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, 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 May 5, 2000
- -------------------------------------- --------------------------
Common Stock, par value $.16 per share 7,367,207 Shares
<PAGE>
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, 2000 and 1999 ..................... 1
Consolidated Balance Sheets --
March 31, 2000 and December 31, 1999 ........ 2
Consolidated Statements of Cash Flows --
For the three months ended
March 31, 2000 and 1999...................... 3
Consolidated Statement of Comprehensive Income --
For the three months ended
March 31, 2000 and 1999 ..................... 4
Notes to Consolidated Financial Statements ........... 5-9
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 10-14
3. Quantitative and Qualitative Disclosure
about Market Risks ................................... 15
PART II. OTHER INFORMATION
1. Legal Proceedings............................................... 16-17
6. Exhibits and Reports on Form 8-K ............................... 18
SIGNATURES ..................................................... 19
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)
<TABLE>
<CAPTION>
Three months ended
March 31
2000 1999
-------- --------
<S> <C> <C>
OPERATING REVENUE
Communication service revenues.................... $ 13,808 $ 12,153
Communication products sold....................... 2,872 3,452
Other............................................. 332 297
-------- --------
Total Operating Revenues............................... 17,012 15,902
-------- --------
OPERATING EXPENSES
Communication service expenses.................... 6,429 5,120
Cost of communication products sold............... 2,156 2,557
Depreciation and amortization..................... 2,638 2,305
Marketing and customer services................... 1,384 1,089
General and administrative services............... 2,854 2,384
-------- --------
Total Operating Expenses............................... 15,461 13,455
-------- --------
Operating Income.................................. 1,551 2,447
-------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction...... 11 5
Equity in net losses of affiliates................ (2,758) (3,611)
Interest expense.................................. (389) (463)
Gain on sale of investment........................ -- 8,982
Other, net........................................ 481 299
-------- --------
Total Other Income (Expense)........................... (2,655) 5,212
-------- --------
Income (loss) before income taxes and
dividends on utility preferred stock........... (1,104) 7,659
INCOME TAXES AND DIVIDENDS ON
UTILITY PREFERRED STOCK
Income taxes...................................... 105 3,147
Dividends on utility preferred stock.............. 16 16
-------- --------
Total Income taxes and dividends
on utility preferred stock.......................... 121 3,163
-------- --------
NET INCOME (LOSS)......................................... $ (1,225) $ 4,496
======== ========
Average common shares outstanding................. 7,339 7,424
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net income (loss) per common share................ $ (0.17) $ 0.61
======== ========
Dividends per common share................................ $ 0.10 $ 0.10
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 2,832 $ 1,674
Temporary investments, including $7,000 and zero restricted . 18,416 11,726
Accounts receivable ......................................... 7,468 7,787
Accounts receivable - affiliated companies .................. 9,096 5,152
Inventories, lower of cost or market, at average cost ....... 1,278 1,302
Prepaid expenses ............................................ 4,811 1,088
Other ....................................................... 364 310
-------- --------
TOTAL CURRENT ASSETS ..................................... 44,265 29,039
-------- --------
INVESTMENTS
Investments and advances in affiliated companies ............ -- 11,994
Investments available-for-sale .............................. 7,996 6,371
-------- --------
7,996 18,365
-------- --------
PROPERTY, PLANT AND EQUIPMENT
In service .................................................. 136,034 131,753
Under construction .......................................... 2,703 4,092
-------- --------
138,737 135,845
Less accumulated depreciation ............................... 72,032 69,949
-------- --------
66,705 65,896
-------- --------
OTHER ASSETS ....................................................... 1,364 1,354
-------- --------
TOTAL ASSETS ................................................ $120,330 $114,654
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt maturing within one year ..................... $ 1,007 $ 1,007
Accounts payable and accrued liabilities .................... 8,142 9,662
Accrued taxes ............................................... 326 324
Accrued interest and dividends .............................. 565 439
Advance billings, customer deposits and other ............... 3,680 1,224
-------- --------
TOTAL CURRENT LIABILITIES ................................ 13,720 12,656
-------- --------
LONG-TERM DEBT ..................................................... 21,582 21,582
-------- --------
OTHER LIABILTIES
Equity in net losses of affiliates in excess of
investments and advances .................................. 4,606 --
Deferred income taxes ....................................... 10,701 9,785
Other ....................................................... 998 861
-------- --------
16,305 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 .. 1,195 1,194
Outstanding shares: 7,340,531 at March 31, 2000
7,339,362 at December 31, 1999
