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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 March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
Yes |X| No | |
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 7, 2003
----- --------------------------
Common Stock, par value $0.16 per share 15,441,744 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 ended
March 31, 2003 and 2002 ............................ 1
Consolidated Balance Sheets --
March 31, 2003 and December 31, 2002 ............... 2
Consolidated Statements of Cash Flows --
For the three months ended
March 31, 2003 and 2002 ............................ 3
Consolidated Statements of Shareholders' Equity --
For the three months ended
March 31, 2003 and 2002 ............................ 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 ........................................... 39
4. Controls and Procedures ......................................... 40
PART II. OTHER INFORMATION
1. Legal Proceedings ............................................... 41
6. Exhibits and Reports on Form 8-K ................................ 41
SIGNATURES....................................................... 42
CERTIFICATIONS................................................... 43
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
March 31,
OPERATING REVENUE 2003 2002
-------- --------
Communication service revenues ..................................... $ 38,858 $ 15,909
Communication products sold ........................................ 2,645 3,279
Other .............................................................. 582 389
-------- --------
Total operating revenues ........................................... 42,085 19,577
-------- --------
OPERATING EXPENSES
Communication service expenses (exclusive of
depreciation and amortization below) ............................ 14,956 7,006
Cost of communication products sold ................................ 2,261 2,776
Depreciation and amortization ...................................... 9,551 3,881
Marketing and customer services .................................... 4,039 2,141
General and administrative services ................................ 6,075 3,536
-------- --------
Total operating expenses ....................................... 36,882 19,340
-------- --------
Operating income .......................................... 5,203 237
-------- --------
OTHER INCOME (EXPENSE)
Equity in net losses of affiliates ................................. (678) (475)
Interest expense ................................................... (4,595) (708)
Other, net ......................................................... 856 7
-------- --------
Total other income (expense) ................................... (4,417) (1,176)
-------- --------
Income (loss) from continuing operations before
income taxes and dividends on utility
preferred stock ....................................... 786 (939)
INCOME TAXES AND DIVIDENDS ON
UTILITY PREFERRED STOCK
Income taxes (benefit) ............................................. 315 (150)
Dividends on utility preferred stock ............................... 16 16
-------- --------
Total income taxes and dividends
on utility preferred stock ..................................... 331 (134)
-------- --------
Income (loss) from continuing operations ..................... 455 (805)
Discontinued operations:
Loss from operations of
Paging business, net of income tax
benefit of $3 and $2 ........................................... (7) (3)
-------- --------
Income (loss) before cumulative effect of change in
accounting principle .................................... 448 (808)
Cumulative effect of change in accounting principle,
net of income taxes of $177 ...................................... 260 --
-------- --------
NET INCOME (LOSS) ....................................................... $ 708 $ (808)
======== ========
Weighted average common shares outstanding ......................... 15,421 7,366
Weighted average common shares and equivalents outstanding ......... 15,469 7,366
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Income (loss) from continuing operations ........................... $ 0.03 $ (0.11)
Loss from discontinued operations .................................. -- --
Cumulative effect of accounting change ............................. 0.02 --
-------- --------
Net income (loss) per common share ............................... $ 0.05 $ (0.11)
======== ========
Dividends per common share ......................................... $ 0.13 $ 0.13
======== ========
See notes to consolidated financial statements.
