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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 November 8, 2002
----- -------------------------------
Common Stock, par value $0.16 per share 15,424,016 Shares
D&E Communications, Inc. and Subsidiaries
Form 10-Q
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Operations -
For the three months and nine months ended
September 30, 2002 and 2001 ................................................... 1
Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 ...................................... 2
Consolidated Statements of Cash Flows -
For the nine months ended
September 30, 2002 and 2001 ................................................... 3
Consolidated Statements of Shareholders' Equity -
For the nine months ended
September 30, 2002 and 2001 ................................................... 4
Notes to Consolidated Financial Statements ............................................. 5
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 17
3. Quantitative and Qualitative Disclosures
About Market Risk ...................................................................... 46
4. Controls and Procedures ........................................................................ 46
PART II. OTHER INFORMATION
1. Legal Proceedings .............................................................................. 47
6. Exhibits and Reports on Form 8-K ............................................................... 47
SIGNATURES................................................................................................ 48
CERTIFICATIONS............................................................................................ 49
i
Form 10-Q Part I - Financial Information Item
1. Financial Statements
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per-share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- -------- --------
OPERATING REVENUES
Communication service revenues .................. $ 37,931 $ 15,925 $ 75,777 $ 45,938
Communication products sold ..................... 3,467 3,192 10,406 9,414
Other ........................................... 568 375 1,425 1,152
-------- -------- -------- --------
Total operating revenues ....................... 41,966 19,492 87,608 56,504
-------- -------- -------- --------
OPERATING EXPENSES
Communication service expenses (exclusive of
depreciation and amortization below) ............ 14,780 7,921 29,995 20,707
Cost of communication products sold ............. 2,625 2,431 8,493 7,474
Depreciation and amortization ................... 7,064 3,983 16,519 11,200
Marketing and customer services ................. 4,744 2,207 9,606 6,785
Merger-related costs ............................ -- -- 973 --
General and administrative services ............. 5,940 4,410 15,126 11,630
-------- -------- -------- --------
Total operating expenses ....................... 35,153 20,952 80,712 57,796
-------- -------- -------- --------
Operating income (loss) ....................... 6,813 (1,460) 6,896 (1,292)
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Equity in net income (losses) of affiliates ..... (914) 5,137 (2,091) 5,579
Interest expense ................................ (4,383) (682) (7,139) (1,600)
Other-than-temporary loss on investments ........ -- -- (2,999) --
Other, net ...................................... 91 346 292 1,090
-------- -------- -------- --------
Total other income (expense) ................... (5,206) 4,801 (11,937) 5,069
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes and dividends on
utility preferred stock ....................... 1,607 3,341 (5,041) 3,777
INCOME TAXES AND DIVIDENDS ON
UTILITY PREFERRED STOCK
Income taxes .................................... 1,037 (898) (1,170) (643)
Dividends on utility preferred stock ............ 16 16 49 49
-------- -------- -------- --------
Total income taxes and dividends
on utility preferred stock ..................... 1,053 (882) (1,121) (594)
-------- -------- -------- --------
Income (loss) from continuing operations ...... 554 4,223 (3,920) 4,371
Discontinued operations:
Loss from operations of discontinued D&E
Wireless segment prior to December 31, 2001,
net of income tax benefit of $390 and $1,942 ... -- (1,553) -- (4,552)
Gain on disposal of discontinued D&E Wireless
segment, net of operating losses during
Phase-out period and net of income taxes
of $138 and $29,337 ............................ (280) -- 55,506 --
Income (loss ) from operations of Conestoga
Wireless and Paging, net of income tax
or (benefit) of ($116), $3, ($242) and ($8) .... (283) 4 (450) (13)
-------- -------- -------- --------
Income (loss) before extraordinary item ....... (9) 2,674 51,136 (194)
Extraordinary item, income tax benefit of $107.. -- -- -- 107
-------- -------- -------- --------
NET INCOME (LOSS) ................................ $ (9) $ 2,674 $ 51,136 $ (87)
======== ======== ======== ========
Weighted average common shares outstanding ...... 15,401 7,379 11,188 7,384
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Income (loss) from continuing operations ........ $ 0.04 $ 0.57 $ (0.35) $ 0.59
Income (loss) from discontinued operations ...... (0.04) (0.21) 4.92 (0.62)
Extraordinary item .............................. 0.00 0.00 0.00 0.02
-------- -------- -------- --------
Net income (loss) per common share ............. $ -- $ 0.36 $ 4.57 $ (0.01)
======== ======== ======== ========
Dividends per common share ...................... $ 0.13 $ 0.13 $ 0.38 $ 0.38
======== ======== ======== ========
See notes to consolidated financial statements.
1
D & E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 7,246 $ 615
Accounts receivable ....................................................... 20,031 10,105
Accounts receivable - PCS ONE ............................................. 2,804 5,938
Inventories, lower of cost or market, at average cost ..................... 3,549 1,781
Prepaid expenses .......................................................... 4,626 3,817
Other ..................................................................... 932 494
--------- ---------
TOTAL CURRENT ASSETS .................................................... 39,188 22,750
--------- ---------
INVESTMENTS
Investments in and advances to affiliated companies ...................... 5,356 6,431
Investments available-for-sale ............................................ 1,077 4,425
--------- ---------
6,433 10,856
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
In service ................................................................ 301,819 178,274
Under construction ........................................................ 7,085 5,034
--------- ---------
308,904 183,308
Less accumulated depreciation ............................................. 99,716 88,163
--------- ---------
209,188 95,145
--------- ---------
OTHER ASSETS
Assets held for sale ...................................................... 18,715 --
Goodwill .................................................................. 222,289 5,126
Intangible assets, net of amortization .................................... 36,898 1,017
Deferred income taxes ..................................................... -- 905
Other ..................................................................... 19,178 7,079
--------- ---------
297,080 14,127
--------- ---------
TOTAL ASSETS .............................................................. $ 551,889 $ 142,878
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Borrowings under line of credit ........................................... $ -- $ 1,757
Long-term debt maturing within one year ................................... 129 52
Accounts payable and accrued liabilities .................................. 19,146 16,319
Accrued taxes ............................................................. 21,081 352
Accrued interest and dividends ............................................ 1,620 333
Advance billings, customer deposits and other ............................. 4,867 3,668
--------- ---------
TOTAL CURRENT LIABILITIES ............................................... 46,843 22,481
--------- ---------
LONG-TERM DEBT .................................................................... 245,000 58,124
--------- ---------
OTHER LIABILITIES
Equity in net losses of discontinued D&E Wireless
operations in excess of investments and advances ........................ -- 10,388
Deferred income taxes ..................................................... 38,903 --
Other ..................................................................... 10,440 6,564
--------- ---------
49,343 16,952
--------- ---------
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 $0.16, authorized shares 30,000,000 ............... 2,508 1,219
Outstanding shares: 15,418,317 at September 30, 2002
7,362,226 at December 31, 2001
Additional paid-in capital ................................................ 157,897 39,956
Accumulated other comprehensive income (loss) ............................. (3,050) (2,833)
Retained earnings ......................................................... 57,006 10,637
Treasury stock at cost, 276,908 shares at September 30, 2002
276,900 shares at December 31, 2001 ..................................... (5,104) (5,104)
--------- ---------
209,257 43,875
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................ $ 551,889 $ 142,878
========= =========
See notes to consolidated financial statements.
2
D & E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES OF
CONTINUING OPERATIONS ............................................ $ 16,070 $ 7,531
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of proceeds from sales and removal
costs ............................................................ (16,227) (28,217)
Business acquisition costs, net of cash acquired of $1,003 ....... (158,677) --
Proceeds from sale of temporary investments ...................... -- 34,671
Purchase of temporary investments ................................ -- (26,002)
Investments in and advances to affiliates ........................ (1,567) (9,259)
Returns of investments and repayments from
affiliates ....................................................... 550 453
--------- ---------
Net Cash Used In Investing Activities from Continuing Operations (175,921) (28,354)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ........................................ (4,574) (2,579)
Payments on long-term debt ....................................... (44,991) (51)
Proceeds from long-term debt financing ........................... 160,000 --
Payment of debt issuance costs ................................... (7,999) --
Net proceeds from (payments on) revolving lines of
credit ........................................................... (11,757) 25,233
Proceeds from issuance of common stock ........................... 739 263
Purchase of treasury stock ....................................... -- (931)
--------- ---------
Net Cash Provided By Financing Activities from
Continuing Operations .......................................... 91,418 21,935
--------- ---------
CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS ......................... (68,433) 1,112
CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS
Cash Provided by (Used in) Operating Activities of
Discontinued Operations .......................................... (382) 865
Cash Provided by (Used in) Investing Activities of
Discontinued Operations .......................................... 75,446 (4,944)
--------- ---------
Net Cash Provided By (Used In ) Discontinued Operations .......... 75,064 (4,079)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 6,631 (2,967)
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD ............................................ 615 3,527
--------- ---------
END OF PERIOD .................................................. $ 7,246 $ 560
========= =========
See notes to consolidated financial statements.
3
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the nine months ended September 30, 2002 and 2001
(In thousands)
(Unaudited)
2002 2001
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------ -------- ------ ---------
COMMON STOCK
Balance at beginning of year ......................... 7,639 $ 1,219 7,608 $ 1,214
Common stock issued for acquisition .................. 7,877 1,260 -- --
Common stock issued for Employee Stock Purchase,
Long-Term Incentive and Dividend Reinvestment Plans .. 137 22 24 3
Common stock issued for stock options exercised ...... 42 7 -- --
------ -------- ------ ---------
Balance at September 30 .............................. 15,695 2,508 7,632 1,217
------ -------- ------ ---------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ......................... 39,956 39,374
Common stock issued for acquisition .................. 115,668 --
Common stock issued for Employee Stock Purchase, Long-
Term Incentive and Dividend Reinvestment Plans ....... 1,890 442
Common stock issued for stock options exercised ...... 383 --
-------- ---------
Balance at September 30 .............................. 157,897 39,816
-------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year ......................... (2,833) 467
Unrealized gain (loss) on investments ................ (2,042) 1,584
Loss realized on other-than-temporary decline in value
of investments, net of tax ........................... 1,825 --
-------- ---------
Balance at September 30 .............................. (3,050) 2,051
-------- ---------
RETAINED EARNINGS
Balance at beginning of year ......................... 10,637 18,366
Net income (loss) .................................... 51,135 (87)
Dividends on common stock: $.38, $.38 per share ...... (4,766) (2,761)
-------- ---------
Balance at September 30 .............................. 57,006 15,518
-------- ---------
TREASURY STOCK
Balance at beginning of year ......................... (277) (5,104) (226) (4,059)
Treasury stock acquired .............................. -- -- (52) (995)
------ -------- ------- ---------
Balance at September 30 .............................. (277) (5,104) (278) (5,054)
------ -------- ------- ---------
TOTAL SHAREHOLDERS' EQUITY ........................... 15,418 $209,257 7,354 $ 53,548
====== ======== ======= =========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
2002 2001 2002 2001
------- -------- -------- -------
COMPREHENSIVE INCOME (LOSS)
Net income (loss) ....................................... $ (9) $ 2,674 $ 51,135 $ (87)
Unrealized gain (loss) on investments, net of income
taxes of ($105), $277, ($1,303) and $941 .............. (174) 429 (2,042) 1,584
Loss realized on other-than-temporary decline in value of
investments, net of tax of $1,387 ..................... -- -- 1,825 --
------- -------- -------- --------
Total comprehensive income (loss) ....................... $ (183) $ 3,103 $ 50,918 $ 1,497
======= ======== ======== ========
See notes to consolidated financial statements.
4
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
The accompanying consolidated financial statements include the accounts of
D&E Communications, Inc. and its wholly owned subsidiaries. D&E Communications,
Inc., including its subsidiary companies, is defined and referred to herein as
D&E. On May 24, 2002, D&E completed its acquisition of Conestoga Enterprises,
Inc. (Conestoga). The following subsidiaries of Conestoga are included in D&E's
September 30, 2002 results since the date of the completion of the acquisition:
o The Conestoga Telephone and Telegraph Company and Buffalo Valley
Telephone Company, which are incumbent rural local exchange carriers
providing both regulated and nonregulated communication services;
o CEI Networks, Inc., which provides long distance and competitive local
telephone services;
o Infocore, Inc., which provides communication consulting services
including the design and installation of communications systems;
o Conestoga Investment Corporation, an investment holding company;
o Conestoga Mobile Systems, which provides paging communication services
and has been reported as a discontinued operation; and
o Conestoga Wireless Company, which provides wireless personal
communication services (PCS) and has been reported as a discontinued
operation.
The accompanying financial statements are unaudited and we have prepared
them 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 our results of
operations, financial position and cash flows for the periods presented. Certain
items in the financial statements for the three months and nine months ended
September 30, 2001 have been reclassified for comparative purposes to conform to
the current period's presentation. In addition, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to 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. We believe that the
disclosures made are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with D&E's financial
statements and notes thereto included in our Annual Report on Form 10-K/A for
the fiscal year ended December 31, 2001 and with D&E's Current Report on Form
8-K related to the completion of its acquisition of Conestoga filed with the
Securities and Exchange Commission on June 10, 2002.
