,046) (38) (439)
-------- -------- -------- -------- -------- --------
Balance at end of year .................................. (226) (4,059) (146) (2,485) (38) (439)
-------- -------- -------- -------- -------- --------
TOTAL SHAREHOLDERS' EQUITY ................................. 7,382 $ 55,362 7,339 $ 68,324 7,422 $ 64,162
======== ======== ======== ======== ======== ========
COMPREHENSIVE INCOME (LOSS)
Net income (loss) ....................................... ($11,606) $ 8,851 ($12,255)
Unrealized loss on investments, net of income
tax benefit of ($581) and ($184) ..................... (1,269) (539) --
Reclassification adjustment for losses included in
net loss, net of income tax of $1,172 ................ 2,275 -- --
-------- -------- --------
Total comprehensive income (loss) ....................... ($10,600) $ 8,312 ($12,255)
======== ======== ========
See notes to consolidated financial statements.
F - 5
37
Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
1. Nature of Business
Description and Principles of Consolidation
D&E Communications, Inc. and its subsidiaries (D&E) provide communications
services and equipment to customers in the south central Pennsylvania market and
in certain areas of Eastern Europe. D&E's consolidated financial statements
include the accounts of Denver and Ephrata Telephone and Telegraph Company (D&E
Telephone); D&E Telephone and Data Systems, Inc. (TDS); D&E Wireless, Inc.
(Wireless); D&E Investments, Inc. (Investments); D&E Systems, Inc.; and PCS
Licenses, Inc. D&E Marketing Corp. was merged into Investments in January 1999.
During 2000, D&E acquired two companies that provide computer networking
services. On December 31, 2000, TDS merged these operations and renamed the
surviving entity D&E Networks, Inc. All significant intercompany balances and
transactions are eliminated in consolidation. The accounts of D&E Telephone are
reported using generally accepted accounting principles applicable to regulated
entities.
D&E provides local and long distance telephone services, including enhanced
calling features, high-speed data services and Internet access services. D&E
offers computer networking and repair services and both sells and installs
communications equipment, such as telephone systems and data communications
products. D&E also provides services for directory advertising, local billing
and collection and support services to its affiliated companies. D&E began
offering Internet access services and equipment in October 2000.
D&E has a 50% interest in PCS ONE, a partnership that provides Personal
Communications Services (PCS) and related equipment for digital wireless voice
and data communications. D&E also has a 33% interest in EuroTel, L.L.C.
(EuroTel), a domestic joint venture that owns an international investment in
Pilicka Telephone (Pilicka), a telecommunications company located in Poland.
These investments are accounted for on the equity method. Under the equity
method, D&E reports its interest in the entity as an investment in its
consolidated balance sheets and its percentage share of the earnings or losses
from the entity in its consolidated statements of operations.
Regulatory Environment and Competition
A substantial portion of D&E's operations is subject to regulation at both the
federal and state levels by the Federal Communications Commission (FCC) and the
Pennsylvania Public Utility Commission (PUC). The passage of the
Telecommunications Act of 1996 (the 1996 Act) provided comprehensive changes to
federal and state regulations that govern telecommunications. D&E's local
exchange company currently qualifies as a rural telephone company and is exempt
until July 2001 from certain provisions of the 1996 Act. D&E applied for an
additional one-year extension beyond July 2001 of its exemption from certain
provisions of the 1996 Act.
D&E files its own tariff rates with the PUC for such services as dial tone and
calling features. In compliance with state statutes, commonly known as Chapter
30, D&E joined in a petition to the PUC in July 1998 for an alternative form of
regulation. D&E's Chapter 30 plan is pending before the PUC which is expected to
enter an Order by June 30, 2001. Subject to final regulatory approval, the plan
will be adopted along with a new ratemaking process in which, instead of a rate
base/rate of return methodology, prices are adjusted in accordance with the
Gross Domestic Product Price Index with a productivity offset.
F-6
38
D&E expects both to experience an increasing amount of competitive pressures and
to encounter 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. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers in D&E's
customer base.
2. Significant Accounting Policies
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.
Recent Pronouncements
D&E adopted Securities and Exchange Commission Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB 101) in the fourth
quarter of 2000, retroactive to January 1, 2000, as required by the SEC. SAB 101
provides guidance on recognition of certain non-recurring fees, such as service
activation and installation fees, and associated incremental direct expenses
over the expected term of the customer relationship. As of January 1, 2000, the
total cumulative effect of noncash deferred net revenues was $658, which was
recorded as a cumulative effect of a change in accounting principle, net of
income taxes of $267. Similarly, D&E's share of EuroTel's deferred net revenue
included in the cumulative change was $521. At December 31, 2000, D&E had $1,975
of deferred revenue and $1,317 of deferred costs.
During 2000, D&E adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which
provides guidance for determining the fair value of derivative instruments. D&E
had no impact on its results of operations as a result of adopting SFAS 133.
During 1999, D&E adopted AICPA Statement of Position No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," which
provides guidance for determining whether computer software costs should be
expensed as incurred or capitalized and amortized. As a result of adopting the
new standard, D&E's 1999 net income increased by $345, net of income taxes.
During 1998, D&E adopted the provisions of three new financial accounting
standards. D&E expanded its disclosure on operating segments based on the
standards established in Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (see Note
16). D&E also follows the reporting standards established in Statement of
Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions
and Other Postretirement Benefits" (see Note 15). Additionally, D&E adopted
AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-up
Activities," which provides guidance on accounting for start-up activities and
organization costs and requires these costs to be expensed as incurred. As a
result of adopting this new standard in 1998, D&E expensed organization costs of
$421, which is recorded as a cumulative effect of a change in accounting
principle, net of income taxes of $170.
F-7
39
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 and are subject to adjustments that may either increase or
decrease the amount of interstate access revenues.
Cash and Short-Term Investments
Cash and cash equivalents consist of all highly liquid investments purchased
with a maturity of three months or less. Cash balances may exceed F.D.I.C.
insured limits at times. Short-term investments consist of high-quality,
short-term commercial paper.
Investments Available-for-Sale
All marketable equity securities are classified as investments
available-for-sale. Marketable securities available-for-sale are recorded at
fair market value, based on market quotes from national exchanges. Any
unrealized holding gains or losses, net of deferred taxes, are reported as a
separate component of shareholders' equity. Any realized gains or losses are
included in the statement of operations.
Prepaid Directory
Directory advertising revenues and costs are deferred and amortized over the
12-month period related to the directory publication.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated using the
straight-line method of depreciation over the estimated useful lives of 24 years
for buildings, 3 to 27 years for equipment and 14 to 48 years for outside plant
facilities. Depreciation as a percentage of average depreciable plant in service
amounted to 8.1% in 2000, 7.6% in 1999 and 7.4% in 1998.
When depreciable regulated 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.
Intangible Assets
The cost in excess of the fair value of net assets acquired is recorded as
goodwill and included in other long-term assets. Amortization expense for
goodwill is recorded on a straight-line basis over five years. Goodwill at
December 31, 2000 and 1999 was $9,203 and $515, respectively. The related
accumulated amortization was $1,295 and $326, respectively.
F-8
40
Impairment of Long-Lived Assets
Based upon the provisions of 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 is made based on estimates of future cash flows. D&E has determined
there has been no impairment to the carrying values of such assets in 2000 and
1999.
Advertising
D&E expenses advertising costs as incurred. Advertising expenses were $1,255 for
2000, $748 for 1999 and $267 for 1998.
Capitalized Interest
The cost of funds used to finance construction projects is capitalized as part
of the construction costs. Capitalized interest on regulated telephone
construction projects is recorded as Allowance for Funds Used During
Construction (AFUDC), a noncash element of other income. Interest costs related
to nonregulated construction projects are reflected as a cost of assets and a
reduction of interest expense. Interest costs capitalized on assets were $265
for 2000, $46 for 1999 and $58 for 1998.
Income Taxes
D&E files a consolidated federal income tax return. D&E has two categories of
income taxes: current and deferred. Current taxes are those amounts D&E expects
to pay when it files its tax returns. Since D&E must report some of its revenues
and expenses differently for its financial statements than it does for income
tax purposes, it records the tax effects of those differences as deferred tax
assets and liabilities in its consolidated balance sheets. These deferred tax
assets and liabilities are measured using the enacted tax rates that are
currently in effect. 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." Basic earnings
per common share is calculated by dividing net income by the weighted average
number of common shares outstanding. The computation of diluted earnings per
share is similar to basic earnings per share except the denominator is increased
to include contingently issuable common shares. Since the exercise price of
D&E's issued and outstanding warrants is slightly lower than the December 31,
2000, market price of D&E stock, there is no difference between basic and
diluted earnings per share in any of the periods presented.
Comprehensive Income
In January 1998, D&E adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting comprehensive income and its components. Comprehensive income
consists of net income and other gains and losses from non-owner sources
affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income.
F-9
41
Reclassifications
For comparative purposes, certain amounts have been reclassified to conform to
the current-year presentation. The reclassifications had no impact on net
income.
3. Cash Flow Information
Cash paid for income taxes and interest expense for the years ended December 31
was as follows:
2000 1999 1998
------ ------ ------
Interest expense .................. $1,698 $1,815 $2,019
Income taxes ...................... 2,361 1,441 1,315
D&E recorded noncash transactions in connection with its investing and financing
activities. At December 31, 2000, accounts payable included capital expenditures
of $3,580 and advances to affiliates of $1,807. During 2000, D&E issued common
stock for the following: $1,768 for business acquisitions, $80 for compensation
and $217 for dividends reinvested. D&E also recorded long-term liabilities in
2000 of $1,572 in connection with business acquisitions (see Note 4).
On March 25, 1999, D&E exchanged its investment in D&E SuperNet, Inc. for cash
and an investment in OneMain.com, Inc. (OneMain) (see Note 6). The value of the
OneMain shares received in the exchange was $6,870.
On December 31, 1998, D&E made an additional investment in PCS ONE of $1,557
through a contribution of its PCS licenses for two Basic Trading Areas: the
D-Block license in Harrisburg and the E-Block license in York/Hanover, PA. In
August 1998, D&E acquired additional equity in EuroTel by converting $4,555 of
its note receivable from EuroTel into an additional equity investment.
On June 8, 1998, D&E elected the FCC's Amnesty Option for the return of the
C-Block PCS license (see Note 9), and as a result, the FCC note payable of
$11,879 was extinguished along with $1,178 of accrued interest.
4. Acquisitions
On April 28, 2000, D&E acquired substantially all of the assets and liabilities
of CompuSpirit, Inc., a computer network service provider. On August 1, 2000,
D&E acquired all of the outstanding shares of Alternate Solutions, Inc., a
computer network service provider. The acquisitions were financed by payments of
$5,973 cash, 93,388 shares of D&E common stock valued at $1,768 and future
payments of $1,572 due to the sellers. The transactions were accounted for under
the purchase method of accounting. Neither of the individual company's results
of operations nor their combined results of operations prior to the acquisitions
would have made a material change in D&E's earnings if such results had been
included from the beginning of the year. Goodwill of $8,688 related to the
acquisitions is being amortized over five years using the straight-line method.
