<PAGE> 1
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 September 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.
<TABLE>
<CAPTION>
Class Outstanding at November 3, 2000
----- -------------------------------
<S> <C>
Common Stock, par value $.16 per share 7,385,737 Shares
</TABLE>
<PAGE> 2
Form 10-Q
D&E Communications, Inc. and Subsidiaries
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
-------- ----
<S> <C>
PART I. FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Operations --
For the three months and nine months ended
September 30, 2000 and 1999 ..................... 1
Consolidated Balance Sheets --
September 30, 2000 and December 31, 1999 ........ 2
Consolidated Statements of Cash Flows --
For the nine months ended
September 30, 2000 and 1999...................... 3
Consolidated Statement of Comprehensive Income --
For the three months and nine months ended
September 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 .................................... 19
PART II. OTHER INFORMATION
1. Legal Proceedings............................................ 20
2. Changes in Securities and Use of Proceeds.................... 21
6. Exhibits and Reports on Form 8-K ............................ 21
SIGNATURES .................................................. 22
</TABLE>
i
<PAGE> 3
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 Nine Months Ended
September 30 September 30
OPERATING REVENUE 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Communication service revenues .................... $ 15,603 $ 12,691 $ 43,095 $ 37,444
Communication products sold ....................... 3,073 2,854 8,722 9,087
Other ............................................. 361 317 1,044 964
-------- -------- -------- --------
Total Operating Revenues ....................... 19,037 15,862 52,861 47,495
-------- -------- -------- --------
OPERATING EXPENSE
Communication service expenses (exclusive of
depreciation and amortization below) ........... 7,154 5,328 19,449 15,589
Cost of communication products sold ............... 2,330 2,021 6,506 6,635
Depreciation and amortization ..................... 3,159 2,530 8,543 7,191
Marketing and customer services ................... 1,781 1,260 4,857 3,592
General and administrative services ............... 3,524 2,458 9,117 7,598
-------- -------- -------- --------
Total Operating Expenses ....................... 17,948 13,597 48,472 40,605
-------- -------- -------- --------
Operating Income .......................... 1,089 2,265 4,389 6,890
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Allowance for funds used during construction ...... 96 11 120 25
Equity in net losses of affiliates ................ (3,616) (3,506) (10,180) (9,875)
Interest expense .................................. (421) (459) (1,245) (1,383)
Gain (loss) on investments ........................ (413) -- (3,378) 8,982
Other, net ........................................ 439 349 1,400 1,061
-------- -------- -------- --------
Total Other Income (Expense) ................... (3,915) (3,605) (13,283) (1,190)
-------- -------- -------- --------
Income (loss) before income taxes and
dividends on utility preferred stock ... (2,826) (1,340) (8,894) 5,700
INCOME TAXES AND DIVIDENDS ON
UTILITY PREFERRED STOCK
Income taxes ...................................... (410) 159 (1,359) 3,450
Dividends on utility preferred stock .............. 16 16 49 49
-------- -------- -------- --------
Total Income taxes and dividends
on utility preferred stock .................. (394) 175 (1,310) 3,499
-------- -------- -------- --------
NET INCOME (LOSS) ..................................... $ (2,432) $ (1,515) $ (7,584) $ 2,201
======== ======== ======== ========
Average common shares outstanding ................. 7,398 7,381 7,365 7,398
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net income (loss) per common share ............ $ (0.33) $ (0.21) $ (1.03) $ 0.30
======== ======== ======== ========
Dividends per common share ........................ $ 0.13 $ 0.10 $ 0.33 $ 0.29
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
D & E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30,
2000 December 31,
ASSETS (Unaudited) 1999
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ...................................... $ 5,331 $ 1,674
Temporary investments, including $8,667 and $0 restricted ...... 10,926 11,726
Accounts receivable ............................................ 13,920 7,787
Accounts receivable - affiliated companies ..................... 5,913 5,152
Inventories, lower of cost or market, at average cost .......... 1,835 1,302
Prepaid expenses ............................................... 1,802 1,088
Other .......................................................... 278 310
--------- ---------
TOTAL CURRENT ASSETS ........................................ 40,005 29,039
--------- ---------
INVESTMENTS
Investments and advances in affiliated companies ............... -- 11,994
Investments available-for-sale ................................. 3,417 6,371
--------- ---------
3,417 18,365
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
In service ..................................................... 143,074 131,753