5
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) ACQUISITION OF BUSINESS
On May 24, 2002, we completed the acquisition of Conestoga Enterprises,
Inc. (Conestoga), a neighboring rural local telephone company providing
integrated communications services throughout the eastern half of Pennsylvania.
The acquisition was completed through the merger of Conestoga with and into D&E
Acquisition Corp., a wholly owned subsidiary of D&E, pursuant to the Amended and
Restated Agreement and Plan of Merger, dated as of January 9, 2002.
As of September 30, 2002, the purchase price allocation has been determined
by D&E based on preliminary reports of independent appraisers. The allocation
includes recognition of further adjustments to tangible assets and liabilities
to state them at their fair values, and recognition of additional identifiable
intangible assets at their fair values. The residual effect of such adjustments
was recorded as goodwill. D&E will finalize the valuation during the fourth
quarter of 2002. The preliminary purchase-price allocation for the Conestoga
acquisition follows:
Consideration paid:
Cash consideration to Conestoga stockholders $149,422
Transaction costs ($937 paid in 2001 and $5,401 paid in 2002) 6,375
D&E stock to Conestoga stockholders (7,876,655 shares) at $14.57 per share 114,763
based on 3-day average market price per share prior to close of the
merger on May 24, 2002
Fair value of Conestoga stock options 2,165
-------
Purchase price 272,725
-------
Assets acquired:
Cash $1,003
Accounts receivable 10,144
Inventories 2,016
Prepaid expenses 14,596
Other current assets 103
Property, plant and equipment 112,259
Other non-current assets 5,399
Net assets of wireless and paging operations, held for sale 18,715
Customer base (3-8 year life) 38,000
Goodwill 217,143
--------
Total assets acquired $419,378
========
Liabilities assumed:
Long-term debt and lines of credit $79,178
Accounts payable and accrued liabilities 8,246
Accrued transaction costs of Conestoga
($4,857 paid through September 30, 2002) 5,704
Accrued taxes 10,212
Advance billings, customer deposits and other 1,208
Deferred income taxes 35,462
Other 3,877
Capital lease obligations 2,766
-------
Total liabilities assumed 146,653
-------
Net assets acquired $272,725
=======
6
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
As part of the purchase price, D&E has accrued approximately $3,099 for the
estimated costs of severance and retention bonuses to be paid to Conestoga
employees. Also included in the opening balance sheet were $2,605 of unpaid
merger advisor fees. These accruals comprise the accrued transaction costs of
Conestoga.
The statement of operations include $973 of costs related to the merger
including $839 of costs related to an abandoned debt offering contemplated to
finance the acquisition, as well as $134 of severance costs for terminating
certain D&E employees as a result of the merger. D&E terminated 43 employees as
of September 30, 2002 and approximately 10 additional employees will be
terminated. Most of the remaining severance payments will be made during the
remainder of 2002.
The following unaudited pro forma combined results of operations is
provided for illustrative purposes only and assumes that the Conestoga
acquisition had occurred as of the beginning of each of the periods presented.
The following unaudited pro forma information should not be relied upon as
necessarily being indicative of the historical results that would have been
obtained if this acquisition had actually occurred during those periods, nor of
the results that D&E may experience in the future.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------ ------------------------
2001 2002 2001
------- -------- --------
Pro forma operating revenues $41,512 $122,885 $120,342
Pro forma income (loss) before
extraordinary items $ 3,479 $ 52,178 $ 2,148
Pro forma net income $ 3,479 $ 52,178 $ 2,225
Pro forma income (loss) per share $ 0.23 $ 3.46 $ 0.15
(3) INTANGIBLE ASSETS
On January 1, 2002, we adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which addresses the
accounting for goodwill and intangible assets subsequent to their acquisition.
With the adoption of SFAS 142, goodwill is no longer subject to amortization. As
an indefinite lived asset, goodwill is still subject to at least an annual
assessment for impairment. We have completed our transitional intangible
impairment test, and based upon a discounted future cash flows model, the
goodwill has been deemed to not be impaired.
SFAS 142 also requires that goodwill and indefinite-lived intangible assets
be tested annually for impairment using a two-step process. The first step is to
identify a potential impairment by comparing the fair value of reporting units
to their carrying value and, upon adoption, must be measured as of the beginning
of the fiscal year. As of January 1, 2002, the results of the first step
indicated no potential impairment of the D&E's goodwill. We will perform this
assessment annually during the fourth quarter beginning in the fourth quarter of
2002. Should the results of the first step of the impairment testing indicate a
potential impairment, the second step would be completed to measure the amount
of any impairment loss.
The annual assessment will be performed by an independent appraisal firm.
In performing the evaluation to determine if an impairment exists, the appraisal
firm is expected to use information from various sources including, but not
limited to, current stock price, transactions involving similar companies,
7
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
the business plan prepared by management and current and past operating results
of the Company among other information. The estimates used by the appraisal firm
may be different from those used by management in the preparation of its
business plan or from the current operating results of the Company and those
differences may be material. The assessment could be impacted by future events
such as, the stock price of the Company, being either higher or remaining at
current or lower prices for a significant period of time, transactions announced
or completed prior to the completion of the evaluation, regulatory or other
developments as well as the actual operating results of the Company.
The elimination of goodwill amortization, net of tax, would have reduced
net loss by approximately $253 for the three months and $726 for the nine months
ended September 30, 2001, or $0.03 and $0.06 respectively per basic and diluted
share. Pro forma net loss and loss per share information are shown as if the
provisions of SFAS No. 142 were in effect for fiscal 2001.
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) 2002 2001 2002 2001
- ------------------------------ ------- --------- ---------- ---------
Income (loss) before
extraordinary item ($ 9) $ 2,674 $ 51,136 ($ 194)
Extraordinary item -- -- -- 107
------ --------- ---------- -------
Reported net income (loss) ($ 9) $ 2,674 $ 51,136 ($ 87)
Add: Goodwill amortization -- 253 -- 726
------ --------- ---------- -------
Adjusted net income (loss) ($ 9) $ 2,927 $ 51,136 639
------- --------- ---------- -------
Basic and diluted earnings per share:
Income (loss) before
extraordinary item ($0.00) $ 0.36 $ 4.57 ($ 0.03)
Extraordinary item -- -- -- 0.02
----- --------- ---------- -------
Reported net income (loss) ($0.00) $ 0.36 $ 4.57 ($ 0.01)
Add: Goodwill amortization -- 0.04 -- 0.10
----- --------- ---------- -------
Adjusted net income (loss) ($0.00) $ 0.40 $ 4.57 $ 0.09
----- --------- ---------- -------
As a result of the Conestoga acquisition described in Note 2 as well as
previous acquisitions, the intangible assets and related accumulated
amortization recorded on our balance sheets are as follows:
AS OF SEPTEMBER 30, 2002 AS OF DECEMBER 31, 2001
----------------------------- -----------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ ------- -------------
Customer base $ 38,000 $ (1,886) $ -- $ --
Non-compete agreements 1,424 (640) 1,450 (433)
----- ----- ----- -----
Total $ 39,424 $ (2,526) $ 1,450 $ (433)
====== ===== ===== ===
8
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
Aggregate amortization expense related to these intangible assets recorded
for the nine-months ended September 30, 2002 was $2,093. Estimated amortization
expense for succeeding years is as follows:
For the year ended:
December 31, 2002 $3,579
December 31, 2003 5,944
December 31, 2004 5,944
December 31, 2005 5,041
December 31, 2006 4,326
(4) DISCONTINUED OPERATIONS
D&E WIRELESS
D&E's fifty percent partnership interest in D&E/Omnipoint Wireless Joint
Venture, L.P. (PCS ONE) and the related contract services D&E provides to PCS
ONE constitute a separate segment of our business. On October 17, 2001, D&E
entered into a definitive agreement to sell its interest in PCS ONE to
VoiceStream Wireless Corporation for $117,000 less working capital and long-term
debt adjustments.
The assets and liabilities and results of operations of D&E Wireless are
reported as discontinued operations in accordance with APB Opinion No. 30 with a
measurement date of December 31, 2001. The only assets or liabilities held for
sale were the equity in net losses of PCS ONE, which were classified as equity
in net losses of discontinued D&E Wireless operations in excess of investments
and advances in the balance sheet.
In accordance with EITF 85-36, beginning January 1, 2002, through disposal
date (the phase-out period), losses from D&E Wireless were deferred because it
was reasonably assured that the ultimate disposition of this business would
result in the recognition of a gain. Losses were deferred until a gain on sale
was recognized.
On April 1, 2002, D&E consummated its sale of PCS ONE. The related contract
services D&E provided to PCS ONE were terminated subsequent to the sale, after a
six month post closing period.
Upon completion of the sale, we received $74,168 in cash, subject to post
closing adjustments as set forth in the sale agreement. These adjustments were
finalized in the third quarter of 2002 and resulted in additional cash proceeds
of $2,287, which were collected in October, 2002. In addition, we received
equipment with a fair value of approximately $2,014. Selling and other estimated
costs, offset by post-closing adjustments, are approximately $1,542 and
associated income taxes are estimated at $29,325. The gain on sale recognized
was $55,413 after eliminating the $10,098 liability for the equity in net losses
of discontinued D&E Wireless operations in excess of investments and advances.
The proceeds from the sale of PCS ONE were used to help finance the acquisition
of Conestoga Enterprises, Inc. (see Note 2).
9
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
Summarized financial information for the discontinued operations of D&E
Wireless Services is as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue $ 729 $ 3,133 $ 4,741 $ 8,704
Expenses 709 2,822 4,299 7,932
-------- -------- -------- --------
Operating income 20 311 442 772
Equity in net loss of PCS ONE -- (2,315) (1,605) (7,359)
Phase-out losses deferred until sale -- -- 1,268 --
Gain on sale of PCS ONE (162) -- 84,738 --
Other income -- 61 -- 93
-------- -------- -------- --------
Income (loss) from D&E wireless
Operations before taxes (142) (1,943) 84,843 (6,494)
Income taxes 138 (390) 29,337 (1,942)
-------- -------- -------- --------
Income (loss) from D&E wireless
Operations, net of taxes $ (280) $ (1,553) $ 55,506 $ (4,552)
-------- ======== ======== ========
The summarized results of operations of PCS ONE were as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ---------------------------
2002 2001 2002 2001
----- -------- ------- -------
Net sales $ -- $ 13,485 $12,312 $33,751
Net loss $ -- $ (4,630) (3,211) (14,718)
Our share of loss $ -- $ 2,315 (1,605) (7,359)
CONESTOGA WIRELESS
On May 24, 2002, we acquired Conestoga Enterprises, Inc. (see Note 2). From
the date of acquisition, D&E had committed to a plan to sell the assets of
Conestoga's wireless segment. As such, the assets and results of operations of
the Conestoga wireless segment are reported as discontinued operations in
accordance with Statement of Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets." The assets are not
depreciated while they are held for sale.
On November 12, 2002, we entered into a definitive agreement to sell
substantially all of the assets of the Conestoga wireless segment to Keystone
Wireless, LLC ("Keystone"), a Delaware limited liability company. Keystone is an
affiliate of PC Management, Inc., a Ft. Myers-based company that owns and
manages wireless communications systems throughout the United States. Upon
completion of the sale, CWC will receive $10.0 million in cash and D&E will
receive $10.0 million in a secured promissory note issued by Keystone, each
subject to certain purchase price adjustments to be determined after closing.
Proceeds from the sales price, including adjustments, less costs to sell are
estimated at the $18,500 value recorded in the balance sheet and there will be
no gain or loss recorded as a result of a sale. The sale is subject to final
regulatory approval by the Federal Communications Commission and other customary
closing conditions.
10
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
The carrying amount of the major classes of assets included as part of the
Conestoga wireless business to be sold, excluding Paging Services assets listed
below, are as follows:
SEPTEMBER 30, 2002
------------------
Inventories $ 1,250
Property & equipment 16,050
PCS licenses 1,200
-------
Total $18,500
-------
Summarized income statement information for the discontinued operations of
the Conestoga wireless segment were as follows:
MAY 24, 2002 TO THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2002 SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
--------------- -------------------- --------------------
Revenue $ 765 $ 3,271 $ 4,036
Expenses 1,045 3,687 4,732
----- ----- -----
Operating loss (280) (416) (696)
Income taxes (benefit) (121) (123) (244)
---- ----- -----
Loss from Conestoga wireless
operations, net of taxes $ (159) $ (293) $ (452)
--- --- ---
PAGING SERVICES
During the third quarter, we committed to a plan to sell the assets of
Conestoga Mobile Systems' and D&E's paging operations. We expect to sell the
business within a year. No liabilities are expected to be included as part of
the sale. The carrying amount of the major classes of assets included as part of
the business to be sold are as follows:
SEPTEMBER 30, 2002
------------------
Inventories $ 47
Property & equipment 168
----
Total $215
----
Summarized income statement information for the discontinued operations of
the paging services were as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ---------------------
2002 2001 2002 2001
------ ------ ------- ------
Revenue $ 183 $ 24 $ 294 $ 78
Expenses 166 17 290 99
--- -- --- ---
Operating income (loss) 17 7 4 ( 21)
Income taxes (benefit) 7 3 2 ( 8)
---- -- ---- -----
Income (loss) from Paging
operations, net of taxes $ 10 $ 4 $ 2 ($ 13)
11
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) INVESTMENTS IN AFFILIATED COMPANIES
As of December 31, 2001, we owned a one-third investment in EuroTel L.L.C.