F-10
42
5. Investments Available-for-Sale
The following is a summary of the Company's investments in marketable equity
securities:
2000 1999
------- -------
At December 31:
Cost basis .................................. $ 1,646 $ 7,094
Unrealized gains (losses) ................... 872 (723)
------- -------
Fair value .................................. $ 2,518 $ 6,371
======= =======
6. Sale of Investments in Affiliated Companies
In March 1999, D&E sold its 50% interest in D&E SuperNet, Inc. in exchange for
$2,420 in cash and $6,814 in common stock of OneMain. D&E earned additional
consideration of $112 from the exchange upon D&E SuperNet, Inc. meeting certain
operational and earnings margin requirements. The additional consideration was
paid $56 in cash and $56 in stock. The proceeds from this exchange generated a
1999 gain of $9,093, or $6,001 net of income taxes. In September 2000, OneMain
was acquired by EarthLink, Inc. (EarthLink). D&E exchanged its investment in
OneMain for $2,070 in cash and $1,421 in common stock of EarthLink. This
transaction generated a loss of $3,378, or $2,245 net of income taxes. The
investments in EarthLink and OneMain are reported as available-for-sale
securities and valued at market price.
In May 1998, D&E sold its 15% interest in Berks and Reading Area Cellular
Enterprises for $2,375. The proceeds from the sale of this investment generated
a gain of $1,659, or $1,062 net of income taxes.
7. Equity Investments in Affiliated Companies
D&E/Omnipoint Wireless Joint Venture, L.P.
D&E owns a 50% interest in D&E/Omnipoint Wireless Joint Venture, L.P., doing
business as PCS ONE. PCS ONE is a domestic joint venture 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. The
joint venture will operate for an initial period of 10 years, with provisions
for subsequent renewals.
EuroTel, L.L.C.
D&E owns a 33% investment in EuroTel, a domestic corporate joint venture.
EuroTel holds a 100% investment in PenneCom, B.V. (PenneCom), an international
telecommunications company that holds a 100% investment in Pilicka located in
Poland. In April 1999, PenneCom entered into an agreement to sell its entire
investment in Pilicka to Elektrim S.A. (Elektrim) for $140,000 in cash and
notes. In July 1999, Elektrim issued written notice to PenneCom that it was
repudiating the purchase agreement. In August 1999, PenneCom filed an
arbitration request with the International Court of Arbitration seeking specific
performance of the agreement as well as compensatory and punitive damages. The
discovery, briefing and hearing phases on all liability issues were completed
during 2000. A hearing of claims for damages was conducted in January 2001, and
the arbitration panel formally closed the arbitration. It is not possible to
predict the outcome of the arbitration.
F-11
43
In December 1999, PenneCom sold its 48% interest in Monor Telephone Company
(MTT). Early in January 2000, D&E received $14,051 in cash related to the sale
of MTT. The funds were placed into temporary investments, including a $8,667
portion which is restricted in accordance with terms of a pledge of collateral
D&E agreed to provide to a bank for a loan made to PenneCom in December 1999
(see Note 12).
The equity investments in EuroTel are subject to the risks of foreign currency
translation changes, which are included in the earnings results of PenneCom, MTT
and Pilicka.
Summarized financial information for EuroTel, PCS ONE and other affiliates is
presented as follows:
EuroTel
2000 1999 1998
-------- -------- --------
At December 31:
Current assets ............................. $ 3,026 $ 50,141 $ 9,085
Noncurrent assets .......................... 44,422 38,089 33,038
Current liabilities ........................ 25,374 19,769 7,578
Noncurrent liabilities ..................... 48,813 63,289 37,114
Years ended December 31:
Net sales .................................. $ 4,930 $ 3,413 $ 643
Gain (loss) from joint venture ............. -- 1,524 (649)
Gain (loss) on foreign currency translation 60 (824) (650)
Net income (loss) .......................... (18,385) 13,853 (9,789)
PCS ONE
2000 1999 1998
-------- -------- --------
At December 31:
Current assets ............................ $ 6,639 $ 1,898 $ 2,381
Noncurrent assets ......................... 43,726 40,504 38,189
Current liabilities ....................... 12,798 7,625 6,048
Noncurrent liabilities .................... 61,249 41,964 27,026
Years ended December 31:
Net sales ................................. $ 30,947 $ 17,081 $ 4,751
Net loss .................................. (18,475) (20,404) (15,726)
Other Affiliates
2000 1999 1998
-------- -------- --------
At December 31:
Current assets ..................... $ -- $ -- $ 297
Noncurrent assets .................. -- -- 3,211
Current liabilities ................ -- -- 2,956
Years ended December 31:
Net sales .......................... $ -- $ 1,745 $ 13,161
Income from joint venture .......... -- -- 708
Loss on foreign currency translation -- -- (3,080)
Net loss ........................... -- (42) (411)
F-12
44
The summary of changes for D&E's investments in affiliates is as follows:
2000 1999 1998
-------- -------- --------
Equity loss ........................ $(15,334) $ (4,956) $(11,398)
Investments ........................ 1,750 5,498 10,094
Sale of investments ................ -- (252) (716)
Distributions ...................... (12,619) -- --
-------- -------- --------
Total activity ..................... $(26,203) $ 290 $ (2,020)
======== ======== ========
D&E provides support services to its affiliated companies. Amounts owed to D&E
for working capital provided and services performed for EuroTel, PenneCom and
Pilicka at December 31, 2000 and 1999, were $4,703 and $4,988, respectively. The
accounts receivable from PCS ONE at December 31, 2000 and 1999, for working
capital provided, services performed and management fees totaled $7,045 and
$3,394, respectively. Amounts owed to D&E for services performed for D&E
SuperNet, Inc. at December 31, 2000 and 1999, were $0 and $110, respectively.
These amounts represent either short-term or long-term accounts receivable due
from affiliates.
8. Property, Plant and Equipment
Property, plant and equipment is summarized as follows at December 31:
2000 1999
-------- --------
Land and buildings ............................... $ 33,513 $ 30,826
Digital switching equipment ...................... 48,721 43,103
Outside plant facilities ......................... 44,953 41,712
Telecommunications equipment for rental .......... 3,361 3,437
Computers and office equipment ................... 11,363 8,835
Other equipment .................................. 5,352 3,840
Plant under construction ......................... 7,913 4,092
-------- --------
Total property, plant and equipment .............. 155,176 135,845
Less accumulated depreciation .................... 79,321 69,949
-------- --------
Property, plant and equipment, net ............... $ 75,855 $ 65,896
======== ========
9. Return of PCS License
On June 8, 1998, under the terms of the FCC Amnesty Option, D&E returned to the
FCC the full license spectrum for the C-Block PCS license for the Lancaster
Basic Trading Area. As a result, the license was retired at a cost of $21,417,
and the related FCC note payable of $11,879 was extinguished along with $1,178
of accrued interest. As a result of the early retirement, D&E recorded an
extraordinary loss of $7,901, net of the related income tax benefit, or a loss
of $1.07 per common share.
F-13
45
10. Notes Payable and Long-Term Debt
D&E had unsecured lines of credit with domestic banks totaling $20,000 at
December 31, 2000. These lines of credit are payable on demand and provide D&E
with the option to borrow at prevailing interest rates. There was no amount
outstanding under the lines of credit as of December 31, 2000 and 1999.
Long-term debt at December 31 consisted of the following:
2000 1999
------- -------
8.95% ESOP Note due 2000 ............................ $ -- $ 153
6.49% Senior Notes due 2004 ......................... 10,000 10,000
7.55% Senior Notes due 2007 ......................... 3,182 3,636
9.18% Senior Notes due 2021 ......................... 8,400 8,800
Other ............................................... 242 --
------- -------
21,824 22,589
Less current maturities ............................. 917 1,007
------- -------
Total long-term debt ................................ $20,907 $21,582
======= =======
In July 1992, D&E borrowed $2,080 from a local bank to finance the purchase of
240,000 shares of D&E common stock for the Employee Stock Ownership Plan (the
ESOP Note). The ESOP Note was paid in full in December 2000. Interest was
payable quarterly and principal payments of $208 were due annually.
In January 1994, D&E issued $10,000 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 February 1993, D&E issued $5,000 of 7.55% Senior Notes to an insurance
company, due on November 15, 2007. Interest is payable semiannually, with annual
principal payments of $455.
In November 1991, D&E issued $10,000 of 9.18% Senior Notes to an insurance
company, due on November 15, 2021. Interest is payable semiannually, with annual
principal payments of $400.
Other debt consists of equipment capital leases assumed in the business
acquisitions during 2000. Payments are due monthly with interest rates from 9.9%
to 17.3%. Final due dates range from January 2001 to October 2004.
Under covenants contained in D&E Telephone Senior Note Agreements, the maximum
amount of D&E Telephone's consolidated debt balance should not exceed 50% of the
sum of D&E Telephone's consolidated debt plus consolidated tangible net worth.
At December 31, 2000 and 1999, 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 $22,186.
F-14
46
Maturities of long-term debt for each year ending December 31, 2001 through
2005, are as follows:
Year Aggregate Amount
---- ----------------
2001 $ 917
2002 906
2003 910
2004 10,928
2005 855
11. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities are summarized as follows at December
31:
2000 1999
------- -------
Trade payables ......................................... $12,102 $ 4,326
Accrued compensation ................................... 2,733 2,066
Accrued pension ........................................ 1,520 1,520
Other .................................................. 2,620 1,750
------- -------
Total accounts payable and accrued liabilities ......... $18,975 $ 9,662
======= =======
12. Commitments and Contingencies
The terms of the business acquisition agreements entered into in 2000 require
future payments to the sellers of $510 in 2001, $613 in 2002 and $716 in 2003.
Interest is imputed at 7.7%.
Under the terms of the PCS ONE limited partnership agreement, D&E agreed to
provide funding to PCS ONE for up to $1,000 per year, provided that the total
accumulated funding does not exceed $5,000. D&E may be requested to lend amounts
above the $1,000 annually under the terms of the limited partnership agreement.
In May 2000, PCS ONE entered into a financing agreement with a bank to provide a
$70,000 credit facility. The joint venture partners have no guarantee
requirement in connection with this agreement. D&E and its joint venture partner
must maintain contributed capital plus certain additional allowable deposit and
license acquisition costs at a level of 66.7% of the funds borrowed. On December
31, 2000, the partners had an allowable capital contribution of $42,848, making
$57,500 of the facility available.
