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, 2000
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 4, 2000
----- -----------------------------
Common Stock, par value $.16 per share 7,421,281 Shares
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
TABLE OF CONTENTS
<TABLE>
Item No. Page
-------- ----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
1. Financial Statements
Consolidated Statements of Operations --
For the three months and six months ended
June 30, 2000 and 1999 ..................... 1
Consolidated Balance Sheets --
June 30, 2000 and December 31, 1999 ........ 2
Consolidated Statements of Cash Flows --
For the six months ended
June 30, 2000 and 1999...................... 3
Consolidated Statement of Comprehensive Income --
For the three months and six months ended
June 30, 2000 and 1999 ..................... 4
Notes to Consolidated Financial Statements .......... 5
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 10
3. Quantitative and Qualitative Disclosure
about Market Risks .................................. 18
PART II. OTHER INFORMATION
1. Legal Proceedings.............................................. 19
2. Changes in Securities and Use of Proceeds...................... 20
4. Submission of Matters to a Vote
of Security Holders ................................. 20
6. Exhibits and Reports on Form 8-K .............................. 21
SIGNATURES .................................................... 23
</TABLE>
i
<PAGE>
Form 10-Q Part 1 - Financial Information
Item 1. Financial Statements
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(in the thousands, except per-share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
OPERATING REVENUE 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Communication service revenues ......................... $ 13,684 $ 12,600 $ 27,492 $ 24,753
Communication products sold ............................ 2,777 2,781 5,649 6,233
Other .................................................. 351 350 683 647
-------- -------- -------- --------
Total Operating Revenues ............................ 16,812 15,731 33,824 31,633
-------- -------- -------- --------
OPERATING EXPENSE
Communication service expenses (exclusive of
depreciation and amortization below) ................ 5,866 5,139 12,295 10,261
Cost of communication products sold .................... 2,020 2,058 4,176 4,614
Depreciation and amortization .......................... 2,746 2,356 5,384 4,661
Marketing and customer services ........................ 1,692 1,244 3,076 2,332
General and administrative services .................... 2,739 2,756 5,593 5,140
-------- -------- -------- --------
Total Operating Expenses ............................ 15,063 13,553 30,524 27,008
-------- -------- -------- --------
Operating Income ............................... 1,749 2,178 3,300 4,625
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction ........... 13 9 24 14
Equity in net losses of affiliates ..................... (3,806) (2,758) (6,564) (6,369)
Interest expense ....................................... (435) (461) (824) (924)
Gain (loss) on investments ............................. (2,965) -- (2,965) 8,982
Other, net ............................................. 480 413 961 712
-------- -------- -------- --------
Total Other Income (Expense) ........................ (6,713) (2,797) (9,368) 2,415
-------- -------- -------- --------
Income (loss) before income taxes and
dividends on utility preferred stock ........ (4,964) (619) (6,068) 7,040
INCOME TAXES AND DIVIDENDS ON
UTILITY PREFERRED STOCK
Income taxes ........................................... (1,054) 145 (949) 3,291
Dividends on utility preferred stock ................... 17 16 33 33
-------- -------- -------- --------
Total Income taxes and dividends
on utility preferred stock ....................... (1,037) 161 (916) 3,324
-------- -------- -------- --------
NET INCOME (LOSS) .......................................... $ (3,927) $ (780) $ (5,152) $ 3,716
======== ======== ======== ========
Average common shares outstanding ...................... 7,358 7,392 7,348 7,407
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net income (loss) per common share ................. $ (0.53) $.(0.11) $ (0.70) $ 0.50
======== ======== ======== ========
Dividends per common share ............................. $ 0.10 $ 0.10 $ 0.20 $ 0.19
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30,
2000 December 31,
ASSETS (Unaudited) 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ......................................... $ 7,027 $ 1,674
Temporary investments, including $7,000 and $0 restricted ......... 16,392 11,726
Accounts receivable ............................................... 8,543 7,787
Accounts receivable - affiliated companies ........................ 6,071 5,152
Inventories, lower of cost or market, at average cost ............. 1,369 1,302
Prepaid expenses .................................................. 3,561 1,088
Other ............................................................. 333 310
--------- ---------
TOTAL CURRENT ASSETS ........................................... 43,296 29,039
--------- ---------
INVESTMENTS
Investments and advances in affiliated companies .................. -- 11,994
Investments available-for-sale .................................... 8,113 6,371
--------- ---------
8,113 18,365
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