(EuroTel), a domestic corporate joint venture. EuroTel held a 100% investment in
PenneCom, B.V. (PenneCom), an international telecommunications holding company
that held a 100% investment in Pilicka Telefonia, Sp.zo.o (Pilicka), a
telecommunications company located in Poland.
As of December 31, 2001, PenneCom was indebted to EuroTel for $10,656 and
to the investors in EuroTel for $36,751 (including $14,623 to D&E). PenneCom
agreed with EuroTel and the EuroTel investors to satisfy a portion of its
indebtedness to EuroTel and the founders by transferring PenneCom's entire
equity interests in Pilicka to EuroTel and the founders. PenneCom satisfied
$3,384 of its indebtedness to EuroTel by transferring 22.56% of the capital
stock of Pilicka to EuroTel, satisfied $4,650 of its indebtedness to D&E by
transferring 31.00% of the capital stock of Pilicka to D&E, and satisfied $6,966
of indebtedness to the other EuroTel investors by transferring 46.44% of the
capital stock of Pilicka to the other EuroTel investors. The total amount of
indebtedness satisfied by PenneCom was equal to the total estimated fair value
of Pilicka at December 31, 2001. These transactions were effective as of January
1, 2002.
As a result of the transactions described above, D&E now has a 31.00%
direct ownership in Pilicka and an indirect 7.52% ownership in Pilicka, through
its continuing one-third interest in EuroTel. D&E accounts for both its
investment in EuroTel and its investment in Pilicka using the equity method of
accounting.
The summarized results of operations of EuroTel were as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
Net sales $ -- $ 1,868 $ -- $ 5,542
Net income (loss) (1,683) 15,411 (2,730) 16,737
Our share of income (loss) (561) 5,137 (910) 5,579
The summarized results of operations of Pilicka were as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2002 2002
-------- --------
Net sales $2,235 $ 6,958
Net loss $ (753) $(2,677)
Our share of loss $ (234) $ (830)
Investment amortization $ (119) $ (351)
Total loss $ (353) $(1,181)
12
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) ACCOUNTING CHANGES AND RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The provisions of this Statement are effective for exit or disposal activities
initiated after December 31, 2002 and are not expected to have a material effect
on the Company's results of operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002" ("SFAS No. 145"), which rescinded or amended various existing
standards. One change addressed by this Statement pertains to treatment of
extinguishments of debt as an extraordinary item. SFAS No. 145 rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt," and states that an
extinguishment of debt cannot be classified as an extraordinary item unless it
meets the unusual or infrequent criteria outlined in Accounting Principles Board
("APB") Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB No. 30"). The provisions of SFAS 145 are effective for
fiscal years beginning after May 15, 2002 and provide that extinguishments of
debt that were previously classified as an extraordinary item in prior periods
that do not meet the criteria in APB No. 30 for classification as an
extraordinary item shall be reclassified. The adoption of SFAS No. 145 is not
expected to have a material effect on the Company's results of operations,
financial position or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). This Statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
For Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), and the accounting
and reporting provisions of APB No. 30. However, certain provisions of SFAS No.
121 and APB No. 30 have been maintained. The Company adopted SFAS No. 144
effective January 1, 2002. We have determined that there is no impairment to any
long-lived assets. We have also accounted for the planned sale of the Conestoga
wireless operations and the combined Conestoga and D&E paging operations in
accordance with SFAS 144 (Note 3).
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). This Statement establishes common
accounting practices relating to legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development or normal operation of a long-lived asset. The Company
will adopt SFAS No. 143 on January 1, 2003. The adoption is not expected to have
a material effect on the Company's results of operations, financial position or
cash flows.
(7) LONG-TERM DEBT
During the second quarter of 2002 in connection with the Conestoga
acquisition (Note 2), we incurred additional indebtedness to finance a portion
of the acquisition and to repay certain existing indebtedness and related fees
and we also assumed certain existing indebtedness of Conestoga. The following
table sets forth total long-term debt outstanding:
13
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
INTEREST RATE
AT SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
DESCRIPTION 2002 Maturity 2002 2001
- -------------------------- ------------------ -------- ------------- ------------
Senior Secured Revolving
Credit Facility 5.81% 2009 $ 32,250 $ 8,000
Senior Secured Term Loan B 5.95% 2010 125,000 --
Senior Secured Term Loan A 6.07% 2011 50,000 50,000
Secured Term Loan 9.34% 2014 20,000 --
Secured Term Loan 9.36% 2014 15,000 --
Capital lease obligations 2,879 176
---------- -------
245,129 58,176
Less current maturities 129 52
---------- -------
Total long-term debt $ 245,000 $58,124
========== =======
Senior Secured Revolving Credit Facility:
The Senior Secured Revolving Credit Facility ("Credit Facility") is a
$75,000 8 1/2-year senior secured reducing revolving credit facility. The Credit
Facility requires interest only payments for two years initially with increasing
quarterly principal reductions of the amount available to borrow beginning in
the third quarter of 2004 and continuing through the fourth quarter of 2009.
Interest is payable at a base rate or at one, two, three or six month LIBOR
rates plus an applicable margin based on our leverage ratio. At September 30,
2002 the interest rate was 5.81%. The Credit Facility also requires a quarterly
commitment fee on the unused portion.
Senior Secured Term Loan B:
We have outstanding a new 8 1/2-year variable rate Senior Secured Term Loan
B ("Term Loan B") for $125,000. Term Loan B bears interest at our option at
either the U.S. prime rate plus 1.75% to 3.00% or at LIBOR plus 2.50% to 4.00%,
depending on our total leverage ratio. At September 30, 2002 the average
interest rate was 5.95%. Term Loan B requires interest only payments for two
years initially with increasing quarterly principal payments beginning in the
third quarter of 2004 and continuing through the fourth quarter of 2010.
Senior Secured Term Loan A:
The Secured Senior Term Loan A ("Term Loan A") bears interest at a base
rate or at either the U.S. prime rate plus 2.00% to 3.125% or at LIBOR plus
2.625% to 4.125%, depending on our leverage ratio. At September 30, 2002 the
average interest rate was 6.07%. The Term Loan A requires interest only payments
for three years initially with increasing quarterly principal payments beginning
in the third quarter of 2004 and continuing through the second quarter of 2011.
9.34% Secured Term Loan:
The 9.34% Secured Term Loan was assumed as a result of the Conestoga
acquisition (Note 2) and has been recorded at its book value, which approximates
fair value. The 9.34% Secured Term Loan requires interest to be paid quarterly
at the stated rate and also requires principal to be paid in quarterly
installments of $500 beginning in 2005 and continuing through 2014.
14
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
9.36% Secured Term Loan:
The 9.36% Secured Term Loan was assumed as a result of the Conestoga
acquisition (Note 2) and has been recorded at its book value, which approximates
fair value. The 9.36% Secured Term Loan requires interest to be paid quarterly
at the stated rate and also requires principal to be paid in quarterly
installments of $375 beginning in 2005 and continuing through 2014.
Our indebtedness requires that we maintain certain financial and
operational covenants. The most restrictive covenant is the total leverage
ratio. At September 30, 2002, we were in compliance with all covenants. We are
also required to maintain interest rate protection on one-half of the total
amount of senior indebtedness outstanding, with a weighted average life of at
least 2 years, beginning on November 24, 2002.
Based on the borrowing rate currently available to us for bank loans, the
book value of long-term debt approximates the fair market value.
Maturities of long-term debt, for each year ending December 31, 2002
through 2006, are as follows:
YEAR AGGREGATE AMOUNT
---- ----------------
2002 $ --
2003 --
2004 2,500
2005 5,000
2006 5,000
At December 31, 2001, we had $1,757 outstanding under our lines of credit
with domestic banks. As of May 24, 2002 in connection with the obtaining of our
new revolving credit facility, we terminated our lines of credit and repaid all
amounts outstanding.
Capital lease obligations:
As a result of the Conestoga acquisition, we assumed a long-term lease
agreement for a building that requires monthly rent payments of approximately
$24, including interest at 7.95% through April 2020. In addition, D&E has
equipment leases that require monthly payments of $5 through October 2004.
(8) INVESTMENTS, AVAILABLE-FOR-SALE
During the second quarter of 2002, the company determined that the decline
in value of two of its available-for-sale securities was other than temporary.
As such, D&E recorded a $2,999 realized loss with a corresponding tax benefit of
$1,174.
(9) BUSINESS SEGMENT DATA
Our segments, excluding the Wireless Services and Paging segments, which
are now reported as discontinued segments, are RLEC, CLEC, Internet Services and
Systems Integration. In the first quarter of 2002 we renamed our ILEC segment
our "RLEC" segment and our Networking Services segment our "Systems Integration"
segment to better define these businesses. The measure of profitability for our
segments is operating income.
15
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollar amounts are in thousands)
(Unaudited)
Financial results for D&E's business segments are as follows:
EXTERNAL REVENUES INTERSEGMENT REVENUES OPERATING INCOME (LOSS)
-------------------------- --------------------------- --------------------------
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------- --------------------------
SEGMENT 2002 2001 2002 2001 2002 2001
------- ------- ------- ------- ------- ------- ------
RLEC .............. $25,518 $10,754 $ 2,384 $ 1,372 $ 9,027 $ 1,230
CLEC .............. 7,716 1,560 146 108 (1,253) (1,186)
Internet Services . 1,226 583 107 7 (94) (593)
Systems Integration 6,201 6,035 7 44 (567) (855)
Corporate, Other
and Eliminations . 1,305 560 (2,644) (1,531) (300) (56)
------- ------- ------- ------- ------- -------
Total ............. $41,966 $19,492 $ -- $ -- $ 6,813 $(1,460)
======= ======= ======= ======= ======= =======
EXTERNAL REVENUES INTERSEGMENT REVENUES OPERATING INCOME (LOSS)
-------------------------- --------------------------- --------------------------
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------- --------------------------
SEGMENT 2002 2001 2002 2001 2002 2001
------- ------- ------- -------- -------- -------- --------
RLEC .............. $ 50,985 $ 30,787 $ 4,185 $ 3,557 $ 13,029 $ 6,134
CLEC .............. 13,308 4,970 373 219 (3,138) (2,776)
Internet Services . 3,086 1,201 150 18 (563) (1,733)
Systems Integration 17,687 17,384 32 82 (1,895) (2,768)
Corporate, Other
and Eliminations . 2,542 2,162 (4,740) (3,876) (537) (149)
------- -------- ------- ------- ------- --------
Total ............. $ 87,608 $ 56,504 $ -- $ -- $ 6,896 $ (1,292)
======= ======== ======= ======= ======= ========
SEGMENT ASSETS
------------------------------
SEPTEMBER DECEMBER
SEGMENT 30, 2002 31, 2001
------- --------- ---------
RLEC .............. $ 449,752 $ 151,303
CLEC .............. 57,244 12,232
Internet Services . 4,216 1,775
Systems Integration 15,708 14,787
Corporate, Other
and Eliminations . 24,969 (37,219)
--------- ---------
Total ............. $ 551,889 $ 142,878
========= =========
The following table shows a reconciliation of the results for the business
segments to the applicable line items in the consolidated financial statements
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------- ------- ------- -------
Operating income (loss) from reportable segments $ 7,113 $(1,404) $ 7,433 $(1,143)
Corporate, other and eliminations .............. (300) (56) (537) (149)
Equity in net income (losses) of affiliates .... (914) 5,137 (2,091) 5,579
Interest expense ............................... (4,383) (682) (7,139) (1,600)
Loss on investments ............................ -- -- (2,999) --
Other, net ..................................... 91 346 292 1,090
------- ------- ------- -------
Income (loss) from continuing operations
before income taxes and dividends
on utility preferred stock .................... $ 1,607 $ 3,341 $(5,041) $ 3,777
======= ======= ======= =======
16
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 following discussion should be read in conjunction with our
consolidated financial statements, including the notes thereto, included in this
quarterly report on Form 10-Q. 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,
2001 have been reclassified for comparative purposes.
OVERVIEW
We are a leading rural local telephone company providing integrated
communications services to residential and business customers in markets
throughout the eastern half of Pennsylvania. We operate an incumbent rural local
telephone company, or RLEC, in parts of Berks, Lancaster, Union and smaller
portions of three other adjacent counties in Pennsylvania, and a competitive
local telephone company, or CLEC, in the Lancaster, Harrisburg, Reading,
Altoona, Pottstown, State College and Williamsport, Pennsylvania metropolitan
areas, which we refer to as our edge-out markets. We offer our customers a
comprehensive package of communications services including local and long
distance telephone, high speed data, and Internet access services. We also
provide business customers with integrated voice and data network solutions.
Our segments, excluding the wireless services and paging segments, which,
as discussed below, are now reported as discontinued segments, are RLEC, CLEC,
Internet Services and Systems Integration. In the first quarter of 2002 we
renamed our ILEC segment our "RLEC" segment and our Networking Services segment
our "Systems Integration" segment to better define these businesses. The measure
of profitability for our segments is operating income.
Our RLEC revenue is derived primarily from network access charges, local
telephone service, enhanced telephone services and regional toll service.