D&E became a party to a $40,000 loan agreement between a domestic bank and
PenneCom in December 1999. The loan amount was increased to $50,000 in August
2000. D&E, along with the other investors in EuroTel, pledged security on the
loan, which management anticipates will be repaid in conjunction with the sale
of Pilicka. D&E pledged a total of $8,667 of investments as collateral. PenneCom
used the loan primarily to refinance higher interest debt. Under covenants
contained in the agreement, D&E is required to maintain a ratio of debt to cash
flow not to exceed 2.75 to 1. For the purpose of this covenant, cash flow
includes net income plus depreciation, amortization, interest expense and loss
from foreign investments. At December 31, 2000 and 1999, D&E was in compliance
with the debt covenants.
F-15
47
13. Income Taxes
The provision for income taxes consists of the following:
2000 1999 1998
------- ------- -------
Current:
Federal ...................... $ 485 $ 884 $ (756)
State ........................ 944 981 764
------- ------- -------
1,429 1,865 8
Deferred:
Federal ...................... (2,990) 2,069 380
State ........................ (55) 109 888
------- ------- -------
(3,045) 2,178 1,268
------- ------- -------
Total income taxes .............. $(1,616) $ 4,043 $ 1,276
======= ======= =======
The effective income tax rate on consolidated pre-tax earnings differs from the
federal income tax statutory rate for the following reasons:
2000 1999 1998
------ ------ ------
Federal statutory rate ......................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal
tax benefits ............................. (4.7) 5.5 (28.5)
Benefit of rate differential applied
to temporary differences ................. 0.6 (0.6) 2.8
Valuation allowance ......................... (15.6) (7.3) (45.8)
Prior-period tax ............................ -- (0.5) (7.2)
Other, net .................................. (1.1) 0.1 (1.5)
----- ----- -----
Effective income tax rate ...................... 13.2% 31.2% (46.2)%
===== ===== =====
Approximately $39,285 of state net operating loss carryforwards remained at
December 31, 2000. These carryforwards are due to the operations of D&E's
subsidiaries and will expire in the years 2007 through 2010. 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-16
48
The significant components of the net deferred income tax liability were as
follows at December 31:
2000 1999
---------- ----------
Deferred tax liabilities:
Depreciation.............................................................. $ 4,337 $ 5,678
Depreciation - affiliated companies....................................... 2,722 2,046
Investments............................................................... 407 2,073
Other, net................................................................ -- 205
--------- ---------
7,466 10,002
Deferred tax assets:
Employee benefits......................................................... (401) (217)
Net operating loss carryforwards.......................................... (2,590) (1,684)
Equity in net loss of affiliates......................................... (3,662) (1,531)
Other, net............................................................... (369) --
---------- ---------
(7,022) (3,432)
Valuation allowance.......................................................... 6,252 3,215
--------- ---------
Deferred income taxes........................................................ $ 6,696 $ 9,785
========== ==========
D&E has increased its valuation allowance on the deferred tax assets related to
the equity loss of affiliates as a result of changes in estimates of 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, 2000 and 1999, amounted to
$6,252 and $3,215, respectively.
14. Shareholders' Equity
On October 22, 1998, D&E's Board of Directors authorized the repurchase of up to
$2,000 of D&E common stock. Additionally, on October 30, 2000, an additional
authorization was made to repurchase $1,000 of D&E common stock. The shares
reacquired may be used for D&E's incentive compensation programs, Employee Stock
Purchase Plan, Dividend Reinvestment Plan and for other corporate purposes. As
of December 31, 2000, D&E had purchased 102,700 shares of treasury stock for a
total cost of $2,146. Separately, the Board of Directors authorized acquisition
of 123,500 shares outside of the open market repurchase plan for a cost of
$1,913.
On January 7, 1998, D&E issued 1.3 million shares of D&E common stock to a
subsidiary of Citizens Communications Company (Citizens) in consideration for
$27,015. 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. These warrants expire on January 7, 2003. None of these
warrants has been exercised.
D&E has an Employee Stock Purchase Plan (ESPP), which provides eligible D&E
employees the opportunity to purchase shares of D&E common stock through payroll
deductions. There are 551,001 shares of common stock reserved for issuance
pursuant to the ESPP. The total number of shares purchased pursuant to the ESPP
during 2000 and 1999 was 9,404 and 7,313, respectively.
F-17
49
D&E offers a Dividend Reinvestment and Stock Purchase Plan (DRP) to its
shareholders. The DRP provides all shareholders of D&E 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 amount per quarter, while continuing
to receive cash dividends; or 3) both reinvesting all cash dividends and making
such optional cash purchases. There are 189,262 shares of common stock reserved
for issuance pursuant to the DRP. The total number of shares purchased through
the DRP during 2000 and 1999 was 15,980 and 17,285, respectively.
Shares for the ESPP and DRP may be purchased by participants at fair market
value, which is defined as the average of the highest and lowest per-share sale
prices as reported by the NASDAQ National Market on the day of the purchase.
Shares for the ESPP may also be purchased at a 10% discount from fair market
value as approved by the shareholders on April 27, 2000. 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 Stock Market as DECC.
At December 31, 2000 and 1999, D&E common stock of 2,875,324 and 2,904,121
shares, respectively, was held in a voting trust. Certain trustees of the voting
trust are officers of D&E.
15. 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 average pensionable compensation as defined
by the plan. Accrued benefits are vested after five years of participation in
the plan. Assets of the pension plan consist primarily of stocks and bonds.
2000 1999 1998
------ ------ -------
Assumptions of the Plan:
Discount rates used to determine projected benefit
obligation as of December 31............................. 7.5 % 8.0 % 6.5 %
Expected long-term rates of return on assets................ 9.8 % 9.8 % 9.8 %
Rates of increase in compensation levels.................... 4.5 % 4.5 % 4.5 %
The following schedules reconcile the beginning and ending balances of the
pension benefit obligation and related plan assets.
2000 1999
---------- ----------
Change in Benefit Obligation:
Benefit obligation at beginning of year...................................... $ 18,678 $ 21,448
Service cost................................................................. 754 831
Interest cost................................................................ 1,591 1,362
Actuarial (gain) loss........................................................ 3,290 (3,734)
Benefits paid................................................................ (1,243) (1,229)
--------- ---------
Benefit obligation at end of year............................................ $ 23,070 $ 18,678
========= =========
F-18
50
2000 1999
---------- ----------
Change in Plan Assets:
Fair value of assets at beginning of year.................................... $ 19,646 $ 16,720
Actual return on plan assets................................................. (36) 2,635
Employer contributions....................................................... 1,520 1,520
Benefits paid................................................................ (1,243) (1,229)
--------- ---------
Fair value of assets at end of year.......................................... $ 19,887 $ 19,646
========= =========
2000 1999
---------- ----------
Recognition of Funded Status of the Plan:
Funded status at end of year................................................. $ (3,184) $ 968
Unrecognized net actuarial (gain) loss....................................... 1,984 (2,755)
Unrecognized prior service cost.............................................. 167 222
--------- ---------
Net amount recognized at end of year......................................... $ (1,033) $ (1,565)
========== ==========
2000 1999 1998
---------- ---------- ----------
Components of Net Periodic Benefit Cost:
Service cost................................................ $ 754 $ 831 $ 666
Interest cost............................................... 1,591 1,362 1,311
Expected return on assets................................... (1,528) (1,284) (1,101)
Amortization of:
Transition asset......................................... -- -- (64)
Prior service cost....................................... 55 55 55
Actuarial loss........................................... 116 414 256
--------- --------- ---------
Total net periodic benefit cost............................. $ 988 $ 1,378 $ 1,123
========== ========== ==========
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 contributions amounted to $536 in 2000, $256 in 1999 and $215 in 1998.
Employee Stock Ownership Plan
In July 1992, D&E established the Employee Stock Ownership Plan (ESOP), covering
all eligible employees. Unallocated shares were held in a "suspense account" in
the ESOP's trust fund until allocated to participants' accounts. D&E made
quarterly contributions to the ESOP, which, along with the dividends on
unallocated shares, were used to repay the ESOP Note. As principal payments on
the ESOP Note were made, unallocated shares held in the suspense account were
released and allocated among the participants' accounts. 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.
F-19
51
Both unallocated and allocated shares of the ESOP are considered outstanding for
purposes of calculating earnings per share. The ESOP Note was paid in full in
December 2000 and was reflected as long-term debt with a corresponding reduction
in shareholders' equity for the unearned ESOP compensation, which represented
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 on the fair market 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:
2000 1999 1998
---------- ---------- ----------
Compensation expense........................................ $ 55 $ 251 $ 241
Interest expense............................................ 12 34 56
Dividends on unallocated shares............................. (8) (19) (31)
D&E shares held by the ESOP are summarized as follows at December 31:
2000 1999
------- -------
Unallocated.................................................................. -- 17,414
Allocated.................................................................... 217,622 203,267
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 $12 in 2000, $8 in 1999 and $47 in 1998.
1999 Long-Term Incentive Plan
The 1999 Long-Term Incentive Plan (the Plan) was approved by the shareholders of
the Company during 1999. Officers and other key employees of the Company are
eligible for participation in the Plan. Awards under the Plan are made at the
discretion of the Board of Directors and/or the Board's Compensation Committee.
There were 525,000 shares registered for issuance under the Plan.
Awards granted under the Plan were in the form of Performance Shares of common
stock. A performance-restricted share entitles a participant to receive a target
number of shares of common stock based upon the Company's attainment of
predetermined goals over a specified performance period. The total number of
performance-restricted shares granted to participants during 2000 and 1999 were
46,940 and 39,834, respectively. The cost of the Plan amounted to $720 in 2000
and $333 in 1999.
F-20
52
If the minimum goals are not met, no performance-restricted shares will be
earned by the participant. If the performance goals are fully achieved, 100% of
the performance-restricted shares will be earned by the participant. During the
performance period, each performance-restricted share will be considered equal
to one share of common stock for dividend (but not voting) purposes and the
participant shall be entitled to dividend equivalents. At the end of the
performance period, any performance-restricted shares that have been earned will
be converted to shares of common stock.
16. Segment Reporting
In 1998, D&E adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). This statement changes the way public companies are required to report
financial and descriptive information about their operating segments. SFAS 131
defines operating segments as business components for which separate financial
information is available and regularly evaluated by management as a means for
assessing segment performance and allocating resources to those segments.
D&E's business units have been aggregated into four reportable segments: (i)
Telecommunication Services, (ii) Telephone & Data Services, (iii) Wireless
Services, and (iv) International Communication Services. Telecommunication
Services is distinguished by services provided primarily in a regulated market
to all residences and businesses in a franchised geographic area. Its services
are generally delivered through traditional telephone systems, and its revenues
are earned primarily from a volume of usage and lease of facilities. Telephone &
Data Services is distinguished by services provided with minimal geographic and
regulatory restrictions. Customers include residential and business long
distance subscribers. Additionally, Telephone & Data Services customers include
businesses that purchase telephone or computer network systems, which can be a
one-time installation service as opposed to a monthly usage service. Wireless
Services is distinguished by its marketing methods, service delivery, customer
base and regulatory environment. The International Communications Services
segment records income from equity in earnings of affiliates that operate in
Europe under unique regulatory environments. For more information on significant
noncash items, see Note 3. Intersegment revenues are recorded at the same rates
charged to external customers.