In service ........................................................ 137,889 131,753
Under construction ................................................ 4,315 4,092
--------- ---------
142,204 135,845
Less accumulated depreciation ..................................... 74,069 69,949
--------- ---------
68,135 65,896
--------- ---------
OTHER ASSETS ............................................................. 3,466 1,354
--------- ---------
TOTAL ASSETS ...................................................... $ 123,010 $ 114,654
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt maturing within one year ........................... $ 1,033 $ 1,007
Accounts payable and accrued liabilities .......................... 10,729 9,662
Accrued taxes ..................................................... 262 324
Accrued interest and dividends .................................... 442 439
Advance billings, customer deposits and other ..................... 3,076 1,224
--------- ---------
TOTAL CURRENT LIABILITIES ...................................... 15,542 12,656
--------- ---------
LONG-TERM DEBT ........................................................... 21,590 21,582
--------- ---------
OTHER LIABILITIES
Equity in net losses of affiliates in excess of
investments and advances ...................................... 7,960 --
Deferred income taxes ............................................. 10,227 9,785
Other ............................................................. 1,156 861
--------- ---------
19,343 10,646
--------- ---------
PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 4 1/2%,
par value $100, cumulative, callable at par, at the option
of the Company, authorized 20,000 shares,
outstanding 14,456 shares ...................................... 1,446 1,446
--------- ---------
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, par value $.16, authorized shares 30,000,000 ........ 1,201 1,194
Outstanding shares: 7,340,531 at June 30, 2000
7,339,362 at December 31, 1999
Additional paid-in capital ........................................ 37,841 37,026
Unrealized gain (loss) on investments ............................. 2,371 (539)
Unearned ESOP Compensation ........................................ (153) (153)
Retained earnings ................................................. 26,664 33,281
Treasury stock at cost, 163,808 shares at June 30, 2000
146,112 shares at December 31, 1999 .................... (2,835) (2,485)
--------- ---------
65,089 68,324
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................ $ 123,010 $ 114,654
========= =========
</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>
Six Months Ended
June 30
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES ..................................... $ 8,491 $ 6,694
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of proceeds from sales and removal costs (7,379) (4,518)
Acquisition of business, net of cash acquired of $18 ............. (2,077) --
Proceeds from sale of temporary investments ...................... 36,626 17,758
Purchase of temporary investments ................................ (41,292) (20,577)
Proceeds from sale of investment in affiliated company ........... -- 2,420
Increase in investments and advances to affiliates ............... (17,548) (14,008)
Decrease in investments and repayments from affiliates ........... 30,110 9,804
-------- --------
Net Cash Used In Investing Activities ................ (1,560) (9,121)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ........................................ (1,370) (1,345)
Payments on long-term debt ....................................... (5) --
Proceeds from issuance of common stock ........................... 146 155
Purchase of treasury stock ....................................... (349) (861)
-------- --------
Net Cash Used In Financing Activities ................ (1,578) (2,051)
-------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................................ 5,353 (4,478)
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD ................................................. 1,674 7,192
-------- --------
END OF PERIOD ....................................................... $ 7,027 $ 2,714
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------------- -----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) ........................................... $(3,927) $ (780) $(5,152) $ 3,716
Other comprehensive income:
Unrealized gain(loss) on investments, net of
taxes of $50, ($1,329), $792 and $171 ................... 71 (2,581) 953 332
Reclassification adjustment for losses
included in net income, net of taxes of $1,008 .......... 1,957 -- 1,957 --
------- ------- ------- -------
Total comprehensive income (loss) ........................... $(1,899) $(3,361) $(2,242) $ 4,048
======= ======= ======= =======
</TABLE>
See notes to consolidated 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
Telephone and Data Systems (TDS); 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). Certain prior year balances have been
reclassified to conform to current year presentation.
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, 1999.
(2) INVESTMENTS AVAILABLE-FOR-SALE
The decline in market value of OneMain.com, Inc. shares was determined
to be "other than temporary" when an offer was received in June, 2000 to
purchase the company. A reduction in the original value recorded for the
shares was recognized as loss of $2,965 in other expense.
