UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 -Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 6, 1998
----- --------------------------
Common Stock, par value $.16 per share 7,438,294 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 Operations --
For the three months ended
March 31, 1998 and 1997 ..................... 1
Consolidated Balance Sheets --
March 31, 1998 and December 31, 1997 ........ 2
Consolidated Statements of Cash Flows --
For the three months ended
March 31, 1998 and 1997...................... 3
Notes to Consolidated Financial Statements ........... 4-6
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......... 7-13
3. Quantitative and Qualitative Disclosure
about Market Risks .......................... 13
PART II. OTHER INFORMATION
2. Changes in Securities ................................ 14
4. Submission of Matters to a Vote
of Security Holders.......................... 14
6. Exhibits and Reports on Form 8-K ..................... 14
SIGNATURES .................................. 15
i
<PAGE>
Form 10-Q Part I - Financial Information
Item 1. Financial Statements
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per-share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
1998 1997
---- ----
<S> <C> <C>
OPERATING REVENUE
Communication service revenues ........................... $ 10,648 $ 9,231
Communication products sold .............................. 1,748 2,210
Other .................................................... 316 337
-------- --------
Total Operating Revenues .............................. 12,712 11,778
-------- --------
OPERATING EXPENSE
Communication service expenses ........................... 4,085 2,565
Cost of communication products sold ...................... 1,217 1,594
Depreciation and amortization ............................ 2,383 2,031
Marketing and customer services .......................... 810 837
General and administrative services ...................... 2,671 2,558
-------- --------
Total Operating Expenses .............................. 11,166 9,585
-------- --------
Operating Income ................................. 1,546 2,193
-------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction ............. 18 20
Equity in net income (loss) of affiliates ................ (2,151) (160)
Interest expense ......................................... (731) (618)
Other, net ............................................... 447 28
-------- --------
Total Other Income (Expense) .......................... (2,417) (730)
-------- --------
Income before minority interest, income taxes
and dividends on utility series preferred stock (871) 1,463
MINORITY INTEREST ........................................... 0 50
-------- --------
Income before income taxes and
dividends on utility series preferred stock ... (871) 1,513
INCOME TAXES AND DIVIDENDS ON
UTILITY SERIES PREFERRED STOCK
Income taxes ............................................. (15) 607
Dividends on utility series preferred stock .............. 16 16
-------- --------
Total Income taxes and dividends
on utility series preferred stock .................. 1 623
-------- --------
NET INCOME (LOSS) ........................................... $ (872) $ 890
======== ========
Average common shares outstanding ........................ 7,345 5,804
Earnings (loss) per common share ......................... $ (0.12) $ 0.15
======== ========
Dividends per common share ............................... $ 0.10 $ 0.10
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
D & E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS Unaudited
CURRENT ASSETS
Cash and cash equivalents ................................ $ 3,921 $ 61
Temporary investments .................................... 12,000 --
Accounts receivable ...................................... 6,163 6,824
Accounts receivable - affiliated companies ............... 6,767 4,630
Inventories, lower of cost or market, at average cost .... 975 891
Prepaid expenses ......................................... 3,198 3,286
Other .................................................... 325 454
--------- ---------
TOTAL CURRENT ASSETS .................................. 33,349 16,146
--------- ---------
INVESTMENTS
Investments and advances in affiliated companies ......... 16,491 15,690
Other .................................................... 359 359
--------- ---------
16,850 16,049
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant in service ............................... 117,879 116,655
Under construction ....................................... 1,000 800
--------- ---------
118,879 117,455
Less accumulated depreciation ............................ 56,666 54,654
--------- ---------
62,213 62,801
--------- ---------
OTHER ASSETS
Accounts receivable - affiliated company ................. 133 113
PCS licenses and other assets ............................ 23,097 23,245
Other .................................................... 1,648 1,607
--------- ---------
24,878 24,965
--------- ---------
TOTAL ASSETS ............................................. $ 137,290 $ 119,961
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ............................................ $ 425 $ --
Long-term debt maturing within one year .................. 1,063 1,063
Accounts payable ......................................... 7,169 8,285
Accrued taxes ............................................ 618 617
Accrued interest and dividends ........................... 1,664 1,290
Advance billings, customer deposits and other ............ 2,473 3,100
--------- ---------
TOTAL CURRENT LIABILITIES ............................. 13,412 14,355
--------- ---------
LONG-TERM DEBT .................................................. 35,656 41,657
--------- ---------
OTHER LIABILTIES
Deferred income taxes .................................... 6,736 6,863
Other .................................................... 2,573 2,615
--------- ---------
9,309 9,478
--------- ---------
PREFERRED STOCK OF UTILITY SUBSIDIARY par value $100,
cumulative, callable at par, at the option of the
