UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For
the transition period from ___________ to ___________
Commission File Number: 000-20709
D & E Communications, Inc.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
(State or other jurisdiction of
incorporation or organization)
I.R.S. Employer Identification Number: 23-2837108
Brossman Business Complex
124 East Main Street
P.O. Box 458
Ephrata, Pennsylvania 17522
(Address of principal executive offices)
Registrant's Telephone Number: (717) 733-4101
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
(D & E Communications, Inc. is the successor registrant to Denver and Ephrata
Telephone and Telegraph Company by virtue of a three-for-one share exchange
effective June 7, 1996.)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 8, 1997
----- -----------------------------
Common Stock, par value $.16 per share 6,115,457 Shares
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Income --
For the three months and six months ended
June 30, 1997 and 1996 ...................... 1
Consolidated Balance Sheets --
June 30, 1997 and December 31, 1996 ......... 2
Consolidated Statements of Cash Flows --
For the six months ended
June 30, 1997 and 1996 ...................... 3
Notes to Consolidated Financial Statements ........ 4-7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............... 8-16
3. Quantitative and Qualitative Disclosure
about Market Risks ................................ 17
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote
of Security Holders................................ 18
6. Exhibits and Reports on Form 8-K .................. 19
SIGNATURES ........................................ 20
i
<PAGE>
Form 10-Q Part I - Financial Information
Item 1. Financial Statements
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months Ended Six months Ended
June 30 June 30
OPERATING REVENUE 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Local network services .................................... $ 2,350,114 $ 2,159,857 $ 4,571,867 $ 4,271,902
Network access services ................................... 4,217,500 3,981,244 8,312,231 7,898,219
Long distance network services ............................ 982,608 1,013,599 2,038,355 2,122,999
Directory advertising ..................................... 779,437 743,723 1,511,692 1,474,041
Sales & services .......................................... 3,210,949 3,272,934 6,379,447 5,887,752
Other ..................................................... 481,758 447,033 987,184 855,818
------------ ------------ ------------ ------------
Total Operating Revenue ....................... 12,022,366 11,618,390 23,800,776 22,510,731
------------ ------------ ------------ ------------
OPERATING EXPENSE
Network operations ........................................ 1,317,858 1,497,670 2,603,369 3,031,739
Network access ............................................ 431,212 443,860 921,730 936,016
Depreciation .............................................. 1,914,035 1,781,338 3,800,565 3,563,211
Customer services ......................................... 428,687 425,805 846,405 854,735
Financial and administrative services ..................... 1,448,913 1,303,107 2,883,769 2,487,947
Directory advertising ..................................... 504,261 427,169 1,006,781 900,081
Operating taxes, other than income ........................ 354,459 381,341 740,794 742,403
Costs of products sold .................................... 1,565,114 1,556,652 3,153,518 2,759,949
Other ..................................................... 1,629,997 1,300,553 3,223,019 2,535,991
------------ ------------ ------------ ------------
Total Operating Expense .......................... 9,594,536 9,117,495 19,179,950 17,812,072
------------ ------------ ------------ ------------
Operating Income ............................... 2,427,830 2,500,895 4,620,826 4,698,659
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction ............. 15,894 19,499 35,844 54,078
Equity in net income of affiliates ....................... 218,394 183,229 58,636 254,782
Interest expense ......................................... (571,166) (655,854) (1,189,154) (1,286,646)
Other, net ............................................... 135,618 (12,697) 163,866 (1,231)
------------ ------------ ------------ ------------
Total Other Income (Expense) .......................... (201,260) (465,823) (930,808) (979,017)
------------ ------------ ------------ ------------
Income before minority interest, income taxes
and dividends on utility series preferred stock 2,226,570 2,035,072 3,690,018 3,719,642
MINORITY INTEREST ............................................. (16,929) 6,753 33,478 7,616
------------ ------------ ------------ ------------
Income before income taxes and
dividends on utility series preferred stock ......... 2,209,641 2,041,825 3,723,496 3,727,258
INCOME TAXES AND DIVIDENDS ON
UTILITY SERIES PREFERRED STOCK
Income taxes ......................................... 891,537 858,424 1,498,937 1,515,835
Dividends on utility series preferred stock .......... 16,263 16,263 32,526 32,526
------------ ------------ ------------ ------------
Total Income taxes and dividends
on utility series preferred stock .............. 907,800 874,687 1,531,463 1,548,361
------------ ------------ ------------ ------------
NET INCOME .................................................... $ 1,301,841 $ 1,167,138 $ 2,192,033 $ 2,178,897
============ ============ ============ ============