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)
(3) EQUITY INVESTMENTS IN AFFILIATED COMPANIES
(a) PCS ONE
D&E owns a fifty percent partnership interest in D&E/Omnipoint
Wireless Joint Venture, L.P. (PCS ONE) that was formed in November 1997 to
provide PCS wireless communications services and equipment to customers in
the Lancaster, Harrisburg, York/Hanover and Reading, Pennsylvania Basic
Trading Areas. The results of operations of PCS ONE were as follows:
Three months ended Six months ended
June 30 June 30
-------------------------------------------------
2000 1999 2000 1999
------ ------ ------- ------
Net sales ...... $7,684 $4,000 $14,824 $7,157
Net loss ....... ($4,130) ($4,357) ($7,584) ($9,385)
D&E's share
of loss......... ($2,065) ($2,179) ($3,792) ($4,693)
(b) EuroTel
As previously reported, D&E holds a one-third ownership interest in
EuroTel L.L.C. (EuroTel), a domestic corporation which owns 100% of
PenneCom B.V. (PenneCom), a Netherlands limited liability company which
provides local exchange telephone and data transmission services in Central
Europe. On April 12, 1999, D&E announced that PenneCom had signed a
definitive agreement to sell the shares of its Polish operations (Pilicka
Telefonia, Sp.zo.o.) to Elektrim S.A. (Elektrim) for $140,000 in cash and
notes during 1999 and that the sale was subject to, among other things,
Polish regulatory review. It was projected that after payment of
outstanding debt and other expenses, the sale would generate approximately
$80,000 of net cash to PenneCom. On July 27, 1999, Polish regulatory
authorities approved the proposed share purchase. However, on July 28,
1999, Elektrim issued written notice to PenneCom that it was repudiating
the purchase agreement and on August 2, 1999, PenneCom filed an arbitration
request with the International Court of Arbitration seeking specific
performance of the agreement as well as compensatory and punitive damages.
Arbitration proceedings are underway at the date of this filing. See Item
1(a) of Part II of this Report.
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)
(4) RECENT ACCOUNTING PRONOUNCEMENTS
On April 3, 2000, the Financial Accounting Standards Board issued FIN
44, "Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25" which clarifies, among other issues, (a) the
definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms
of a previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in the Interpretation cover
specific events that occur after December 15, 1998. To the extent that the
Interpretation covers events occurring during the period after December 15,
1998, but before the effective date of July 1, 2000, the effects of
applying the Interpretation are recognized on a prospective basis from July
1, 2000. Management is currently evaluating the impact, if any, the
Interpretation will have on D&E's financial position or results of
operation.
In July 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101B which amends the implementation date of
SAB 101, "Revenue Recognition" to the three month period ending December
31, 2000. SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in the financial statements. Management is currently
assessing the impact, if any, SAB 101 will have on D&E's financial position
or results of operations.
(5) ACQUISITION
On April 28, 2000, D&E acquired substantially all of the assets and
liabilities of CompuSpirit, Inc., a computer network service provider for
$2,400 in a combination of cash and 26,220 shares of common stock. All such
shares are unregistered but have certain registration rights. A contingent
purchase price agreement provides for payments up to $600 dependent on
meeting certain future earnings goals. The acquisition was accounted for
under the purchase method of accounting. The proforma results of
CompuSpirit, Inc. are not significant to the consolidated results of
operations or financial condition.
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)
(6) SUBSEQUENT EVENTS
On August 1, 2000, D&E acquired all of the outstanding shares of
Alternate Solutions, Inc.(ASI), a computer network service provider for
$5,500 in a combination of cash and D&E Common Shares. The transaction will
be accounted for under the purchase method of accounting. The agreement
includes a provision for an additional payment up to $1,500 to ASI
contingent on meeting certain future events and earnings goals. ASI's
results of operations would not have made a material change in D&E's first
half of 2000 earnings if such results had been included from the beginning
of the year.
(7) CONTINGENCIES
D&E became party to a $40,000 loan agreement from a domestic bank to
PenneCom in December 1999. D&E, along with the other two investors in
EuroTel, each pledged $7,000 of investments as collateral for security on
the loan. Management anticipates the loan, which was used primarily to
refinance higher interest debt, will be repaid in conjunction with the sale
of Pilicka.
See Item 1. of Part II of this Report for discussion of related legal
proceedings.
On May 17, 2000, PCS ONE entered into a financing agreement with a
bank to provide a $70,000 credit facility. The joint venture partners have
no guarantee requirement in connection with this agreement. D&E and its
joint venture partner must maintain contributed capital plus certain
additional allowable deposit and license acquisition costs at a level of
66.7% of the funds borrowed. On June 30,2000, the partners had an allowable
capital contribution of $41,048 making $61,578 of the facility available.
