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, 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 August 6, 1998
----- -----------------------------
Common Stock, par value $.16 per share 7,445,893 Shares
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
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Item No. Page
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<S> <C>
PART I. FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Operations --
For the three months and six months ended
June 30, 1998 and 1997 ............................................ 1
Consolidated Balance Sheets --
June 30, 1998 and December 31, 1997 ............................... 2
Consolidated Statements of Cash Flows --
For the six months ended
June 30, 1998 and 1997............................................. 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 .............. 16
PART II. OTHER INFORMATION
2. Changes in Securities ................................................... 17
4. Submission of Matters to a Vote of Security Holders...................... 17
6. Exhibits and Reports on Form 8-K ........................................17-18
SIGNATURES .............................................................. 19
</TABLE>
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 Six months ended
June 30 June 30
------------------ ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUE 1998 1997 1998 1997
Communication service revenues................. $10,717 $ 9,473 $21,365 $18,705
Communication products sold.................... 1,736 2,275 3,484 4,485
Other.......................................... 273 275 589 611
------- ------ ------- -------
Total Operating Revenues.................... 12,726 12,023 25,438 23,801
------- ------ ------- -------
OPERATING EXPENSE
Communication service expenses................. 4,016 2,577 8,104 5,142
Cost of communication products sold............ 1,166 1,569 2,383 3,163
Depreciation and amortization.................. 2,370 2,058 4,753 4,089
Marketing and customer services................ 884 856 1,693 1,693
General and administrative services............ 2,600 2,535 5,269 5,093
------- ------ ------- -------
Total Operating Expenses...................... 11,036 9,595 22,202 19,180
------- ------ ------- -------
Operating Income............................ 1,690 2,428 3,236 4,621
------- ------ ------- -------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction.... 20 16 38 36
Equity in net income (loss) of affiliates....... (2,429) 218 (4,579) 59
Interest expense................................ (634) (571) (1,365) (1,189)
Gain on sale of investment...................... 1,659 0 1,659 0
Other, net...................................... 506 119 953 197
------- ------ ------- -------
Total Other Income (Expense)................... (878) (218) (3,294) (897)
------- ------ ------- -------
Income (loss) before income taxes and
dividends on utility series preferred
stock...................................... 812 2,210 (58) 3,724
INCOME TAXES AND DIVIDENDS ON
UTILITY SERIES PREFERRED STOCK
Income taxes.................................... 606 892 591 1,499
Dividends on utility series preferred stock..... 16 16 33 33
------- ------ ------- -------
Total Income taxes and dividends
on utility series preferred stock............ 622 908 624 1,532
------- ------ ------- -------
Net income (loss) before extraordinary
item ..................................... 190 1,302 (682) 2,192
Extraordinary loss on early extinguishment of
debt, net of income tax benefit of $220 .... (7,901) 0 (7,901) 0
------- ------ ------- -------
NET INCOME (LOSS).................................. $(7,711) $1,302 $(8,583) $ 2,192
======== ====== ======= =======
Average common shares outstanding............... 7,439 6,110 7,392 5,963
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) before extraordinary item ...... $0.02 $0.21 ($0.09) $0.37
Extraordinary loss ............................. (1.06) 0.00 (1.07) 0.00
------- ------ ------- -------
Earnings (loss) per common share............ ($1.04) $0.21 ($1.16) $0.37
======= ====== ======= =======
Dividends per common share...................... $0.10 $0.10 $0.19 $0.19
======= ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
D & E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30,
1998 December 31,
Unaudited 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................... $ 6,134 $ 61
Temporary investments......................................... 12,000 ---
Accounts receivable........................................... 6,835 6,824
Accounts receivable - affiliated companies.................... 3,096 4,630
Inventories, lower of cost or market, at average cost......... 1,031 891
Prepaid expenses.............................................. 1,680 3,286
Other......................................................... 697 454
-------- --------
TOTAL CURRENT ASSETS........................................ 31,473 16,146
-------- --------
INVESTMENTS
Investments and advances in affiliated companies.............. 19,465 15,690
Other......................................................... 359 359
-------- --------
19,824 16,049
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant in service.................................... 120,534 116,655
Under construction............................................ 394 800
-------- --------
120,928 117,455
Less accumulated depreciation................................. 58,619 54,654
-------- --------
62,309 62,801
-------- --------
OTHER ASSETS
Accounts receivable - affiliated company...................... 362 113