Additional paid-in capital .................................. 37,153 37,026
Unrealized gain (loss) on investments ....................... 343 (539)
Unearned ESOP Compensation .................................. (153) (153)
Retained earnings ........................................... 31,324 33,281
Treasury stock at cost, 151,302 shares at March 31, 2000
146,112 shares at December 31, 1999 ....................... (2,585) (2,485)
-------- --------
67,277 68,324
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $120,330 $114,654
======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES............................................ $ 2,065 $ 3,466
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of proceeds from sales and removal costs...... (3,412) (1,596)
Proceeds from sale of temporary investments............................. 11,726 11,866
Purchase of temporary investments....................................... (18,416) (14,713)
Proceeds from sale of investment in affiliated company ................. --- 2,420
Increase in investments and advances to affiliates...................... (8,197) (8,095)
Decrease in investments and repayments from affiliates.................. 18,095 6,153
------- -------
Net Cash Used In Investing Activities....................... (204) (3,965)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock............................................... (684) (673)
Proceeds from issuance of common stock.................................. 80 67
Purchase of treasury stock.............................................. (99) (550)
------- -------
Net Cash Used In Financing Activities....................... (703) (1,156)
------- -------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS....................................................... 1,158 (1,655)
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD........................................................ 1,674 7,192
------- -------
END OF PERIOD.............................................................. $ 2,832 $ 5,537
======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
Three months ended
March 31
2000 1999
---- ----
Net income (loss) ............................. $(1,225) $ 4,496
Other comprehensive income:
Unrealized gain on investments, net of
income taxes of $743 and $1,500........... 882 2,913
------ -------
Total comprehensive income (loss) ............. $ (343) $ 7,409
====== =======
See notes to consolidated financial statements.
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)
(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.
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)
(2) 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
March 31
2000 1999
---- ----
Net sales ....... $7,140 $3,157
Net loss ........ ($3,454) ($5,028)
D&E's share
of loss........ ($1,727) ($2,514)
(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, cable television 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>
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) 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.
On March 24, 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101A which amends the implementation date of SAB
101, "Revenue Recognition" to the three month period ending June 30, 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.
(4) SUBSEQUENT EVENTS
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 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 $600 to CompuSpirit contingent on
meeting certain future earnings goals. CompuSpirit's results of operations would
not have made a material change in D&E's first quarter earnings if such results
had been included from the beginning of the year.
7
<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)
(5) 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 legal proceeding.
8
<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)
(6) BUSINESS SEGMENT DATA
Financial results for D&E's four primary operating segments are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31
2000 1999
---- ----
External Customer Revenues
<S> <C> <C>
Telecommunication Services................. $9,510 $9,279
Telephone & Data Services.................. 4,193 4,864
Wireless Services.......................... 2,156 1,403
International Communication Services....... 1,046 356
Corporate, Other and Eliminations.......... 107 ---
------------ --------------
Total Company........................... $17,012 $15,902
============ ==============
Intersegment Revenues
Telecommunication Services................. $414 $350
Telephone & Data Services.................. 122 88
Corporate, Other and Eliminations.......... (536) (438)
------------ --------------
Total Company........................... --- ---
============ ==============
Net Income (Loss)
Telecommunication Services................. $962 $1,265
Telephone & Data Services.................. (15) 115
Wireless Services.......................... (1,130) (1,670)
International Communication Services....... (1,064) (1,287)
Corporate, Other and Eliminations.......... (8) 6,073
------------ --------------
Total Company........................... $(1,225) $4,496
============ ==============
Assets
Telecommunication Services................. $106,007 $95,232
Telephone & Data Services.................. 7,253 8,057
Wireless Services.......................... 6,324 4,726
International Communication Services....... 2,783 6,626
Corporate, Other and Eliminations.......... (2,037) 5,691
----------- --------------
Total Company.......................... $120,330 $120,332
============ ==============
</TABLE>
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
(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 ended March 31, 1999 have been reclassified for comparative
purposes.