Average common shares outstanding .................... 6,110,109 5,725,187 5,963,491 5,722,091
Earnings per common share ............................ $ .21 $ .20 $ .37 $ .38
============ ============ ============ ============
Dividends per common share ........................... $ .10 $ .10 $ .19 $ .19
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
1997 December 31,
ASSETS (unaudited) 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ..................................... $ 446,818 $ 312,125
Accounts receivable ........................................... 7,242,581 8,454,775
Accounts receivable and notes receivable - affiliated companies 1,997,482 1,028,780
Inventories, lower of cost or market, at average cost ......... 901,411 1,009,904
Prepaid expenses .............................................. 1,651,868 2,406,465
Other current assets .......................................... 461,325 1,393,336
------------- -------------
TOTAL CURRENT ASSETS ................................... 12,701,485 14,605,385
------------- -------------
INVESTMENTS
Investments in affiliated companies ........................... 10,678,956 9,580,320
Other ......................................................... 327,403 327,403
------------- -------------
11,006,359 9,907,723
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant in service .................................... 113,101,968 110,961,586
Under construction ............................................ 5,159,205 1,233,340
------------- -------------
118,261,173 112,194,926
Less accumulated depreciation ................................. 50,817,812 47,207,238
------------- -------------
67,443,361 64,987,688
------------- -------------
OTHER ASSETS
Unamortized software costs .................................... 63,411 126,825
Accounts receivable-affiliated company ........................ 108,366 101,342
PCS licenses .................................................. 23,006,422 0
Other ......................................................... 1,749,261 1,826,978
------------- -------------
24,927,460 2,055,145
------------- -------------
TOTAL ASSETS .......................................................... $ 116,078,665 $ 91,555,941
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ................................................. $ 10,879,547 $ 7,140,000
Long-term debt maturing within one year ....................... 1,224,748 1,220,158
Accounts payable .............................................. 7,832,714 6,499,496
Accounts payable-affiliated companies ......................... 0 196,941
Accrued taxes ................................................. 404,520 493,546
Accrued interest and dividends ................................ 899,182 468,780
Advance billings, customer deposits and other ................. 2,093,244 2,842,432
------------- -------------
TOTAL CURRENT LIABILITIES ............................. 23,333,955 18,861,353
------------- -------------
LONG-TERM DEBT ........................................................ 36,766,767 24,888,193
------------- -------------
OTHER LIABILITIES
Deferred income taxes ......................................... 5,882,029 6,545,013
Regulatory liability, net ..................................... 764,477 778,783
Accrued retirement benefits ................................... 1,565,438 1,565,438
Other ......................................................... 35,788 108,835
------------- -------------
8,247,732 8,998,069
------------- -------------
MINORITY INTEREST ..................................................... 0 229,973
------------- -------------
PREFERRED STOCK OF UTILITY SUBSIDIARY par value $100,
cumulative, callable at par, at the option of the Company,
authorized 20,000 shares, outstanding:
Series A 4 1/2%: 14,456 shares ....................... 1,445,600 1,445,600
------------- -------------
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, par value $.16, authorized shares 30,000,000 .... 974,508 918,508
Outstanding shares, 6,113,590 at June 30, 1997
5,740,674 at December 31, 1996
Additional paid-in capital .................................... 10,061,278 2,020,656
Unearned ESOP compensation .................................... (950,740) (950,740)
Retained earnings ............................................. 36,199,565 35,144,329
------------- -------------
46,284,611 37,132,753
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................ $ 116,078,665 $ 91,555,941
============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the six months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 2,192,033 $ 2,178,897
Adjustments to reconcile net cash provided by
operating activities:
Depreciation and amortization ....................... 4,101,853 3,796,909
Deferred income taxes ............................... (677,290) (166,056)
Undistributed (earnings) losses of affiliates ....... (58,636) (254,782)
Distribution from affiliates ........................ 0 414,000
Tax benefits applicable to ESOP ..................... 9,003 10,839
Loss on retirement of property, plant and equipment . 48,081 9,042
Allowance for funds used during construction ........ (35,844) (54,078)
Losses applicable to minority interest .............. (50,407) (7,617)
Changes in operating assets and liabilities
Accounts receivable ................................. (346,846) (461,144)
Inventories ......................................... 108,493 (31,746)