Under construction ............................................. 4,000 4,092
--------- ---------
147,074 135,845
Less accumulated depreciation .................................. 77,109 69,949
--------- ---------
69,965 65,896
--------- ---------
OTHER ASSETS ........................................................ 7,439 1,354
--------- ---------
TOTAL ASSETS ................................................... $ 120,826 $ 114,654
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt maturing within one year ........................ $ 1,029 $ 1,007
Accounts payable and accrued liabilities ....................... 11,758 9,662
Accrued taxes .................................................. 497 324
Accrued interest and dividends ................................. 568 439
Advance billings, customer deposits and other .................. 3,321 1,224
--------- ---------
TOTAL CURRENT LIABILITIES ................................... 17,173 12,656
--------- ---------
LONG-TERM DEBT ...................................................... 21,824 21,582
--------- ---------
OTHER LIABILITIES
Equity in net losses of affiliates in excess of
investments and advances ................................... 10,610 --
Deferred income taxes .......................................... 7,487 9,785
Other .......................................................... 1,294 861
--------- ---------
19,391 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 ..... 1,213 1,194
Outstanding shares: 7,393,103 at September 30, 2000
7,339,362 at December 31, 1999
Additional paid-in capital ..................................... 39,234 37,026
Unrealized gain (loss) on investments .......................... 1,035 (539)
Unearned ESOP Compensation ..................................... (153) (153)
Retained earnings .............................................. 23,307 33,281
Treasury stock at cost, 208,813 shares at September 30, 2000
146,112 shares at December 31, 1999 ................. (3,644) (2,485)
--------- ---------
60,992 68,324
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 120,826 $ 114,654
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES ....................................... $ 11,870 $ 11,644
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of proceeds from sales and removal costs ... (11,570) (8,721)
Acquisition of business, net of cash acquired of $18 ................. (5,893) --
Proceeds from sale of temporary investments .......................... 50,077 29,519
Purchase of temporary investments .................................... (49,277) (29,361)
Proceeds from sale of investment in affiliated company ............... -- 2,420
Increase in investments and advances to affiliates ................... (27,860) (22,353)
Decrease in investments and repayments from affiliates ............... 39,612 15,558
-------- --------
Net Cash Used In Investing Activities .................... (4,911) (12,938)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ............................................ (2,235) (2,005)
Payments on long-term debt ........................................... (129) --
Proceeds from issuance of common stock ............................... 220 225
Purchase of treasury stock ........................................... (1,158) (1,682)
-------- --------
Net Cash Used In Financing Activities .................... (3,302) (3,462)
-------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................................... 3,657 (4,756)
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD .................................................... 1,674 7,192
-------- --------
END OF PERIOD .......................................................... $ 5,331 $ 2,436
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) .................................. $(2,432) $(1,515) $(7,584) $ 2,201
Other comprehensive income:
Unrealized gain(loss) on investments, net of
taxes of ($1,041), ($565), ($250) and ($393) ... (1,654) (1,096) (701) (764)
Reclassification adjustment for losses
included in net income, net of taxes of
$164 and $1,172 ................................ 319 -- 2,276 --
------- ------- ------- -------
Total comprehensive income (loss) .................. $(3,767) $(2,611) $(6,009) $ 1,437
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
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. During the quarter ended September 30,
2000, EarthLink, Inc. completed the acquisition of OneMain. A reduction in
the original value recorded for the shares was recognized as loss of
$2,965 in other expense in the second quarter and an additional loss of
$413 was
5
<PAGE> 8
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)
recognized upon completion of the acquisition.
(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:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............. $ 7,702 $ 4,467 $22,526 $11,624
Net loss .............. ($ 4,779) ($ 4,252) ($12,363) ($13,637)
D&E's share of loss ... ($ 2,389) ($ 2,126) ($ 6,181) ($ 6,818)
</TABLE>
(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 of Part II of this Report.
6
<PAGE> 9
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 has concluded the Interpretation has
no impact on D&E's financial position or results of operation.