RESULTS OF OPERATIONS
Summary. Operating revenues increased 7.0% for the three months March 31,
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 9.1% for the first quarter of 2000 compared
to 15.4% for the first 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.
For the quarter ended March 31, 1999, other income included a gain of
$8,982 from the exchange of D&E SuperNet, Inc. stock for cash and stock in
OneMain.com, Inc. The net-of-tax gain was $5,921. Net income (loss) for the
quarter ended March 31, 2000 was a loss of $1,225 or $0.17 per share compared to
an income of $4,496 or $0.61 per share in 1999. The current year improved by
$200 over 1999 if the gain in 1999 from the sale of SuperNet is excluded.
Operating Revenues. Consolidated operating revenues for the three months
ended March 31, 2000 were $17,012, up 7.0% from $15,902 for the first quarter in
1999. The primary reason for this increase was the increase in support services
provided to affiliated companies.
Telecommunications Services segment revenues increased 2.5% to $9,510 in
2000 from $9,279 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 13.8% to $4,193 in
2000 from $4,864 in 1999. The decrease resulted from decreased sales of
telecommunication equipment and data cabling installations that were high in the
first quarter of 1999 which was partially offset by a 13% increase in computer
networking services from installations of software and computer hardware.
10
<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
(Dollar amounts are in thousands)
Wireless Services segment revenues increased 53.7% to $2,156 in 2000 from
$1,403 in 1999. The increase was primarily from expansion of sales and customer
support services provided to PCS ONE.
International Communication Services segment revenues increased 193.8% to
$1,046 in 2000 from $356 in 1999. The increase was primarily driven by one-time
service revenues of $700 that will not be repeated in future quarters.
Operating Expenses. Consolidated operating expenses for the three months
ended March 31, 2000 were $15,461, up from $13,455 in 1999. The primary reason
for the increase was the increase in support service costs that included
approximately $700 of one-time costs that will not be repeated in future
quarters.
Communication service expenses include network operations, network access,
and directory advertising, which increased at approximately the same rate as
revenue growth. Communication service costs, including the support service cost
in this category, increased 64.2% to $3,212 in 2000 from $1,956 in 1999. The
increase in support service costs included in this category was mainly due to
approximately $647 for support services provided to PCS ONE and $691 for
European operations.
The cost of communication products sold decreased 15.7% to $2,156 in 2000
from $2,557 in 1999. The decrease related to decreased equipment and cabling
sales, which was offset by increases in computer networking installations.
Depreciation and amortization expense increased 14.5% to $2,638 in 2000
from $2,305 in 1999. Depreciation increased $314 from continuing capital
additions.
Marketing and customer services expense increased 27.1% to $1,384 in 2000
from $1,089 in 1999. All the categories of marketing, sales, advertising, and
customer service increased, with nearly half of these increases attributable to
the continued development of a competitive local exchange carrier (CLEC) which
commenced service in October 1999.
General and administrative services increased 19.7% to $2,854 in 2000 from
$2,384 in 1999. The increase was primarily attributable to the annual and
long-term incentive plans, and other benefit accruals.
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
(Dollar amounts are in thousands)
Other Income (Expense). Other income (expense) for the three months ended
March 31, 2000 was a net expense of $2,655, compared with a net income of $5,212
in the first quarter of 1999. For the quarter ended March 31, 1999, other income
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. Equity in the net losses of affiliates
decreased primarily due to decreased losses of PCS ONE. D&E's equity in PCS
ONE's losses decreased from a loss of $2,465 to a loss of $1,739. Losses from
the European activity were $146 lower than incurred in 1999. 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 16.0% to $389 in 2000 from $463 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 $105 for the three months ended March 31,
2000, compared to $3,147 in 1999. The decrease was primarily related to the tax
attributable to the gain on the sale of SuperNet stock in 1999 with no similar
transaction 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 $2,065. The net decrease of investments
in affiliates was $9,898, primarily from the receipt of funds in January 2000
from PenneCom's sale of Monor Telephone
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
(Dollar amounts are in thousands)
Company in Hungary late in 1999. These funds provided the source for net
additions to temporary investments of $6,690 and funded capital expenditures of
$3,422. Capital additions were primarily for digital electronic switching and
circuit equipment, computers, and initial switching equipment for equipment
purchased to provide CLEC services. Dividend payments were $684, and cash
balances increased $1,158.