Prepaid expenses .................................... 754,597 677,731
Accounts payable .................................... 278,953 (339,541)
Accrued taxes and accrued interest .................. 341,376 (14,433)
Advance billings, customer deposits and other ....... (749,188) (1,508,234)
Other, net .......................................... (372,275) (522,389)
----------- -----------
Net Cash Provided by Operating Activities ... 5,543,903 3,727,398
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ........................................ (6,554,120) (3,082,248)
Allowance for funds used during construction ................ 35,844 54,078
Proceeds from sale of assets ................................ 150,478 43,267
Cost of removal of plant retired ............................ (48,640) (48,146)
Acquisition of other assets ................................. (801,801) (466,136)
Increase in investments and advances to affiliates .......... (2,220,678) (2,916,475)
Decrease in investments and repayments from affiliates ...... 1,197,752 2,487,524
----------- -----------
Net Cash Used In Investing Activities ....... (8,241,165) (3,928,136)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ................................... (1,008,140) (1,049,598)
Net proceeds from (payments on) revolving lines of credit ... 3,072,880 1,150,000
Proceeds from issuance of demand note ....................... 666,667 0
Net contributions from minority interest .................... 0 1,500
Proceeds from issuance of common stock ...................... 100,548 173,684
----------- -----------
Net Cash Provided by Financing Activities.... 2,831,955 275,586
----------- -----------
INCREASE IN CASH
AND CASH EQUIVALENTS ........................................ 134,693 74,848
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD ......................................... 312,125 50,911
----------- -----------
END OF PERIOD ............................................... $ 446,818 $ 125,759
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
(1) BASIS OF PRESENTATION
D & E Communications, Inc. is a telecommunications holding company
which became the successor parent company to its telephone operating
subsidiary, Denver and Ephrata Telephone and Telegraph Company ("Telco")
through a Restructuring (the "Restructuring") resulting from that certain
Agreement and Plan of Exchange (the "Plan of Exchange") whereby each
outstanding Common Share, $0.50 par value of Telco was exchanged for three
Common Shares, $0.16 par value of D & E Communications, Inc. in June 1996
(the "Share Exchange"). The accompanying consolidated financial statements
include the accounts of D & E Communications, Inc., Telco, Red Rose
Communications, Inc. ("Red Rose"), D & E Marketing Corp. ("Marketing"), D &
E Wireless, Inc. ("Wireless") and D & E Investments, Inc.
("Investments"),its subsidiary companies, collectively defined as "D&E".
The accompanying financial statements are unaudited and have been
prepared by D&E pursuant to generally accepted accounting principals and
the rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of management, the financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the results of operations, financial position and cash flows
of D&E for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The use of
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Certain items in the financial statements for the six
months ended June 30, 1996 have been reclassified for comparative purposes
and to reflect the three-for-one Share Exchange effective June 7, 1996. D&E
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto
included in the D&E Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
4
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
(2) NON-CASH FINANCING AND INVESTING ACTIVITIES
D&E recorded non-cash transactions for shares of common stock issued
in connection with an acquisition and a merger. D&E issued 21,408 shares of
D&E common stock in January 1997 as the deferred portion of the price in
connection with the acquisition of Com Tech Technical Services ("Com
Tech"). Separately, $7,307,000 of the cost incurred in the merger with PCS
One, Inc. ("PCS One") was paid by the issuance of 317,667 shares of D&E
common stock. D&E also assumed a long-term note payable to the Federal
Communications Commission ("FCC") for $11,879,000 as part of the PCS One
merger. See Note 3.
(3) ACQUISITIONS AND DISPOSITIONS OF AFFILIATED COMPANIES
D&E is positioning itself to participate in a new generation of
wireless services known as Personal Communications Services ("PCS"). On
March 21, 1997 D&E merged with PCS One, the owner of the C-Block broadband
PCS license to operate in the Lancaster, Pennsylvania market. The merger
was accounted for as a purchase with no material effect on the consolidated
net income for the first or second quarter of 1997. D&E recorded a cost for
the merger with PCS One of $21,123,000. D&E issued 317,667 shares of D&E
common stock to PCS One shareholders. Long-term debt payable to the FCC of
$11,879,000 was assumed and a note payable to The D and E Group of
$1,559,000 was assumed and eliminated in consolidation. D&E dissolved its
80% owned partnership, The D and E Group, which held a minority interest in
PCS One. D&E then formed a subsidiary corporation, Investments to hold the
Lancaster C-Block license acquired as part of the merger with PCS One. D&E
formed a separate subsidiary, Wireless, in April to design, construct and
operate the PCS network.