1
D&E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per-share amounts)
(Unaudited)
March 31, December 31,
ASSETS 2003 2002
--------- ------------
CURRENT ASSETS
Cash and cash equivalents ............................................ $ 8,947 $ 15,514
Accounts receivable .................................................. 16,983 19,368
Inventories, lower of cost or market, at average cost ................ 3,402 3,475
Prepaid expenses ..................................................... 12,006 7,454
Other ................................................................ 1,522 1,074
--------- ---------
TOTAL CURRENT ASSETS ............................................... 42,860 46,885
--------- ---------
INVESTMENTS
Investments in and advances to affiliated companies .................. 4,901 5,142
Investments available-for-sale ....................................... 1,400 1,313
--------- ---------
6,301 6,455
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
In service ........................................................... 307,909 307,000
Under construction ................................................... 5,119 3,456
--------- ---------
313,028 310,456
Less accumulated depreciation ........................................ 115,878 109,351
--------- ---------
197,150 201,105
--------- ---------
OTHER ASSETS
Assets held for sale ................................................. 215 6,665
Goodwill ............................................................. 147,488 147,488
Intangible assets, net of accumulated amortization ................... 177,414 178,964
Other ............................................................ 13,916 14,256
--------- ---------
339,033 347,373
--------- ---------
TOTAL ASSETS ......................................................... $ 585,344 $ 601,818
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt maturing within one year .............................. $ 135 $ 132
Accounts payable and accrued liabilities ............................. 18,903 20,112
Accrued taxes ........................................................ 872 19,520
Accrued interest and dividends ....................................... 1,990 1,840
Advance billings, customer deposits and other ........................ 9,896 8,535
--------- ---------
TOTAL CURRENT LIABILITIES .......................................... 31,796 50,139
--------- ---------
LONG-TERM DEBT ............................................................ 245,731 244,966
--------- ---------
OTHER LIABILITIES
Deferred income taxes ................................................ 85,186 85,516
Other ................................................................ 21,782 19,148
--------- ---------
106,968 104,664
--------- ---------
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 .......... 2,515 2,512
Outstanding shares: 15,432,550 at March 31, 2003 and
15,413,640 at December 31, 2002
Additional paid-in capital ........................................... 158,294 158,101
Accumulated other comprehensive income (loss) ........................ (7,249) (7,071)
Retained earnings .................................................... 51,125 52,343
Treasury stock at cost, 306,910 shares at March 31, 2003 and
at December 31, 2002 ........................................ (5,282) (5,282)
--------- ---------
199,403 200,603
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 585,344 $ 601,818
========= =========
See notes to consolidated financial statements.
2
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES OF
CONTINUING OPERATIONS ............................................. $ 8,970 $ 424
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of proceeds from sales .................. (3,637) (5,170)
Business acquisition costs ........................................ -- (475)
Proceeds from Conestoga Wireless sale ............................. 10,005 --
Increase in investments and advances to affiliates ................ (521) (504)
Decrease in investments and repayments from affiliates ............ 84 401
-------- -------
Net Cash Provided By (Used In) Investing Activities from
Continuing Operations ................................... 5,931 (5,748)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock ......................................... (1,839) (860)
Payments on long-term debt ........................................ (11,232) (14)
Proceeds from long-term debt financing ............................ 12,000 --
Net proceeds from (payments on) revolving lines of credit ......... -- 5,562
Proceeds from issuance of common stock ............................ 110 98
-------- -------
Net Cash Provided By (Used In) Financing Activities
from Continuing Operations .................................. (961) 4,786
-------- -------
CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS ....................... 13,940 (538)
CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS
Cash Provided by (Used in) Operating Activities of
Discontinued Operations ......................................... (20,507) 1,022
-------- -------
Net Cash Provided by (Used In) Discontinued Operations .......... (20,507) 1,022
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... (6,567) 484
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD ............................................. 15,514 615
-------- -------
END OF PERIOD ................................................... $ 8,947 $ 1,099
======== =======
See notes to consolidated financial statements.
3
D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the three months ended March 31, 2003 and 2002
(in thousands)
(Unaudited)
2003 2002
---- ----
Shares Amount Shares Amount
--------- --------- --------- ---------
COMMON STOCK
Balance at beginning of year ..................................... 15,721 $ 2,512 7,639 $ 1,219
Common stock issued for Employee Stock Purchase,
and Dividend Reinvestment Plans ................................ 19 3 9 1
--------- --------- --------- ---------
Balance at March 31 .............................................. 15,740 2,515 7,648 1,220
--------- --------- --------- ---------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ..................................... 158,101 39,956
Common stock issued for Employee Stock Purchase
and Dividend Reinvestment Plan ................................. 193 153
--------- ---------
Balance at March 31 .............................................. 158,294 40,109
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year ..................................... (7,071) (2,833)
Unrealized gain (loss) on investments, net of tax ................ 54 (657)
Unrealized loss on interest rate swap agreements, net of tax ..... (232) --
--------- ---------
Balance of March 31 .............................................. (7,249) (3,490)
--------- ---------
RETAINED EARNINGS
Balance at beginning of year ..................................... 52,343 10,637
Net income (loss) ................................................ 708 (808)
Dividends on common stock: $0.13, $0.13 per share ................ (1,926) (917)
--------- ---------
Balance at March 31 .............................................. 51,125 8,912
--------- ---------
TREASURY STOCK
Balance at beginning of year ..................................... (307) (5,282) (277) (5,104)
Treasury stock acquired .......................................... -- -- -- --
--------- --------- --------- ---------
Balance at March 31 .............................................. (307) (5,282) (277) (5,104)
--------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY .......................................... 15,433 $ 199,403 7,371 $ 41,647
========= ========= ========= =========
COMPREHENSIVE INCOME (LOSS)
Net income (loss) ................................................ $ 708 ($808)
Unrealized gain (loss) on investments, net of income
taxes of $33 and ($428) ........................................ 54 (657)
Unrealized loss on interest rate swap agreements, net of
income taxes of ($158) ......................................... (232) --
--------- ---------
Total comprehensive income (loss) ................................ $ 530 ($1,465)
========= =========
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
(Dollars in thousands, except per-share amounts)
(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.