PCS licenses and other assets................................. 1,577 23,245
Other......................................................... 1,479 1,607
-------- --------
3,418 24,965
-------- --------
TOTAL ASSETS................................................ $117,024 $119,961
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable................................................. $ 3,513 $ ---
Long-term debt maturing within one year....................... 1,063 1,063
Accounts payable.............................................. 6,718 8,285
Accrued taxes................................................. 84 617
Accrued interest and dividends................................ 478 1,290
Advance billings, customer deposits and other................. 1,964 3,100
-------- --------
TOTAL CURRENT LIABILITIES................................... 13,820 14,355
-------- --------
LONG-TERM DEBT.................................................... 23,778 41,657
-------- --------
OTHER LIABILITIES
Deferred income taxes......................................... 6,248 6,863
Other......................................................... 2,549 2,615
-------- --------
8,797 9,478
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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.. 1,187 977
Outstanding shares: 7,443,538 at June 30, 1998
6,128,672 at December 31, 1997
Additional paid-in capital.................................. 36,299 10,341
Unearned ESOP Compensation.................................. (695) (695)
Retained earnings........................................... 32,392 42,402
-------- --------
69,183 53,025
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $117,024 $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>
Six months ended
June 30
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................................... $(8,583) $2,192
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt...................... 8,361 ---
Depreciation and amortization........................................... 4,753 4,102
Deferred income taxes................................................... (615) (677)
Undistributed losses from affiliates.................................... 4,579 (59)
Tax benefits applicable to ESOP......................................... 6 9
Gain on sale of investments............................................. (1,659) ---
Loss on retirement of property, plant and equipment..................... --- 48
Allowance for funds used during construction............................ (38) (36)
Losses applicable to minority interest.................................. --- (50)
Changes in operating assets and liabilities:
Accounts receivable and notes receivable................................ (10) (347)
Inventories............................................................. (140) 108
Prepaid expenses........................................................ 1,606 755
Accounts payable........................................................ (1,567) 1,508
Accrued taxes and accrued interest...................................... (167) 341
Advance billings, customer deposits and other........................... (1,136) (749)
Other, net.............................................................. (357) (372)
-------- ------
Net Cash Provided By Operating Activities........................ 5,033 6,773
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures....................................................... (3,844) (6,554)
Allowance for funds used during construction............................... 38 36
Purchase of temporary investments.......................................... (12,000) ---
Proceeds from sale of assets............................................... 75 150
Proceeds from sale of investments ......................................... 2,375 ---
Cost of removal of plant retired........................................... (65) (48)
Acquisition of other assets................................................ --- (2,031)
Increase in investments and advances to affiliates......................... (20,783) (2,221)
Decrease in investments and repayments from affiliates..................... 12,997 1,198
-------- ------
Net Cash Used In Investing Activities............................ (21,207) (9,470)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock.................................................. (1,353) (1,008)
Net proceeds from (payments on) revolving lines of credit.................. 3,513 3,073
Proceeds from issuance of demand note...................................... --- 667
Payments on long-term debt................................................. (6,000) ---
Proceeds from issuance of common stock..................................... 26,087 100
-------- ------
Net Cash Provided By Financing Activities........................ 22,247 2,832
-------- ------
INCREASE IN CASH
AND CASH EQUIVALENTS......................................................... 6,073 135
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD.......................................................... 61 312
-------- ------
END OF PERIOD................................................................ $6,134 $447
======== ======
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
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. The
accompanying consolidated financial statements include the accounts of
Denver and Ephrata Telephone and Telegraph Company ("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, is defined and referred to herein 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.