In June 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) ACQUISITIONS
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 D&E common stock. All
such shares are unregistered but have certain registration rights. The
agreement, as amended, contains a provision for payment of an additional
$600 in deferred purchase price during 2001 through 2003. 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 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 67,168 shares of
7
<PAGE> 10
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)
D&E common stock. The transaction was accounted for under the purchase
method of accounting. The agreement, as amended, includes a provision for
payment of an additional $1,200 in deferred purchase price during 2001
through 2003. It also includes a provision for an additional payment up to
$300 contingent on meeting certain future events and earnings goals. ASI's
proforma results are not significant to the consolidated results of
operations or financial condition.
(6) SUBSEQUENT EVENTS
On October 30, 2000, D&E announced that its Board of Directors
authorized the repurchase of up to $1 million worth of its shares of
Common Stock. The repurchased shares will be held as treasury shares
available for issuance in connection with future stock dividends and stock
splits, employee benefit plans, executive compensation plans and for
issuance under D&E's Dividend Reinvestment Plan.
(7) CONTINGENCIES
D&E became party to a $40,000 loan agreement from a domestic bank to
PenneCom in December 1999 and further increased the loan to $50,000 in
August 2000. D&E, along with the other two investors in EuroTel, each
increased their pledge of investments as collateral for security on the
loan from $7,000 to $8,667. 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 September 30,2000, the partners had an allowable
capital contribution of $42,548 making $63,820 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> 11
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 Nine months ended
September 30 September 30
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
External Revenues
Telecommunication Services .............. $ 10,019 $ 9,666 $ 29,308 $ 28,709
Telephone & Data Services ............... 6,135 4,285 15,007 13,235
Wireless Services ....................... 2,235 1,633 6,398 4,498
International Communication Services .... 190 277 1,401 1,052
Corporate, Other and Eliminations ....... 458 1 747 1
-------- -------- -------- --------
Total Company ........................ $ 19,037 $ 15,862 $ 52,861 $ 47,495
======== ======== ======== ========
Intersegment Revenues
Telecommunication Services .............. $ 708 $ 365 $ 1,619 $ 1,081
Telephone & Data Services ............... 120 88 403 285
Corporate, Other and Eliminations ....... (828) (453) (2,022) (1,366)
-------- -------- -------- --------
Total Company ........................ $ -- $ -- $ -- $ --
======== ======== ======== ========
Net Income (Loss)
Telecommunication Services .............. $ 1,319 $ 1,358 $ 3,447 $ 3,888
Telephone & Data Services ............... (754) (42) (762) 52
Wireless Services ....................... (1,375) (1,385) (3,906) (4,498)
International Communication Services .... (1,421) (1,280) (4,059) (3,423)
Corporate, Other and Eliminations ....... (201) (166) (2,304) 6,182
-------- -------- -------- --------
Total Company ........................ $ (2,432) $ (1,515) $ (7,584) $ 2,201
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets
Telecommunication Services .............. $ 110,203 $ 100,029
Telephone & Data Services ............... 20,637 6,942
Wireless Services ....................... 6,141 3,693
International Communication Services .... 3,536 15,341
Corporate, Other and Eliminations ....... (19,691) (11,351)
--------- ---------
Total Company $ 120,826 $ 114,654
========= =========
</TABLE>
9
<PAGE> 12
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
(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 nine months ended September 30, 1999 have been
reclassified for comparative purposes.
RESULTS OF OPERATIONS
Summary. Operating revenues increased 20% for the three months ended
September 30, 2000 compared with the same period of 1999. The increase
from two computer services companies acquired during 2000 accounted for
$2,447 or 15% of the increase. Support services to affiliated companies
increased $256 or 2% and other revenues increased $472 or 3% of the total.
Operating profit as a percentage of revenue decreased to 5.7% for the
third quarter of 2000 compared to 14.2% for the third quarter of 1999. The
acquired companies generated a $291 operating loss for the quarter and
because support service revenue is recorded at the cost to provide the
service, the increase in support service revenue contributed to the
decrease in gross profit margin.
Net income (loss) for the nine months ended September 30, 2000 was a
loss of $7,584 or $1.03 per share compared to income of $2,201 or $0.30
per share in 1999. The nine months ended September 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 nine months ended September 30, 2000, other expense
included a $3,378 loss on the exchange of OneMain shares for EarthLink,
Inc. shares. The net-of-tax loss was $2,245. Excluding the gain in 1999
and the loss in 2000 from the exchange of SuperNet/OneMain shares for
EarthLink, Inc. shares, earnings per share was a loss of $0.73 in 2000
versus a loss of $0.50 in 1999.