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 ended March 31, 2002 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 for the fiscal year ended
December 31, 2002.
Stock Compensation
The Company accounts for stock compensation under the intrinsic
value method of APB Opinion 25 and related interpretations. Based on the
additional disclosure requirements of SFAS No. 148, the following table
illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123.
Three months ended
(In thousands, except per share amounts) March 31,
2003 2002
------- -------
Net income (loss), as reported ............................................ $ 708 $ (808)
Add: stock-based employee compensation included in
reported net income (loss), net of related tax ................... -- --
Deduct: total stock-based employee compensation expense determined
under fair value-based method, net of related tax ................ (13) --
------- -------
Pro forma net income (loss) ........................................... $ 695 $ (808)
======= =======
Basic and diluted income (loss) per share:
As reported ........................................................... $ 0.05 $ (0.11)
Pro forma ............................................................. $ 0.05 $ (0.11)
5
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
The fair value of options grants of $4.46 and $6.20 in the year ended
December 31, 2002 and options converted at the Conestoga acquisition of $7.20 is
estimated using the Black-Scholes option price model with the following
assumptions that have not changed since no options were granted in 2003:
Dividend yield......................... 2.55%
Expected life.......................... 5 years
Expected volatility.................... 60.30%
Risk-free interest rate................ 4.47%
(2) ACCOUNTING CHANGES AND RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FSAB")
issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and
clarifies the accounting guidance on derivative instruments (including
certain derivative instruments embedded in other contracts) and hedging
activities that fall within the scope of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 also amends
certain other existing pronouncements, which will result in more
consistent reporting of contracts that are derivatives in their entirety
or that contain embedded derivatives that warrant separate accounting.
This Statement is effective for contracts entered into or modified after
June 30, 2003, with certain exceptions, and for hedging relationships
designated after June 30, 2003. The Company has not yet determined the
impact this pronouncement will have on the Company's financial position,
results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123" ("SFAS No. 148"). This Statement provides alternative
methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation from the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). In addition, this Statement amends the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. As permitted by SFAS No. 148, D&E will continue to
account for the Company's stock-based compensation in accordance with APB
No. 25, and the adoption of SFAS No. 148 requires prominent disclosures
about the effects of SFAS No. 123 on reported income in the interim
financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). This Statement establishes
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. SFAS
No. 143
6
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the legal obligations are
incurred and capitalize that amount as a part of the book value of the
long-lived asset. That cost is then depreciated over the remaining life of
the underlying long-lived asset. D&E adopted SFAS No. 143 effective
January 1, 2003 and recorded an after-tax benefit of approximately $260 as
a cumulative effect accounting adjustment in the first quarter 2003. The
adjustment represents the cumulative estimate of cost of removal charged
to depreciation expense in earlier years.
The following pro forma amounts have been adjusted for the effect of
retroactive application on depreciation and costs of removal expense and
related income taxes which would have been made had the new method been in
effect at the beginning of 2002.