F-21
53
Financial results for D&E's four primary operating segments are as follows:
Tele- Telephone International Corporate,
communication & Data Wireless Communications Other and Total
(In thousands) Services Services Services Services Eliminations Company
- -------------- ------------- --------- -------- -------------- ------------ -------
2000
External customer revenues............. $39,649 $22,614 $8,863 $1,606 $1,223 $73,955
Intersegment revenues.................. 2,431 538 -- -- (2,969) --
Depreciation and amortization.......... 9,792 2,204 -- -- 133 12,129
Equity in net loss of affiliates....... -- -- (9,214) (5,608) -- (14,822)
Net income (loss)...................... 4,735 (2,079) (5,785) (6,248) (2,229) (11,606)
Significant noncash items.............. 3,580 3,341 1,807 -- -- 8,728
Segment assets......................... 121,801 21,022 6,885 -- (25,487) 124,221
Equity in losses of affiliates in excess
of investments and advances........ -- -- 8,532 2,903 -- 11,435
Capital expenditures................... 15,096 1,927 -- -- 3,718 20,741
1999
External customer revenues............. $38,487 $17,218 $6,480 $1,274 $ 68 $63,527
Intersegment revenues.................. 1,457 394 -- -- (1,851) --
Depreciation and amortization.......... 9,006 757 -- 8 -- 9,771
Equity in net income (loss) of
affiliates......................... -- -- (10,243) 5,267 20 (4,956)
Gain on sale of affiliates............. -- -- -- -- 9,093 9,093
Net income (loss)...................... 5,131 76 (6,765) 4,124 6,285 8,851
Significant noncash items.............. 941 -- -- -- 5,206 6,147
Segment assets......................... 100,029 6,942 3,693 15,341 (11,351) 114,654
Investment in equity method
affiliates ........................ -- -- (1,699) 10,353 -- 8,654
Capital expenditures................... 12,052 911 -- -- 935 13,898
1998
External customer revenues............. $36,035 $12,459 $3,654 $681 $482 $53,311
Intersegment revenues.................. 1,174 431 -- -- (1,605) --
Depreciation and amortization.......... 8,410 690 17 -- 255 9,372
Equity in net income (loss) of
affiliates......................... -- -- (7,821) (3,717) 140 (11,398)
Gain on sale of affiliates............. -- -- -- -- 1,659 1,659
Net income (loss)...................... 3,720 128 (5,800) (4,153) (6,150) (12,255)
Significant noncash items.............. -- -- 1,557 -- 13,057 14,614
Segment assets......................... 94,139 6,452 7,038 5,723 (3,275) 110,077
Investment in equity method
affiliates......................... -- -- 4,534 4,536 233 9,303
Capital expenditures................... 7,086 730 -- -- -- 7,816
F-22
54
D&E/OMNIPOINT
WIRELESS JOINT VENTURE, L.P.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
F-23
55
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
TABLE OF CONTENTS
Pages
-----
Report of Independent Accountants 1
Financial Statements:
Balance Sheets as of December 31, 2000 and 1999 2
Statements of Operations for the years ended December 31, 2000, 1999
and 1998 3
Statements of Changes in Partners' Capital (Deficit) for the years ended
December 31, 2000, 1999 and 1998 4
Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 5
Notes to Financial Statements 6-13
F-24
56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
D&E/Omnipoint Wireless Joint Venture, L.P.:
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in partners' capital (deficit) and cash flows present
fairly, in all material respects, the financial position of D&E/Omnipoint
Wireless Joint Venture, L.P. at December 31, 2000 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 8, 2001, except for Note 11,
as to which the date is March 14, 2001
1
F-25
57
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
Balance Sheets
December 31, 2000 and 1999
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 1,585,977 $ 1,500
Accounts receivable, net of reserve for bad debts of $330,339
and $278,101 at December 31, 2000 and 1999, respectively .. 3,532,844 1,074,445
Inventories ................................................. 1,284,149 786,678
Prepaid expenses ............................................ 44,712 35,213
------------ ------------
6,447,682 1,897,836
------------ ------------
PROPERTY AND EQUIPMENT
In service .................................................. 52,796,615 46,052,805
Under construction .......................................... 3,845,599 1,472,143
------------ ------------
56,642,214 47,524,948
Less: accumulated depreciation ............................. 16,574,501 9,767,147
------------ ------------
40,067,713 37,757,801
------------ ------------
OTHER ASSETS
Unamortized debt issuance expense ........................... 1,809,717 659,702
FCC Licenses, net ........................................... 1,986,683 2,040,559
Other long-term assets ...................................... 53,579 46,284
------------ ------------
3,849,979 2,746,545
------------ ------------
TOTAL ASSETS ......................................................... $ 50,365,374 $ 42,402,182
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES
Accounts payable ............................................ $ 1,011,238 $ 1,401,322
Due to affiliates ........................................... 9,338,775 4,827,598
Accrued interest ............................................ 737,286 56,742
Other accrued liabilities ................................... 1,302,816 1,099,343
Unearned revenue ............................................ 372,173 233,370
Customer deposits ........................................... 36,066 7,166
------------ ------------
TOTAL CURRENT LIABILITIES ............................ 12,798,354 7,625,541
------------ ------------
LONG TERM LIABILITIES
Long term debt .............................................. 57,500,000 39,989,585
Due to affiliates ........................................... 3,929,464 1,974,474
------------ ------------
TOTAL LONG TERM LIABILITIES ........................... 61,429,464 41,964,059
------------ ------------
Commitments and contingencies (Note 8)
PARTNERS' CAPITAL (DEFICIT)
Capital contributions ....................................... 32,722,038 30,922,038
Accumulated net loss ........................................ (56,584,482) (38,109,456)
------------ ------------
TOTAL PARTNERS' CAPITAL (DEFICIT) .................................... (23,862,444) (7,187,418)
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) .................... $ 50,365,374 $ 42,402,182
============ ============
The accompanying notes are an integral part of these financial statements.
2
F-26
58
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
Statements of Operations
for the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Operating Revenues
Communication service revenues and handset sales $ 33,742,296 $ 19,000,310 $ 5,207,717
Less: Allowances and discounts (2,795,711) (1,919,672) (456,542)
------------ ------------ ------------
Net operating revenues 30,946,585 17,080,638 4,751,175
Operating Expenses
Cost of communications service revenue
and handset sales 17,757,003 15,060,115 8,961,420
Depreciation and amortization 7,219,788 6,112,395 3,710,538
Selling, general and administrative services 18,340,154 12,955,410 7,352,056
------------ ------------ ------------
Total operating expenses 43,316,945 34,127,920 20,024,014
------------ ------------ ------------
Loss from operations (12,370,360) (17,047,282) (15,272,839)
------------ ------------ ------------
Other Income (Expense)
Interest expense (5,617,896) (3,364,038) (521,148)
Interest income 53,514 6,992 67,501
------------ ------------ ------------
Total other income (expense) (5,564,382) (3,357,046) (453,647)
------------ ------------ ------------
Loss before extraordinary item (17,934,742) (20,404,328) (15,726,486)
Extraordinary loss on early extinguishment of debt (540,284) -- --
------------ ------------ ------------
Net loss $(18,475,026) $(20,404,328) $(15,726,486)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
F-27
59
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
Statements of Changes in Partners' Capital (Deficit)
for the years ended December 31, 2000, 1999 and 1998
Contributed Accumulated
Capital Deficit Total
------------ ------------ ------------
Balance at December 31, 1997 $ 13,264,904 $ (1,978,642) $ 11,286,262
Capital Contributions 11,936,606 - 11,936,606
Net Loss - (15,726,486) (15,726,486)
------------ ------------ ------------
Balance at December 31, 1998 25,201,510 (17,705,128) 7,496,382
Capital Contributions 5,720,528 - 5,720,528
Net Loss - (20,404,328) (20,404,328)
------------ ------------ ------------
Balance at December 31, 1999 30,922,038 (38,109,456) (7,187,418)
Capital Contributions 1,800,000 - 1,800,000
Net Loss - (18,475,026) (18,475,026)
------------ ------------ ------------
Balance at December 31, 2000 $ 32,722,038 $(56,584,482) $(23,862,444)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
F-28
60
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(18,475,026) $(20,404,328) $(15,726,486)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 7,219,788 6,112,395 $ 3,710,538
Amortization of debt issuance costs 222,315 121,776 9,369
License use fees 267,192 442,804 --
Reserve for bad debts 1,060,080 876,692 109,787
Extraordinary loss on early extinguishment of debt 540,284 -- --
Changes in operating assets and liabilities:
Accounts receivable (3,518,479) (1,404,045) (585,259)
Inventories (497,471) (449,402) (24,673)
Prepaid expenses (200,468) 298,964 (314,911)
Accounts payable 596,075 (1,914,287) 56,502
Other accrued liabilities 884,017 539,017 249,644
Unearned revenue and customer deposits 167,703 154,909 85,627
Other (7,295) (26,432) (11,779)
------------ ------------ ------------
Net cash used in operating activities (11,741,285) (15,651,937) (12,441,641)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (7,846,301) (1,291,254) (8,741,583)
------------ ------------ ------------
Cash flows from financing activities:
Partners' contributions 1,800,000 5,259,000 10,310,730
Proceeds from long term debt 57,500,000 8,557,363 8,435,213
Repayments of long-term debt (39,989,585) -- --
Debt issuance costs (1,912,614) (575,111) (215,736)
Due to affiliates 3,774,262 2,871,786 (680,473)
------------ ------------ ------------
Net cash provided by financing activities 21,172,063 16,113,038 17,849,734
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents 1,584,477 (830,153) (3,333,490)
Cash and cash equivalents at beginning of the period 1,500 831,653 4,165,143
------------ ------------ ------------
Cash and cash equivalents at the end of the period $ 1,585,977 $ 1,500 $ 831,653
============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
F-29
61
OMNIPOINT/D&E WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
DESCRIPTION:
In November 1997, D&E Wireless, Inc., (D&E), Omnipoint Venture
Partners, LLC (Omnipoint Venture Partner) and Omnipoint Holdings II,
LLC (Omnipoint Holdings), (collectively, the Partners), formed
D&E/Omnipoint Wireless Joint Venture, L.P. (the Partnership) doing
business as PCS ONE. The Partnership will operate for an initial
period of 10 years, with provisions for subsequent renewals. The
Partnership is comprised of general partners and limited partners. D&E
Wireless, Inc. holds a 1% general partnership interest and a 49%
limited partnership interest in the Partnership. Omnipoint Venture
Partners, LLC holds a 1% general partnership interest in the
Partnership and Omnipoint Holdings II, LLC holds a 49% limited
partnership interest in the Partnership. The Partners have committed
to finance the operations of the Partnership until January 1, 2002.