Approximately $40,000 of the proceeds were used to repay a vendor loan
agreement under which D&E was jointly and severally liable to contribute up
to a total of $50,000 equity to PCS ONE in the event that PCS ONE was
unable to meet its obligations as they came due.
8
<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)
(8) BUSINESS SEGMENT DATA
Financial results for D&E's four primary operating segments are as
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
----------------------- ---------------------
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
External Revenues
Telecommunication Services............ $ 9,779 $ 9,764 $19,289 $19,043
Telephone & Data Services............. 4,679 4,086 8,872 8,950
Wireless Services..................... 2,007 1,462 4,163 2,865
International Communication Services.. 165 419 1,211 775
Corporate, Other and Eliminations..... 182 - 289 -
-------- ------- ------- -------
Total Company.................. $ 16,812 $15,731 $33,824 $31,633
======== ======= ======= =======
Intersegment Revenues
Telecommunication Services............ $ 497 $ 366 $ 911 $ 716
Telephone & Data Services............. 161 109 283 197
Corporate, Other and Eliminations..... (658) (475) (1,194) (913)
-------- ------- ------- -------
Total Company...................... $ - $ - $ - $ -
======== ======= ======= =======
Net Income (Loss)
Telecommunication Services............ $ 1,136 $ 1,265 $ 2,128 $ 2,530
Telephone & Data Services............. 7 (21) (8) 94
Wireless Services..................... (1,401) (1,443) (2,531) (3,113)
International Communication Services.. (1,574) (856) (2,638) (2,143)
Corporate, Other and Eliminations..... (2,095) 275 (2,103) 6,348
-------- ------- ------- -------
Total Company...................... $ (3,927) $ (780) $(5,152) $ 3,716
======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
Assets 2000 1999
-------- ------------
<S> <C> <C>
Telecommunication Services............ $109,701 $100,029
Telephone & Data Services............. 10,029 6,942
Wireless Services..................... 5,991 3,693
International Communication Services.. 3,109 15,341
Corporate, Other and Eliminations..... (5,820) (11,351)
-------- --------
Total Company...................... $123,010 $114,654
======== ========
</TABLE>
9
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
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, 1999 have been reclassified
for comparative purposes.
RESULTS OF OPERATIONS
Summary. Operating revenues increased 6.9% for the three months June
30, 2000 compared with the same period of 1999. The increase was primarily
from increased support services to affiliated companies. Operating profits
as a percentage of revenue decreased to 10.4% for the second quarter of
2000 compared to 13.8% for the second quarter of 1999. Because support
service revenue is recorded at the cost to provide the service, an increase
in support service revenue will result in a decrease in gross profit
margin.
Net income (loss) for the six months ended June 30, 2000 was a loss of
$5,152 or $0.70 per share compared to income of $3,716 or $0.50 per share
in 1999. The six months ended June 30, 1999, included a gain of $8,982 from
the exchange of D&E SuperNet, Inc. (SuperNet) stock for cash and stock in
OneMain.com, Inc. (OneMain). The net-of-tax gain was $5,921. For the six
months ended June 30, 2000, other expense included $2,965 recognized as an
"other than temporary" decrease in the market value of OneMain. The
net-of-tax loss from that adjustment was $1,957. Excluding the gain in 1999
and the loss in 2000 from the sale of SuperNet/OneMain share valuation,
earnings per share was a loss of $0.43 in 2000 versus a loss of $0.30 in
1999.
Three months ended June 30, 2000 compared to the three months
ended June 30, 1999
Operating Revenues. Consolidated operating revenues for the three months
ended June 30, 2000 were $16,812, up 6.9% from $15,731 for the second
quarter in 1999. The primary reason for this increase was the increase in
support services provided to affiliated companies and the acquisition of
CompuSpirit, Inc. (CSI) on April 28, 2000.
Telecommunications Services segment revenues increased 0.2% to $9,779
in 2000 from $9,764 in 1999. The increase was attributable to an increase
of approximately 4% in the number of telephone access lines in service and
increased local private network revenues.
10
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Telephone & Data Services segment revenues increased 14.5% to $4,679
in 2000 from $4,086 in 1999. The increase resulted approximately $600 from
sales of CSI, which was acquired in April 2000. Telecommunication equipment
and data cabling installations increased $217 during the second quarter of
2000 compared to the same period in 1999 while computer networking services
from installations of software and computer hardware declined $291.