(4) NOTES PAYABLE AND LONG-TERM DEBT
As a result of the Restructuring, Telco negotiated amendments,
effective June 7, 1996, to the financial covenants stipulated in each of
the following Allstate Life Insurance Company ("Allstate") Senior Note
Agreements: 9.18% Senior Note due November 15, 2021, 7.55% Senior Note due
November 15, 2007 and 6.49% Senior Note due January 14, 2004. Prior to the
Restructuring, the covenants contained in these note agreements
5
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
were calculated based upon consolidated Telco financial data. In connection
with the Restructuring, Telco transferred all the capital stock of its
subsidiaries to D&E. The amendments changed the limit on accumulated
distributions and restricted investments from $9,000,000 plus 75% of
accumulated consolidated net income of Telco, to $5,000,000 plus 75% of
accumulated net income of Telco. The distributions, restricted investments
and net income are cumulative since June 30, 1991. These Senior Note
Agreements of Telco are guaranteed by D&E.
On February 2, 1995, Telco and the other investors in the Monor
Communications Group ("MCG") entered into a Project Completion Agreement
with the Overseas Private Investment Corporation ("OPIC") as a condition to
OPIC's Finance Agreement with Monor Telephone Company ("MTT"). The Finance
Agreement provides a credit facility to MTT in an amount up to $30,000,000.
The Project Completion Agreement provides that Telco will guarantee
payments to MTT or MCG in an amount determined by OPIC, not to exceed
$3,333,000, if, in the opinion of OPIC, MTT has insufficient funds to
achieve project completion or to meet its obligations as they become due
and payable.
The loan agreements with Allstate described above have waived
consideration of the guarantee as part of Telco debt in calculating certain
covenant conditions of the notes. The waivers which expired on April 1,
1997 have been extended to November 30, 1997 by amendments dated April 1,
1997.
D&E entered into loan agreements with two local banks during the
second quarter for a general purpose line of credit of $3,000,000 and two
separate $5,000,000 notes for PCS equipment purchases. The new loans are
repayable at interest rates ranging from 8%, to prime, to adjusted LIBOR.
The $5,000,000 notes are due November 15, 1997 and the line of credit is
repayable on demand.
Marketing issued a demand note payable to HunTel Systems Incorporated
("HunTel")on June 27, 1997 for $667,000 at 8.5% interest. The proceeds from
the note were provided as partial payment for a one third equity investment
in Eurotel, a U.S. joint venture formed to operate a telephone system in
central Poland.
6
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Unaudited)
(5) SUBSEQUENT EVENTS
On July 17, 1997, Marketing issued a demand note payable to HunTel for
$433,000 at 8.5% interest. The note was provided as a portion of the equity
investment in Eurotel, a U.S. joint venture formed to operate a telephone
system in central Poland. This note is in addition to a previous
contribution to the joint venture in June of 1997 in the form of a demand
note for $667,000 payable to HunTel.
(6) STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share." This Statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997. Earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented. D&E currently estimates there will be no impact on its financial
statements upon the adoption of SFAS No. 128.
7
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Monetary amounts presented in the following discussion are rounded to
the nearest thousand dollars. Certain items in the financial statements for
the six months ended June 30, 1996 have been reclassified for comparative
purposes and to reflect the Share Exchange.
RESULTS OF OPERATIONS
Net Income. Net income for the three months ended June 30, 1997 was
$1,302,000, up $135,000 or 11.5% over $1,167,000 for the three months ended
June 30, 1996. The increase results primarily from an increase in equity in
net income of affiliates of $35,000 and other income (primarily interest
income) of $148,000, coupled with an $85,000 decrease in interest expense.
Earnings per share for the three months in 1997 increased to $.21 from $.20
in 1996 with 6.7% more shares outstanding.
Net income for the six months ended June 30, 1997 was $2,192,000, up
$13,000 or 0.6% from $2,179,000 recorded in the previous year. The
decreases in operating income of $78,000 and equity in earnings of
affiliates of $196,000 were offset by the improvements in results from
lower interest expense of $97,000, the increase in other net income and
expense (primarily interest income) and from minority interests, coupled
with a decrease in income taxes. Earnings per share for the six months of
1997 decreased to $.37 from $.38 in 1996 as a result of the larger number
of shares outstanding.
Operating Revenues. Total operating revenues for the three months
ended June 30, 1997 were $12,022,000, 3.5% more than the $11,618,000
recorded for the same quarter in 1996. For the six months ended June 30,
1997 operating revenues were $23,801,000, 5.7% ahead of the $22,511,000
generated in the same period of 1996. Three month and six month growth came
primarily from the increased revenues from telephone local network and
network access services and from the computer services provided by Com Tech
Technical Services ("Com Tech") which was acquired in November of 1996.