Three months ended
March 31, 2002
--------------
As Reported Pro forma
----------- ---------
Net Income $ (808) $ (802)
Basic Earnings per share $(0.11) $(0.11)
Diluted Earnings per share $(0.11) $(0.11)
In 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". D&E applied the initial recognition
and measurement provisions on a prospective basis effective December 31,
2002. This interpretation requires that at the time a Company issues a
guarantee, the Company must recognize a liability for the fair value of
that obligation under the guarantee. As part of the Company's acquisition
of Conestoga, D&E assumed a guarantee agreement with Mountain Union for
lease obligations on the wireless tower sites of Conestoga's wireless
subsidiary. When D&E entered into the asset purchase agreement with
Keystone Wireless, whereby Keystone Wireless was assigned the
responsibility for the leases, Mountain Union declined to release D&E from
its guarantee. In the event of a default by Keystone Wireless, D&E
continues to guarantee the wireless tower site lease payments, which cover
a 10-year period commencing on the commencement date of the lease of each
tower. As such, the guarantee is a continuing guarantee provided on an
individual tower site basis. The lease payments start at $1.5 per site per
month, with provision for an increase of 4% per year. The majority of
these tower site leases and our guarantee will expire in 2011 and
thereafter. D&E has estimated and recorded the fair value of the liability
for the lease guarantees of $3,200 and that is presented as an offset to
the fair value of the Conestoga assets held for sale at December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities -- An Interpretation of
Accounting Research Bulletin (ARB) No. 51" ("FIN 46"). This interpretation
clarifies how to identify variable interest entities and how a company
should assess its interests in a variable interest entity to decide
whether to consolidate the entity. FIN 46 applies to variable interest
entities created after January 31, 2003, in which a company obtains an
interest after that date. Also, FIN 46 applies in the first fiscal quarter
or interim period
7
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
beginning after June 15, 2003, to variable interest entities in which a
company holds a variable interest that it acquired before February 1,
2003. D&E does not have any ownership in variable interest entities.
In January 2003, the Emerging Issues Task Force issued EITF 00-21
"Revenue Arrangements with Multiple Deliverables" (EITF 00-21"). EITF
00-21 primarily addresses certain aspects of the accounting by a vendor
for arrangements under which it will perform multiple revenue-generating
activities. Specifically, it addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting. In applying EITF 00-21, separate contracts with the same
entity or related parties that are entered into at or near the same time
are presumed to have been negotiated as a package and should, therefore,
be evaluated as a single arrangement in considering whether there are one
or more units of accounting. That presumption may be overcome if there is
sufficient evidence to the contrary. EITF 00-21 also addresses how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. The provisions of EITF 00-21 are
effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. D&E is currently evaluating the impact this
statement will have on its financial position or results of operations.
(3) EARNINGS PER SHARE
Basic earnings per share amounts are based on income divided by the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share amounts are based on income divided by
the weighted average number of shares of common stock outstanding during
the period after giving effect to dilutive common stock equivalents from
assumed conversions of employee stock options. The following table shows
how earnings per share were computed for the periods presented:
Three months ended March 31,
----------------------------
2003 2002
-------- --------
Basic earnings (loss) per share computation
Income (loss) from continuing operations $ 455 $ (805)
Loss from discontinued operations (7) (3)
Cumulative effect of accounting change 260 --
-------- --------
Net income (loss) $ 708 $ (808)
======== ========
Weighted average shares (thousands) 15,421 7,366
-------- --------
Basic earnings (loss) per share
Income (loss) from continuing operations $ 0.03 $ (0.11)
Loss from discontinued operations -- --
Cumulative effect of accounting change 0.02 --
-------- --------
8
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
Net income (loss) $ 0.05 $ (0.11)
======== ========
Diluted earnings (loss) per share computation
Income (loss) from continuing operations $ 455 $ (805)
Loss from discontinued operations (7) (3)
Cumulative effect of accounting change 260 --
-------- --------
Net income (loss) $ 708 $ (808)
======== ========
Weighted average shares (thousands) 15,421 7,366
Plus incremental shares from assumed stock option exercises 48 --
-------- --------
Adjusted weighted average shares 15,469 7,366
-------- --------
Diluted earnings (loss) per share
Income (loss) from continuing operations $ 0.03 $ (0.11)
Loss from discontinued operations -- --
Cumulative effect of accounting change 0.02 --
-------- --------
Net income (loss) $ 0.05 $ (0.11)
======== ========
(4) ACQUISITION
On May 24, 2002, D&E 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.
The following unaudited pro forma combined results of operations is
provided for illustrative purposes only and assumes that this acquisition
had occurred as of the beginning of 2002. The following 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 occurred at the beginning of 2002, nor the results that may be
obtained in the future.