Wireless Services segment revenues increased 37.3% to $2,007 in 2000
from $1,462 in 1999. The increase was primarily from expansion of sales and
customer support services provided to PCS ONE.
International Communication Services segment revenues decreased 60.6%
to $165 in 2000 from $419 in 1999 primarily as a result of the sale of
Monor Telephone Company (MTT) in December 1999.
Operating Expenses. Consolidated operating expenses for the three
months ended June 30, 2000 were $15,063, up from $13,553 in 1999. The
reasons for the increase included higher support service costs for
affiliates, expenses related to CSI which was acquired during the second
quarter 2000, and increased marketing and customer services expenditures.
Communication service expenses include network operations, network
access, directory advertising, and support services costs. Communication
service cost in this category, increased 21.1% to $2,458 in 2000 from
$2,030 in 1999. An increase in support service costs was partially due to
approximately $453 for support services provided to PCS ONE with decreases
of $255 for European operations and $144 for OneMain. In addition, these
costs increased $366 as a result of the CSI acquisition. Network operations
expenses increased 18.3%, partially resulting from the extension of
competitive local exchange carrier (CLEC) services and expenses related to
the development of new product services.
The cost of communication products sold decreased 1.8% to $2,020 in
2000 from $2,058 in 1999. The decrease related to decreased equipment and
cabling sales and decreases in computer networking installations.
11
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Depreciation and amortization expense increased 16.6% to $2,746 in
2000 from $2,356 in 1999. Depreciation increased $390 primarily as a result
of continuing capital additions.
Marketing and customer services expense increased 36.0% to $1,692 in
2000 from $1,244 in 1999. All the categories of marketing, sales,
advertising, and customer service increased, with a large portion of these
increases attributable to the continued development of CLEC services since
October 1999.
General and administrative services decreased to $2,739 in 2000 from
$2,756 in 1999. The decrease was primarily attributable to the timing of
accruals for the pension and long-term incentive plans.
Other Income (Expense). Other income (expense) for the three months
ended June 30, 2000 was a net expense of $6,713, compared with a net
expense of $2,797 in the second quarter of 1999. For the quarter ended June
30, 2000, other expense included $2,965 recognized as an "other than
temporary" decrease in the market value of OneMain. Equity in the net
losses of affiliates increased $1,048, primarily from $1,015 in increased
European activity losses and $33 of increased losses of PCS ONE. The loss
from European activity includes a legal settlement. See Part II Item 1 (b)
Legal Proceedings. Future losses are expected to continue while PCS ONE and
Pilicka develop their business and until completion of the sale of Pilicka,
which is now in arbitration before the International Court of Arbitration
at the International Chamber of Commerce.
Interest expense decreased 5.6% to $435 in 2000 from $461 in 1999.
Long-term debt repayments and increased interest expense capitalized in
connection with a building expansion accounted for the decrease in interest
expense.
Income taxes. Income taxes were a benefit of $1,054 for the three
months ended June 30, 2000, compared to $145 in 1999. The change was
primarily related to the other than temporary decline in OneMain market
value of $2,965 with a tax effect of $1,008.
12
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Six months ended June 30, 2000 compared to the six months ended
June 30, 1999
Operating Revenues. Consolidated operating revenues for the six months
ended June 30, 2000 were $33,824, up 6.9% from $31,633 for the first half
of 1999. The primary reason for this increase was the increase in support
services provided to affiliated companies and the acquisition of CSI on
April 28, 2000.
Telecommunications Services segment revenues increased 1.3% to $19,289
in the first half of 2000 from $19,043 in 1999. The increase was
attributable to an increase of approximately 4% in the number of telephone
access lines in service, increased local private network revenues and
volume increases in intrastate and interstate network access revenues.
Telephone & Data Services segment revenues decreased 0.9% to $8,872 in
the first half of 2000 from $8,950 in 1999. The decrease resulted from
decreased sales of telecommunication equipment and data cabling
installations and from a 5% decrease in computer networking services from
installations of software and computer hardware. These decreases were
offset by approximately $600 of revenue from CSI which was acquired in
April 2000.
Wireless Services segment revenues increased 45.3% to $4,163 in the
first half of 2000 from $2,865 in 1999. The increase was primarily from
expansion of sales and customer support services provided to PCS ONE.
International Communication Services segment revenues increased 56.2%
to $1,211 in the first half of 2000 from $775 in 1999. The increase was
partially the result of one-time service revenues of $700 early in 2000
which was not repeated in the second quarter and is not anticipated in
future quarters.