The Partnership was formed for the purpose of providing Personal
Communications Services (PCS) and related equipment for digital
wireless voice and data communications in the Lancaster, Harrisburg,
York-Hanover and Reading Basic Trading Areas in Pennsylvania.
Therefore, the Partnership has one reportable business segment. The
Partnership has operating agreements to utilize certain spectrum under
licenses initially held by the Partners.
On February 25, 2000, Omnipoint Corporation, the ultimate parent
company of Omnipoint Venture Partner and Omnipoint Holdings, merged
into a wholly-owned subsidiary of VoiceStream Wireless Holding
Corporation, with Omnipoint Corporation as the surviving entity,
resulting in Omnipoint Corporation becoming a wholly-owned subsidiary
of VoiceStream Wireless Holding Corporation.
As a result of this merger FCC regulations required that the C-Block
licenses for Reading, Lancaster, Harrisburg and York-Hanover be
transferred to two joint ventures between VoiceStream and Cook Inlet
Region, Inc. In connection with the transfer of these licenses, the
respective operating agreements which permit the Partnership to
utilize these FCC licenses were assigned to the transferees and
remained in full force and effect.
CAPITAL CONTRIBUTIONS:
In accordance with the limited partnership agreement (the Partnership
Agreement), capital contributions by the Partners are required as
follows:
6
F-30
62
o Initial contributions: the Partners made initial cash and in-kind
contributions of equipment totaling $9,109,904.
o Additional cash contributions: The Partners have contributed an
aggregate of $21,524,730 in cash contributions, including
$1,800,000 in 2000, $5,259,000 in 1999 and $10,310,730 in 1998.
o Additional property contributions: Pursuant to an approval of the
Federal Communications Commission, the Partners assigned and
contributed three licenses to the Partnership with a value of
$2,087,404 for three Basic Trading Areas: the D-Block license in
Harrisburg, Pa., the E-Block license in York-Hanover, Pa. and the
E-Block license in Lancaster, Pa. The Partnership recorded the
value of the licenses in accordance with provisions in the
Partnership Agreement, which was based on the contributor's cost
of such licenses. The D-Block license for Harrisburg and the
E-Block license for York-Hanover were transferred to the
Partnership in December 1998; the E-Block license for Lancaster
was transferred to the Partnership in July 1999.
DISTRIBUTIONS AND ALLOCATIONS:
Net profits and losses are allocated to the Partners in the proportion
of their respective percentage ownership interests in the Partnership,
as defined by the Partnership Agreement. The amount of annual cash
distributions, if any, is determined by the Management Committee. For
purposes of all distributions and allocations, the respective
Partner's percentage ownership interests are determined as outlined in
the Partnership Agreement.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments that subject the Partnership to concentrations
of credit risk consist primarily of trade receivables; however
concentrations of credit risk are limited due to the large number of
relatively low revenue generating customers in the Partnership
customer base. The Partnership also maintains reserves for potential
credit losses and such losses have been within management
expectations.
2. NEW ACCOUNTING PRONOUNCEMENTS
The Partnership is required to adopt the provisions of Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No.
137 and SFAS No. 138, beginning in the first quarter of fiscal 2001.
This standard, as amended, requires that all derivative instruments be
recorded on the balance sheet at their fair value and changes in the
fair value be recorded each period in earnings or comprehensive
income. The adoption of SFAS No. 133 did not result in recording a
cumulative adjustment as of the beginning of 2001. The Partnership
currently does not expect the adoption of SFAS No. 133 to have a
material impact on future net
7
F-31
63
income since the Partnership does not have derivative instruments or
engage in hedging activity through the use of derivative instruments.
The Partnership adopted Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition", in the fourth quarter of 2000. This adoption
had no impact on the Partnership's financial statements.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts or certain disclosures. Actual results could differ from those
estimates.
REVENUE RECOGNITION:
Usage and access charges are recorded as revenue based on the amount
of communications services rendered as measured principally by
subscriber usage and fees, after deducting an estimate of certain
allowances and discounts. Prepaid revenues are deferred until earned.
Revenue from the sale of handsets and related accessories is
recognized upon shipment or point-of-sale.
ADVERTISING COSTS:
The Partnership expenses production costs of print, radio and
television advertisements and other advertising costs as such costs
are incurred. Advertising expenses included in operating expenses were
$3,586,596 in 2000, $2,874,914 in 1999 and $2,070,908 in 1998.
CASH AND CASH EQUIVALENTS:
The Partnership considers cash on hand, cash in banks, and investments
with a maturity of three months or less when purchased as cash and
cash equivalents.
INVENTORY:
Inventory is recorded at the lower of cost or market on the basis of
average cost or replacement value. Inventory consists primarily of
handsets and accessories. Potential losses on sale of handsets and
accessories are recognized in the period in which sales are made as a
cost of acquiring subscribers. Due to the rapid turn-over of equipment
and accessories, inventory is recorded on a FIFO accounting basis.
8
F-32
64
PROPERTY AND EQUIPMENT AND DEPRECIATION:
Property and equipment are stated at cost and depreciated using the
straight-line method of depreciation over the estimated useful lives
of the assets which are 3 to 5 years for equipment and 6 to 12 years
for network infrastructure. Depreciation begins when the fixed asset
is placed into service. Network infrastructure under construction
consists of equipment that has not been placed in service and costs
associated with developing information systems; accordingly no
depreciation has been recorded. When the assets are placed in service,
the Partnership transfers the assets to the appropriate property and
equipment category and depreciates these assets over their respective
estimated useful lives. The costs of maintenance and repairs are
charged to operating expense.
LICENSE COSTS AND DEFERRED FINANCING COSTS:
In accordance with the Partnership Agreement, after obtaining the
approval by the Federal Communications Commission, the following
transactions occurred: on December 30, 1998, D&E contributed its PCS
broadband licenses for two Basic Trading Areas: the D-Block license in
Harrisburg and the E-Block license in York-Hanover, Pa. to the
Partnership, and on July 31, 1999, Omnipoint Venture Partner
contributed its PCS broadband license for one Basic Trading Area: the
E-Block license in Lancaster, Pa.
License costs are amortized over a period of 40 years as there is an
observable market and perfunctory renewal giving rise to an indefinite
life. Amortization expense recorded in 2000 and 1999 totaled $53,876
and $46,845, respectively, for PCS license fees.
PCS ONE manages operations under C-Block licenses in Lancaster, Pa.,
Harrisburg Pa., York-Hanover, Pa. and Reading, Pa. pursuant to
operating agreements with affiliates of one of its Partners. License
use fees and related interest expense recorded in 2000 and 1999
amounted to $740,664 and $916,272, respectively.
Deferred financing costs are amortized over the life of the related
financing agreement.
IMPAIRMENT OF LONG-LIVED ASSETS:
Based upon the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," the Partnership 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 is made based on
estimates of future cash flows. The Partnership has determined there
were no impairments to the carrying values of such assets in 2000,
1999 and 1998.
9
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65
CAPITALIZED INTEREST:
The cost of funds used to finance construction projects is capitalized
as part of the construction costs. Interest costs related to
construction projects are reflected as a cost of the assets and
reduction of interest expense. Interest costs capitalized were
$127,424 in 2000, $47,692 in 1999 and $478,712 in 1998.
INCOME TAX:
Federal and state income taxes are payable by the individual Partners;
therefore, no provision or liability for income taxes is reflected in
the financial statements. For federal income tax purposes, each item
of income, gain, loss deduction or credit entering into the
computation of the Partner's taxable income shall be allocated in the
same proportion as profits and losses are allocated between the
Partners.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments subject to fair value disclosure requirements
are carried in the financial statements at amounts that approximate
fair value. The only financial instrument subject to this reporting
requirement is the financing agreement.
4. SUPPLEMENTAL CASH FLOW INFORMATION:
2000 1999 1998
----------- ----------- -----------
Cash paid for interest, net of amounts capitalized $ 4,891,437 $ 3,280,210 $ 454,762
Non-cash investing and financing activities:
Fixed assets funded by financing agreement -- 4,878,202 10,531,571
Licenses contributed by the Partners -- 461,528 1,625,876
Capital expenditures included in accounts payable -- 986,159 2,262,881
Capital expenditures included in due to affiliates 2,424,713 -- --
5. INVENTORY:
Inventory consists of the following at December 31, 2000 and 1999:
2000 1999
---------- ----------
Handsets $1,190,169 $ 706,736
Accessories 93,980 79,942
---------- ----------
$1,284,149 $ 786,678
========== ==========
10
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66
6. PROPERTY AND EQUIPMENT:
Property and Equipment, at cost, consist of the following at December
31, 2000 and 1999:
2000 1999
----------- -----------
Network infrastructure $50,116,754 $44,369,816
Machinery, office and computer equipment 1,230,724 782,398
Improvement to leased properties 1,246,904 743,420
Motor vehicles 202,233 157,171
Plant under construction 3,654,630 1,472,143
Software under development 190,969 --
----------- -----------
56,642,214 47,524,948
Less accumulated depreciation 16,574,501 9,767,147
----------- -----------
Fixed assets, net $40,067,713 $37,757,801
=========== ===========
Depreciation expense for the years ended December 31, 2000, 1999, and 1998 was
$7,165,912, $6,065,550 and $3,710,538, respectively.
7. LONG-TERM DEBT:
On May 17, 2000 the Partnership entered into a $70 million credit
agreement, as amended (the "Credit Agreement") with major financial
institutions to extinguish existing indebtedness and finance purchases
and installations of telecommunications equipment, engineering
services, certain related construction costs, third-party equipment
and other expenses. Advances exercised by the Partnership at December
31, 2000 amounted to $ 57,500,000.
Principal outstanding under the Credit Agreement is payable in
quarterly installments beginning June 30, 2002. Interest on the unpaid
principal balance is payable quarterly in arrears at varying rates, at
a base rate equal to the greater of (a) the Prime Rate in effect on
such day or (b) the Federal Funds Effective Rate in effect on such day
plus 0.5%, or LIBOR plus varying rates, at the option of the
Partnership.
The Partnership is subject to certain financial and operational
covenants including restrictions on the payment of distributions to
the Partners, restrictions on additional indebtedness and attaining
certain financial performance measurements. The most restrictive of
these covenants requires the Partnership to maintain a certain ratio
of indebtedness to total capitalization. The Partnership was in
compliance with this and all other covenants at December 31, 2000.
Proceeds from advances under the Credit Agreement in 2000 were
utilized to extinguish outstanding indebtedness of the Partnership. In
connection with the extinguishment, the Partnership incurred a
$540,284 loss on extinguishment related to the write-off of
unamortized debt issuance costs.