Network access revenue consists of switched access paid by long distance
companies who utilize our network for the origination and completion of toll
calls and special access paid by telecommunication companies and end-users for
the installation and use of dedicated circuits. Local telephone service revenue
consists of charges for local telephone services, including monthly charges for
basic local service. Enhanced telephone services revenue is derived from
providing special calling features, such as call waiting, caller ID, voicemail
and PhoneGuard(TM), a telemarketer call-blocking service. Regional long distance
revenue is derived from providing regional long distance services to our RLEC
customers.
Our CLEC revenue is derived primarily from network access charges, local
telephone service, enhanced telephone services and long distance service
revenue. Network access revenue consists of switched access paid by long
distance companies who utilize our network for the origination and completion of
toll calls and special access paid by telecommunication companies and end-users
for the installation and use of dedicated circuits. Local telephone service
revenue consists of charges for local telephone services, including monthly
charges for basic local service. Enhanced telephone services revenue is derived
from providing special calling features, such as call waiting,
17
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)
caller ID, voicemail and PhoneGuard(TM). Long distance revenue consists of
charges for both national and regional long distance services, a portion of
which is provided on a resale basis.
Our Internet Services revenue is derived from dial-up and high speed
Internet access services, in addition to web hosting services. We market these
services primarily in our RLEC and CLEC service areas.
Our Systems Integration revenue is derived from sales of services that
support the design, implementation and maintenance of local and wide area
networks and telecommunications systems. In addition, we sell data and voice
communications equipment and provide custom computer programming service. We
market these products and services primarily in our RLEC and CLEC service areas.
Our operating costs and expenses primarily include wages and related
employee benefit costs, depreciation and amortization, selling and advertising,
software and information system services and general and administrative
expenses. Our RLEC segment incurs costs related to network access charges,
directory expense and other operations expenses such as digital electronic
switch expense, engineering and testing costs. Our CLEC incurs costs related to
leased network facilities associated with providing local telephone service to
customers, engineering costs and network access costs for local calls and long
distance expense. Our Internet Services segment incurs leased network facilities
costs for our dial-up Internet service and for our DSL Internet service. Our
Systems Integration business incurs expenses primarily related to equipment and
materials used in the course of the installation and provision of service.
We incur access line-related capital expenditures associated with access
line additions, expenditures for upgrading existing facilities and costs related
to the provision of DSL and dial-up Internet services in our RLEC and CLEC
territories. We believe that our capital expenditures related to CLEC access
line growth are generally associated with additional customers and therefore
tend to result in incremental revenue. We believe that our additional capital
expenditures relating to our investment in software and systems will provide us
with a competitive advantage in the marketplace and generally allow for
corresponding reductions in operating expenses through increased operating
efficiencies.
As of December 31, 2001, we owned a one-third investment in EuroTel L.L.C.
(EuroTel), a domestic corporate joint venture. EuroTel held a 100% investment in
PenneCom, B.V. (PenneCom), an international telecommunications holding company
that held a 100% investment in Pilicka Telefonia, Sp.zo.o (Pilicka), a
telecommunications company located in Poland.
As of December 31, 2001, PenneCom was indebted to EuroTel and the investors
in EuroTel, including D&E. PenneCom agreed with EuroTel and the EuroTel
investors to satisfy a portion of its indebtedness to EuroTel and the founders
by transferring PenneCom's entire equity interests in
18
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)
Pilicka to EuroTel and the founders. The total amount of indebtedness satisfied
by PenneCom was equal to the total estimated fair value of Pilicka at December
31, 2001. As a result of these transactions, we now have a 31.00% direct
ownership in Pilicka and a 7.52% indirect ownership in Pilicka, through our
continuing one-third interest in EuroTel. We account for both our investment in
EuroTel and Pilicka using the equity method of accounting. We currently are
exploring strategic alternatives with regard to these investments.
On April 1, 2002, we completed the sale of our investment in PCS ONE, whose
results, along with related contract services provided to PCS ONE, have been
reported as a discontinued segment.
On May 24, 2002, we completed our acquisition of Conestoga Enterprises,
Inc. ("Conestoga"), a neighboring rural local exchange carrier providing
integrated communications services throughout the eastern half of Pennsylvania.
The acquisition was completed through the merger of Conestoga with and into D&E
Acquisition Corp. (the "Merger Sub"), a wholly-owned subsidiary of D&E, pursuant
to the Amended and Restated Agreement and Plan of Merger, dated as of January 9,
2002 (the "Merger Agreement"), by and among D&E, Conestoga and the Merger Sub
(the "Merger"). We paid cash consideration of $149,422 and issued 7,876,655
shares of D&E common stock to Conestoga shareholders pursuant to the Merger
Agreement. We also assumed existing indebtedness of Conestoga and outstanding
options issued pursuant to Conestoga equity compensation plans.
In connection with the Merger, we entered into an Amended and Restated
Credit Agreement dated May 24, 2002 (the "Credit Agreement") with CoBank, ACB
("CoBank"), as a lender and administrative agent and certain other lenders. The
Credit Agreement provides for a new $125 million 8-1/2 year variable rate senior
secured term loan and a $25 million increase to our existing $50 million
revolving credit facility provided by CoBank. The Credit Agreement is also the
governing document for our existing $50 million term loan from CoBank. On May
24, 2002, we borrowed the $125 million term loan and $35 million under the
revolving credit facility. These borrowings, along with proceeds from the sale
of our interest in PCS ONE, were used to pay the cash portion of the Merger as
well as to repay certain existing indebtedness and related fees and expenses.
The $125 million term loan and borrowings under the $75 million revolving credit
facility bear interest at our option at either the U.S. prime rate plus 1.75% to
3.00% or at LIBOR plus 2.50% to 4.00%, depending on our total leverage ratio.
The $50 million term loan bears interest at our option at either the U.S. prime
rate plus 2.00% to 3.125% or at LIBOR plus 2.625% to 4.125%, depending on our
total leverage ratio. We are also required to maintain interest rate protection
on one-half of the total amount of senior indebtedness outstanding, with a
weighted average life of at least 2 years, beginning on November 24, 2002.
Conestoga's wireless business and Conestoga and D&E's paging businesses are
held for sale and have been reported as discontinued operations.
19
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 connection with the integration of the Conestoga acquisition, we
reviewed certain of our access line count methodologies. As a result of this
process, the total number of our RLEC access lines was adjusted upward by 526
lines from the number of RLEC lines reported at June 30, 2002. In addition, the
total number of our CLEC lines was adjusted downward by 2,879 lines from the
number of CLEC lines reported at June 30, 2002. The count correction and
conforming the methodology had no impact on revenues or expenses. We believe
that at September 30, 2002 our count methodologies are applied consistently
throughout our organization.
20
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)
RESULTS OF OPERATIONS
The following table is a summary of our operating results by segment
for the three months ended September 30, 2002 and 2001:
CORPORATE,
INTERNET SYSTEMS OTHER AND TOTAL
RLEC CLEC SERVICES INTEGRATION ELIMINATIONS COMPANY
------- ------- -------- ----------- ------------ -------
THREE MONTHS ENDED
SEPTEMBER 30, 2002
- --------------------
Revenues - External $25,518 $ 7,716 $ 1,226 $ 6,201 $ 1,305 $ 41,966
Revenues - Intercompany 2,384 146 107 7 (2,644) --
------- ------- ------- ------- ------- --------
Total Revenues 27,902 7,862 1,333 6,208 (1,339) 41,966
------- ------- ------- ------- ------- --------
Depreciation and Amortization 5,609 1,224 143 298 (210) 7,064
Other Operating Expenses 13,266 7,891 1,284 6,477 (829) 28,089
------- ------- ------- ------- ------- --------
Total Operating Expenses 18,875 9,115 1,427 6,775 (1,039) 35,153
------- ------- ------- ------- ------- --------
Operating Income (Loss) 9,027 (1,253) (94) (567) (300) 6,813
------- ------- ------- ------- ------- --------
Adjusted EBITDA (1) 14,636 (29) 49 (269) ( 510) 13,877
------- ------- ------- ------- ------- --------
Net cash provided by
continuing operating activities 10,622
Net cash provided by / used in
continuing investing activities (5,721)
Net cash provided by / used in
financing activities (4,545)
THREE MONTHS ENDED
SEPTEMBER 30, 2001
- --------------------
Revenues - External $10,754 $ 1,560 $ 583 $ 6,035 $ 560 $ 19,492
Revenues - Intercompany 1,372 108 7 44 (1,531) --
------- ------- ------- ------- ------- --------
Total Revenues 12,126 1,668 590 6,079 (971) 19,492
------- ------- ------- ------- ------- ---------
Depreciation and Amortization 2,913 149 69 769 83 3,983
Other Operating Expense 7,983 2,705 1,114 6,165 (998) 16,969
------- ------- ------- ------- ------- --------
Total Operating Expenses 10,896 2,854 1,183 6,934 (915) 20,952
------- ------- ------- ------- ------- --------
Operating Income (Loss) 1,230 (1,186) (593) (855) (56) (1,460)
------- ------- ------- ------- ------- --------
Adjusted EBITDA (1) 4,143 (1,037) (524) (86) 27 2,523
------- ------- ------- ------- ------- --------
Net cash provided by / used in
continuing operating activities (207)
Net cash provided by / used in
continuing investing activities (7,697)
Net cash provided by
financing activities 2,138
21
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 following table is a summary of our operating results by segment for
the nine months ended September 30, 2002 and 2001:
CORPORATE,
INTERNET SYSTEMS OTHER AND TOTAL
RLEC CLEC SERVICES INTEGRATION ELIMINATIONS COMPANY
------- ------- -------- ----------- ------------ -------
NINE MONTHS ENDED
SEPTEMBER 30, 2002
------------------
Revenues - External $50,985 $13,308 $3,086 $ 17,687 $2,542 $ 87,608
Revenues - Intercompany 4,185 373 150 32 (4,740) --
----- --- --- -- ------- ------
Total Revenues 55,170 13,681 3,236 17,719 (2,198) 87,608
------ ------ ----- ------ ------- ------
Depreciation and Amortization 12,884 1,893 352 944 446 16,519
Other Operating Expenses 29,257 14,926 3,447 18,670 (2,107) 64,193
------ ------ ----- ------ ------- ------
Total Operating Expenses 42,141 16,819 3,799 19,614 (1,661) 80,712
------ ------ ----- ------ ------- ------
Operating Income (Loss) 13,029 (3,138) (563) (1,895) (537) 6,896
------ ------- ----- ------- ----- -----
Adjusted EBITDA (1) 25,913 (1,245) (211) (951) (91) 23,415
------ ------- ----- ----- ---- ------
Net cash provided by
Continuing operating activities 16,070
Net cash provided by/used in
Continuing investing activities (175,921)
Net cash provided by
Financing activities 91,418
CORPORATE,
INTERNET SYSTEMS OTHER AND TOTAL
RLEC CLEC SERVICES INTEGRATION ELIMINATIONS COMPANY
------- ------- -------- ----------- ------------ -------
NINE MONTHS ENDED
SEPTEMBER 30, 2002
------------------
Revenues - External $ 30,787 $ 4,970 $ 1,201 $ 17,384 $ 2,162 $ 56,504
Revenues - Intercompany 3,557 219 18 82 (3,876) --
----- --- -- -- ------- ------
Total Revenues 34,344 5,189 1,219 17,466 (1,714) 56,504
------ ----- ----- ------ ------- ------
Depreciation and Amortization 8,092 565 164 2,075 304 11,200
Other Operating Expense 20,118 7,400 2,788 18,159 (1,869) 46,596
------ ----- ----- ------ ------- ------
Total Operating Expenses 28,210 7,965 2,952 20,234 (1,565) 57,796
------ ----- ----- ------ ------- ------
Operating Income (Loss) 6,134 (2,776) (1,733) (2,768) (149) (1,292)
----- ------- ------- ------- ----- -------
Adjusted EBITDA (1) 14,226 (2,211) (1,569) (693) 155 9,908
------ ------- ------- ----- --- -----
Net cash provided by
continuing operating activities 7,531
Net cash provided by/used in
continuing investing activities (28,354)
Net cash provided by
financing activities 21,935
22
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)
- ---------------
(1) We compute Adjusted EBITDA by adding depreciation and amortization
expense to operating income. Adjusted EBITDA is presented because we believe it
is frequently used by securities analysts, investors and other interested
parties in the evaluation of companies in our industry. However, other companies
in our industry may calculate Adjusted EBITDA differently than we do. Adjusted
EBITDA is not a measurement of financial performance under generally accepted
accounting principles and should not be considered as a substitute for cash flow
from operating activities as a measure of liquidity or a substitute for net
income as an indicator of operating performance or any other measure of
performance derived in accordance with generally accepted accounting principles.
CONSOLIDATED OPERATIONS
Three months ended September 30, 2002 compared to the three months ended
September 30, 2001
Consolidated operating revenues from continuing operations increased
$22,474, or 115.3%, to $41,966 for the three months ended September 30, 2002
from $19,492 in the same period of 2001. The revenue increase was primarily due
to $24,456 in incremental revenue attributable to the acquisition of Conestoga
on May 24, 2002 offset by a $1,010 reduction in D&E's RLEC network access
revenues and a $1,454 decline in D&E's system integration revenues.