(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
4
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
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 in March 1997. D&E assumed a long-term note payable to
the Federal Communications Commission ("FCC") for $11,879 as part of the
PCS One, Inc. merger during the first quarter of 1997.
On June 8, 1998, the FCC debt of $11,879 was extinguished along with
its $1,178 accrued interest by acceptance of the FCC's Amnesty Option.
Under the terms of the Amnesty Option, the full license spectrum for the
Lancaster, PA Basic Trading Area ("BTA") C-Block license with a book value
of $21,417 was returned to the FCC. D&E did not chose the Disaggregation
Option, which allowed a return of a portion of the spectrum and partial
reduction of FCC debt, because the Amnesty Option provided the potential
for a greater long term cash savings. D&E has additional spectrum available
to continue development of the wireless business through its D&E/Omnipoint
Wireless Joint Venture, L.P. ("PCS ONE"). 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 PCS ONE. Wireless holds a
5
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
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 $1,725 and $3,371 as its share of the PCS ONE
loss for the second quarter and year to date 1998 respectively.
(4) DISPOSITION OF BUSINESS
On May 14, 1998 Holdings sold its fifteen percent (15%) interest in
Berks & Reading Area Cellular Enterprises for $2,375. The gain on the sale
was $1,659. The proceeds from the sale were used by D&E to increase its
investment in PCS ONE by $1,600 and for working capital requirements. The
Holdings partnership was dissolved on June 10, 1998 because it no longer
owned any cellular investments and its business purpose was complete.
(5) 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, which
expire on November 3, 1998, 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.
(6) 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
6
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
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.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," (SOP 98-1).
Sop-98-1 provides, among other things, guidance for determining whether
computer software is for internal use and when the cost related to such
software should be expensed as incurred or capitalized and amortized. SOP
98-1 is required to be adopted no later than January 1, 1999.
D&E subsidiaries currently capitalize central office initial operating
system and initial application software costs. For noncentral office
equipment, only the initial operating system software is capitalized.
Subsequent additions, modifications, or upgrades of initial software
programs, whether operating or application packages, are expensed as
incurred. D&E is currently evaluating the provisions of SOP 98-1 and has
not yet quantified the effect at this time. The adoption of SOP 98-1 is
expected to result in an increase in earnings in the year of adoption due
to the prospective capitalization of costs which were previously expensed.
(8) SUBSEQUENT EVENTS
During June 1998, D&E Marketing advanced $4,400 to Eurotel L.L.C.
(Eurotel). Eurotel is the domestic joint venture in which Marketing
purchased a 33% interest in 1997. Eurotel invested in Pilicka Telephone
(PT) to design, construct and operate a telecommunications network in
central Poland. The advance was interim financing until Eurotel's permanent
financing was completed. The loan to Eurotel, including interest at 15%,
was repaid in August 1998.
7
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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 and six months ended June 30, 1997 have been reclassified
for comparative purposes.
RESULTS OF OPERATIONS
Summary. Operating revenues increased approximately 6% for both the
three months and the six months ended June 30, 1998 compared with the same
periods of 1997. Operating expenses increased approximately 15% for both
the three and six month periods of 1998 compared to 1997. The result was a
30% drop in operating income in the comparable periods. This decrease is
partially related to D&E Telephone cost increases and to the TDS decline in
system sales. Equity in income of affiliates decreased as a result of the
sales in September 1997 and May 1998 of cellular partnership interests
which were generating income. Additionally, Eurotel's development of a new
phone system in Poland and PCS ONE's development of a Personal
Communication System (PCS) network in south central Pennsylvania, created
substantial losses in 1998. These losses are expected to continue as these
businesses develop. The return of the C-Block PCS license for the
Lancaster, PA BTA, in June 1998, and the related FCC debt extinguishment,
resulted in an extraordinary loss (net of tax) of $7,901. This loss did not
result in the use of cash. Ongoing amortization and interest expenses will
decrease approximately $340 per quarter as a result of the license return
without any interruption to the development of the PCS network. Earnings
per share was also negatively affected by an increase in excess of 20% of
common shares outstanding, primarily from the issuance of 1.3 million
shares to Citizens in January 1998.