Company, authorized 20,000 shares, outstanding:
Series A 4 1/2%: 14,456 shares ......................... 1,446 1,446
--------- ---------
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, par value $.16, authorized shares 30,000,000 1,186 977
Outstanding shares: 7,435,617 at March 31, 1998
6,128,672 at December 31, 1997
Additional paid-in capital ............................... 36,159 10,341
Unearned ESOP Compensation ............................... (695) (695)
Retained earnings ........................................ 40,817 42,402
--------- ---------
77,467 53,025
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $ 137,290 $ 119,961
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................................ $ (872) $ 890
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................. 2,387 2,038
Deferred income taxes ......................................... (128) (315)
Undistributed losses from affiliates .......................... 2,151 160
Tax benefits applicable to ESOP ............................... 3 4
Loss on retirement of property, plant and equipment ........... 3 44
Allowance for funds used during construction .................. (18) (20)
Losses applicable to minority interest ........................ -- (50)
Changes in operating assets and liabilities:
Accounts receivable and notes receivable ...................... 662 200
Inventories ................................................... (84) 79
Prepaid expenses .............................................. 88 60
Accounts payable .............................................. (1,116) (1,555)
Accrued taxes and accrued interest ............................ 375 939
Advance billings, customer deposits and other ................. (627) (425)
Other, net .................................................... (44) (416)
-------- --------
Net Cash Provided By Operating Activities ................... 2,780 1,633
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................................. (1,591) (1,129)
Allowance for funds used during construction ..................... 18 20
Purchase of temporary investments ................................ (12,000) --
Proceeds from sale of assets ..................................... 48 36
Cost of removal of plant retired ................................. (23) (18)
Acquisition of other assets ...................................... -- (431)
Increase in investments and advances to affiliates ............... (8,958) (876)
Decrease in investments and repayments from affiliates ........... 3,849 1,074
-------- --------
Net Cash Used In Investing Activities ...................... (18,657) (1,324)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ........................................ (677) (493)
Net proceeds from (payments on) revolving lines of credit ........ 425 178
Payments on long-term debt ....................................... (6,000) --
Proceeds from issuance of common stock ........................... 25,987 41
-------- --------
Net Cash Provided By (Used In) Financing Activities ........ 19,735 (274)
-------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................................. 3,858 35
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD .............................................. 61 312
-------- --------
END OF PERIOD .................................................... $ 3,919 $ 347
======== ========
</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
(Dollar amounts are in thousands)
(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 ("D&E Telephone") in
June 1996. The accompanying consolidated financial statements include the
accounts of D & E Communications, Inc.; D&E Telephone; D&E Holdings,
L.P.("Holdings L.P."); D&E Telephone and Data Systems ("TDS"); D&E
Marketing Corp. ("Marketing"); D&E Wireless, Inc. ("Wireless"); and D&E
Investments, Inc. ("Investments"). D&E Communications, Inc., including
these subsidiary companies, are collectively defined and referred to as
"D&E".
The accompanying financial statements are unaudited and have been
prepared by D&E pursuant to generally accepted accounting principles and
the rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of management, the financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the results of operations, financial position, and cash
flows of D&E for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The use of
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. D&E believes that the disclosures made are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the D&E Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
4
<PAGE>
(2) NON-CASH FINANCING AND INVESTING ACTIVITIES
D&E recorded non-cash transactions for shares of common stock issued
in connection with an acquisition and a merger. D&E issued 21,408 shares of
D&E common stock in January 1997 as the deferred portion of the price in
connection with the acquisition of Com Tech Technical Services, now doing
business as D&E Computer Networking Services ("Computer Networking ").
Separately, $7,307 of the cost incurred in the merger with PCS One, Inc.
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 as part of the PCS One, Inc. merger. See Note 3.
(3) ACQUISITIONS AND JOINT VENTURES WITH AFFILIATED COMPANIES
On March 21, 1997 D&E merged with PCS One, Inc., the owner of the
C-Block broadband PCS license to operate in the Lancaster, Pennsylvania
market. The merger was accounted for as a purchase with no material effect
from the merger on the consolidated net income in 1997. D&E recorded the
merger with PCS One, Inc. at a value of $21,123. D&E issued 317,667 shares
of D&E common stock to PCS One, Inc. shareholders. Long-term debt payable
to the FCC of $11,879 was assumed, and a note payable to The D and E Group
of $1,559 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, Inc. D&E then formed a subsidiary corporation, Investments, to
hold the Lancaster C-Block license. D&E formed a separate subsidiary,
Wireless, in April 1997 to design, construct, and operate the PCS network.