Consolidated operating income from continuing operations increased $8,273
to an income of $6,813 for the three months ended September 30, 2002 from a loss
of $1,460 in the same period of 2001. The increase was primarily related to
$5,657 in incremental income attributable to the acquisition of Conestoga. The
increase was also partially attributable to improved operating results in D&E's
RLEC and Internet Services segments and the discontinuance of goodwill
amortization in 2002 due to the adoption of SFAS 142. Goodwill amortization
resulted in $384 of expense in the period for 2001.
Other income and expense was a net expense of $5,206 in the third quarter
of 2002 compared to a net income of $4,801 in the same period of the prior year.
This net decrease in other income of $10,456 is primarily attributable to (i) a
$6,051 decrease in European affiliate income recognized in the third quarter of
2002 as a result of a portion of an arbitration award being included in European
affiliate income in the third quarter 2001 and (ii) a $3,701 increase in
interest expense in the third quarter of 2002, as a result of increased
borrowings to finance the acquisition of Conestoga.
Income taxes were $1,037 in the third quarter of 2002 compared to a benefit
of $898 in the same period of 2001.
Adjustments to the gain for discontinued operations from D&E Wireless
resulted in an after-tax loss of $280 in the third quarter of 2002 primarily
from the final post-closing adjustments and
23
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)
transition activity related to the sale of our wireless partnership interest,
compared with the loss from D&E's Wireless operations of $1,553 in the third
quarter of 2001. The discontinued operations of Conestoga Wireless business and
our Paging Service businesses for the third quarter of 2002 was a loss of $283
after taxes as compared to income of $4 from D&E's paging services in 2001.
Our net loss was $9, or $0.00 per share in the third quarter of 2002
compared to a net income of $2,674, or $0.36 per share in the third quarter of
2001.
Nine months ended September 30, 2002 compared to the nine months ended September
30, 2001
Consolidated operating revenues from continuing operations increased
$31,104 or 55.1% to $87,608 for the nine months ended September 30, 2002 from
$56,504 in the same period of 2001. The revenue increase was primarily due to
$31,798 in incremental revenue attributable to the acquisition of Conestoga on
May 24, 2002 as well as an increase of approximately 45% in the number of D&E's
customers in our Internet Services segment and 47% more access lines in our CLEC
segment before including Conestoga's lines. These revenue increases were offset
by decreases in D&E's system integration revenues.
Consolidated operating income from continuing operations increased $8,188
to an income of $6,896 for the nine months ended September 30, 2002 from a loss
of $1,292 in the same period of 2001. The increase was primarily related to
$7,431 incremental income attributable to the acquisition of Conestoga, improved
operating results in D&E's Internet Services and Systems Integration segments
and the discontinuance of goodwill amortization in 2002 due to the adoption of
SFAS 142, which resulted in $1,099 of amortization expense in the period for
2001. The increases were partially offset by $839 of financing costs expensed as
merger-related costs associated with an abandoned debt offering, $134 of
severance charges expensed as merger-related costs for D&E employees terminated
as a result of the merger, $285 of stay bonuses to D&E employees working during
transition and a charge to bad debt expense of $651 for WorldCom receivables as
a result of their bankruptcy filing.
Other income and expense was a net expense of $11,937 in the first nine
months of 2002 compared to a net income of $5,069 in the same period of the
prior year. This net decrease in other income of $17,006 is primarily
attributable to (i) a $7,670 decrease in European affiliate income recognized in
the first nine months of 2002 as a result of a portion of an arbitration award
being included in European affiliate income in the first nine months of 2001;
(ii) a $5,539 increase in interest expense in the first nine months of 2002, as
a result of increased borrowings to finance the acquisition of Conestoga; and
(iii) the recognition of a loss of $2,999 in 2002 in the nine months ended
September 30, 2002 for the decline in market value of certain publicly traded
investments that were determined to be other than temporary declines.
24
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)
Income taxes were a benefit of $1,170 in the first nine months of 2002
compared to a benefit of $643 in the same period of 2001.
Discontinued operations of D&E Wireless resulted in an income of $55,506
after tax in the first nine months of 2002 primarily from the completion of the
sale of our wireless partnership interest, compared with the loss from
operations of $4,552 in the first nine months of 2001. The discontinued
operations of the Conestoga Wireless business and our Paging Services businesses
included in the first nine months of 2002 were a loss of $450 after taxes as
compared to an after tax loss of $13 from D&E's paging services in 2001.
Our net income was $51,136, or $4.57 per share in the first nine months of
2002 compared to a net loss of $87, or $0.01 per share in the first nine months
of 2001.
RLEC SEGMENT RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2002 2001 Change 2002 2001 Change
------ ------ ------ ------- ------ ------
Revenues:
Local Telephone Service $ 8,270 $ 3,029 $ 5,241 $ 16,695 $ 9,060 $ 7,635
Network Access 13,723 6,925 6,798 27,680 19,320 8,360
Other 5,909 2,172 3,737 10,795 5,964 4,831
------ ------ ------ ------ ------ ------
Total Revenues 27,902 12,126 15,776 55,170 34,344 20,826
------ ------ ------ ------ ------ ------
Depreciation
and Amortization 5,609 2,913 2,696 12,884 8,092 4,792
Other Operating Expenses 13,266 7,983 5,283 29,257 20,118 9,139
------ ------ ------ ------ ------ ------
Total Operating Expenses 18,875 10,896 7,979 42,141 28,210 13,931
------ ------ ----- ------ ------ ------
Operating Income 9,027 1,230 7,797 13,029 6,134 6,895
------ ------ ------ ------ ------ ------
Access Lines at Sept. 30 146,619 61,962 146,619 61,962
------- ------ ------- ------
RLEC segment revenues increased $15,776 to $27,902 for the three months
ended September 30, 2002 from $12,126 in the same period of 2001. The Conestoga
acquisition added $16,172 while our D&E RLEC revenue decreased $396 from the
same period of 2001. Our D&E local telephone service revenues increased $804 or
26.6% to $3,833 in the third quarter of 2002, from $3,029 in the same period of
2001, driven by rate increases effective in December 2001 and July 2002. We
experienced a decrease of $1,010 or 14.6% to $5,915 in D&E's network access
revenues in the third quarter of 2002, from $6,925 in the same period of 2001,
as a result of lower call volumes and a decrease in certain network access rate
elements. The access line increase was
25
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 net result of 648 fewer D&E lines compared to a year earlier, primarily
relating to the loss of 488 lines from one customer that relocated its customer
service operations outside of our territory, and 84,895 Conestoga lines
acquired; plus 410 additions from net adjusted line counts.
RLEC operating expenses increased $7,979 to $18,875 in the third quarter of
2002 from $10,896 in the same period of the prior year. The Conestoga
acquisition added $9,274 while our D&E RLEC expense decreased $1,295.
Depreciation expense increased $2,696 as a result of tangible and intangible
assets from the Conestoga acquisition and D&E's capital additions. In the third
quarter of 2002, we charged bad debt expense $162 for WorldCom receivables as a
result of their bankruptcy filing.
RLEC segment revenues increased $20,826 to $55,170 in the first nine months
of 2002 from $34,344 in the same period of 2001. The Conestoga acquisition added
$20,921 while our D&E RLEC revenue decreased $95 from the same period of 2001.
Our D&E local telephone service revenues increased $1,824 or 20.1% to $10,884 in
the first nine months of 2002, from $9,060 in the same period of 2001, driven by
rate increases effective in December 2001 and July 2002. We experienced a
decrease of $2,088 or 10.8% to $17,232 in D&E's network access revenues in the
first nine months of 2002, from $19,320 in the same period of 2001, as a result
of lower call volumes and a decrease in certain network access rate elements.
RLEC operating expenses increased $13,931 to $42,141 in the first nine
months of 2002 from $28,210 in the same period of the prior year. The increase
was primarily attributable to increased operating expenses from incremental
costs associated with the Conestoga acquisition as well as financing costs
expensed during the second quarter of 2002 related to an abandoned debt
offering, severance related costs and a charge to bad debt expense of $590 for
WorldCom receivables as a result of their bankruptcy filing. Depreciation and
amortization expense increased $4,792 as a result of tangible and intangible
assets from the Conestoga acquisition and D&E's capital additions, primarily a
new building placed into service in July 2001.
26
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)
CLEC SEGMENT RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30,
------------------------------- --------------------------------
2002 2001 CHANGE 2002 2001 CHANGE
------ ------ ------ ------- ------ ------
Revenues:
Local Telephone Service $1,963 $442 $1,521 $3,564 $1,073 $2,491
Network Access 1,088 295 793 2,083 1,040 1,043
Long Distance 4,658 872 3,786 7,711 2,454 5,257
Other 153 59 94 323 622 (299)
------ ------ ------ ------- ----- ------
Total Revenues 7,862 1,668 6,194 13,681 5,189 8,492
------ ------ ------ ------- ----- ------
Depreciation and
Amortization 1,224 149 1,075 1,893 565 1,328
Other Operating Expenses 7,891 2,705 5,186 14,926 7,400 7,526
------ ------ ------ ------- ----- ------
Total Operating Expenses 9,115 2,854 6,261 16,819 7,965 8,854
------ ------ ------ ------- ----- ------
Operating Loss (1,253) (1,186) (67) (3,138) (2,776) (362)
------ ------ ------ ----- ----- ------
Access Lines at Sept. 30 28,387 6,785 28,387 6,785
------ ----- ------ -----
CLEC segment revenues increased $6,194 to $7,862 in the third quarter of
2002 from $1,668 in same period of 2001. Of this increase, the Conestoga
acquisition added $5,592 while our D&E CLEC revenue increased $602 from the same
period of 2001. The D&E increase was primarily from the addition of access lines
for new customers that increased basic area service revenues. The access line
increase was the result of 3,187 additional D&E lines compared to a year earlier
and 20,420 Conestoga lines acquired plus growth of 874 lines in the quarter
offset by a 2,879 line count decrease from correcting a Conestoga line count
error and conforming the count methodology to D&E's methodology. The count
correction and conforming the methodology had no impact on revenue or expenses.
CLEC operating expenses increased $6,261 to $9,115 in the third quarter of
2002 from $2,854 in the same period of the prior year. The increase was
primarily related to the Conestoga acquisition and additional network operating
costs consistent with the larger customer base, higher depreciation expense for
additional equipment added and increased sales and marketing expense related to
commencement of operations in our Harrisburg, Pennsylvania market.
CLEC segment revenues increased $8,492 to $13,681 in the first nine months
of 2002 from $5,189 in same period of 2001.The Conestoga acquisition added
$7,638 while our D&E CLEC revenue increased $854 from the same period of 2001.
The D&E increase was primarily from the addition of access lines for new
customers that increased basic area service revenues.
27
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)
CLEC operating expenses increased $8,854 to $16,819 in the first nine
months of 2002 from $7,965 in the same period of the prior year. The increase
was primarily related to the Conestoga acquisition and additional network
operating costs consistent with the larger customer base, higher depreciation
expense for additional equipment added and increased sales and marketing expense
related to commencement of operations in our Harrisburg, Pennsylvania market.
The expenses included a charge to bad debt expense of $62 for WorldCom
receivables as a result of their bankruptcy filing.
INTERNET SERVICES SEGMENT RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2002 2001 CHANGE 2002 2001 CHANGE
------ ------ ------ ------- ------ ------
Revenues $1,333 $590 $743 $3,236 $1,219 $2,017
Depreciation and
Amortization 143 69 74 352 164 188
Other Operating Expenses 1,284 1,114 170 3,447 2,788 659
----- ----- --- ------- ------ ---
Total Operating Expenses 1,427 1,183 244 3,799 2,952 847
----- ----- --- ----- ----- ---
Operating Loss (94) (593) 499 (563) (1,733) 1,170
---- ----- --- ----- ----- -----
Customers at September 30
DSL 5,138 1,791 5,138 1,791
Dial-up Access 12,417 8,431 12,417 8,431
Web-hosting Services 590 406 590 406
Internet Services segment revenues increased 125.9% to $1,333 in the third
quarter of 2002 from $590 in the same period of 2001. This revenue increase is
primarily attributable to significant increases in subscribers for dial-up, DSL
and web-hosting services in the third quarter of 2002 from the third quarter
2001. The Conestoga acquisition accounted for $269 of the revenue increase.
Management anticipates an increase in fourth quarter revenue when the dial-up
access service is expected to be offered in the Conestoga territories.
Internet Services segment operating expenses increased 20.7% to $1,427 in
the third quarter of 2002 from $1,183 in the same period of the prior year. The
direct cost of operations increased as a result of providing service to the
larger customer base; however, the spreading of fixed operating costs over a
larger revenue base improved operating margins. Management anticipates an
increase in fourth quarter expenses when the Internet access service is expected
to be offered in the Conestoga territories.
28
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)
Internet Services segment revenues increased $2,017 or 165.2% to $3,236 in
the first nine months of 2002 from $1,219 in the same period of 2001. Dial-up
services for single user residential and business customers, as well as DSL
customers and web-hosting subscriber increases accounted for $1,670 of the
revenue increase, with $346 of the increase attributable to the Conestoga
acquisition.
