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, 1999
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 5, 1999
-------------------------------------- --------------------------
Common Stock, par value $.16 per share 7,394,368 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, 1999 and 1998 ..................... 1
Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998 ........ 2
Consolidated Statements of Cash Flows --
For the three months ended
March 31, 1999 and 1998...................... 3
Consolidated Statement of Comprehensive Income --
For the three months ended
March 31, 1999 and 1998 ..................... 4
Notes to Consolidated Financial Statements ........... 5-8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 9-13
3. Quantitative and Qualitative Disclosure
about Market Risks ................................... 14
PART II. OTHER INFORMATION
6. Exhibits and Reports on Form 8-K ................................ 15
SIGNATURES ...................................................... 16
i
<PAGE>
Form 10-Q Part I - Financial Information
Item 1. Financial Statements
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per-share amounts)
(Unaudited)
Three months ended
March 31
----------------------
1999 1998
-------- --------
OPERATING REVENUE
Communication service revenues .................. $ 12,177 $ 10,648
Communication products sold ..................... 3,447 1,748
Other ........................................... 278 316
-------- --------
Total Operating Revenues ..................... 15,902 12,712
-------- --------
OPERATING EXPENSE
Communication service expenses .................. 4,937 4,085
Cost of communication products sold ............. 2,557 1,217
Depreciation and amortization ................... 2,305 2,383
Marketing and customer services ................. 1,089 810
General and administrative services ............. 2,567 2,671
-------- --------
Total Operating Expenses ..................... 13,455 11,166
-------- --------
Operating Income ........................ 2,447 1,546
-------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction .... 5 18
Equity in net losses of affiliates .............. (3,611) (2,151)
Interest expense ................................ (463) (731)
Gain on sale of investment ...................... 8,982 --
Other, net ...................................... 299 447
-------- --------
Total Other Income (Expense) ................. 5,212 (2,417)
-------- --------
Income (loss) before income taxes,
dividends on utility preferred stock . 7,659 (871)
INCOME TAXES AND DIVIDENDS ON
UTILITY PREFERRED STOCK
Income taxes .................................... 3,147 (15)
Dividends on utility preferred stock ............ 16 16
-------- --------
Total Income taxes and dividends
on utility preferred stock ................ 3,163 1
-------- --------
NET INCOME (LOSS) .................................. $ 4,496 $ (872)
======== ========
Average common shares outstanding ............... 7,424 7,345
BASIC EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) per common share .............. $ 0.61 $ (0.12)
======== ========
Dividends per common share ...................... $ 0.10 $ 0.10
======== ========
See notes to consolidated financial statements.
1
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................. $ 5,537 $ 7,192
Temporary investments ...................................... 17,653 14,805
Accounts receivable ........................................ 7,340 7,109
Accounts receivable - affiliated companies ................. 3,206 2,903
Inventories, lower of cost or market, at average cost ...... 1,271 1,028
Prepaid expenses ........................................... 3,128 3,658
Other ...................................................... 1,190 689
--------- --------
TOTAL CURRENT ASSETS .................................... 39,325 37,384
--------- --------
INVESTMENTS
Investments and advances in affiliated companies ........... 7,326 9,303
Investment available for sale .............................. 11,227 --
Other ...................................................... 359 359
--------- --------
18,912 9,662
--------- --------
PROPERTY, PLANT AND EQUIPMENT
In service ................................................. 125,006 123,766
Under construction ......................................... 345 426
--------- --------
125,351 124,192
Less accumulated depreciation .............................. 64,383 62,526
--------- --------
60,968 61,666
--------- --------
OTHER ASSETS
Accounts receivable - affiliated companies ................. 215 461
Other ...................................................... 912 904
--------- --------
1,127 1,365
--------- --------
TOTAL ASSETS ............................................... $ 120,332 $110,077
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt maturing within one year .................... 1,063 1,063
Accounts payable ........................................... 8,002 7,924
Accrued taxes .............................................. 522 491
Accrued interest and dividends ............................. 596 449
Advance billings, customer deposits and other .............. 3,229 3,423
--------- --------
TOTAL CURRENT LIABILITIES ............................... 13,412 13,350
--------- --------
LONG-TERM DEBT .................................................... 22,657 22,657
--------- --------
OTHER LIABILTIES
Deferred income taxes ...................................... 11,642 7,660
Other ...................................................... 759 802
--------- --------
12,401 8,462