On November 14, 1997, Wireless and Omnipoint Venture Partner I, L.L.C.
formed a limited partnership D&E/Omnipoint Wireless Joint Venture, L.P.
("PCS ONE"). Wireless holds a 50% interest in PCS ONE which operates a PCS
communication system in the Basic Trading Areas of Lancaster, Harrisburg,
York-Hanover, and Reading, Pennsylvania. Under the terms of the agreement,
the joint venture will operate for an initial period of 10 years, with
provisions for subsequent renewals. Wireless recorded $1,646 as its share
of the loss for the first quarter of 1998.
During a period of reconsideration and waiver of the C-Block license
interest, the Federal Communications Commission ("FCC") reviewed the
repayment terms for C-Block license note agreements.
5
<PAGE>
In December 1997, the FCC offered C-Block holders several options as
alternatives to the original payment terms. A Reconsideration Order was
published on April 8, 1998, explaining the revised options of Amnesty,
which is a forgiveness of debt for returning 100% of the spectrum in a
license. An alternative is Disaggregation, or a returning of 50% of the 30
MHZ spectrum in a license. D&E has until June 8, 1998 to review its
options. If the Disaggregation option were chosen, D&E would be required to
write off approximately $4,000 of its license cost and would lose between
15% and 30% of its original $1,320 deposit. Additionally, as part of the
Reconsideration Order, on July 31, 1998, the selected repayment terms of
the debt to the FCC related to the C-Block license will resume.
(4) PRIVATE PLACEMENT FINANCING
On January 7, 1998 D&E issued 1.3 million shares of D&E Common Stock
to a subsidiary of Citizens Utilities Company ("Citizens") in consideration
for $27 million, or $20.78 per share, pursuant to an exemption from
registration under Section 4 (2) of the Securities Act of 1933, as amended.
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 on January 7, 1998 to
acquire 65,000 shares of Common Stock at $20.78 per share. The warrants are
exercisable immediately any time within five years from the date of grant.
(5) COMPREHENSIVE INCOME
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which the Company adopted as of January 1, 1998.
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income. For D&E, such items have included
only reductions of the ESOP trust loan. Since its adoption by the Company,
there have been no transactions reportable under SFAS 130.
6
<PAGE>
<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
three months ended March 31, 1997 have been reclassified for comparative
purposes.
RESULTS OF OPERATIONS
Summary. Net operations for the three months ended March 31, 1998 resulted
in a loss of $872, compared with an income of $890 for the three months ended
March 31, 1997. Earnings per share for the first quarter of 1998 was a loss of
$.12 versus an income of $.15 in 1997. The primary reason for the loss was the
recording of $1,646 (D&E's 50% share) of the losses of PCS ONE which began
operations in November 1997. These losses are anticipated to continue as the
business develops. Additionally, operating income decreased $647 primarily as a
result of increased network operations expenses and increased depreciation
expense. There was a 26% increase in the weighted average number of shares
outstanding between the periods primarily as a result of shares' being issued in
connection with a merger late in the first quarter of 1997 and the private
placement of D&E shares during the first quarter of 1998.
Operating Revenues. Total operating revenues for the three months ended
March 31, 1998 were $12,712, up 7.9% from the $11,778 recorded for the first
quarter in 1997. Operating revenues are derived primarily from local network
services revenues, network access services revenues, long distance network
services revenues, and other communication services revenues. The three-month
growth resulted primarily from communication service revenue of $1,104 for
services provided to affiliated companies, notably PCS ONE. Communication
products sold decreased $462, primarily as a result of the completion of a major
data communication network during 1997.
Local network services revenues are generated from providing local exchange
and local private line services. Local network services revenues for the three
months ended March 31, 1998 were $2,508, up 12.9% from $2,221 in 1997. The
increase was primarily due to a revenue neutral rate adjustment made in May of
1997
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 (continued)
which increased the basic area rate while decreasing some long distance
rates and other service rates. Additionally, an increase of approximately 5% in
the number of access lines serviced contributed to the increase.
Network access services revenues are received from D&E Telephone'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 $4,104 for the three months ended March 31, 1998,
up 0.2% from $4,095 in 1997.