Local network services revenues are generated from providing local
exchange and local private line services. Local network services revenues
for the three months ended June 30, 1997 were $2,350,000, up $190,000 or
8.8% from $2,160,000 in 1996. For the six months ended June 30, 1997, local
network services revenues
8
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
were $4,572,000, up $300,000 or 7.0% from $4,272,000 in 1996. The increase
is primarily due to an increase of approximately 5% in the number of access
lines serviced. A revenue neutral rate adjustment made in May of 1997
increased the basic area rate while decreasing some long distance rates and
other service rates. Local network services continues to experience part of
its growth from the introduction of new custom calling features such as
Caller ID Deluxe.
Network access services revenues are received from Telco's
subscribers, from local exchange carriers, interexchange carriers and
cellular companies for their use of local exchange facilities in providing
interstate and intrastate long distance services to their customers and
from settlement pools administered by the National Exchange Carrier
Association, Inc. ("NECA"). Revenues in this category were $4,217,000 for
the three months ended June 30, 1997, up $236,000 or 5.9% over $3,981,000
in 1996. For the six months ended June 30, 1997 these revenues were
$8,312,000, up $414,000 or 5.2% ahead of $7,898,000 in 1996. The increase
in the second quarter was primarily due to an increase in the number of
access lines generating approximately $12,000, an increase in the minutes
of use generating approximately $149,000, and an increase in the number of
special circuits and local exchange carrier ports installed to handle the
increased volume generated approximately $75,000. The increase year-to-date
from these same factors generated increases of $99,000, $195,000 and
$117,000 respectively.
Long distance network services revenues are received from long
distance calls made by customers within the Capital (south central) Region
of Pennsylvania. Revenues in this category for the three months ended June
30, 1997 were $983,000, down $31,000 or 3.1% from $1,014,000 in 1996. For
the six months ended June 30, 1997, revenues were $2,038,000, down $85,000
or 4.0% from $2,123,000 in 1996. The decrease in the quarter and
year-to-date revenues resulted primarily from a decrease in the minutes of
use. In the future, revenues from this category may decline as a result of
extending the local calling area for certain exchanges. This change is one
of the provisions within the revenue neutral rate adjustment made in May of
1997.
Sales & services revenues consist primarily of the services provided
by Red Rose: sales and service of business telephone systems, computer
network systems and communications products,
9
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
revenues from work at customers' sites and revenue from the long distance
calling service, D and E Long Distance ("DELD"). Certain non-regulated
Telco services are also included. Revenues in this category for the three
months ended June 30, 1997 were $3,211,000, down $62,000 or 1.9% from
$3,273,000 in 1996. This decrease resulted from an $861,000 sale of a fiber
optic facility constructed for a third party in 1996 which had no
comparative revenue in 1997. The decrease was partially offset by the
increase of $747,000 in telephone and computer system installations,
including $635,000 from Com Tech which was acquired in November 1996. For
the six months ended June 30, 1997 revenues were $6,379,000, up $492,000 or
8.4% from $5,888,000 in 1996. This increase included an increase of
$1,287,000 from telephone and computer system services including $1,059,000
from Com Tech, offset by the $861,000 reduction related to the sale of the
fiber optic facility in 1996.
Other revenues were $482,000 for the three months ended June 30, 1997,
up $35,000 or 7.8% from $447,000 in 1996. For the six months ended June 30,
1997, revenues in this category were $987,000, up $131,000 or 15.4% over
the $856,000 recorded during the same period in 1996. The increases in the
quarter and year-to-date amounts were primarily due to computer programming
services for special applications.
Operating Expenses. Total operating expenses for the three month
period ended June 30, 1997 were $9,595,000, up 5.2% over the $9,117,000
recorded during the same quarter in 1996. For the six months ended June 30,
1997 operating expenses were $19,180,000, up 7.7% from $17,812,000 in the
prior year. A major reason for the increase was the operating expenses
incurred by Com Tech subsequent to its acquisition in November of 1996,
which accounts for $565,000 of the quarterly figure and $983,000 of the
1997 six month figure.
Network operations expenses are incurred in maintaining Telco's
switching and transmission facilities, including digital central office
switching equipment and outside plant cable and trunk facilities. Network
operations include related employee costs, engineering expense, maintenance
of land and buildings, testing, general purpose computers, office
equipment, video conferencing and other materials and supplies. Expenses in
this category for the three months ended June 30, 1997 were $1,318,000,
down $180,000 or 12.0% from $1,498,000 during the
10
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
same quarter in 1996. For the six months ended June 30, 1997, these
expenses were $2,603,000, down $429,000 or 14.1% from $3,032,000 during the
same period in the prior year. Expenses for the quarter and year-to-date
were down primarily due to a decrease in wages and benefits payable which
was partially attributable to the early retirement program in December 1996
and to a decrease in computer software purchases.