Operating Revenues. Total operating revenues for the three months
ended June 30, 1998 were $12,726, up 5.9% from the $12,023 recorded for the
second quarter in 1997. For the six months ended June 30, 1998, operating
revenues were $25,438, up 6.9% from $23,801 for the first half of 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 quarter and
year-to-date growth resulted primarily from communication service revenue
for services provided to affiliated companies, notably PCS ONE.
Communication products sold decreased primarily
8
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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
as a result of lower telephone system sales and 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 June 30, 1998 were $2,555, up 8.7% from $2,350
in 1997. For the six months ended June 30, 1998, local network services
revenues were $5,063, up 10.7% from $4,572 in 1997. The increase was
primarily due to a revenue neutral rate adjustment made in May of 1997
which increased the basic area rate while decreasing some other service
rates. Additionally, an increase of approximately 5% in the number of
access lines contributed to the quarter and year to date increases.
Network access services revenues are received from D&E Telephone's
subscribers, from local exchange carriers, interexchange carriers, and
wireless 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 $4,216 for the
three months ended June 30, 1998, versus $4,218 in 1997. For the six months
ended June 30, 1998 these revenues were $8,320 versus $8,312 in the same
period of the prior year.
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 June 30, 1998 were $1,524, up 6.3% from $1,434 in 1997. For the six
months ended June 30, 1998, these revenues were $3,018 up 2.2% from $2,954
in 1997. The increase in the quarterly revenue resulted primarily from
increases in the minutes of use. Increases were moderated by a rate
decrease which was one of the provisions within the revenue neutral rate
adjustment made in May of 1997. The same factors affected the six-month
comparison.
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 June 30, 1998 were $1,670, up from $692
in 1997. For the six
9
<PAGE>
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
months ended June 30, 1998, these revenues were $3,432 up from $1,355 in
1997. The increases were primarily attributable to the revenue for services
provided to PCS ONE and the two European joint ventures.
Communication products sold revenues are derived primarily from sale and
installation of telephone and computer network systems. Revenues in this
category for the three months ended June 30, 1998 were $1,736, down 23.6%
from $2,275 in 1997. For the six months ended June 30, 1998, these revenues
were $3,484, down 22.3% from $4,485 in 1997. The quarter and year to date
amounts were down in 1998 as a result of several major installations in
1997 with no similar repeat work in 1998.
Operating Expenses. Total operating expenses for the three month
period ended June 30, 1998 were $11,036, up 15.0% from $9,595 recorded
during the same quarter in 1997. For the six months ended June 30, 1998,
operating expenses were $22,202, up 15.8% from $19,180 in the first half of
1997. The primary reason for the increases were 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
$4,016, up 55.8% from $2,577 for the same quarter of 1997. For the six
months ended June 30, 1998, expenses in this category were $8,104, up 57.6%
from $5,142 in 1997. The increase was primarily related to additional
network operations and other communication service costs as described
further in the following paragraphs.
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 June 30,
1998 were $1,608, up 18.1% from $1,362 during the same quarter in 1997. For
the six months ended June 30, 1998, these expenses were $3,327, up 25.1%
from $2,659 in the first half of 1997. Expenses for the quarter and six
months were up primarily due to an increase in
10
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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
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. Expenses
in this category for the three months ended June 30, 1998 were $1,098 up
from $111 in the same quarter of 1997. For the six months ended June 30,
1998, these expenses were $2,218, up from $210 in the first half of 1997.
These costs were primarily for PCS ONE, the two European operations, and
D&E SuperNet.
Cost of communication products sold for the three months ended June
30, 1998 was $1,166, down 25.7% from $1,569 in the same quarter of 1997.
For the six months ended June 30, 1998, this cost was $2,383, down 24.7%
from $3,163 in the first half of 1997. The decreases were primarily related
to a lower number of telephone system sales in 1998.