11
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67
Maturities of long-term debt for each year ending December 31, 2001
through 2005 are as follows:
2001 $ -
2002 1,584,000
2003 3,699,926
2004 6,439,615
2005 5,471,592
8. COMMITMENTS AND CONTINGENCIES:
The Partnership has entered into certain noncancelable operating
leases for its offices and retail locations. Future minimum rentals
under these noncancelable operating leases as of December 31, 2000 are
as follow:
2001 $ 684,116
2002 625,494
2003 554,906
2004 378,785
2005 81,171
Thereafter 141,015
-----------
Total Minimum Rentals $ 2,465,487
===========
Total rental expense for the years ended December 31, 2000, 1999, and
1998 was $2,897,157, $ 2,305,537 and $1,284,795, respectively.
9. PARTNERS' EQUITY:
Under the terms of the Partnership Agreement, the Management Committee
may require each general partner to advance up to $1,000,000 per year
to the Partnership in the form of loans, and to contribute additional
capital to the Partnership in proportion to their respective interest
in the partnership.
The Partnership received initial contributions from D&E and Omnipoint
Venture Partner of $9,109,904 and additional contributions in 2000,
1999, 1998 and 1997 of $1,800,000, $5,720,528, $11,936,606 and
$4,155,000, respectively from the Partners. At December 31, 2000 the
Partners had contributed a total of $32,722,038 to the Partnership.
12
F-36
68
10. RELATED PARTY TRANSACTIONS NOT DISCLOSED ELSEWHERE:
Pursuant to the Partnership Agreement, the Partnership entered into
separate service agreements with the Partners covering services such
as engineering, accounting and financing, human resources, marketing
and public relations, billing, interconnection and telecommunications
services. Costs incurred under such agreements during 2000, 1999, and
1998 amounted to $3,401,847, $2,865,691 and $4,190,077, respectively.
Additionally, the Partnership purchases from one of the Partners,
handsets and accessories, at the Partner's cost, to be used in the
performance of the Partnership's business. Purchases during 2000,
1999, and 1998 amounted to $6,855,744, $5,290,538 and $4,263,775,
respectively.
11. SUBSEQUENT EVENT:
On March 14, 2001, the Partnership obtained an amendment ("Amendment")
to the Credit Agreement. The Amendment increased the revolving credit
commitment from $30,000,000 to $42,000,000. When aggregated with the
term loan commitment of $40,000,000, the Partnership has a total
credit facility of $82,000,000. In addition, the Amendment includes
revisions to certain financial covenants which renders such covenants
less restrictive. The Partnership incurred a commitment fee of
$180,000 in connection with the increase in the revolving credit
agreement.
Additionally the Amendment permits the Partnership to repay
VoiceStream $6.7 million in connection with VoiceStream's retirement
of FCC debt related to the Reading C-Block license. As a condition to
the effectiveness of the Amendment VoiceStream has filed applications
with the FCC to transfer the Reading, Lancaster, Harrisburg and
York-Hanover C-Block licenses from VoiceStream to the Partnership.
13
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69
EUROTEL L.L.C.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999 AND FOR EACH OF
THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000
F-38
70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
EuroTel L.L.C.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, members' equity (deficit) and
comprehensive income (loss) and cash flows present fairly, in all material
respects, the financial position of EuroTel L.L.C. and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. 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 of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 2, the Company is dependent upon the Founders to meet its
cash flow requirements for the year 2001.
Rome, Italy
March 5, 2001
F-39
71
EUROTEL L.L.C.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
ASSETS 2000 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 811,097 $ 48,526,747
Receivables, net of allowance for doubtful accounts
of $245,607 and $46,141 respectively 2,215,056 1,614,569
------------ ------------
Total current assets 3,026,153 50,141,316
------------ ------------
Property, plant and equipment, net 37,848,775 31,376,372
Intangible assets, net 5,459,226 6,712,589
Loan receivable 523,425 --
------------ ------------
$ 46,857,579 $ 88,230,277
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Due to Founders $ 8,500,431 $ 10,310,366
Accounts payable 5,052,796 6,956,832
Accrued liabilities 795,810 2,501,534
Deferred revenue 10,504,430 --
Current portion of long-term debt 46,620,447 --
------------ ------------
Total current liabilities 71,473,914 19,768,732
------------ ------------
Deferred revenue 1,309,141 10,000,000
License obligation 451,527 1,125,562
Long-term debt -- 32,395,000
Other liabilities 362,417 --
------------ ------------
Total liabilities 73,596,999 63,289,294
------------ ------------
Commitments and contingencies (Note 16)
Members' equity (deficit):
Members' capital (23,451,142) 29,006,024
Cumulative other comprehensive loss (3,288,278) (4,065,041)
------------ ------------
Total members' equity (deficit) (26,739,420) 24,940,983
------------ ------------
$ 46,857,579 $ 88,230,277
============ ============
The accompanying notes are an integral part of these
financial statements.
2
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72
EUROTEL L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Operating revenue:
Telecommunication revenue $ 4,506,642 $ 1,934,149 $ 237,520
Installation and equipment sales 423,597 1,478,445 405,086
------------ ------------ ------------
Total operating revenue 4,930,239 3,412,594 642,606
Operating expenses:
Wages and benefits 4,164,906 3,038,360 2,032,254
Interconnection charges 1,125,737 553,889 81,273
Depreciation and amortization 3,907,570 2,755,619 1,326,614
General and administrative 4,596,294 3,926,608 2,218,166
------------ ------------ ------------
Total operating expenses 13,794,507 10,274,476 5,658,307
------------ ------------ ------------
Operating loss (8,864,268) (6,861,882) (5,015,701)
------------ ------------ ------------
Other income (expenses):
Equity in income (loss) of affiliate -- 1,524,684 (649,924)
Interest income 236,643 444,632 366,994
Interest expense (4,770,048) (8,724,828) (3,822,453)
Litigation costs related to sale of subsidiary (3,403,623) (951,651) --
and affiliate
Gain on sale of affiliate -- 35,410,444 --
Foreign exchange gains 685,307 742,989 575,421
Foreign exchange losses (625,064) (1,566,602) (1,225,912)
Dutch withholding tax expense -- (2,202,917) --
Other (79,685) (161,295) (17,266)
------------ ------------ ------------
Total other income (expenses) (7,956,470) 24,515,456 (4,773,140)
------------ ------------ ------------
Income (loss) before extraordinary item (16,820,738) 17,653,574 (9,788,841)
Extraordinary item -- extinguishment of debt -- (3,800,368) --
Cumulative effect on prior years of a change
in accounting policy (1,564,384) -- --
------------ ------------ ------------
Net income (loss) $(18,385,122) $ 13,853,206 $ (9,788,841)
============ ============ ============
The accompanying notes are an integral part of these
financial statements.
3
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73
EUROTEL L.L.C.
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
CUMULATIVE
OTHER TOTAL COMPREHENSIVE
MEMBERS' COMPREHENSIVE MEMBERS' INCOME
CAPITAL LOSS EQUITY (DEFICIT) (LOSS)
------------- ------------- ---------------- -------------
Balances, December 31, 1997 $ 2,987,003 $ (88,189) $ 2,898,814 $ (1,782,940)
------------
Conversion of note payable to equity 11,041,326 -- 11,041,326
Capital contributions 6,983,330 (6,006,889) 976,441
Net loss (9,788,841) -- (9,788,841) $ (9,788,841)
Foreign currency translation adjustment -- (118,250) (118,250) (118,250)
------------- ----------- ------------ ------------
Balances, December 31, 1998 11,222,818 (6,213,328) 5,009,490 (9,907,091)
Capital contributions 3,930,000 -- 3,930,000
Net income 13,853,206 -- 13,853,206 $ 13,853,206
Foreign currency translation adjustment -- (3,915,964) (3,915,964) (3,915,964)
Reclassification adjustment:
Foreign currency translation related
to investment in MTT sold in 1999 -- 6,064,251 6,064,251 6,064,251
------------- ----------- ------------ ------------
Balances, December 31, 1999 29,006,024 (4,065,041) 24,940,983 $ 16,001,493
------------
Capital contributions 2,100,000 -- 2,100,000
Shareholder distributions (36,172,044) -- (36,172,044)
Net loss (18,385,122) -- (18,385,122) $(18,385,122)
Foreign currency translation adjustment -- 776,763 776,763 776,763
------------- ----------- ------------ ------------
Balance, December 31, 2000 $ (23,451,142) $(3,288,278) $ (26,739,420) $(17,608,359)
============= =========== ============= ============
The accompanying notes are an integral part of these
financial statements.
4
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74
EUROTEL L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $(18,385,122) $ 13,853,206 $ (9,788,841)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Extraordinary item-extinguishment of debt -- 3,800,368 --
Gain on sale of affiliate -- (35,410,444) --
Depreciation and amortization 3,907,570 2,755,619 1,326,614
Amortization of deferred financing costs 47,500 916,378 381,825
Unrealized foreign exchange loss 339,899 740,113 675,729
Loss on sale of fixed assets 66,981 87,075 33,467
Equity in income of affiliate -- (1,524,684) 649,924
Noncash charges -- -- 50,000
Changes in assets and liabilities:
Receivables (1,249,640) 287,706 (969,686)
Accounts payable (1,151,303) 1,855,230 (649,674)
Accounts payable to Founders 2,454,124 1,806,744 1,693,908
Accrued liabilities 814,894 2,487,586 264,232
Accrued interest (656,797) (1,660,374) 3,206,867
Other assets 127,090 -- --
------------ ------------ ------------
Total adjustments 4,700,318 (23,858,683) 6,663,206
------------ ------------ ------------
Net cash used in operating activities (13,684,804) (10,005,477) (3,125,635)
------------ ------------ ------------
Cash flows from investing activities:
Deposit received on sale of Pilicka -- 10,000,000 --
Proceeds from sale of property, plant and equipment 29,708 7,480 696,725
Purchase of property, plant and equipment (10,117,734) (16,400,238) (14,551,366)
Purchase of additional MTT shares -- (50,522) --
Proceeds from sale of MTT, net -- 43,027,372 --
Acquisition of intangible assets (590,042) (976,324) (1,339,032)
------------ ------------ ------------
Net cash (used in)/provided by investing activities (10,678,068) 35,607,768 (15,193,673)
------------ ------------ ------------
Cash flows from financing activities:
Payment of notes payable to Founders (3,607,263) -- --
Proceeds from issuance of notes payable to Founders -- 3,500,000 4,897,573
Debt financing costs -- -- (1,832,757)
Proceeds from issuance of convertible bonds -- -- 20,000,000
Redemption of convertible bonds -- (23,265,814) --
Distribution to Founders (36,172,044) -- --
Proceeds from short-term borrowings from Founders 2,100,000 -- 8,762,807
Payments of short-term borrowings from Founders -- -- (8,762,807)
Proceeds from issuance of long-term debt 14,225,447 32,300,000 --
Proceeds from issuance of common stock and member contributions -- 3,930,001 --
------------ ------------ ------------
Net cash (used in)/provided by financing activities (23,453,860) 16,464,187 23,064,816
------------ ------------ ------------
Effect of exchange rate changes on cash 101,082 (492,519) (146,648)
------------ ------------ ------------
Net increase in cash and cash equivalents (47,715,650) 41,573,959 4,598,860
Cash and cash equivalents at beginning of period 48,526,747 6,952,788 2,353,928
------------ ------------ ------------
Cash and cash equivalents at end of period $ 811,097 $ 48,526,747 $ 6,952,788
------------ ------------ ------------
Cash paid for interest $ 7,902,308 $ 9,077,260 $ --
------------ ------------ ------------
Supplemental disclosure of noncash activity:
Long-term debt of $95,000 was issued for debt financing costs in 1999.