Depreciation expense for the three months ended June 30, 1997 was
$1,914,000, up $133,000 or 7.5% from $1,781,000 in 1996. For the six months
ended June 30, 1997 depreciation was $3,801,000, up $238,000 or 6.7% over
$3,563,000 during the same period in 1996. The majority of the increases
were attributable to an increase in plant-in-service in 1997.
Financial and administrative services expenses for the three months
ended June 30, 1997 were $1,449,000, up $146,000 or 11.2% over $1,303,000
in 1996. For the six months ended June 30, 1997 these expenses were
$2,884,000, up $396,000 or 15.9% over $2,488,000 in 1996. Increases in the
quarterly and year-to-date amounts are primarily related to wage and
benefit increases and to professional fees related to the merger with PCS
One in 1997.
Directory advertising expenses for the three months ended June 30,
1997 were $504,000, up $77,000 or 18.0% over the $427,000 reported in 1996.
For the six months ended June 30, 1997 expenses were $1,007,000, up
$107,000 or 11.9% over the $900,000 reported during this period in 1996.
The increases are primarily related to increased production costs of the
phone directory.
Costs of products sold consists primarily of the material costs of
equipment sales and the costs related to the sale of a fiber optic facility
to a third party in 1996. These costs for the three months ended June 30,
1997 were $1,565,000, up $8,000 or 0.5% over $1,557,000 in 1996. The
increase of $516,000 in telephone and computer system sales, including
$417,000 recorded by Com Tech which was acquired in November of 1996, was
offset by a decrease in purchases due to the completion of the fiber optic
facility. For the six months ended June 30, 1997, costs of products sold
were $3,154,000, up $394,000 or 14.3% over $2,760,000 during the same
period in 1996. The increase from computer system sales of $876,000,
including $698,000 recorded by Com Tech, was partially offset by the
decrease in purchases related to the fiber optic facility sale made in
1996.
11
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Other expenses primarily include all operating expenses incurred by
Red Rose, Marketing and Wireless in the course of their business
activities, excluding material costs and operating taxes other than income
taxes. These expenses for the three months ended June 30, 1997 were
$1,630,000, up $329,000 or 25.3% from $1,301,000 in 1996. This increase was
primarily related to costs recorded by Com Tech amounting to $149,000 and
Wireless start-up costs of $280,000. For the six months ended June 30,
1997, these expenses were $3,223,000, up $687,000 or 27.1% over $2,536,000
in 1996. This increase was primarily related to operating costs of Com Tech
amounting to $285,000 and Wireless amounting to $280,000 plus other PCS
development costs.
Other Income (Expense). Other income (expense) for the three months
ended June 30, 1997 was a net expense of $201,000, down $265,000 or 56.8%
from a net expense of $466,000 in 1996. For the three months ended June 30,
1997 the decrease is related to an increase in equity in the income of
affiliates of approximately $35,000, a decrease in interest expense of
$85,000 primarily resulting from capitalized interest on PCS equipment
additions and an increase in interest income of $135,000 primarily from PCS
One for funds it borrowed from D&E to make payments to the FCC. For the six
months ended June 30, 1997, the net expense was $931,000, down $48,000 or
4.9% from a net expense of $979,000 in 1996. The decrease for the six
months ended June 30, 1997, resulted from a decrease in interest expense of
$97,000 combined with the increase in other net income (primarily interest
income)of $161,000 which offset both the decreases in allowance for funds
used in construction of $18,000 and equity in net income of affiliates of
$196,000.
The reduction in equity earnings of European affiliates is primarily
related to the joint venture in Hungary. MCG is a domestic corporate joint
venture that owns approximately 90% of MTT, which operates a telephone
company in Hungary. Marketing owns 16.5% of MCG. In June 1997, Marketing
invested an additional $167,000 in MCG to be used subsequent to June 30,
1997 to purchase additional shares of MTT.
The net losses reported by MCG are directly related to the losses of
MTT. These result primarily from the foreign currency translation losses
related to the strength of the United States dollar in relation to other
currencies. Specifically the foreign currency translation losses reflected
herein relate to the use by
12
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
MTT of the Hungarian Forint ("HUF") as the functional currency for
accounting purposes and the subsequent translation to U.S. dollars for
reporting purposes. D&E anticipates that these losses will continue to be
countered by MTT's ability to raise rates to customers in order to repay
the OPIC loan with devalued HUFs. The telecommunications rate regulation in
Hungary permits MTT to make certain inflation adjustments based upon the
Producer Price Index, and, in response, MTT raised rates approximately 25%
in January 1997. Therefore, management has decided the cost of foreign
currency hedging is not currently warranted. The Hungarian government has
been receptive to the conversion of HUFs to U.S. dollars, and MTT has not
experienced, and does not expect to experience, any difficulties in making
the necessary currency conversions.