Three months ended September 30, 2000 compared to the three months
ended September 30, 1999
Operating Revenues. Consolidated operating revenues for the three
months ended September 30, 2000 were $19,037, up 20.0% from $15,862 for
the third quarter in 1999. The primary reason for this increase was the
acquisition of CompuSpirit, Inc. (CSI) on April 28, 2000 and Alternate
Solutions, Inc. (ASI) on August 1, 2000.
10
<PAGE> 13
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
(Dollar amounts are in thousands)
Telecommunications Services segment revenues increased 3.7% to $10,019
in 2000 from $9,666 in 1999. The increase was attributable to an increase
of approximately 3% in the number of telephone access lines in service,
increased local private network revenues and increased revenue from custom
calling features.
Telephone & Data Services segment revenues increased 43.2% to $6,135 in
2000 from $4,285 in 1999. The acquisitions of CSI in April 2000 and ASI in
August 2000 added $2,447 in revenues. Telecommunication equipment and data
cabling installations decreased $371 during the third quarter of 2000
compared to the same period in 1999 while computer networking services
from installations of software and computer hardware declined $363.
Wireless Services segment revenues increased 36.9% to $2,235 in 2000
from $1,633 in 1999. The increase was primarily from expansion of sales
and customer support services provided to PCS ONE.
International Communication Services segment revenues decreased 31.4%
to $190 in 2000 from $277 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 September 30, 2000 were $17,948, up from $13,597 in 1999. The
primary reason for the increase was the expenses related to CSI and ASI
acquired during 2000. New competitive local exchange services and internet
access services developed internally increased expenses over the same
period last year. Support service costs for affiliates also increased over
1999.
Communication service expenses include network operations, network
access, directory advertising, and support services costs. Communication
service cost in this category increased 34.3% to $7,154 in 2000 from
$5,328 in 1999. These costs increased $1,079 as a result of the CSI and
ASI acquisitions. An increase in support service costs was due to
approximately $526 for support services provided to PCS ONE with decreases
of $86 for European operations and $165 for OneMain. The extension of
competitive local exchange carrier (CLEC) services and (ISP) internet
access services increased these costs $643.
11
<PAGE> 14
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
(Dollar amounts are in thousands)
The cost of communication products sold increased 15.3% to $2,330 in
2000 from $2,021 in 1999. The increase related to the CSI and ASI
acquisitions was $663. Other costs decreased $354 since repair order
increases were more than offset by decreased new equipment and cabling
sales and decreases in computer networking installations.
Depreciation and amortization expense increased 24.9% to $3,159 in 2000
from $2,530 in 1999. Depreciation and amortization increased $629
including $311 from the companies acquired and the remainder from
continuing capital additions.
Marketing and customer services expense increased 41.3% to $1,781 in
2000 from $1,260 in 1999. All the categories of marketing, sales,
advertising, and customer service increased, with approximately $340
related to newly acquired companies and $200 of these increases
attributable to the continued development of CLEC and ISP services.
General and administrative services increased 43.4% to $3,524 in 2000
from $2,458 in 1999. The major increases were approximately $344 related
to the two new acquisitions, $240 related to ISP startup expenses and a
$260 increase in incentive compensation plans.
Other Income (Expense). Other income (expense) for the three months
ended September 30, 2000 was a net expense of $3,915, compared with a net
expense of $3,605 in the third quarter of 1999. For the quarter ended
September 30, 2000, other expense included $413 recognized as a loss on
the exchange of OneMain shares for EarthLink, Inc. shares. Equity in the
net losses of affiliates offset the investment loss primarily from a $118
improvement in the results of PCS ONE.
Interest expense decreased 8.3% to $421 in 2000 from $459 in 1999.
Increased interest expense capitalized in connection with a building
expansion accounted for the decrease in interest expense along with
long-term debt repayments.
Income taxes. Income taxes were a benefit of $410 for the three months
ended September 30, 2000, compared to an expense of $159 in 1999. The
change was partially related to the loss on the exchange of OneMain shares
of $413 with a tax effect of $125.