--------- --------
PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 4 1/2%, par value
$100, cumulative, callable at par, at the option of the
Company, authorized 20,000 shares, outstanding
14,456 shares ............................................ 1,446 1,446
--------- --------
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, par value $.16, authorized shares 30,000,000 . 1,191 1,190
Outstanding shares: 7,397,442 at March 31, 1999
7,422,396 at December 31, 1998
Additional paid-in capital ................................. 36,654 36,546
Unrealized gain on investment .............................. 2,913 --
Unearned ESOP Compensation ................................. (429) (429)
Retained earnings .......................................... 31,076 27,294
Treasury stock at cost, 69,888 shares at March 31, 1999,
38,480 shares at December 31, 1998 ...................... (989) (439)
--------- --------
70,416 64,162
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $ 120,332 $110,077
========= ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................................ $ 4,496 $ (872)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................. 2,305 2,387
Deferred income taxes ......................................... 2,482 (128)
Equity in net losses from affiliates .......................... 3,611 2,151
Gain on sale of investment in affiliated company .............. (8,982) --
Allowance for funds used during construction .................. (5) (18)
Other, net .................................................... 2 6
Changes in operating assets and liabilities:
Accounts receivable and notes receivable ...................... (231) 662
Inventories ................................................... (244) (84)
Prepaid expenses .............................................. 530 88
Accounts payable .............................................. 78 (1,116)
Accrued taxes and accrued interest ............................ 177 375
Advance billings, customer deposits and other ................. (195) (627)
Other, net .................................................... (558) (44)
-------- --------
Net Cash Provided By Operating Activities ......... 3,466 2,780
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .......................................... (1,595) (1,591)
Allowance for funds used during construction .................. 5 18
Proceeds from sale of temporary investments ................... 11,866 --
Purchase of temporary investments ............................. (14,713) (12,000)
Proceeds from sale of assets .................................. 25 48
Cost of removal of plant retired .............................. (31) (23)
Proceeds from sale of investment in affiliated company ........ 2,420 --
Increase in investments and advances to affiliates ............ (8,095) (8,958)
Decrease in investments and repayments from affiliates ........ 6,153 3,849
-------- --------
Net Cash Used In Investing Activities ............. (3,965) (18,657)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ..................................... (673) (677)
Net proceeds from revolving lines of credit ................... -- 425
Payments on long-term debt .................................... -- (6,000)
Proceeds from issuance of common stock ........................ 67 25,987
Purchase of treasury stock .................................... (550) --
-------- --------
Net Cash Provided By (Used In) Financing Activities (1,156) 19,735
-------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................................. (1,655) 3,858
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD .............................................. 7,192 61
-------- --------
END OF PERIOD .................................................... $ 5,537 $ 3,919
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Statement of Comprehensive Income
(in thousands)
(Unaudited)
Three months ended
March 31
--------------------
1999 1998
------ -----
Net income (loss) ................................ $4,496 $(872)
Other comprehensive income, net of tax ........... 2,913 --
------ -----
Total comprehensive income ....................... $7,409 $(872)
====== =====
See notes to consolidsated financial statements.
4
<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. 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); D&E
Investments, Inc. (Investments); and D&E Systems, Inc. (Systems). 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. These financial statements
should 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, 1998.
(2) NON-CASH FINANCING AND INVESTING ACTIVITIES
On March 25, 1999, D&E exchanged its shares of D&E SuperNet, Inc.
(SuperNet)for cash and shares of OneMain.com, Inc. (OneMain). The non-cash
value of the share exchange was recorded as a net increase in investments
of $6,562. The increase in
5
<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)
market price of the OneMain shares subsequent to the share exchange
increased the investment by $4,413 and the unrealized net of tax gain on
investment by $2,913. See Note 3.
(3) EXCHANGE OF INVESTMENT
On March 25, 1999, Investments sold its fifty percent interest in
SuperNet in exchange for $2,420 cash and $6,814 in shares of OneMain. D&E
owns less than 5% of the outstanding shares of OneMain. D&E records trades
of equity securities on a trade date basis. The shares of OneMain are held
as available-for-sale securities and are valued at a discount from market
price to take into consideration certain trading restrictions on the
shares.