Income taxes. The federal and state income taxes for the three months
ended June 30, 1997 were $892,000, up $34,000 or 3.9% from $858,000 in
1996. The effective income tax rate for the three months ended June 30,
1997 was 40.6% compared to 42.4% for the same quarter in 1996. For the six
months ended June 30, 1997 taxes were $1,499,000, down $17,000 or 1.1% from
$1,516,000 in 1996. The effective income tax rate for the six months ended
June 30, 1997 was 40.6% compared to 41.0% in the prior year.
FINANCIAL CONDITION
Liquidity and Capital Resources. D&E believes that it has adequate
internal and external resources available to meet ongoing operating
requirements, including expansion and modernization of the network, and
business development. D&E expects that foreseeable capital requirements for
its existing business will be financed primarily through internally
generated funds and additional debt. Additional short or long-term debt or
equity financing will be needed to fund new business development activities
and to enhance D&E's capital structure.
The primary source of funds to support ongoing business activities
during the six months ended June 30, 1997 was $5,544,000 provided by
operating activities. The major working capital changes which affected
funds from operations were a $347,000 use of funds from accounts receivable
increases related to the growth in business volume and $279,000 provided by
13
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
accounts payable increases primarily from a net increase due to Northern
Telecom for PCS equipment purchases. See Note 2 regarding other non-cash
changes to these accounts. Prepaid expenses decreased providing $755,000 in
available cash while advance billing decreases used $749,000 of funds.
These two changes were primarily related to amortization of deferred
revenue and production costs of the Donnelley directory.
Investing activity consisted primarily of approximately $4.3 million
of PCS equipment under construction and another $2.3 million comprised
largely of telephone plant equipment upgrades. The acquisition of the
C-Block broadband PCS license for the Lancaster, PA market area which was
owned by PCS One at the time of the merger was recorded as a non-cash
addition of approximately $21.3 million. Approximately $350,000 of interest
was capitalized during the six months ended June 30, 1997 which was
primarily related to the PCS license and equipment under construction. The
related Federal Communications Commission ("FCC")financed portion of the
purchase price, $11,879,000, interim financing assumed of $1,559,000 and
the issuance of 317,667 shares of common stock were also recorded as
non-cash consideration related to the merger.
Marketing invested $873,000 during 1997 for a one third interest in
Eurotel, a U.S. joint venture formed to operate a telephone system in
central Poland. Marketing issued a demand note payable to HunTel for
providing a portion of the payment for the investment in Eurotel.
The cash balance at June 30, 1997 was $447,000 and $2,787,000 was
available from the $13,000,000 of previously established short-term credit
lines available at the end of the quarter. During the quarter, D&E arranged
an additional $13,000,000 of short-term financing with two local banks
including $3,000,000 for general purposes and two separate $5,000,000 notes
for PCS equipment additions. The new loans are repayable at interest rates
ranging from 8%, to prime, to adjusted LIBOR. During the quarter, D&E also
entered into a Network Product Purchase Agreement with Northern Telecom
Inc. to acquire approximately $8,000,000 of PCS equipment to be used in
building the wireless network.
D&E's ratio of total debt to total debt plus capital increased to
50.6% at June 30, 1997 from 46.3% at December 31, 1996. This
14
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
increase resulted primarily from the increase in long-term debt to the FCC
for the PCS license.
OTHER
During the third quarter of 1996, Telco exceeded 50,000 access lines.
Therefore, on July 1, 1997 when the traffic-sensitive access rates expired
under the FCC Small Company Incentive regulation, Telco was required to
follow another method of determining these rates. Accordingly, in December
1996, Telco elected to rejoin NECA's Traffic Sensitive Pool and effective
July 1, 1997, revised its traffic-sensitive access rates and applied the
rates from the NECA Interstate Access Tariff. Telco anticipates a decline
of approximately $300,000 quarterly thereafter in interstate access revenue
derived from interstate pool settlements. The interstate revenues that will
be generated through participating in NECA access rates and settlements are
more favorable than if Telco established rates based on its own costs.