Operating Expenses. Consolidated operating expenses for the six months
ended June 30, 2000 were $30,524, up from $27,008 in 1999. The reasons for
the increase included higher support service costs for affiliates, expenses
related to CSI which was acquired during the second quarter 2000, and
increased marketing and customer services expenditures.
Communication service expenses include network operations, network
access, directory advertising, and communication service costs.
13
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Communication service cost in this category increased 42.2% to $5,670 in
2000 from $3,988 in 1999. An increase of $1,311 in support service costs
was primarily due to $1,104 for support services provided to PCS ONE, $435
for European operations and a decrease for OneMain of $228. Increased costs
of $366 were attributable to the acquisition of CSI. Network operations
expenses increased 16.9% partially resulting from the expansion of CLEC
services and expenses related to the development of new product services.
The cost of communication products sold decreased 9.5% to $4,176 in
the first half of 2000 from $4,614 in 1999. The decrease related to
decreased equipment and cabling sales, which were partially offset by an
increase in computer networking installation costs.
Depreciation and amortization expense increased 15.5% to $5,384 in the
first half of 2000 from $4,661 in 1999. Depreciation increased $723
primarily as a result of continuing capital additions.
Marketing and customer services expense increased 31.9% to $3,076 in
the first half of 2000 from $2,332 in 1999. All the categories of
marketing, sales, advertising, and customer service increased, with a large
portion of these increases attributable to the continued development of
CLEC services since October 1999.
General and administrative services increased 8.8% to $5,593 in the
first half of 2000 from $5,140 in 1999. The increase was primarily
attributable to the short-term and long-term incentive plans and increased
information systems expenses.
Other Income (Expense). Other income (expense) for the six months
ended June 30, 2000 was a net expense of $9,368, compared with a net income
of $2,415 in the first half of 1999. The 1999 amount included a one-time
gain of $8,982 from the exchange of D&E SuperNet, Inc. stock for cash and
stock in OneMain.com, Inc. The six months ended June 30, 2000 included a
loss of $2,965 from recognition of an "other than temporary" decline in the
market value of the OneMain shares. Equity in the net losses of affiliates
were $195 greater primarily due to increased losses from European activity.
D&E's equity in PCS ONE's losses decreased from a loss of $4,681 in 1999 to
a loss of $3,987 in 2000. Losses from the European activity increased from
a loss of $1,708 to a loss of $2,577 in 2000. Equity in the income of
SuperNet decreased by $20 as a result of the sale to OneMain in 1999.
14
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Future losses are expected to continue while PCS ONE and Pilicka develop
their business and until completion of the sale of Pilicka, which is now in
arbitration before the International Court of Arbitration at the
International Chamber of Commerce.
Interest expense decreased 10.8% to $824 in the first half of 2000
from $924 in 1999. Long-term debt repayments and increased interest expense
capitalized in connection with a building expansion accounted for the
decrease in interest expense.
Income taxes. Income taxes were a benefit of $949 for the six months
ended June 30, 2000, compared to an expense of $3,291 in 1999. The change
was primarily from taxes of $3,061 accrued in 1999 related to the gain on
the SuperNet stock exchange and the benefit of $1,008 tax reduction
attributable to the loss recognized for the decrease in market value of the
OneMain shares in 2000.
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.
Cash provided from operations was $8,491. The net decrease of
investments in affiliates was $12,562, primarily from the receipt of funds
in January 2000 from PenneCom's sale of Monor Telephone Company in Hungary
late in 1999. These funds provided the source for net additions to
temporary investments of $4,666 and funded capital expenditures of $7,403.
Capital additions were primarily for digital electronic switching and
circuit equipment, computers, and initial switching equipment purchased to
provide CLEC services. Dividend payments were $1,370, and cash balances
increased $1,674.
At June 30, 2000, $16,392 was invested in commercial paper and other
investment grade securities while $7,027 was held in liquid
15
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
cash balances. The investment balance continues to include $7,000 held as
collateral for a bank loan made to PenneCom. D&E also maintains available
short-term lines of credit of $25,000. D&E's ratio of total debt to total
debt plus capital increased to 25.4% at June 30, 2000 from 24.5% at
December 31, 1999.