Internet Services segment operating expenses increased $847 or 28.7% to
$3,799 in the first nine months of 2002 from $2,952 in the same period of the
prior year. The direct cost of operations increased as a result of providing
service to the larger customer base; however, the spreading of fixed operating
costs over a larger revenue base improved operating margins.
SYSTEMS INTEGRATION SEGMENT RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30,
------------------------------- --------------------------------
2002 2001 Change 2002 2001 Change
------ ------ ------ ------- ------ ------
Revenues $6,208 $6,079 $129 $17,719 $17,466 $253
Depreciation and
Amortization 298 769 (471) 944 2,075 (1,131)
Other Operating Expenses 6,477 6,165 312 18,670 18,159 511
----- ----- --- ------ ------ ---
Total Operating Expenses 6,775 6,934 (159) 19,614 20,234 (620)
----- ----- --- ------ ------ ---
Operating Loss (567) (855) 288 (1,895) (2,768) 873
----- ----- --- ----- ----- ---
Systems Integration segment revenues increased $129 or 2.1% to $6,208 in
the third quarter of 2002 from $6,079 in the same period of 2001. The Conestoga
acquisition added $1,594, while D&E's product sales decreased $648 and D&E's
service revenues decreased $806 from the third quarter of 2001. We believe these
decreases partially relate to the effects of a slowing economy and reductions in
customer spending for communications related infrastructure and consulting
services.
Systems Integration segment operating expenses decreased $159 or 2.2% to
$6,775 in the third quarter 2002 from $6,934 in the same period of the prior
year. The decrease in depreciation and amortization primarily relates to the
discontinuance of amortizing goodwill from two acquisitions in 2000 due to the
adoption of a new accounting pronouncement, which amounted to $384 in the third
quarter of 2001. Other operating expense changes in the third quarter of 2002
primarily related to decreased cost of equipment sold and lower computer
services expense from temporarily reassigning staff.
29
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)
Systems Integration segment revenues increased $253 or 1.5% to $17,719 in
the first nine months of 2002 from $17,466 in the same period of 2001. The
Conestoga acquisition added $2,204, while D&E's product sales decreased $233 and
D&E's service revenues decreased $1,707 from the first nine months of 2001. We
believe the decrease partially relates to the effects of a slowing economy and
reductions in customer spending for communications related infrastructure and
consulting services.
Systems Integration segment operating expenses decreased $620 or 3.1% to
$19,614 in the first nine months of 2002 from $20,234 in the same period of the
prior year. The decrease in depreciation and amortization primarily relates to
the discontinuance of amortizing goodwill from two acquisitions in 2000 due to
the adoption of a new accounting pronouncement, which amounted to $1,099 for the
nine months ended September 30, 2001. Other operating expense changes in the
first nine months of 2002 primarily related to increased cost of equipment sold
offset by lower computer services expense.
OTHER INCOME (EXPENSE)
Other income (expense) for the three months ended September 30, 2002 was a
net expense of $5,206, compared to a net income of $4,801 in the same period of
2001. The equity in the operations of our European affiliates decreased to a
loss of $914 in the third quarter of 2002 from an income $5,137 in 2001 as a
result of a portion of an arbitration award included in 2001. Interest expense
increased to $4,383 from $682 in the third quarter of 2001, as a result of
increased borrowings for the Conestoga acquisition and capital expenditures.
Other income (expense) for the first nine months of 2002 was a net expense
of $11,937, compared to a net income of $5,069 in the same period of 2001. The
equity in the operations of our European affiliates decreased to a loss of
$2,091 in the first nine months of 2002 from an income of $5,579 in 2001 as a
result of a portion of an arbitration award included in 2001. Interest expense
increased to $7,139 from $1,600 in the first nine months of 2001, as a result of
increased borrowings for the Conestoga acquisition and capital expenditures. A
loss of $2,999 was recognized in 2002 for the decline in market value of certain
publicly traded investments that were determined to be other than temporary
declines.
INCOME TAXES
Income tax expense was $1,037 in the third quarter of 2002 compared to a
benefit of $898 in the same period of 2001. The change in tax primarily resulted
from the $5,137 of European income in 2001 having its tax provision being offset
by a benefit from the reversal of a related valuation allowance on deferred tax
assets from previous net operating losses on European investments.
30
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)
Income taxes were a benefit of $1,170 in the first nine months of 2002
compared to a benefit of $643 in the same period of 2001. The change in tax
primarily resulted from the taxable income in 2001 changing to a taxable loss in
2002 and the change in the valuation allowance for European results in 2001.
DISCONTINUED OPERATIONS
On April 1, 2002, we completed the sale of our investment in PCS ONE, which
has been reported as a discontinued segment. For the three months ended
September 20, 2002, we reported a $280 loss from the discontinued D&E Wireless
segment resulting primarily from an adjustment to the gain on sale as well as
the closing out of contract services provided to PCS ONE. In the third quarter
in 2001, the wireless services segment incurred a loss of $1,553. For the
year-to-date period ended September 30,2002, the discontinued D&E wireless
services segment recognized a $55,506 gain primarily from the sale of our
interest in PCS ONE as well as related contract services provided to PCS ONE.
The comparable period in 2001 included a loss of $4,552 from the operations of
the D&E wireless services segment.
On May 24, 2002, concurrent with the completion of the Conestoga
acquisition, we classified the Conestoga wireless business as a discontinued
operation. Conestoga Wireless recorded a loss after taxes of $283 for the third
quarter of 2002 and a loss of $450 for the period from acquisition through
September 30, 2002. During the third quarter 2002 the Paging Services business
was reported as discontinued. Paging Services recorded an income after taxes of
$11 for the third quarter of 2002 and $2 for the nine months ended September 30,
2002. In 2001, our D&E Paging Services business reported income of $4 in the
third quarter and a nine-month loss of $13.
EXTRAORDINARY ITEM
As a result of moving to an alternative form of regulation during the first
quarter of 2001, in accordance with SFAS 101 "Regulated Enterprises - Accounting
for the Discontinuation of Application of FASB No. 71," $107 of previously
established regulatory tax liabilities were eliminated.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
We have historically generated cash from our operating activities. Our
overall capital resource strategy is to finance capital expenditures for new and
existing lines of businesses and acquisitions partly with operating cash and
through external sources, such as bank borrowings and offerings of debt or
equity securities.
31
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)
Net cash provided by continuing operations was $16,070 in the first nine
months of 2002 compared with $7,531 in the same period of the prior year. As a
result of the merger, the Company experienced improved operating efficiencies
offset by higher cash operating expenses relating to the continued growth in our
CLEC and Internet Services segments, payments for merger-related severance and
payments assumed on liabilities from Conestoga.
Net cash used in investing activities was $175,921 in the first nine months
of 2002 primarily due to $158,677 in net cash expenditures related to the
Conestoga acquisition. Other capital additions were $16,227 for the period.
Capital additions primarily included $8,279 for network and outside plant
infrastructure expansion plus $3,884 for CLEC switching equipment and line
extensions and $1,818 for computers. In the first nine months of 2001, $28,217
was invested in capital additions including $8,566 for construction of an office
building, $6,363 for computer equipment and software and $6,528 for network
infrastructure equipment.
Net cash provided by financing activities was $91,418 in the first nine
months of 2002. Long-term debt was increased $160,000. The majority of the
additional debt was used to fund the Conestoga acquisition. Of the remainder,
$64,747 was used to repay other long-term loans and lines of credit and to pay
debt issuance costs. During the nine months ended September 30, 2002, we paid
quarterly dividends of $4,574, which included dividends paid on shares issued to
Conestoga shareholders in the merger. In the first nine months of 2001, $25,233
was provided from bank lines of credit and $2,579 was used to pay quarterly
dividends. During the fourth quarter 2002, management expects to repurchase
30,000 shares of D&E's common stock in a private transaction.
EXTERNAL SOURCES OF CAPITAL AT SEPTEMBER 30, 2002
During the second quarter of 2002, we abandoned an offering of senior notes
due to market conditions. We completed an amendment to our existing credit
facility to provide a new 8 1/2-year variable rate senior secured term loan for
$125,000 and a $25,000 increase to our existing 8 1/2-year revolving credit
facility. In connection with the amended agreement, we incurred debt issuance
costs of approximately $7,999, which will be amortized over the 8 1/2-year life
of the debt. We amended our existing credit facility to, among other things,
increase certain interest rate provisions, grant the lender a secured position
with respect to all credit facility borrowings and include additional financial
covenants.
As of September 30, 2002, we had $285,000 in credit facilities consisting
of the following:
- $50,000 single draw 10-year term loan, of which $50,000 was
outstanding,
- $75,000 senior reducing revolving credit loan for 8 1/2 years, of
which $32,250 was drawn,
- $125,000 single draw 8 1/2-year term loan, of which $125,000 was
outstanding,
32
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)
- $35,000 single draw 12-year term loan, of which $35,000 was
outstanding.
The $50,000 term loan requires interest only payments for three years with
increasing quarterly principal payments from the third quarter of 2004 through
the second quarter of 2011. The revolving credit facility requires interest only
payments for two years with increasing quarterly principal reductions of the
amount available to borrow from the third quarter of 2003 through the fourth
quarter of 2009. The $125,000 term loan requires interest only payments for two
years with increasing quarterly principal payments from the third quarter of
2004 through the fourth quarter of 2010. The $35,000 term loan requires interest
only payments for three years with equal quarterly payments from the first
quarter of 2005 through the fourth quarter of 2014. Interest on both the $50,000
and $125,000 term loans and the revolving credit facility is payable at a base
rate or at LIBOR rates plus an applicable margin based on our leverage ratio.
Interest on the $35,000 term loan was fixed at 9.34% for $20,000 and 9.36% for
the remaining $15,000 supplement. A commitment fee must be paid on the unused
portion of the revolving credit facility. We are required to maintain interest
rate protection on one-half of the total amount of senior indebtedness
outstanding, with a weighted average life of at least 2 years, beginning on
November 24, 2002.
The credit facilities include a number of significant covenants that impose
restrictions on our business. These covenants include, among others,
restrictions on additional indebtedness, mergers, expansion of CLEC services
into new markets, acquisitions and the disposition of assets, sale and leaseback
transactions and capital lease payments. In addition, we are required to comply
with financial covenants with respect to the maximum indebtedness to total
capitalization ratio, a maximum leverage ratio, a debt service ratio and a fixed
charge ratio.
Upon completion of the sale of our interest in PCS ONE on April 1, 2002, we
received approximately $74,168 and subsequently repaid the outstanding balances
on our revolving credit facility and our bank lines of credit. As of May 24,
2002 we discontinued the previous two lines of credit totaling $20,000.
For further information regarding our lines of credit and long-term debt,
see Note 7 to our consolidated financial statements included in this Quarterly
Report on Form 10-Q.
COMMITMENTS, CONTINGENCIES AND PROJECTED USES OF CAPITAL
Having completed the Conestoga acquisition, we believe that our most
significant commitments, contingencies and projected uses of funds in 2002,
other than for operations, include capital expenditures, the payment of annual
common stock dividends and other contractual obligations.
We hold a 31% direct interest in Pilicka and a 33% interest in EuroTel,
both of which we account for under the equity method of accounting. Thus,
neither the assets nor the liabilities of
33
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)
Pilicka or EuroTel are presented on a consolidated basis on our balance sheets.
We have committed to loan EuroTel, on an equal basis with the other investors in
EuroTel, certain of its operating cash needs. In 2001, we made advances of
$9,920 pursuant to this commitment. We advanced $912 in funds to EuroTel in the
nine months ended September 30, 2002, and we expect that our total 2002 funding
requirements for EuroTel will be approximately $1,500. We have provided a letter
of commitment to advance funds to EuroTel for 2002.
In connection with the sale of our D&E Wireless joint venture, we
anticipate making a tax payment of approximately $22,500 in the first quarter of
2003. We expect that we will have to increase bank borrowing to meet this
obligation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our results of operations and financial
condition is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of the financial statements requires us to make
estimates and judgments that affect the reported amounts. On an on-going basis,
we evaluate our estimates, including those related to intangible assets, income
taxes, revenues, contingencies and impairment of long-lived assets. We base our
estimates on historical experience and other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions, as further described below.
Note 2 to our consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2001 provides a summary of
all significant accounting policies that we follow in the preparation of our
financial statements. We have identified the following critical accounting
policies as those that are the most significant to our financial statement
presentation and that require difficult, subjective and complex judgments:
Revenue Recognition
Revenues for all of our business segments are generally recorded when
services are provided or products are delivered. Our RLEC and CLEC pricing is
subject to oversight by both state and federal regulatory commissions. Such
regulation also covers services, competition and other public policy issues.
Different interpretations by regulatory bodies may result in adjustments in
future periods to revenues derived from our RLEC and CLEC operations. We monitor
these proceedings closely and make adjustments to revenue accordingly.
We receive a portion of our interstate access revenues in our RLEC and CLEC
segments from settlement pools in which we participate with other telephone
companies through the National Exchange Carrier Association, Inc. (NECA). These
pools were established at the direction of the
34
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)
FCC and are funded by interstate access service revenues, which the FCC
regulates. Revenues earned through this pooling process are initially recognized
based on estimates and are subject to adjustments that may either increase or
decrease the amount of interstate access revenues. If the actual amounts that we
receive from the settlement pools differ from the amounts that we have recorded
as accounts receivables on our balance sheets, we would be required to record
the amount of such a reduction or increase as an adjustment to our earnings.