Depreciation expense for the three months ended June 30, 1998 was
$2,370, up 15.2% from $2,058 in 1997. For the six months ended June 30,
1998, depreciation was $4,753, up 16.2% from $4,089 in 1997. The majority
of the increases were attributable to an increase in telephone
plant-in-service including primarily, general purpose computers and digital
electronic switching equipment 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 June 30, 1998 were $2,600, up 2.5% from $2,535 in 1997. For the six
months ended June 30, 1998 these expenses were $5,269, up 3.5% from $5,093
in the first half of 1997. The increases in both periods were primarily
attributable to increased capital stock tax and other operating taxes, and
partially to increased wages and benefits.
Other Income (Expense). Other income (expense) for the three months
ended June 30, 1998 was a net expense of $878, compared with a net expense
of $218 in the same quarter of 1997. For the six months ended June 30,
1998, these accounts were a net
11
<PAGE>
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
expense of $3,294 compared with a net expense of $897 in the first half of
1997. The changes were primarily related to reduced equity in the income of
affiliates due to the sale of cellular interests in September 1997 and May
1998 which led to a decrease of affiliate income of $512 for the second
quarter and $724 for the six months of 1998 compared to the same periods of
1997. Also, D&E's share in the loss of PCS ONE totaled $1,511 for the
quarter and $3,157 for the first six months of 1998 with no similar loss in
1997. Future losses are anticipated to continue while the PCS ONE business
develops. Offsetting these decreases in earnings was a gain recorded by D&E
on the sale of its last cellular partnership investment of $1,659 during
the second quarter of 1998.
D&E's share of losses from its investment in Monor Communications
Group ("MCG") was $152 less in the second quarter 1998 than in 1997. For
the six months ended June 30, 1998, D&E's share of MCG's loss was $408 less
than the loss in the first half of 1997. The changes resulted from more
favorable foreign exchange rates in the early part of 1998 compared to
1997. MCG's loss was primarily from its investment in Monor Telephone
("MTT") in Hungary. Start-up loss activities of Eurotel's Pilicka Telephone
("PT") in Poland increased in 1998 by $578 in the second quarter and $1,003
for the six months of 1998 compared with the same periods in 1997. Losses
related to PT are anticipated to continue while construction of the
telephone system in Poland is under way.
Interest expense for the three months ended June 30, 1998 was $634, up
$63 from $571 in 1997. For the six months ended June 30, 1998, interest was
$1,365 up $176 from $1,189 for the first half of 1997. Part of this
interest expense, $138 for the quarter and $347 for the six months ended
June 30, 1998, was comprised of the interest on the PCS license loan from
the FCC which was capitalized in 1997 and expensed in 1998. Other interest
decreased as a result of the reduction of debt after the sale of cellular
interests in the third quarter of 1997, the principal repayment of
long-term senior debt which began in 1997, and the infusion of cash from
the sale of shares to Citizens in January 1998.
Income taxes. Income taxes were $606 for the three months ended June
30, 1998, down from $892 in 1997. For the six months
12
<PAGE>
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
ended June 30, 1998, income taxes were $591, down from $1,499 in the same
period of 1997. The reduction in income taxes was primarily the result of
the losses associated with PCS ONE in 1998 which did not exist in 1997.
Partially offsetting these tax decreases, was a tax increase from D&E's
increasing its valuation allowance on deferred tax assets related to the
equity loss in European investments. The valuation allowance was provided
because realization of tax loss carryforwards is not likely.
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 may be needed to fund growth of the PCS ONE network, other
new business development activities and to enhance D&E's capital structure.
D&E's primary source of funds for the six months ended June 30, 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 June
30, 1998, $12 million was invested in commercial paper, and $6.1 million
was held 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
$5,033. Major changes in funds provided by operating activities include
funds provided by a decrease in prepaid expenses of $1,606, offset by a use
of funds from a decrease in accounts payable and advance billings of
$2,703. A total of $3,844 for capital expenditures was used primarily for
$2,185 of computers and switching equipment and $886 for outside plant
including poles and cable improvements.