OTHER
D&E Telephone files its own tariff rates with the Pennsylvania Public
Utility Commission (PUC) for such services as dial tone and calling
features. In compliance with state statutory law, commonly known as Chapter
30, D&E Telephone joined in a petition to the PUC in July 1998 for an
alternative form of regulation. On March 30, 2000 the PUC issued a revised
Order. D&E Telephone accepted the PUC Order, and filed an amended plan
before July 1, 2000 to accelerate network modernization. Subject to final
regulatory approval, the plan will lead to a new ratemaking process where,
instead of a rate base/rate of return methodology, prices are adjusted in
accordance with the Gross Domestic Product Price Index with a productivity
offset.
On April 28, 2000, D&E acquired substantially all of the assets and
liabilities of CompuSpirit, Inc., a computer network service provider for
$2,400 in a combination of cash and 26,220 shares of common stock. All such
shares are unregistered but have certain registration rights. A contingent
purchase price agreement provides for payments up to $600 dependent on
meeting certain future earnings goals. The acquisition was accounted for
under the purchase method of accounting. The proforma results of
CompuSpirit, Inc. are not significant to the consolidated results of
operations or financial condition.
On May 17, 2000, PCS ONE entered into a financing agreement with a
bank to provide a $70,000 credit facility. The joint venture partners have
no guarantee requirement in connection with this agreement. D&E and its
joint venture partner must maintain contributed capital plus certain
additional allowable deposit and license acquisition costs at a level of
66.7% of the funds borrowed. On June 30, 2000, the partners had an
allowable capital contribution of $41,048 making $61,578 of the facility
available. Approximately $40,000 of the proceeds were used to repay a
vendor loan agreement under which D&E was jointly and severally liable to
contribute up to a total of $50,000 equity to PCS ONE in the
16
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
event that PCS ONE was unable to meet its obligations as they came due.
On April 3, 2000, the Financial Accounting Standards Board issued FIN
44, "Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25" which clarifies, among other issues, (a) the
definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms
of a previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in the Interpretation cover
specific events that occur after December 15, 1998. To the extent that the
Interpretation covers events occurring during the period after December 15,
1998, but before the effective date of July 1, 2000, the effects of
applying the Interpretation are recognized on a prospective basis from July
1, 2000. Management is currently evaluating the impact, if any, the
Interpretation will have on D&E's financial position or results of
operation.
In July, 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101B which amends the implementation date of
SAB 101, "Revenue Recognition" to the three month period ending December
31, 2000. SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in the financial statements. Management is currently
assessing the impact, if any, SAB 101 will have on D&E's financial position
or results of operations.
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements as
to the future performance of D&E and its various domestic and international
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.
17
<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.
18
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
Item 1. Legal Proceedings
(a) Sale of Pilicka Telefonia S.A. to Elektrim S.A.
In April 1999, PenneCom B.V. (PenneCom), a Netherlands limited
liability company which provides communications services in Central Europe
and is owned by EuroTel, LLC (EuroTel), a domestic limited liability
company in which D&E Investments, Inc. has a one-third ownership interest,
signed an agreement to sell, subject to Polish regulatory review, its
shares of Pilicka Telefonia, Sp.zo.o. (Pilicka), a Polish corporation, to
Elektrim S.A. (Elektrim), another Polish corporation, for $140 million in
cash and notes. Polish regulatory authorities approved the proposed
purchase on July 27, 1999. However, on July 28, 1999, Elektrim issued
written notice that it was repudiating the purchase agreement, alleging
that unspecified actions of representatives of Pilicka and PenneCom
constituted fraudulent inducement, thereby rendering the purchase agreement
void (and of no further effect). On August 2, 1999, PenneCom filed an
arbitration request with the International Court of Arbitration at the
International Chamber of Commerce seeking specific performance of the
agreement as well as compensatory and punitive damages. On September 27,
1999, Elektrim filed an answer and counterclaim alleging that its
repudiation of the agreement was justified because, among other things,
PenneCom altered its normal course of business, constituting a "material
adverse change." In its counterclaim, Elektrim requested a dismissal of all
claims brought by PenneCom, a declaration that the agreement was void or
that Elektrim was justified in repudiating the agreement, and a repayment
by PenneCom of Elektrim's $10 million deposit. The discovery, briefing and
hearing phases are complete and a decision is expected to occur in the
third quarter of fiscal 2000. It is not possible at this time to express an
opinion as to the outcome of the arbitration.