Historically, we have not experienced significant adjustments to our revenues as
a result of our participation in these pools.
Regulated Asset Depreciation
We use a composite group remaining life method and straight-line composite
rates to depreciate the regulated property assets of our RLEC and CLEC segments.
Under this method, when we replace or retire such assets, we deduct the net book
value of these assets and charge it to accumulated depreciation. The effect of
this accounting is to amortize any gains or losses on dispositions over the
service lives of the remaining regulated telephone property assets rather than
recognizing such gain or loss in the period of retirement.
In addition, use of the composite group remaining life method requires that
we periodically revise our depreciation rates. Such revisions are based on asset
retirement activity, cost of removal and salvage values and often require that
we make related estimates and assumptions. If actual outcomes differ from our
estimates and assumptions, we may be required to adjust depreciation and
amortization expense, which could impact our earnings.
Goodwill and Intangible Assets
Purchase price accounting requires extensive use of accounting estimates
and judgments to allocate the purchase price to the fair market value of the
assets and liabilities purchased. In our recording of the purchase of Conestoga
Enterprises, we have engaged a valuation expert to assist us in determining the
fair value of these assets and liabilities. Included in the preliminary asset
valuation for this purchase was the valuation of intangible assets that will be
amortized over their estimated useful lives.
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" which requires that goodwill and indefinite-lived intangible
assets resulting from business combinations no longer be amortized, but instead
be reviewed for recoverability which may result in periodic write-downs. We will
assess on an annual basis the fair values of the reporting units holding the
goodwill and any intangibles and, if necessary, assess on an interim basis for
any impairments. Any write-offs would result in a charge to earnings and a
reduction in equity in the period.
35
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)
SFAS 142 also requires that goodwill and indefinite-lived intangible assets
be tested annually for impairment using a two-step process. The first step is to
identify a potential impairment by comparing the fair value of reporting units
to their carrying value and, upon adoption, must be measured as of the beginning
of the fiscal year. As of January 1, 2002, the results of the first step
indicated no potential impairment of the D&E's goodwill. We will perform this
assessment annually during the fourth quarter beginning in the fourth quarter of
2002. Should the results of the first step of the impairment testing indicate a
potential impairment, the second step would be completed to measure the amount
of any impairment loss.
The annual assessment as of October 31, 2002 will be performed by an
independent appraisal firm and is expected to be completed by the time the
annual report on Form 10-K for the year ended December 31, 2002 is filed. In
performing the evaluation to determine if an impairment exists, the appraisal
firm is expected to use information from various sources including, but not
limited to, current stock price, transactions involving similar companies, the
business plan prepared by management and current and past operating results of
the Company among other information. The estimates used by the appraisal firm
may be different from those used by management in the preparation of its
business plan or from the current operating results of the Company and those
differences may be material. The assessment could be impacted by future events
such as, the stock price of the Company, being either higher or remaining at
current or lower prices for a significant period of time, transactions announced
or completed prior to the completion of the evaluation, regulatory or other
developments as well as the actual operating results of the Company.
Impairment of Long-Lived Assets
Based upon the provisions of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," we review assets and finite-lived intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. Our assets subject to SFAS
No. 144 include our property, plant and equipment and certain intangibles. A
determination of impairment is made based on estimates of future cash flows.
While we have never recorded an impairment charge under SFAS 144, future events
or changes in circumstances could result in a charge to earnings.
Investment in Unconsolidated Affiliates
We have investments and advances to affiliated entities that are accounted
for under the equity method of accounting. We periodically evaluate whether
there have been declines in value in these investments, and if so, whether these
declines are considered temporary or other-than-temporary. Other-than-temporary
declines would be recognized as realized losses in earnings. Evidence of a loss
in value includes, but is not limited to, our inability to recover the carrying
36
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)
amount of the investment or the inability of the investee to sustain an earnings
capacity, which would justify the carrying amount of the investment. The fair
value of an investment that is less than its book value may indicate a loss in
value of the investment. Our evaluations are based on many factors, including
the duration and extent to which the fair value is less than carrying amount;
the financial health of and business outlook for the investee, including
industry performance, changes in technology, and operational and financing cash
flow factors; and our intent and ability to hold the investment, including
strategic factors.
Retirement Benefits
Retirement benefits are a significant cost of doing business and yet
represent obligations that will be settled in the future. Retirement benefit
accounting is intended to reflect the recognition of future benefit costs over
the employee's approximate service period based on the terms of the plans and
the investment and funding decisions made by a company. We record the costs of
providing retirement benefits in accordance with SFAS No. 87 "Employers'
Accounting for Pensions". Our estimates include assumptions regarding the
discount rate to value the future obligation and the expected return on our plan
assets. We use discount rates in line with current market interest rates on high
quality fixed rate debt securities. Our return on assets is based on our current
expectation of the long-term returns on assets held by the plan. Changes in
these key assumptions can have a significant impact on the projected benefit
obligations, funding requirements and periodic benefit costs that we incur.
Income Taxes
We file a consolidated federal income tax return. We have two categories of
income taxes: current and deferred. Current taxes are those amounts we expect to
pay when we file our tax returns. Since we must report some of our revenues and
expenses differently for our financial statements than we do for income tax
purposes, we record the tax effects of those differences as deferred tax assets
and liabilities in our consolidated balance sheets. These deferred tax assets
and liabilities are measured using the enacted tax rates that are currently in
effect.
Management judgment is required in determining the provision for current
income taxes, deferred tax assets and liabilities, and any valuation allowance
recorded against the net deferred tax assets. A valuation allowance is
established for any deferred tax asset that we may not be able to use in the
preparation and filing of our future tax returns. We have recorded a valuation
allowance due to uncertainties related to the ability to utilize some of the
deferred tax assets, consisting primarily of equity income losses carried
forward before they expire.
37
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)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The provisions of this Statement are effective for exit or disposal activities
initiated after December 31, 2002 and are not expected to have a material
adverse effect on the Company's results of operations, financial position or
cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002" ("SFAS No. 145"), which rescinded or amended various existing
standards. One change addressed by this Statement pertains to treatment of
extinguishments of debt as an extraordinary item. SFAS No. 145 rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt," and states that an
extinguishment of debt cannot be classified as an extraordinary item unless it
meets the unusual or infrequent criteria outlined in Accounting Principles Board
("APB") Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB No. 30"). The provisions of SFAS 145 are effective for
fiscal years beginning after May 15, 2002 and provide that extinguishments of
debt that were previously classified as an extraordinary item in prior periods
that do not meet the criteria n APB No. 30 for classification as an
extraordinary item shall be reclassified. The adoption of SFAS No. 145 is not
expected to have a material affect on the Company's results of operations,
financial position or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). This Statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
For Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), and the accounting
and reporting provisions of APB No. 30. However, certain provisions of SFAS No.
121 and APB No. 30 have been maintained. The Company adopted SFAS No. 144
effective January 1, 2002. We have determined that there is no impairment to any
long-lived assets. We have also accounted for the planned sale of the Conestoga
wireless operations and the combined Conestoga and D&E paging operations in
accordance with SFAS 144 (Note 3).
In June 2001, the FASB issued SFAS no. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). This Statement establishes common
accounting practices relating to legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development or normal operation of a long-lived asset. The Company
will adopt SFAS No. 143 on January 1, 2003. The adoption is not expected to have
a material effect on the Company's results of operations, financial position or
cash flows.
38
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)
During the first quarter 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition. Annual goodwill amortization of approximately $1,440 ceased as of
January 1, 2002 as a result of adopting SFAS 142. During the first quarter 2002,
we also adopted Statement of Financial accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" (SFAS 144) which addresses
issues relating to the implementation of Financial Accounting Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." We have determined that there is no impairment to any
long-lived assets. However, we have accounted for our planned sale of
Conestoga's wireless segment and our paging services business in accordance with
SFAS 144 as described in Note 3 to our consolidated financial statements
included in this Form 10-Q.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking statements provide our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. These
statements may relate to our financial condition, results of operations, plans,
objectives, future performance and business. Often these statements include
words such as "believes," "expects," "anticipates," "estimates," "intends,"
"strategy," "plan," or similar words or expressions. In particular, statements,
express or implied, concerning future operating results, the ability to generate
income or cash flows, or our capital resources or financing plans are
forward-looking statements. These forward-looking statements involve certain
risks and uncertainties. Our actual performance or achievements may differ
materially from those contemplated by these forward-looking statements.
You should understand that various factors, in addition to those discussed
in the section titled "Factors Affecting Our Prospects" and elsewhere in this
document, could affect our future results and could cause results to differ
materially from those expressed in these forward-looking statements. You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this document. All subsequent written and oral
forward-looking statements attributable to us are expressly qualified in their
entirety by the cautionary statements contained or referred to in this report.
We do not undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this document or to reflect the occurrence of unanticipated events.
39
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)
FACTORS AFFECTING OUR PROSPECTS
THE COMMUNICATIONS INDUSTRY IS BECOMING INCREASINGLY COMPETITIVE, AND
THIS COMPETITION HAS RESULTED IN PRICING PRESSURE ON OUR SERVICE OFFERINGS.
As a provider of integrated communications services, we face competition
from:
o competitive local exchange carriers, including Verizon Communications,
Adelphia Business Solutions (which has received regulatory approval to
compete with us in our RLEC territory using its own facilities),
Commonwealth Telephone Enterprises and XO Communications;
o Internet service providers, including AOL, EarthLink and MSN;
o cable television companies, including Adelphia Communications,
Comcast, AT&T Broadband and Pencor Services;
o wireless services providers, including AT&T Wireless, Cingular
Wireless, Sprint PCS and T-Mobile;
o providers of communications services such as long distance services,
including, AT&T, MCI WorldCom and, as a consequence of its recently
received regulatory approval to provide long distance services in
Pennsylvania, Verizon Communications; and
o systems integration providers, including Morefield Communications,
Inc., IntelliMark IT Business Solutions and Weidenhammer Systems
Corporation.
Many of our competitors have substantially greater financial, technical and
marketing resources, greater name recognition and more established relationships
with a larger base of current and potential customers than us. Accordingly, it
may be difficult to compete against these communications providers.
WE ARE SUBJECT TO A COMPLEX AND UNCERTAIN REGULATORY ENVIRONMENT THAT
MAY REQUIRE US TO ALTER OUR BUSINESS PLANS AND FACE INCREASED COMPETITION.
The United States communications industry is subject to federal, state and
other regulations that are continually evolving. As new communications laws and
regulations are issued, we may be required to modify our business plans or
operations and may not be able to do so in a cost-effective manner. Federal and
state regulatory trends toward a more competitive marketplace through reduced
competitive entry standards are likely to have negative effects on our business
and our ability to compete. The regulatory environment governing ILEC operations
has been and will likely continue to be very liberal in its approach to
promoting competition and network access, which may increase the likelihood of
new competitors offering similar services to our service areas. The introduction
of new competitors could have a negative effect on our ILEC operating results
yet at the same time present operating benefits to our CLEC business.
40
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)
WE HAVE RECEIVED A LIMITED SUSPENSION FROM CERTAIN INTERCONNECTION
REQUIREMENTS OF THE TELECOMMUNICATIONS ACT OF 1996. UPON EXPIRATION OF THE
SUSPENSION, WE MAY BE SUBJECT TO ADDITIONAL COMPETITION FOR TELECOMMUNICATIONS
SERVICES.
Congress specifically recognized that the movement towards increased
competition under the Telecommunications Act of 1996 (TA-96) requires
accommodation for the different market characteristics of areas served by rural
and small incumbent carriers. In this regard, the Pennsylvania Public Utility
Commission (PA PUC) previously granted our RLECs a limited suspension until July
2002 from certain interconnection requirements of the TA-96. The suspension
reduces our interconnection obligations in the RLEC territory by excluding us
from requirements that would allow competitors access to our customers by
relying upon our services and facilities.
In June 2002, our RLECs petitioned the PA PUC for an extension of certain
protections provided in the original suspension. Our RLECs anticipate PA PUC
action on the petition by December 31, 2002. While the request is under review,
the terms and conditions of the original suspension remain in effect. Although
narrower in scope, the June 2002 petition, if granted, would continue to
preclude the use of our RLEC services and facilities by a competitor. If our
RLECs do not receive additional extensions of this suspension, competitors will
be allowed to seek removal of our rural exemption for the purposes of using our
services and facilities through interconnection agreements to provide
competitive services. If this event were to occur, our RLECs would exercise
their right to oppose before the PA PUC the competitor's request. The
prospective competitor would have the burden of proof to show that the request
is not unduly economically burdensome, is technically feasible, and is
consistent with universal service principles.
The introduction of new competitors could result in the loss of customers
and have a negative effect on our operating results. However, such loss would be
partially offset by charges paid to our RLECs by such competitors for
utilization of our services and networks.
WE MUST SECURE UNBUNDLED NETWORK ELEMENTS AT REASONABLE RATES OR CLEC
GROWTH MAY BE DELAYED AND THE QUALITY OF SERVICE MAY DECLINE.