12
<PAGE> 15
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
(Dollar amounts are in thousands)
Nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999
Operating Revenues. Consolidated operating revenues for the nine months
ended September 30, 2000 were $52,861, up 11.3% from $47,495 for the first
nine months of 1999. The primary reason for this increase was acquisitions
of CSI on April 28, 2000 and ASI on August 1, 2000 and the increase in
support services provided to affiliated companies.
Telecommunications Services segment revenues increased 2.1% to $29,308
in the first nine months of 2000 from $28,709 in 1999. The increase was
attributable to an increase of approximately 3% in the number of telephone
access lines in service, increased local private network revenues,
increased use of custom calling features and volume increases in
intrastate and interstate network access revenues.
Telephone & Data Services segment revenues increased 13.4% to $15,007
in the first nine months of 2000 from $13,235 in 1999. The acquisitions of
CSI in April 2000 and ASI in August 2000 added $3,062 to revenues. Sales
of telecommunication equipment and data cabling installations decreased
$933 and computer networking services from installations of software and
computer hardware decreased $494.
Wireless Services segment revenues increased 42.2% to $6,398 in the
first nine months of 2000 from $4,498 in 1999. The increase was primarily
from expansion of sales and customer support services provided to PCS ONE.
International Communication Services segment revenues increased 33.2%
to $1,401 in the first nine months of 2000 from $1,052 in 1999. The
increase was the result of one-time service revenue of $700 early in 2000
which was not repeated thereafter.
Operating Expenses. Consolidated operating expenses for the nine
months ended September 30, 2000 were $48,472, up from $40,605 in 1999. The
primary reason for the increase was the expenses related to CSI and ASI
acquired during 2000. Competitive local exchange services and internet
access services developed internally, increased expenses over the prior
year. Support service costs for affiliates also increased over 1999.
13
<PAGE> 16
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
(Dollar amounts are in thousands)
Communication service expenses include network operations, network
access, directory advertising, and communication service costs.
Communication service cost in this category increased 24.8% to $19,449 in
2000 from $15,589 in 1999. These costs increased $1,445 as a result of the
CSI and ASI acquisitions. An increase in support service costs was due to
approximately $1,630 for support services provided to PCS ONE, $349 for
European operations and a decrease for OneMain of $393. The extension of
CLEC services and ISP expenses increased these costs by $1,262.
The cost of communication products sold decreased 1.9% to $6,506 in the
first nine months of 2000 from $6,635 in 1999. The decrease related to
decreases in cabling sales of $1,464 and computer networking installation
costs of $273 offset by new equipment sales and repairs. The acquisition
of CSI and ASI also increased costs $663.
Depreciation and amortization expense increased 18.8% to $8,543 in the
first nine months of 2000 from $7,191 in 1999. Depreciation and
amortization increased $1,352 including $386 from the companies acquired
and the remainder from continuing capital additions.
Marketing and customer services expense increased 35.2% to $4,857 in
the first nine months of 2000 from $3,592 in 1999. All the categories of
marketing, sales, advertising, and customer service increased, with
approximately $367 related to the newly acquired companies and $504 of
these increases attributable to the continued development of CLEC and ISP
services.
General and administrative services increased 20.0% to $9,117 in the
first nine months of 2000 from $7,598 in 1999. The increases were $427
related to the two new acquisitions, $324 related to ISP startup expenses
and a $740 increase in short-term and long-term incentive plans.
Other Income (Expense). Other income (expense) for the nine months
ended September 30, 2000 was a net expense of $13,283, compared with an
expense of $1,190 in the first nine months 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. The nine months ended September 30,
2000 included a loss of $3,378 on the exchange of the OneMain shares for
EarthLink, Inc. shares. Equity in the net losses of affiliates was $306
lower, primarily due to decreased losses from European activity. D&E's
equity in PCS ONE's losses decreased from a loss of $6,794
14
<PAGE> 17
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
(Dollar amounts are in thousands)
in 1999 to a loss of $6,217 in 2000. Losses from the European activity
increased from a loss of $3,101 to a loss of $3,963 in 2000. Equity in the
income of SuperNet decreased by $20 as a result of the sale to OneMain in
1999. Future losses are expected to continue while PCS ONE and Pilicka
develop their businesses 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. See Item 1. of Part II of this
report.