Long distance network services revenues are received from long distance
calls made by D&E Telephone customers within the Capital (south central) Region
of Pennsylvania and world-wide long distance calls made by D&E Long Distance
customers. Revenues in this category for the three months ended March 31, 1998
were $1,494, down 1.7% from $1,520 in 1997. The decrease in the quarterly
revenue resulted primarily from decreases in the minutes of use and from a rate
decrease. The rate change is one of the provisions within the revenue neutral
rate adjustment made in May of 1997.
Other communication services revenues include equipment rentals, repairs,
paging, billing and collection services, and consulting services provided to
affiliated companies, primarily PCS ONE. Revenues in this category for the three
months ended March 31, 1998 were $1,762, up 165.8% from $663 in 1997. The
increase was primarily attributable to the revenue for services provided to PCS
ONE and the two European joint ventures.
Operating Expenses. Total operating expenses for the three month period
ended March 31, 1998 were $11,166, up 16.5% from the $9,585 recorded during the
same quarter in 1997. The primary reason for the increase was the costs
associated with providing services to affiliated companies, notably PCS ONE.
Communication service expenses, including network operations, network
access, directory advertising, and other communication service costs, were
$4,085, up 59.2% from $2,565 for the first quarter of 1997. The increase was
primarily related to additional network operations and other communication
service costs.
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 {continued)
Network operations expenses are incurred in maintaining D&E Telephone'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 March 31, 1998 were $1,718, up 32.5% from $1,297 during the
first quarter in 1997. Expenses for the quarter were up primarily due to an
increase in the number of employees and the expansion of office space and
equipment purchases to accommodate them. Computer software and equipment
purchases also contributed to the increase in network operations expense.
Other communication service costs include the cost of equipment rentals,
pageboy service, service maintenance agreements, and, primarily, the costs
incurred to provide consulting services to affiliates. These expenses were
$1,119 in the first quarter ended March 31, 1998 up from $99 in the first
quarter of 1997. These costs were primarily for PCS ONE, the two European
operations, and D&E SuperNet.
Cost of communication products sold was $1,217 in the three months ended
March 31, 1998, down 23.7% from $1,594 in the first quarter of 1997. The
decrease was primarily related to lower sales in 1998.
Depreciation expense for the three months ended March 31, 1998 was $2,383,
up 17.3% from $2,031 in 1997. The majority of the increases were attributable to
an increase in telephone plant-in-service including administrative software
placed in service late in 1997. Additionally, amortization of the PCS licenses
acquired during 1997 began when they were placed into service in November 1997.
General and administrative services expenses for the three months ended
March 31, 1998 were $2,671, up 4.4% from $2,558 in 1997. Increases in the
quarter are primarily related to wage and benefit increases.
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 (continued)
Other Income (Expense). Other income (expense) for the three months ended
March 31, 1998 was a net expense of $2,417, up $1,687 from a net expense of $730
in 1997. The increase was related to reduced equity in the income of affiliates.
The increased expense was primarily from D&E's 50% share in the loss of PCS ONE
which totaled $1,646. This loss is anticipated to continue while the PCS ONE
business develops. The sale of certain cellular interests during 1997 led to a
decrease of affiliate income of $212. Losses from European ventures also
increased. Start up loss activities of Eurotel's Pilicka Telephone ("PT") in
Poland were $425. D&E's share of losses from its investment in Monor
Communications Group ("MCG") was $186; this was $256 better than was reported
for the same period in 1997. MCG's loss was primarily from its investment in
Monor Telephone ("MTT") in Hungary which was less negatively affected by
exchange translation in 1998 than in 1997. Interest expense increased $113 in
1998 compared with the first quarter of 1997. An increase in interest expense of
$208 resulted from the PCS license loan interest being capitalized in 1997 and
expensed in 1998. Interest decreased $72 resulting from the reduction of debt
after the sale of cellular interests in the third quarter of 1997. Interest also
deceased $20 as the result of principal repayment of long-term senior debt which
began in 1997.
Income taxes. There was a credit of $15 for the federal and state income
taxes for the three months ended March 31, 1998, versus an expense of $607 in
1997. The reduction in income taxes was primarily the result of the losses of
PCS ONE in 1998 which did not exist in 1997. In 1998 taxes increased from D&E's
increasing its valuation allowance on deferred tax assets related to the equity
loss in European investments, as a result of revised estimates on the
realizability of loss carryforwards.
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
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 (continued)
business will be financed primarily through internally generated funds and
additional debt. Additional short or long-term debt or equity financing may be
needed to fund new business development activities and to enhance D&E's capital
structure.