D&E expanded its corporate organization through its merger with PCS
One. In addition to liquidating The D and E Group, D&E formed two new
subsidiaries. Investments, a Nevada holding company, was formed in March to
hold the C-Block broadband license for the Lancaster, PA market acquired
from PCS One, as well as the Harrisburg, PA D-Block and the York, PA
E-Block PCS licenses acquired by Telco through the FCC's auction bidding
process. Wireless was formed in April to design, construct and operate the
PCS network. On June 25, 1997, D&E announced that Wireless and Omnipoint
Corporation entered into a non-binding memorandum of understanding to form
a joint venture to design, build and market a PCS system in York-Hanover,
Lancaster, Harrisburg and Reading Basic Trading Areas ("BTAs") using Global
System Mobility equipment. On July 15, 1997 Telco and Marketing formed D &
E Holdings, L.P., a partnership to hold certain cellular partnership
interests owned by Telco.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share." This Statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock. This Statement is effective for financial statements issued for
periods ending
15
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
after December 15, 1997. Earlier application is not permitted. This
Statement requires restatement of all prior-period EPS data presented. D&E
currently estimates there will be no impact on its financial statements
upon the adoption of SFAS No. 128.
Recent actions at the state and federal regulatory levels were
favorably resolved from D&E's perspective. On July 10, 1997, the
Pennsylvania Public Utility Commission released an Opinion and Order
granting a two-year waiver for sixteen rural exchange carriers, including
D&E, which allows those companies to modernize networks without facing
competition from non- facilities-based market entrants. On July 18, 1997,
the U.S. Eighth Circuit District Court withdrew specific pricing rules
within the FCC's August 8, 1996, Interconnection order and reaffirmed the
authority of state public utility commissions in addressing the costing
methodologies for local competition. D&E is assessing the effects of
competition in the regional toll area. Currently, long distance calls
within the region must be placed through the local service provider.
Effective December 31, 1997, customers within the regulated Telco area will
have the ability to chose a long distance carrier other than Telco to place
calls within the region. D&E expects the result will be a decrease in long
distance toll revenue partially offset by an increase in access revenues.
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements as
to the future performance of D&E and its various domestic and international
investments and long-term contracts, including MCG, MTT, Eurotel,
Investments and Wireless. Actual results may differ as a result of factors
over which D&E has no control, including but not limited to, regulatory
factors, uncertainties and economic fluctuations in the domestic and
foreign markets in which the companies compete, foreign-currency risks and
increased competition in domestic markets due in large part to continued
deregulation of the telecommunications industry.
16
<PAGE>
Form 10-Q
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 3. Quantitative and Qualitative Disclosure
About Market Risks
D & E does not invest excess funds in derivative financial instruments
or other market risk sensitive instruments for the purpose of managing its
foreign currency exchange rate risk or for any other purpose.
17
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Shareholders was held on April 29, 1997.
(c) Matters voted upon:
(1) Election of the following directors to hold office for a three year
term to expire in 2000. Votes for the election of Mr. Robert M. Lauman were
cast in the following manner: 5,239,157 for and 7,115 withheld. Votes for
the election of Mr. Ronald E. Frisbie were cast in the following manner:
5,238,324 for and 7,344 withheld. Votes for the election of Mr. Thomas H.
Bamford were cast in the following manner: 5,242,492 for and 7,554
withheld.
(2) To approve amending and restating the Articles of Incorporation of D &
E Communications, Inc. in their entirety. Votes for the amendment were cast
in the following manner: 5,141,381 for; 1,504 against; 95,937 abstentions
and -0- broker non-votes.
(3) Subject to the approval amending the Articles of Incorporation,
election of one additional director to hold office for a three year term to
expire in 2000. Votes for the election of Mr. D. Mark Thomas were cast in
the following manner: 5,110,125 for; 26,202 against; 102,886 abstentions
and -0- broker non-votes.
(4) To ratify the Board of Directors' selection of Coopers & Lybrand L.L.P.
as independent auditors in 1997. Votes were cast in the following manner:
5,158,839 for; 20,233 against; 60,380 abstentions and -0- broker non-votes.
18
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Identification
No. of Exhibit Reference
--- ---------- ---------
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K:
A current report on Form 8-K dated April 7, 1997 was filed by the
Registrant with respect to the merger with PCS One, Inc.
A current report on Form 8-K/A dated June 4, 1997 was filed by the
Registrant with respect to the required financial statements for the PCS One,
Inc. merger.
19
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
D & E Communications, Inc.
(Registrant)
Date: August 12, 1997
By: Thomas E. Morell
---------------------------------
Thomas E. Morell
Vice President, Chief Financial Officer
and Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 12, 1997.
20
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Identification
No. of Exhibit Reference
--- ---------- ---------
27 Financial Data Schedule. Filed herewith.
21
<PAGE>
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