Interest expense decreased 10.0% to $1,245 in the first nine months of
2000 from $1,383 in 1999. Interest expense capitalized in connection with
a building expansion accounted for the decrease in interest expense along
with long-term debt repayments.
Income taxes. Income taxes were a benefit of $1,359 for the nine months
ended September 30, 2000, compared to an expense of $3,450 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 a $1,133 tax
reduction attributable to the loss on the exchange of the OneMain shares
for EarthLink, Inc. shares in September 2000. In addition to these
transactions, the development of new businesses contributed to a larger
pretax loss in the current year.
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 $11,870. The net decrease of
investments in affiliates was $11,752, primarily from the receipt of funds
in January 2000 from PenneCom's sale of Monor Telephone Company in Hungary
late in 1999. These funds were used to pay for capital expenditures of
$11,570 and for the $5,893 cash portion
15
<PAGE> 18
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
(Dollar amounts are in thousands)
of the acquisition price of two businesses purchased during 2000.
Approximate capital addition expenditures were $3,000 for two building
projects; $2,300 for digital electronic switching and circuit equipment,
computers, and initial switching equipment purchased to provide CLEC and
ISP services; plus $5,500 for core telephone company systems upgrades.
Cash used in financing activities included dividend payments of $2,235 and
treasury stock purchases of $1,158. Cash balances increased $3,657.
D&E expects to enter a Federal Communications Commission auction of
additional PCS licenses scheduled to begin during the fourth quarter of
2000 to expand its wireless capacity. Additionally, PCS ONE is planning to
implement its own billing system early in 2001 to improve the efficiency
of the billing process. Management anticipates that these enhancements
will require increased capital contributions to the wireless business in
the future.
At September 30, 2000, $10,926 was invested in commercial paper and
other investment grade securities while $5,331 was held in liquid cash
balances. The investment balance includes $8,667 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 26.8% at September 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.
16
<PAGE> 19
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
(Dollar amounts are in thousands)
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. The
agreement, as amended, contains a provision for payment of an additional
$600 in deferred purchase price during 2001 through 2003. 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 September 30, 2000, the partners had an allowable
capital contribution of $42,548, making $63,820 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.
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 has concluded the Interpretation has
no impact on D&E's financial position or results of operation.
17
<PAGE> 20
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
(Dollar amounts are in thousands)
In June, 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.
On August 1, 2000, D&E acquired all of the outstanding shares of
Alternate Solutions, Inc., a computer network service provider for $5,500
in a combination of cash and 67,168 shares of common stock. The
transaction was accounted for under the purchase method of accounting. The
agreement, as amended, includes a provision for payment of an additional
$1,200 in deferred purchase price during 2001 through 2003. It also
includes a provision for an additional payment up to $300 contingent on
meeting certain future events and earnings goals. ASI's proforma results
are not significant to the consolidated results of operations or financial
condition.
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.
18
<PAGE> 21
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.
19
<PAGE> 22
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
Item 1. Legal Proceedings
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 limited liability company, to Elektrim S.A.
(Elektrim), a 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 have been completed, except a damages
hearing which is expected to be held in January 2001. The arbitration panel has
not yet ruled on any issues in the case. It is not possible at this time to
express an opinion as to the outcome of the claim.
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.
20
<PAGE> 23
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds
On August 1, 2000, D&E acquired all of the outstanding shares of Alternate
Solutions, Inc., a computer network service provider for $5,500 in cash and
stock. In connection with the acquisition, D&E issued 67,168 shares of common
stock to the shareholders of Alternate Solutions, 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 shareholders of Alternate Solutions,
Inc. are "accredited investors" within the meaning of Rule 501 of Regulation D
under the Securities Act. The purchasers represented their 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
--- ---------- ---------
<S> <C> <C>
27 Financial Data Schedule. Filed herewith.
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September 30,
2000.
21
<PAGE> 24
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: November 9, 2000
By: /s/ Anne B. Sweigart
--------------------------------
Anne B. Sweigart
President, Chairman of the Board, and Chief
Executive Officer
(On behalf of the Registrant)
Date: November 9, 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)
22
<PAGE> 25
D&E Communications, Inc. and Subsidiaries
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Identification
No. of Exhibit Reference
------- -------------- ---------
<S> <C> <C>
27 Financial Data Schedule. Filed herewith.
</TABLE>
23