Certain assets, net of certain liabilities with a value of $976,441 were
contributed to the Company by its shareholders in 1998.
Notes payable to shareholders of $11,041,326 were converted to equity during
1998 which included $2,636,000 borrowed during 1998.
See Note 6 and Note 8 for other noncash activity.
The accompanying notes are an integral part of these financial statements.
5
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75
EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION:
EuroTel L.L.C. (the Company) was organized in December 1996 to act as a
holding company for a foreign investment in Pilicka Telefonia Sp. z.o.o.
(Pilicka). The Company directly held this investment until May 1998. The
Company organized a wholly-owned subsidiary, PenneCom B.V. (PenneCom), to
act as a Dutch holding company for foreign investments. During 1998 and
1999, these investments were comprised of Pilicka and Monor Telefon
Tarasasag Rt. (MTT). In May 1998, Pilicka was contributed to PenneCom by
the Company at its net book value, as the Company and PenneCom were
entities under common control. Results of operations include the operations
of the Company and Pilicka for the entire years ended December 31, 2000,
1999 and 1998 and include PenneCom's operations since formation in May
1998. In August 1998, the Founders (see definition below) contributed a
48.7% financial interest in Monor Communications Group, Inc. (MCG) at its
book value to PenneCom. MCG held a 92.7% interest in MTT at the time of
contribution. On December 31, 1998, MCG was dissolved and its equity was
distributed. As a result, PenneCom held an interest ranging from 46.4% to
48.3% in MTT during 1998 and 1999, prior to the sale of MTT effective
December 14, 1999. PenneCom's results of operations include the equity in
the loss of MCG and MTT for the period August 1, 1998 to December 31, 1998
and the equity in the income of MTT through December 14, 1999.
MTT provided telecommunication services to the Monor region of Hungary.
Pilicka is involved in the design, construction and operation of a
telecommunications network in the Radom, Piotrkow Trybunalski and
Tarnobrzeg regions in Poland. The Company's founding members are comprised
of three companies: Consolidated Companies, Inc.; D&E Investments, Inc., a
wholly-owned subsidiary of D&E Communications, Inc.; and HunTel Systems,
Inc. (the Founders). During 1999, Pilicka was converted from a Polish S.A.
to a Polish Sp. z o.o.
2. LIQUIDITY:
The Company is dependent upon the Founders to provide the liquidity
necessary for the Company to meet its cash flow requirements for the year
2001. The Founders also provide guarantees and collateral for the Company's
long-term debt. See Note 10 and 12.
6
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76
EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and PenneCom, its wholly-owned subsidiary. All significant intercompany
accounts and transactions between the Company and PenneCom have been
eliminated in consolidation. PenneCom's interest in MTT was accounted for
by the equity method prior to its sale in December 1999.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of Pilicka are measured
using the local currency, Polish zlotys, as the functional currency. Assets
and liabilities of this subsidiary are translated at the exchange rate in
effect at year-end. Income statement accounts are translated at the average
rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are
included in the cumulative other comprehensive income (loss) account in
shareholder's equity. Foreign currency transaction gains and losses, as
well as translation adjustments for monetary assets and liabilities of
Pilicka that are denominated in currencies other than the Polish zloty, are
recognized in the statement of operations. Foreign exchange losses in 2000,
1999 and 1998 include $339,899 and $740,113 and $675,729, respectively, of
unrealized foreign exchange losses resulting primarily from the translation
of foreign denominated payables at the balance sheet date.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid debt instruments
with an original maturity of three months or less and are carried at cost
which approximates fair value due to the short maturities.
7
F-45
77
EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Construction-in-progress
represents the accumulation of costs associated with the construction of
telephone networks and other tangible fixed assets. The Company continually
monitors the progress of these construction projects and tracks each
project by location. The Company includes all costs that are directly
attributable to the network development in construction-in-progress.
Expenditures for repairs and maintenance, which do not materially extend
the useful lives of the related asset, are charged to expense as incurred.
The cost of assets retired or otherwise disposed of, and the accumulated
depreciation thereon, is removed from the accounts with any gain or loss
realized upon sale or disposal charged or credited to operations.
Depreciation expense is recorded in the month following the commencement of
use by applying the straight-line method over the estimated useful life of
the assets: leasehold improvements and buildings (10-25 years),
telecommunication equipment (10 years), and vehicles and other equipment
(5-10 years).
INTANGIBLE ASSETS
Intangible assets include acquisition costs incurred in connection with the
acquisition of nonexclusive licenses to provide telecommunication services,
software and deferred financing costs. Licenses are capitalized and
amortized over the life of each license.
The deferred financing costs are related to long-term debt and are
amortized over the term of the debt.
The Company also has acquired the right for Pilicka to use a billing system
software, which is being amortized over the estimated period of use of
three years.
INCOME TAXES
The differences between the amounts included in these financial statements
for Pilicka and the tax basis of assets and liabilities, prepared in
accordance with the Polish Corporate Income Tax Law, have been recognized
as temporary differences for the purpose of recording deferred income
taxes. All net operating loss carryforwards are recognized as deferred tax
assets. Valuation allowances are recorded for deferred tax assets resulting
from tax losses and temporary timing differences of tax recognition when it
is more likely than not that the benefits will not be realized.
8
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
DUTCH TAX EXPENSE
Dutch tax expense was recognized as a result of the distribution paid from
PenneCom to EuroTel LLC in 1999.
RECOVERABILITY OF LONG-LIVED ASSETS
Management periodically reviews long-lived assets, property, plant and
equipment and intangible assets to be held and used in the business, for
the purpose of determining and measuring impairment on a recurring basis or
when events or changes in circumstances indicate that the carrying value of
an asset or group of assets may not be recoverable. Assets are grouped and
evaluated for possible impairment, and impairment is measured on the basis
of the forecasted discounted cash flows from operating results of the
business over the estimated remaining lives of the assets.
ACCOUNTING FOR LEASES
Leases of assets where a significant portion of the risks and rewards of
ownership are retained by the lessor are classified as operating leases.
Payments made under operating leases are charged to the income statement on
a straight-line basis over the period of the lease.
When an operating lease is terminated before the lease period has expired,
any payment required to be made to the lessor by way of penalty is
recognized as an expense in the period in which termination takes place.
REVENUES
Telecommunication service revenue from access to and the usage of networks
are recognized when services are provided. Commencing on January 1, 2000,
the Company recognizes revenue from installation fees over the period of
the average life of the customer, which is estimated to be five years for
Pilicka. The Company records revenue from the sale of equipment when the
customer accepts delivery. All revenues included in the consolidated
statements of operations are related to Pilicka's operations in Poland. See
also Note 8.
9
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CONCENTRATION OF RISK
Financial instruments, which potentially subject the Company to
concentrations of risk, include cash and cash equivalents and trade
receivables. The Company limits its risk associated with cash and cash
equivalents by placing its investments with highly rated financial
institutions, usually as short-term deposits. With respect to trade
receivables, the Company limits its credit risk by disconnecting service
for certain customers who are past due with respect to their payments.
Included in the consolidated balance sheet at December 31, 2000 and 1999
are the net assets of Pilicka's operations, all of which are located in
Poland and which total approximately $38,941,858 and $34,975,648
respectively.
COMPREHENSIVE INCOME (LOSS)
The Company has elected to present comprehensive income (loss) in the
statement of changes in shareholder's equity. Comprehensive income (loss)
consists of the income (loss) for the period and the change in the foreign
currency translation adjustment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States 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 amounts of revenues and
expenses during the period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain 1999 amounts have been reclassified to conform to the 2000
presentation.
10
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
4. RECEIVABLES:
Receivables consist of the following at December 31, 2000 and 1999:
2000 1999
---------- ----------
Trade receivables, net of allowance for doubtful accounts
of $245,607 and $46,141 respectively $1,191,196 $ 657,064
VAT receivables 499,411 694,757
Due from employee 1,001 1,001
Other 523,448 261,747
---------- ----------
$2,215,056 $1,614,569
========== ==========
VAT receivables relate to VAT refunds due on the purchase of property,
plant and equipment.
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
2000 and 1999:
2000 1999
------------ ------------
Land, buildings and leasehold improvements $ 6,258,562 $ 4,928,919
Telecommunications equipment 29,928,140 21,419,147
Vehicles and other equipment 1,128,075 1,014,356
Construction-in-progress 5,951,787 6,492,612
------------ ------------
43,266,564 33,855,034
Accumulated depreciation (5,417,789) (2,478,662)
------------ ------------
$ 37,848,775 $ 31,376,372
============ ============
The Company recorded a write down of $427,053 during 2000 in relation to
certain telecommunication equipment not expected to be utilized. This loss
amount has been presented in general and administrative expenses. There
have been no other events or changes in circumstances that suggest that the
recoverability of the carrying amount of long-lived assets should be
assessed.
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was $3,210,484, $1,940,646 and $1,326,614, respectively.
11
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
6. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 2000 and 1999:
2000 1999
----------- -----------
Licenses $ 6,973,229 $ 7,468,928
Deferred financing costs 95,000 95,000
Software and other 783,176 739,381
----------- -----------
Total intangible assets 7,851,405 8,303,309
Less: Accumulated amortization (2,392,179) (1,590,720)
----------- -----------
$ 5,459,226 $ 6,712,589
=========== ===========
Pilicka was notified by the Ministry of Communications ("MOC") that,
effective December 29, 2000, its telecommunication license obligations
originally payable in two equal installments on March 31, 2001 and March
31, 2002 were deferred until March 31, 2011. As a result of the extension
of these payment terms, Pilicka reduced the amount of its intangible assets
and the corresponding license obligations by $590,403 based on the present
value of these non-interest-bearing liabilities. The interest rate used to
calculate the present value of this obligation was 8.5%, which is the rate
the Company can obtain financing at the time of this transaction.
Amortization expense for the years ended December 31, 2000, 1999 and 1998
was $744,586, $1,731,351 and $381,825, respectively, of which amortized
financing costs of $47,500, $916,378 and $381,825, respectively, was
classified as interest expense.