(4) INVESTMENTS IN AFFILIATED COMPANIES
D&E owns a fifty percent partnership interest in D&E/Omnipoint
Wireless Joint Venture, L.P. (PCS ONE). PCS ONE was formed in November 1997
to provide PCS wireless communications services and equipment to customers
in the Lancaster, Harrisburg, York/Hanover and Reading Basic Trading Areas.
The results of PCS ONE as a significant subsidiary of D&E are as follows:
Three months ended
March 31
PCS ONE --------------------
Total company 1999 1998
------------- ------- -------
Net sales ............................ $3,157 $ 508
Net loss ............................. ($5,028) ($3,195)
(5) SUBSEQUENT EVENTS
As previously reported in its current report on Form 8-K dated April
21, 1999, D&E holds a one-third ownership interest in EuroTel L.L.C., a
domestic corporation which owns 100% of PenneCom B.V. (PenneCom), a
provider of local exchange telephone, cable television and data
transmission services in Central Europe. On April 12, 1999, D&E announced
that PenneCom signed a
6
<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)
definitive agreement to sell its Polish operations for $140,000 in cash and
notes during 1999. The sale is subject, among other things, to Polish
regulatory review and, after payment of outstanding debt and other
expenses, will generate approximately $80,000 to PenneCom.
(6) BUSINESS SEGMENT DATA
Financial results for D&E's four primary operating segments are as
follows:
Three months ended
March 31
------------------------
1999 1998
-------- ---------
External Customer Revenues
Telecommunication Services ................ $ 9,279 $ 8,821
Telephone & Data Services ................. 4,864 2,776
Wireless Services ......................... 1,403 881
International Communication Services ...... 356 155
Corporate, Other and Eliminations ......... -- 79
-------- ---------
Total Company .......................... $ 15,902 $ 12,712
======== =========
Intersegment Revenues
Telecommunication Services ................ $ 350 $ 242
Telephone & Data Services ................. 88 94
Corporate, Other and Eliminations ......... (438) (336)
-------- ---------
Total Company .......................... -- --
======== =========
Net Income (Loss)
Telecommunication Services ................ $ 1,265 $ 745
Telephone & Data Services ................. 115 (14)
Wireless Services ......................... (1,670) (1,237)
International Communication Services ...... (1,287) (626)
Corporate, Other and Eliminations ......... 6,073 260
-------- ---------
Total Company .......................... $ 4,496 ($ 872)
======== =========
7
<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)
Assets
Telecommunication Services .................. $ 95,232 $101,780
Telephone & Data Services ................... 8,057 7,438
Wireless Services ........................... 4,726 13,320
International Communication Services ........ 6,626 8,721
Corporate, Other and Eliminations ........... 5,691 6,031
-------- --------
Total Company ............................ $120,332 $137,290
======== ========
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
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, 1998 have been reclassified for comparative
purposes.
RESULTS OF OPERATIONS
Summary. Operating revenues increased 25.1% for the three months ended
March 31, 1999 compared with the same period of 1998. The increase was primarily
from communication products sold. Operating expenses increased 20.5% for the
first three months of 1999 compared to the first quarter of 1998. The result was
an operating profit of 15.4% or $2,447 on revenues of $15,902 for the first
quarter of 1999 compared to 12.2% or $1,546 on revenues of $12,712 for the three
months ended March 31, 1998.
Other income included a gain of $8,982 from the exchange of SuperNet stock
for cash and stock in OneMain. The net of tax gain was $5,921. Net income
increased to $4,496 or $0.61 per share in the first quarter of 1999 from a loss
of $872 or $0.12 per share in the three months ended March 31, 1998.
Operating Revenues. Consolidated operating revenues for the three months
ended March 31, 1999 were $15,902, up from $12,712 for the first quarter in
1998.
Telecommunications Services segment revenues increased 6.2% to $9,629 in
1999 from $9,063 in 1998. The increase was primarily from an increase in the
number of access lines and increases in network access services.