At March 31, 2000, $18,416 was invested in commercial paper and other
investment grade securities while $2,832 was held in liquid 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
25.2% at March 31, 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 will file an amended plan before July 1, 2000 to
accelerate network modernization. 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 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,
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
(Dollar amounts are in thousands)
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.
On March 24, 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101A which amends the implementation date of SAB
101, "Revenue Recognition" to the three month period ending June 30, 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.
D&E has not experienced any significant year 2000 problems to date and does
not expect any that would impair its operations. However, due to the complexity
of the year 2000 issue, even the most conscientious efforts cannot guarantee
every problem has been found. D&E is continuing to monitor critical operation
and business systems and its contingency plans in the event a problem should
occur in the coming months. Management believes the changes completed will avoid
any 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.
14
<PAGE>
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.
15
<PAGE>
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 the final briefing phase
is expected to occur in the second quarter of fiscal 2000. D&E fully expects
that PenneCom will continue to vigorously pursue enforcement of the agreement
and defense of the counterclaim. However, 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 its investment banking
agreement with Boles (the Agreement). 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 the
District of
16
<PAGE>
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
Nebraska against Boles to resolve the dispute. In their federal court action,
EuroTel and PenneCom are seeking a declaratory judgment that they have no
obligation to Boles for a commission relating to the sale of Pilicka.
On June 7, 1999, Boles filed a counterclaim against EuroTel and PenneCom
and a third-party complaint and issued service of process upon D&E, and the
other two owners of EuroTel seeking recovery for the additional fees it alleges
to be due to it under the Investment Banking Agreement and seeking punitive or
treble damages on fraud, conspiracy and misrepresentation theories. On August 6,
1999, D&E filed a motion seeking to dismiss the fraud, conspiracy, and
misrepresentation causes of action, which form the basis for the punitive and
treble damages claim, and for an order requiring a more definitive complaint. On
October 25, 1999, Boles filed a motion to transfer venue from the United States
District Court for the District of Nebraska to the United States District Court
for the Eastern District of Virginia, Alexandria Division.
On December 28, 1999, the court entered an Order denying D&E's motion to
dismiss, but requiring Boles to amend its third-party complaint to clarify its
fraud and conspiracy causes of action. Also, on December 28, 1999, the court
entered a separate Order denying Boles' motion to transfer venue. Pursuant to
the court's Order, on January 19, 2000, Boles filed an amended counterclaim
against EuroTel and PenneCom and an amended third-party complaint against D&E
and the other two owners of EuroTel. In the amended pleading, Boles voluntarily
dropped the fraud claims but continued to assert causes of action for breach of
contract and conspiracy and to request declaratory relief against EuroTel,
PenneCom, D&E and the other two owners of EuroTel. EuroTel and PenneCom have
filed a motion to dismiss only the conspiracy counts. D&E has filed a motion to
dismiss not only the conspiracy counts, but also the breach of contract and
declaratory judgment counts. On April 18, 2000, the court dismissed the breach
of contract and the declaratory judgment counts against D&E. The motion to
dismiss the conspiracy counts was denied on the ground that additional facts
need to be developed during discovery before the court can decide that issue.
The facts have not been fully developed and it is not possible at this time to
predict the likelihood, if any, of Boles recovering damages against D&E,
PenneCom, or EuroTel.
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.
17
<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 8-K were filed during the quarter ended March 31, 2000.
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: May 12, 2000
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, 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)
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF
May 12, 2000.
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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