(b) Boles Litigation
On March 26, 1999, representatives of PenneCom informed a
representative of Boles Knop L.L.C. (Boles) that PenneCom had accepted an
unsolicited offer from Elektrim to purchase 100% of the shares of Pilicka.
See Item 1(a) above. Later on March 26, 1999, Boles delivered a letter
asserting that it was due a substantial fee in connection with such
transaction under PenneCom's investment banking agreement with Boles.
PenneCom disputed these assertions by Boles, and following discussions
among the parties, EuroTel and PenneCom commenced an action in May 1999, in
the United States District Court for Nebraska against Boles to resolve the
dispute. On June 7, 1999, Boles filed a counterclaim against EuroTel and
PenneCom and a third-party
19
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
complaint and issued service of process upon D&E and the other two owners
of EuroTel.
On May 26, 2000, a settlement agreement was signed resolving all
claims relating to the dispute. Pursuant to the agreement, PenneCom made a
payment of $1,250 to Boles on June 5, 2000. The parties to the settlement
agreement agreed, among other things, that the payment was not an admission
that any claims of Boles had merit and acknowledged that the parties
desired to avoid the expense and uncertainties of discovery and a trial.
D&E is involved in other various legal proceedings arising in the
ordinary course of its business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on
D&E's consolidated financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
On April 28, 2000, D&E acquired substantially all of the assets and
liabilities of CompuSpirit, Inc., a computer network service provider for
$2,400 in cash and stock. In connection with the acquisition, D&E issued
26,220 shares of common stock to the shareholder of CompuSpirit, Inc. This
transaction was deemed to be exempt from registration under the Securities
Act of 1933, as amended, by virtue of Section 4 (2) or Regulation D
promulgated thereunder, including Rule 506 of Regulation D. The shareholder
of CompuSpirit, Inc. is an "accredited investor" within the meaning of Rule
501 of Regulation D under the Securities Act. The purchaser represented its
intention to acquire the securities for investment only and not with a view
to the distribution thereof. Required disclosure was provided, or access to
information in lieu of disclosure was present. Required legends are affixed
to the securities issued in such transaction.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Date of Meeting. The Annual Meeting of Shareholders was held on
April 27, 2000.
(c) Matters Voted Upon at Annual Meeting. The vote tabulations in respect
to the three matters voted upon at the 2000 Annual Meeting were as follows:
(1) Election of the following directors to hold office for a
three year term to expire in 2003.
20
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
Director For Withheld
--------------------- --------- --------
Mr. Thomas H. Bamford 6,365,910 3,354
Mr. Ronald E. Frisbie 6,368,786 1,201
Mr. Robert M. Lauman 6,362,465 13,589
Mr. D. Mark Thomas 6,364,735 3,392
(2) Approval of the D&E Communications, Inc. 2000 Employee Stock
Purchase Plan.
In Favor Against Abstain
-------- ------- -------
6,340,165 22,337 17,515
(3) Ratification of the Board of Directors' selection of
PricewaterhouseCoopers LLP as independent accountants in 2000.
In Favor Against Abstain
-------- ------- -------
6,358,985 3,392 17,640
The terms of Paul B. Brubaker, Robert A. Kinsley, Steven B. Silverman,
Anne B. Sweigart, John Amos, G. William Ruhl, and W. Garth Sprecher
continued after the Annual Meeting.
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:
One current report on Form 8-K dated June 9, 2000, was filed during
the quarter ended June 30, 2000. The report disclosed the settlement of a
dispute between Boles Knop & Company, L.L.C. and PenneCom, and several
other parties affiliated with PenneCom, regarding fees due under the terms
of an investment banking agreement with Boles. On May 26, 2000, a
settlement agreement was signed resolving all claims relating to the
dispute. Pursuant to the agreement, PenneCom made a payment of $1,250 to
Boles on June 5, 2000. The parties to the settlement agreement agreed,
among
21
<PAGE>
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
other things, that the payment was not an admission that any claims of
Boles had merit, and acknowledged that the parties desired to avoid the
expense and uncertainties of discovery and a trial.
22
<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 10, 2000
By: /s/ Anne B. Sweigart
--------------------------------
Anne B. Sweigart
President, Chairman of the Board, and
Chief Executive Officer
(On behalf of the Registrant)
Date: August 10, 2000
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)
23
<PAGE>
D&E Communications, Inc. and Subsidiaries
INDEX TO EXHIBITS
Exhibit Identification
No. of Exhibit Reference
------- -------------- ---------
27 Financial Data Schedule. Filed herewith.