7. LOAN RECEIVABLE:
In July 2000, the Company loaned United Food Technologies BV (UFT),
$500,000 to expand its network of Wendy's restaurants in Hungary. UFT owns
equity interests in companies operating Wendy's franchises. The loan earns
interest at 10% (20% after the first year) and is due in July 2002. During
2000, interest income related to the loan was $23,425. The loan contract
allows for further discussions regarding an equity investment in UFT by the
Company.
12
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
8. INSTALLATION AND EQUIPMENT SALES REVENUE RECOGNITION:
Prior to January 1, 2000, the Company recorded installation revenue when a
customer was connected to the network. In anticipation of changes in
industry practices, the Company changed its accounting policy with respect
to the recognition of installation revenue commencing on January 1, 2000.
The Company now recognizes revenue from installation fees over the period
of the average life of the customer, which is estimated to be five years
for Pilicka. In this regard the Company has recorded an adjustment of
$1,564,384 for the cumulative effect on prior years as result of this
change. The Company recorded current and non-current deferred revenue at
December 31, 2000 of $504,430 and $1,309,141, respectively in connection
with this change in accounting policy.
9. INVESTMENT IN MTT:
On December 14, 1999, the Company sold its investment in MTT, headquartered
in Budapest, Hungary, for cash and recorded a gain of $35,410,444. A
summary of MTT's financial information for the years ending December 31,
1999 and 1998 is as follows:
1999 1998
------------ -------------
Net revenue $ 20,422,083 $ 17,904,020
Operating profit 8,948,231 7,362,731
Loss on foreign currency translation (1,922,227) (5,461,645)
Net income (loss) 3,421,611 (1,978,261)
Company's equity in income (loss) of MTT 1,524,684 (649,924)
Current assets 8,719,289
Noncurrent assets 48,664,483
Current liabilities 8,942,678
Noncurrent liabilities 48,409,698
Total stockholders' equity 31,396
The Company's equity in income (loss) is for the period January 1, 1999
through December 14, 1999 and August 1, 1998 through December 31, 1998.
13
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
10. DUE TO FOUNDERS:
Due to Founders consist of the following at December 31, 2000 and 1999:
2000 1999
----------- -----------
Accounts payable to Founders $ 5,404,149 $ 3,237,289
Accrued interest on accounts payable to Founders 618,089 330,825
Notes payable to Founders 2,154,310 5,761,573
Accrued interest on notes payable to Founders 323,883 980,679
----------- -----------
Total payable to Founders $ 8,500,431 $10,310,366
=========== ===========
Accounts payable to the Founders represent operating costs paid on behalf
of the Company by those entities. These amounts bear interest at a fixed
rate of 15% (7% through February 1999). Interest expense incurred by the
Company related to these payables in 2000, 1999 and 1998 was $618,089,
$330,825 and $48,787, respectively. Total operating expenses incurred
through related party transactions by the Company were $2,454,123,
$1,782,594 and $1,236,367 during 2000, 1999 and 1998, respectively.
The notes payable bear interest at a fixed rate of 15%. Interest expense
related to these notes recognized during 2000, 1999 and 1998 was $328,897,
$788,942 and $191,737, respectively. These notes are subordinate to the
long-term debt discussed in Note 12 and are due on demand.
Other related party transactions are described in Note 14.
11. CONVERTIBLE BONDS PAYABLE:
During 1999, the Company repaid convertible bonds in their entirety by
paying a premium of $3,222,740 as an incentive to the bondholders to
terminate certain rights under the bonds and the bond subscription
agreement. The premium, unamortized deferred financing costs, and expenses
related to the extinguishment are presented as an extraordinary item. The
bonds accrued interest at 30% of which $6,627,948 and $2,449,315 was
expensed during 1999 and 1998, respectively.
14
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
12. LONG-TERM DEBT:
In December 1999, the Company entered into a revolving credit agreement
with a bank which provides for borrowings through December 31, 2001 of up
to $40,000,000, and which increased to $50,000,000 in July 2000, with
interest at the Bank's base rate (9.5% and 8.5% at December 31, 2000 and
1999, respectively). The Founders have guaranteed the debt and have
individually pledged investment securities to the Bank with a total fair
value of $26,000,000. The debt is collateralized by the Company's deposits
at the Bank. The agreement restricts loans and advances to related parties,
the use of the proceeds from the sale of Pilicka and other transactions
with the parent company's members. Total borrowings under the agreement at
December 31, 2000 of $46,620,447 have been classified as current. At
December 31, 1999, total borrowings were $32,395,000.
13. INCOME TAXES:
UNITED STATES
EuroTel's taxable income passes to its members and therefore no taxes are
recognized related to its operations.
NETHERLANDS
PenneCom is subject to 35% Dutch corporate tax. However, any benefits
derived from "qualifying subsidiaries," which includes Pilicka, are exempt
from Dutch tax. In conjunction with the above, all costs that are
attributable to such qualifying subsidiaries are not deductible for Dutch
tax purposes. As a result, PenneCom has no taxable profit or loss for 2000
and 1999. Therefore, no Dutch taxes have been recorded related to PenneCom.
POLAND
Pilicka incurred tax losses since June 17, 1997 and, therefore, has not
paid income taxes in Poland.
15
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
13. INCOME TAXES, CONTINUED:
Below is the analysis of deferred tax balances related to taxes in Poland:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
TAXABLE DIFFERENCES
Accelerated amortization for license $ 211,887 $ 422,910
Future interest charges on license liability 590,403 --
Unrealized foreign exchange differences 153,933 --
------------ ------------
956,223 422,910
DEDUCTIBLE DIFFERENCES
Net operating losses 4,095,875 3,102,662
Net operating losses carry forwards 3,102,662 --
Provisions 244,068 46,049
Unrealized foreign exchange differences -- 132,644
Deferred revenue 1,812,170 --
Other accruals 775,488 459,224
------------ ------------
10,030,263 3,740,579
TOTAL TEMPORARY DIFFERENCES, NET 9,074,040 3,317,669
Future enacted tax rates 28% 30%
------------ ------------
DEFERRED TAX ASSET 2,540,731 995,301
Valuation allowance (2,540,731) (995,301)
------------ ------------
NET DEFERRED TAX ASSET $ -- $ --
============ ============
Tax losses incurred in 2000 and 1999 and subsequent years will be permitted
to be utilized over five years with 50% utilization restricted per annum. A
full valuation allowance was recorded for all tax assets as it is more
likely than not that the Company will be unable to recover deferred tax
assets through future taxable income.
14. RELATED PARTY TRANSACTIONS:
The Company paid $2,426,754, $594,917 and $70,000 to a law firm for legal
services during the years ended December 31, 2000, 1999 and 1998,
respectively, where one of the lawyers is a managing director of the
Company.
16
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS, CONTINUED:
Pilicka paid $231,641, $247,409 and $490,000 to an affiliated entity for
management services and the purchase of rights to use software during the
years ended December 31, 2000, 1999 and 1998, respectively. The amount
payable to this affiliate at December 31, 2000 and 1999 was $50,503 and
$33,956, respectively. Pilicka also made rental payments of $193,513,
$173,351 and $240,000 during the years ended December 31, 2000, 1999 and
1998, respectively, to a company partially owned by a relative of a member
of Pilicka's management board. There is no amount payable to this affiliate
at December 31, 2000.
Other related party transactions with Founders are included in Note 10.
15. TELECOMMUNICATION LICENSES:
Pilicka has three licenses for the provision of telecommunications services
in the former Voivodships of Radom, Piotrkow Trybunalski, and Tarnobrzeg.
Under the license agreements, Pilicka is obliged to provide public
telecommunications services through its network for local traffic and
through interconnection with the regional and international networks of
Telekomunikacja Polska S.A. for long distance traffic. The terms of
interconnection in each license area are negotiated separately subject to
guidelines established by the Minister of Communications of Poland.
The licenses set forth requirements as to establishing the availability of
services to a specified number of customers. At December 31, 2000, Pilicka
has met the specified requirements in relation to the former Voivodships of
Radom and Piotrkow Trybunalski. However, Pilicka has not met the license
requirements for the former Voivodship of Tarnobrzeg. Pilicka believes that
the likelihood that the failure to meet these build-out milestones will
have a material adverse impact on the financial position of the company is
remote. This assessment is based on Pilicka's progress in this area as well
as past governmental practice, the market conditions in Poland and the
uncertain nature of possible sanctions and the regulatory process.
16. CONTINGENCIES AND COMMITMENTS:
Pilicka has certain long-term agreements to purchase telecommunication
equipment with domestic and foreign suppliers. The total amount of
equipment that Pilicka has committed to purchase after December 31, 2000 is
$3,048,562.
17
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND COMMITMENTS, CONTINUED:
Pilicka is contesting the quality of performance of telecommunications
equipment provided by one of its principal equipment suppliers. In
accordance with the terms of the contract, Pilicka has put the supplier on
notice of alleged performance deficiencies and has suspended its work under
the contract. The supplier previously had contested Pilicka's assertions
and had indicated that Pilicka would be subject to cancellation fees and
penalties if the contract was terminated. Pilicka and the supplier engaged
in negotiations during the second and third quarters of 1999, after which
discussions ended. Pilicka considers this dispute over and does not expect
any further action by the supplier to have a material adverse impact on the
financial position or results of operations of Pilicka.
Rent expense for the years ended December 31, 2000, 1999 and 1998 was
$491,889, $399,785 and $150,000, respectively.
On April 8, 1999, the Company signed an agreement to sell its interest in
Pilicka for consideration of $140,000,000, with an expected close in August
1999. In connection with the agreement, the Company received a $10,000,000
nonrefundable downpayment which has been recorded as deferred revenue. The
counterparty failed to perform under the contract. The Company is engaged
in arbitration before the International Court of Arbitration of the
International Chamber of Commerce against the counterparty, seeking
specific performance by the counterparty, plus damages, interest and costs.
The counterparty denies the Company is entitled to specific performance or
damages and is pursuing a counterclaim to recover the downpayment plus
interest and costs. The arbitration proceedings were closed on February 7,
2001 and PenneCom is awaiting a ruling from the arbitration panel, which is
expected within the first half of fiscal 2001.
On May 26, 2000 PenneCom settled a dispute with an investment banking firm
regarding the sale of Pilicka and MTT by paying $1,250,000 in an effort to
avoid the expense and uncertainties of litigation.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of financial instruments was estimated based on the
following methods and assumptions:
Cash and cash equivalents, accounts receivable and accounts payable: The
carrying amount approximates fair value due to the short maturity of these
instruments.
Loan receivable: The fair value approximates the carrying value due to the
variable interest-rate feature of this instrument.
18
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EUROTEL L.L.C
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
17. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
Due to Founders: It is not practicable to estimate fair value of these
instruments due to the related party nature and unique features of the
instruments.
Long-term debt: Based on the variable interest rate, fair value is
estimated to approximate carrying value.
19
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