13
<PAGE>
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
The cash and cash equivalents balance at June 30, 1998 was $6,134,
plus $14,487 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 29%
at June 30, 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, until November 3, 1998, not to acquire additional
shares of D&E's Common Stock without D&E's consent. If Citizens proposes to
sell any shares of D&E Common Stock that it owns, Citizens must first give
D&E the opportunity to repurchase them. Citizens has the right to require
D&E to register the Common Stock it acquired for public resale.
D&E continues to monitor proceedings before the Pennsylvania Public
Utility Commission (PUC) 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. The state access charge reform
proceeding, formerly targeted for resolution by December 1997, is not
concluded. Management believes the effect from any required rate
adjustments will be revenue neutral.
On March 31, 1998, D&E filed a revenue neutral rate rebalancing
request with the PUC. The request was subsequently suspended by the PUC for
further review and now carries a final resolution date of December 22,
1998.
During a period of reconsideration and waiver of the C-Block license
interest, the FCC reviewed the repayment terms for C- Block license note
agreements. The FCC offered C-Block holders
14
<PAGE>
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
several options as alternatives to the original payment terms. Under the
terms of the Amnesty Option selected, D&E returned the full license
spectrum, reducing license cost by $21,417. In return, the FCC canceled the
principal and accrued interest payable on the financed portion of the
license cost, reducing liabilities by $13,296. The resulting loss is
reported as an extraordinary transaction of $7,901 net of the related
income tax benefit.
The year 2000 issue is the result of computer programs written to use
two digits rather than four to identify the applicable year. Any of D&E's
programs that have date-sensitive software might 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 modifications to essential programs, including the billing system
software and the accounting data base system. Operating systems in the
Company's personal computers have been updated, and correspondence with
vendors and customers regarding their compliance is anticipated to be
accomplished by the end of 1998. The other software program modifications
are nearing completion, and the entire program should be finished in the
second quarter of 1999. 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.
PCS ONE is negotiating a loan agreement to provide additional funds
for continued development of the PCS network. The agreement may require D&E
to contribute equity to PCS ONE in the event of a default.
D&E Marketing advanced $4.4 million to Eurotel during June 1998. The
advance was interim financing until Eurotel's permanent financing was
completed with The Templeton Emerging Europe Fund II, L.P. The loan to
Eurotel, including interest at 15%, was repaid in August 1998.
D&E has agreed to acquire 30,000 shares of its Common Stock in a
privately negotiated transaction with a member in the Voting Trust during
the third quarter of 1998. The shares are expected to remain issued, but
not outstanding after the acquisition.
15
<PAGE>
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
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements as
to year 2000 remediation 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.
16
<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.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 30,
1998.
(c) (1) Election of the following directors to hold office for a
three year term to expire in 2001. Votes for the election
of Mr. Paul W. Brubaker were cast in the following Manner:
6,590,967 for and 6,937 withheld. Votes for the election of
Mr. Steven B. Silverman were cast in the following manner:
6,588,575 for and 7,814 withheld. Votes for the election of
Mrs. Anne B. Sweigart were cast in the following Manner:
6,615,507 for and 200 withheld. Votes for the election of
Mr. Robert A. Kinsley were cast in the following manner:
6,589,331 for and 7,646 withheld.
(2) To ratify the Board of Directors' selection of Coopers & Lybrand
L.L.P. as independent accountants in 1998. Votes were cast in the
following manner: 6,566,347 for; 1,055 against; and 28,692 abstentions.
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 June 2, 1998 was filed by
17
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
Part II - Other Information
the Company with respect to the Assignment of its fifteen percent (15%) interest
in Berks & Reading Area Cellular Enterprises on May 14, 1998 to Cellco
Partnership, d.b.a. Bell Atlantic Mobile for $2.4 million.
A current report on Form 8-K dated June 16, 1998 was filed by the Company
with respect to the June 8, 1998 extinguishment of Federal Communications
Commission debt by return of the Lancaster, PA Basic Trading Area Personal
Communication Services C-Block license.
18
<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, 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
AUGUST 12, 1998.
19
<PAGE>
D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
27 Financial Data Schedule. Filed herewith.
20
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<TOTAL-OPERATING-EXPENSES> 22,793
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