Telephone & Data Services segment revenues increased 72.5% to $4,952 in
1999 from $2,870 in 1998. The increase resulted from utilization of a larger
sales and marketing staff that increased the sales of telecommunication
equipment to industries and several educational institutions. The growth
included computer networking services with installations of software and large
orders for computer hardware for several multi-location clients.
Wireless Services segment revenues increased 59.3% to $1,403 in 1999 from
$881 in 1998. The increase was from the continued build out of the PCS ONE
wireless network and expansion of sales and customer support services provided
to PCS ONE.
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
International Communication Services segment revenues increased 129.7% to
$356 in 1999 from $155 in 1998. The increase was related to the additional
support service provided in connection with the build out of the operation in
Poland.
Operating Expenses. Total operating expenses for the three-month period
ended March 31, 1999 were $13,455, up 20.5% from $11,166 during the same quarter
in 1998. The primary reason for the increase was the increase in cost of goods
sold related to equipment sales.
Communication service expenses include network operations, network access,
and directory advertising which increased in line with revenue growth. Other
communication service costs included in this category, increased 74.8% to $1,956
in 1999 from $1,119 in 1998. The increase was approximately $550 for support
services provided to PCS ONE and $200 for European operations related to the
development and expansion of new businesses.
The cost of communication products sold increased 110.1% to $2,557 in 1999
from $1,217 in 1998. The increase related to increased equipment sales and
computer networking installations. The cost increase was a greater percentage
than revenue increases partially as a result of a higher mix of hardware to
software sales.
Depreciation and amortization decreased 3.3% to $2,305 in 1999 from $2,383
in 1998. Depreciation increased $147 from continuing capital additions. Several
issues account for the amortization decrease of $225. As a result of returning
the C-Block PCS license to the Federal Communications Commission (FCC) in June
1998 amortization decreased $149. Additionally, D&E adopted Statement of
Position No. 98-5, "Reporting on the Costs of Start-up Activities," in the
fourth quarter of 1998. As a result, organization costs were fully expensed in
1998, which decreased 1999 expenses by $29. Separately, a non-compete agreement
was fully amortized during 1998 which decreased 1999 cost by $47.
Marketing and customer services increased 34.4% to $1,089 in 1999 from $810
in 1998. Increased sales costs related to telecommunications products sold
accounted for approximately $130 of this increase and marketing and advertising
costs accounted for approximately $117.
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
Other Income (Expense). Other income (expense) for the three months ended
March 31, 1999 was a net income of $5,212, compared with a net expense of $2,417
in the same quarter of 1998. A gain on the exchange of SuperNet stock for an
investment in OneMain was $8,982 in March 1999 with no similar transaction in
the prior year. Equity in the net losses of affiliates continued to grow with
the development of new telephone systems in Poland accounting for a $615
additional loss and PCS ONE accounting for an $820 additional loss. Future
losses are expected to continue while PCS ONE develops its business and until
completion of the anticipated sale of the Polish company later this year.
Approximately $76 of decreased equity in earnings of affiliates resulted from
the second quarter 1998 sale of an investment in Berks & Reading Area Cellular
Enterprises.
Interest expense for the three months ended March 31, 1999 was $463, down
$268 from $731 in 1998. The return of the C-Block license to the FCC reduced
interest expense by $208. Other long-term debt repayments during 1998 accounted
for the remaining decrease in interest expense.
Income taxes. Income taxes were $3,147 for the three months ended March 31,
1999, compared to a benefit of $15 in 1998. The increase is primarily related to
the gain on the exchange of SuperNet shares. The total tax accrued on the
SuperNet transaction was $3,061 of which $2,238 is deferred.
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 existing local exchange network and
business development activities. D&E expects that foreseeable capital
requirements for its existing businesses will be financed primarily through
internally generated funds, use of its existing cash or temporary investments,
and additional debt. Additional short or long-term debt or equity financing may
be needed to fund growth of new business development activities, and to enhance
D&E's capital structure.
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
In addition to cash provided from operations, D&E's primary single source
of funds for the three months ended March 31, 1999 was $2,420 from the exchange
of SuperNet shares for an investment in OneMain. During the first quarter of
1999, $550 was used to repurchase treasury shares.