In providing our CLEC service, we interconnect with and use other telephone
companies' networks to access certain of their customers. Therefore, we depend,
in certain circumstances, upon the technology and capabilities of these other
telephone companies, the quality and availability of other telephone companies'
facilities and other telephone companies' maintenance of these facilities. We
must also maintain efficient procedures for ordering, provisioning, maintaining
and repairing facilities from these other telephone companies. We may not be
able to obtain the facilities and services of satisfactory quality that we
require from other telephone companies, or on other satisfactory terms and
conditions, in which case we may experience delays
41
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 the growth of our competitive local exchange carrier networks and the
degradation of the quality of our service to customers.
We also provide digital subscriber line services. To provide unbundled
DSL-capable lines that connect each end-user to our equipment, we rely on other
telephone companies. The Telecommunications Act of 1996 generally requires that
charges for these unbundled network elements be cost-based and
nondiscriminatory. Charges for DSL-capable lines and other unbundled network
elements may vary based on rates proposed by other telephone companies and
approved by state regulatory commissions. Increases in these rates or reductions
in ILEC unbundling obligations could harm our CLEC business.
Many of the FCC's rules governing the rates, terms and conditions on which
unbundled network elements are offered by ILECs are under challenge in various
Courts of Appeal and the U.S. Supreme Court. Any decision which limits the FCC's
ability to regulate the rates, terms and conditions on which unbundled network
elements are offered to CLECs may adversely impact our ability to compete.
Additionally, the FCC's rules concerning the availability of unbundled network
elements and the regulatory status of the rates, terms and conditions on which
they are offered are subject to revision. If the FCC constricts the list of
elements it regulates as unbundled network elements, such an action may have an
adverse impact on our ability to compete.
IF WE EXPAND OUR CLEC OPERATIONS, THE SUCCESS OF THIS EXPANSION WILL BE
DEPENDENT ON INTERCONNECTION AGREEMENTS, PERMITS AND RIGHTS-OF-WAY, AND THE
FAILURE TO OBTAIN THESE AGREEMENTS AND PERMITS COULD HAMPER ANY SUCH EXPANSION.
If we expand our CLEC operations, our success will depend, in part, on our
ability to manage existing interconnection agreements and to enter into and
implement new interconnection agreements with other telephone companies. Our
failure to obtain these agreements and permits could hamper this expansion.
Interconnection agreements are subject to negotiation and interpretation by the
parties to the agreements and are subject to state regulatory commission, FCC
and judicial oversight. If the terms of these interconnection agreements need to
be renegotiated, we may not be able to renegotiate existing or enter into new
interconnection agreements in a timely manner or on favorable terms. We must
also maintain existing, and obtain new, local permits, including rights to
utilize underground conduit and pole space and other rights-of-way. We may not
be able to maintain our existing permits and rights or obtain and maintain other
required permits and rights on acceptable terms. Cancellation or nonrenewal of
interconnection agreements, permits, rights-of-way or other arrangements could
significantly harm our business.
DEMAND FOR OUR SYSTEMS INTEGRATION OFFERINGS IS SENSITIVE TO DOWNTURNS
IN THE UNITED STATES ECONOMY GENERALLY.
42
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)
Unlike our RLEC, CLEC and Internet services businesses which generate
revenues of a monthly recurring nature, demand for our systems integration
offerings is generally more sensitive to downturns in the United States economy.
In an economic downturn, consumers and businesses often curtail spending on
voice and data network infrastructure. As a result, we may experience lower than
expected revenues for our systems integration business during an economic
downturn. Reduced demand for our systems integration offerings could adversely
affect the operating profitability of our systems integration segment, which
could have an adverse effect on our operating results and financial condition.
OUR CHAIRMAN AND FOUR OTHER MEMBERS OF OUR BOARD OF DIRECTORS CAN
SIGNIFICANTLY INFLUENCE THE ELECTION OF DIRECTORS AND OTHER MATTERS IN THEIR
CAPACITIES AS TRUSTEES OF A VOTING TRUST.
Certain of our shareholders are parties to a Voting Trust Agreement, dated
as of November 19, 1992, pursuant to which the voting trustees have the right to
exercise sole voting power on all matters submitted to our shareholders for a
vote. The trustees of the voting trust are our chairman and four of our other
directors. The shares represented by the voting trust are voted in accordance
with resolutions adopted by a majority of the voting trustees. The Voting Trust
Agreement will expire on November 19, 2002. It is our understanding that the
parties to the voting trust intend to renew this agreement, although the terms,
including the number of shares covered by the agreement, of any such renewal may
differ from the terms of the current agreement.
As of November 8, 2002, the voting trust beneficially owned 18.8% of our
outstanding shares of common stock. As a result, these directors are able to
significantly influence the election of directors and other matters submitted to
shareholders for a vote. There can be no assurance that the interests of the
trustees of the voting trust will not conflict with the interests of our other
security holders.
WE MAY BE UNABLE TO INTEGRATE SUCCESSFULLY THE BUSINESS OPERATIONS OF
D&E AND CONESTOGA AND SUCH INABILITY COULD HAVE AN ADVERSE IMPACT ON OUR
PROFITABILITY.
The integration of the systems and operations of D&E and Conestoga will
involve significant risks. D&E and Conestoga have different operating support
systems, including billing, accounting, order management, toll rating, trouble
reporting and customer service systems, which may be difficult to integrate. In
addition, some of Conestoga's employees are members of a labor union and are
subject to the terms of a collective bargaining agreement. Because D&E employees
are not unionized, management of the combined company may face difficulties in
integrating employees with different work rules. Even if integration of the
operating systems and employees is ultimately successful, the amount of
management attention diverted to integration efforts may limit their ability to
work on other business matters.
43
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)
OUR INCREASED INDEBTEDNESS COULD RESTRICT OUR OPERATIONS.
As of September 30, 2002, we had approximately $245,129 of total
indebtedness, including current maturities, which increased in connection with
the Conestoga acquisition. This increased indebtedness could restrict our
operations due to the following factors, among others:
o we will use a substantial portion of our cash flow from operations, if
any, to pay principal and interest on our indebtedness, which would
reduce the funds available for working capital, capital expenditures,
acquisitions and other general corporate purposes;
o our indebtedness may limit our ability to obtain additional financing
on satisfactory terms, if at all;
o insufficient cash flow from operations may cause us to attempt to sell
assets, restructure or refinance our debt, or seek additional equity
capital, which we may be unable to do at all or on satisfactory terms;
o our level of indebtedness may make us more vulnerable to economic or
industry downturns;
o we may not have the ability to pay dividends to our shareholders; and
o our debt service obligations increase our vulnerabilities to
competitive pressures, as we may be more leveraged than many of our
competitors.
OUR CREDIT FACILITIES CONTAIN COVENANTS THAT COULD SIGNIFICANTLY
RESTRICT OUR OPERATIONS.
The agreements governing our indebtedness contain covenants imposing
financial and operating restrictions on our business. These restrictions may
limit our ability to take advantage of potential business opportunities as they
arise and adversely affect the conduct of our business. These covenants will
place restrictions on our ability and the ability of our subsidiaries to, among
other things:
o incur more indebtedness
o pay dividends, redeem or repurchase our stock or make other
distributions;
o make acquisitions or investments;
o use assets as security in other transactions;
o enter into transactions with affiliates;
o merge or consolidate with others;
o dispose of assets or use asset sale proceeds;
o create liens on our assets;
o expand our CLEC marketing areas; and
o extend credit.
44
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 addition, our credit facilities require that we maintain specified
financial ratios. Our ability to maintain these financial ratios can be affected
by operating performance or other events beyond our control. Accordingly, we
cannot assure you that we will meet these ratios. Our ability to comply with the
provisions governing our indebtedness may be adversely affected by our
operations and by changes in economic or business conditions or other events
beyond our control. In addition, our failure to comply with our
indebtedness-related obligations could result in an event of default under our
credit facilities or future indebtedness.
THE INABILITY TO SELL THE WIRELESS BUSINESS OF CONESTOGA WOULD RESULT
IN A REDUCTION OF OUR EXPECTED RESOURCES AVAILABLE FOR THE OPERATION OF OUR
BUSINESS, AND MAY ADVERSELY AFFECT THE CONTINUING OPERATIONS OF THE BUSINESS.
We intend to dispose of Conestoga's wireless assets and business. Until the
Conestoga wireless business is sold, we will continue to operate this business,
which incurred operating losses of $8.2 million for the year ended December 31,
2001. The continued operation of the wireless business will negatively impact
our results from discontinued operations and may adversely affect our business
by requiring additional financing to fund operations. The proceeds to be
realized by us from a sale of Conestoga's wireless assets and business are
uncertain.
In addition, pursuant to certain non-competition covenants in our agreement
with VoiceStream Wireless Corporation, for three years following the sale of our
interest in PCS ONE, we may be restricted from providing mobile voice wireless
communications services in the York-Hanover, Lancaster and Reading, Pennsylvania
markets. As a result of the restrictions imposed by these non-competition
covenants, we may be required within 240 days after the Conestoga acquisition to
dispose of that portion of Conestoga's wireless business operated in the
Reading, Pennsylvania market, which represents approximately 37% of the
population area serviced by such business. Due to the significant amount of
fixed costs associated with Conestoga's wireless business, if we were unable to
dispose of that portion of the Conestoga wireless business and were restricted
from providing services in the Reading, Pennsylvania market, we may incur
significantly greater losses from that business than those previously incurred
by Conestoga.
On November 12, 2002, we entered into a definitive agreement to sell
substantially all of the assets of the Conestoga wireless business to Keystone
Wireless, LLC ("Keystone"), a Delaware limited liability company. Keystone is an
affiliate of PC Management, Inc., a Ft. Myers-based company that owns and
manages wireless communications systems throughout the United States. Upon
completion of the sale, we will receive $10.0 million in cash and $10.0 million
in a secured promissory note issued by Keystone, each subject to certain
purchase price adjustments to be determined after closing. The sale is subject
to final regulatory approval by the Federal Communications Commission and other
customary closing conditions.
45
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 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. We will enter into an interest rate
protection agreement on one-half of the total amount of senior indebtedness
outstanding, with a weighted average life of at least 2 years, by November 24,
2002 as required by the loan agreement.
Item 4. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer of D&E
Communications (its principal executive officer and principal financial officer
respectively) have concluded, based on their evaluation as of a date within 90
days prior to the date of the filing of this report, D&E Communications'
disclosure controls and procedures: are effective to ensure that information
required to be disclosed by D&E Communications in the reports filed or submitted
by it under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms; and include controls and procedures designed to ensure
that information required to be disclosed by D&E Communications in such reports
is accumulated and communicated to the company's management, including the Chief
Executive Officer and the Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
There were no significant changes in D&E Communications' internal
controls or in other factors that could significantly affect these controls
subsequent to the date of such evaluation.
46
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
Item 1. Legal Proceedings
We are involved in various legal proceedings arising in the ordinary course
of our business. In the opinion of management, the ultimate resolution of these
matters will not have a material adverse effect on our consolidated financial
condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EXHIBIT IDENTIFICATION
NO. OF EXHIBIT REFERENCE
------ -------------- ---------
4.1 Amendment to Credit Agreement dated
September 12, 2002 by and among
D&E Communications, Inc. and CoBank, ACB
as administrative agent for the Lenders. Filed herewith.
10.1 Employment agreement dated May 24, 2002
between Albert H. Kramer and
D&E Communications, Inc. Filed herewith.
99.1 Certification of Chief Executive Officer Filed herewith.
99.2 Certification of Chief Financial Officer. Filed herewith.
(b) Reports on Form 8-K:
A current report on Form 8-K dated July 23, 2002, was filed during the
quarter ended September 30, 2002. The report announced the execution of a
non-binding letter of intent regarding the potential sale of certain assets of
Conestoga Wireless Corporation.
47
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.
Date: November 14, 2002
By: /s/ G. William Ruhl
---------------------------------
G. William Ruhl
Chief Executive Officer
Date: November 14, 2002
By: /s/ Thomas E. Morell
---------------------------------
Thomas E. Morell
Senior Vice President,
Chief Financial Officer
and Treasurer
48
D&E Communications, Inc. and Subsidiaries
OFFICER CERTIFICATIONS
REQUIRED BY SECTION 13a-14 OF THE EXCHANGE ACT
CERTIFICATIONS
I, G. William Ruhl, certify that:
1. I have reviewed this quarterly report on Form 10-Q of D&E
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
49
D&E Communications, Inc. and Subsidiaries
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ G. William Ruhl
--------------------------
G. William Ruhl
Chief Executive Officer
50
D&E Communications, Inc. and Subsidiaries
I, Thomas E. Morell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of D&E
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
51
D&E Communications, Inc. and Subsidiaries
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Thomas E. Morell
---------------------
Thomas E.Morell
Chief Financial Officer
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D&E Communications, Inc. and Subsidiaries
INDEX TO EXHIBITS
Exhibit Identification
No. of Exhibit Reference
------- -------------- ---------
4.1 Amendment to Credit Agreement dated
September 12, 2002 by and among
D&E Communications, Inc. and CoBank, ACB
as administrative agent for the Lenders. Filed herewith.
10.1 Employment agreement dated May 24, 2002
between Albert H. Kramer and
D&E Communications, Inc. Filed herewith.
99.1 Certification of Chief Executive Officer. Filed herewith.
99.2 Certification of Chief Financial Officer. Filed herewith.