D&E's primary source of funds during the quarter ended March 31, 1998 was
from the issuance on January 7, 1998 of 1.3 million shares of Common Stock to
Citizens in a private placement for $20.78 per share. The $26 million received
net of expenses was used, in part, to repay $6 million of bank debt and to
increase investments in or advances to affiliates. At March 31, 1998, $12
million was invested in commercial paper and $3.9 million was held as an
increase in cash balances. These cash and investment reserves are intended to be
used for additional investment in PCS ONE and for other general working capital
purposes.
Other cash changes included cash provided by operating activities of $2,780
including a reduction in accounts payable of $1,116. A total of $1,591 for
capital expenditures was used primarily for $680 of computers and switching
equipment and $380 for outside plant including poles and cable improvements.
The cash and cash equivalents balance at March 31, 1998 was $3,921 and
$17,575 was available on short-term lines of credit. In addition to this cash,
$12,000 was invested in high quality short-term commercial paper.
D&E's ratio of total debt to total debt plus capital decreased to 32% at
March 31, 1998 from 44% at December 31, 1997. This change resulted primarily
from the increase in equity from the Citizens investment which was partially
used to reduce bank debt.
OTHER
The investment by Citizens represented 17.5% of the shares of D&E Common
Stock outstanding. Under the agreement between the parties, Citizens agrees for
one year not to acquire additional shares of D&E's stock without D&E's consent.
If Citizens proposes to sell any shares of D&E Common Stock, Citizens must first
give D&E the opportunity to repurchase them. Citizens has the right to require
D&E to register the Common Stock it acquired for public resale.
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 (continued)
D&E continues to monitor proceedings before the Pennsylvania Public Utility
Commission dealing with access charge reform and funding for universal service.
Both proceedings are geared to replace the explicit subsidies embedded in
regional toll and intrastate access charges which support below-cost dial-tone
rates. Resolution of the state access charge reform proceeding formerly targeted
for December 1997 remains an open issue.
On March 31, 1998, D&E filed a revenue neutral rate rebalancing request
with the Pennsylvania Public Utility Commission. The request, if approved, will
take effect on June 5, 1998, and is expected to have no material effect on the
future revenue of the Company.
During a period of reconsideration and waiver of the C-Block license
interest, the Federal Communications Commission ("FCC") reviewed the repayment
terms for C-Block license note agreements. In December 1997, the FCC offered
C-Block holders several options as alternatives to the original payment terms. A
Reconsideration Order was published on April 8, 1998, explaining the revised
options of Amnesty, which is a forgiveness of debt for returning 100% of the
spectrum in a license. An alternative is Disaggregation, or a returning of 50%
of the 30 MHZ spectrum in a license. D&E has until June 8, 1998 to review its
options. If the Disaggregation option were chosen, D&E would be required to
write off approximately $4,000 of its license cost and would lose between 15%
and 30% of its original $1,320 deposit. Additionally, as part of the
Reconsideration Order, on July 31, 1998, the selected repayment terms of the
debt to the FCC related to the C-Block license will resume.
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of D&E's programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than 2000. D&E has addressed the issue by identifying the programs
that need to be modified and has completed most of the revisions. The billing
system software modification is complete, the accounting data base system has
been upgraded for the year 2000 and other improvements, and the majority of
other programs' modifications are nearing completion. The cost of completing the
modifications has been immaterial to the current operations, and management
believes the changes will be completed without material impact on its financial
condition or interruption to ongoing business activities.
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 (continued)
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements as to
year 2000 remediation, the FCC license payment alternatives, and the future
performance of D&E and its various domestic and international joint venture
investments. Actual results may differ as a result of factors over which D&E has
no control, including but not limited to, regulatory factors, uncertainties and
economic fluctuations in the domestic and foreign markets in which the companies
compete, foreign-currency risks and increased competition in domestic markets
due in large part to continued deregulation of the telecommunications industry.
Item 3. Quantitative and Qualitative Disclosure
About Market Risks
D&E does not invest excess funds in derivative financial instruments or
other market risk sensitive instruments for the purpose of managing its foreign
currency exchange rate risk or for any other purpose.
13
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part II - Other Information
Item 2. Changes in Securities
See Part I, Item 1, Notes to Consolidated Financial Statements Note 4 and
Part I, Item 2, Management's Discussion and Analysis and Results of Operations,
regarding a Stock Acquisition Agreement between D&E and Citizens Utilities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
27 Financial Data Schedule. Filed herewith.
(b) No Reports of Form 8-K have been filed for the Company during the three
month period ended March 31, 1998 for which this report is filed.
14
<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: May 8, 1998
By: /s/ 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 MAY 8, 1998.
15
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
27 Financial Data Schedule. Filed herewith.
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