At March 31, 1999, $17,653 was invested in commercial paper, and $5,537 was
held in cash balances. An additional $15,000 was available on short-term lines
of credit.
D&E's ratio of total debt to total debt plus capital decreased to 24.8% at
March 31, 1999 from 26.6% at December 31, 1998. This change resulted primarily
from the increase in equity resulting from the SuperNet transaction.
OTHER
D&E holds a one-third ownership interest in EuroTel L.L.C., a domestic
corporation which owns 100% of PenneCom, a provider of local exchange telephone,
cable television and data transmission services in Central Europe. On April 12,
1999, D&E announced that PenneCom signed a definitive agreement to sell its
Polish operations for $140,000 in cash and notes during 1999. The sale is
subject, among other things, to Polish regulatory review and, after payment of
outstanding debt and other expenses, will generate approximately $80,000 to
PenneCom. D&E's share of this additional capital may be used to help finance the
expansion of the territory it serves in south central Pennsylvania through its
Competitive Local Exchange Carrier (CLEC).
In compliance with state statutory law, commonly known as Chapter 30, D&E
Telephone petitioned the Pennsylvania Public Utility Commission (PUC) in July
1998 for a price-cap form of regulation as an alternative to the PUC's existing
rate base/rate of return form of regulation. The PUC expected to render an Order
in June 1999, however, D&E Telephone has agreed to allow the PUC to delay
issuing its Order until July 1999. If D&E Telephone accepts the PUC Order, an
accelerated network modernization plan will be adopted along with a new
ratemaking process where, instead of an opportunity return on investment,
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
price adjustments are based on the Gross Domestic Product Price Index possibly
adjusted for a productivity offset. If D&E Telephone rejects the PUC Order,
another Chapter 30 petition will be required within six months.
A world wide Year 2000 remediation issue has arisen as a result of computer
programs having been written to use two digits rather than four to identify the
applicable year. Specifically, some of D&E's programs that have date-sensitive
software might recognize a date entry using "00" as the year 1900 rather than
2000. D&E addressed this issue by identifying in Phase I, the programs that
needed to be modified. In Phase II, the renovation, validation and
implementation of modifications has been completed for 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
Year 2000 compliance has been confirmed by vendors whose services are critical
to D&E's compliance. Other software program modifications and testing are
nearing completion and should be finished in the second quarter of 1999. D&E
anticipates that training and implementation of the contingency plan will be
completed during 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.
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements as to the
Year 2000 remediation issue 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.
13
<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.
14
<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:
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
15
<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 12, 1999
By: /s/ Anne B. Sweigart
-------------------------------------
Anne B. Sweigart
President, Chairman of the Board, and
Chief Executive Officer
(On behalf of the Registrant)
Date: May 12, 1999
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 12, 1999.
16
<PAGE>
D&E COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Identification
No. of Exhibit Reference
- ------- -------------- ---------
27 Financial Data Schedule. Filed herewith.
17
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF OPERATIONS, BALANCE SHEETS AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 60,968
<OTHER-PROPERTY-AND-INVEST> 18,912
<TOTAL-CURRENT-ASSETS> 39,325
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 1,127
<TOTAL-ASSETS> 120,332
<COMMON> 1,191
<CAPITAL-SURPLUS-PAID-IN> 36,654
<RETAINED-EARNINGS> 32,571
<TOTAL-COMMON-STOCKHOLDERS-EQ> 70,416
0
1,446
<LONG-TERM-DEBT-NET> 22,657
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,063
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 24,750
<TOT-CAPITALIZATION-AND-LIAB> 120,332
<GROSS-OPERATING-REVENUE> 15,902
<INCOME-TAX-EXPENSE> 3,147
<OTHER-OPERATING-EXPENSES> 13,455
<TOTAL-OPERATING-EXPENSES> 16,602
<OPERATING-INCOME-LOSS> 2,447
<OTHER-INCOME-NET> 5,675
<INCOME-BEFORE-INTEREST-EXPEN> 8,122
<TOTAL-INTEREST-EXPENSE> (463)
<NET-INCOME> 4,496
16
<EARNINGS-AVAILABLE-FOR-COMM> 4,496
<COMMON-STOCK-DIVIDENDS> 716
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 3,466
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
</TABLE>