Three months ended
March 31, 2002
------------------
Pro forma operating revenues $43,478
Pro forma income before extraordinary items (1,104)
Pro forma net income (1,104)
Pro forma income per share $ (0.07)
9
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
(5) INTANGIBLE ASSETS
The intangible assets and related accumulated amortization recorded
on our balance sheets are as follows:
As of March 31, 2003 As of December 31, 2002
------------------------ ------------------------
Gross Gross
carrying Accumulated carrying Accumulated
amount amortization amount amortization
-------- ------------ -------- ------------
Indefinite-lived intangibles:
Franchises $104,800 $ -- $104,800 $ --
Finite-lived intangibles:
Customer relationships 75,700 (4,595) 75,700 (3,217)
Trademarks and
Trade names 1,200 (333) 1,200 (233)
Non-compete agreements 1,424 (782) 1,424 (710)
-------- -------- -------- --------
Total intangible assets $183,124 $ (5,710) $183,124 $ (4,160)
======== ======== ======== ========
Aggregate amortization expense related to these intangible assets
recorded for the three-months ended March 31, 2003 and 2002, was $1,550
and $73, respectively.
(6) DISCONTINUED OPERATIONS
D&E Wireless
D&E owned a fifty percent partnership interest in PCS ONE and
performed related contract services to PCS ONE, which constituted a
separate segment of D&E's business. On October 17, 2001, D&E entered into
a definitive agreement to sell its interest in PCS ONE to VoiceStream
Wireless Corporation.
The assets and liabilities and results of operations of D&E Wireless
were reported as discontinued operations in accordance with APB Opinion
No. 30 with a measurement date of December 31, 2001. In accordance with
EITF 85-36, beginning January 1, 2002, through disposal date (the
phase-out period), losses from PCS ONE were deferred because it was
reasonably assured that the ultimate disposition of this business would
result in the recognition of a gain.
On April 1, 2002, D&E consummated the 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, D&E 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 $2,294, which were collected in
10
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
October 2002. In addition, we received equipment with a fair value of
approximately $2,014. Selling and other estimated costs were approximately
$3,836 and the gain on sale was $84,738 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 associated income
taxes were $29,301 resulting in an after tax gain of $55,437.
During the three-month period ended March 31, 2003, D&E paid $20,500
in taxes related to gain on sale of PCS ONE which are included in cash
used in investing activities of discontinued operations in the statement
of cash flows.
Summarized financial information for the discontinued operations of
our wireless business is as follows:
Three months ended
March 31, 2002
--------------
Revenue $ 2,782
Expenses 2,445
-------
Operating income 337
Equity in net loss of PCS ONE (1,605)
Other income (expense) --
-------
Loss from discontinued operations before taxes (1,268)
Losses during phase-out period deferred
against gain on disposal 1,268
-------
Net losses from discontinued operations
before taxes --
Income taxes --
-------
Loss from discontinued operations, net of taxes $ --
-------
The summarized results of operations of PCS ONE were as follows:
Three months ended
March 31, 2002
--------------
Net sales $12,312
Net loss ($ 3,211)
Our share of loss ($ 1,605)
Paging Services
During the third quarter of 2002, D&E committed to a plan to sell
the $215 total assets of Conestoga Mobile Systems' ($205) and D&E's paging
operations ($10). As such, the assets are reported as held for sale and
the results of operations are reported in discontinued operations in
accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." The assets are not depreciated while they are held for
sale. In January 2003, we entered into an agreement to sell our paging
operations' assets for $215. D&E expects that the transaction
11
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
will close in the second quarter of 2003. No liabilities are expected to
be included as part of the sale.
Summarized income statement information for the discontinued
operations of the paging services, including Conestoga Mobile Systems'
operations post D&E's acquisition on May 24, 2002, were as follows:
Three months ended
March 31,
2003 2002
------ ------
Revenue ................................................ $ 172 $ 26
Expenses ............................................... 182 31
------ ------
Operating loss ......................................... (10) (5)
Income taxes ........................................... (3) (2)
------ ------
Loss from paging operations, net of taxes .............. $ (7) $ (3)
====== ======
(7) SALE OF CONESTOGA WIRELESS ASSETS
In connection with the acquisition of Conestoga, the Company had
committed to a plan to sell the assets of Conestoga's wireless segment. As
such, these assets are reported as held for sale in accordance with SFAS
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, D&E 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,
Florida-based company that owns and manages wireless communications
systems throughout the United States. The sale was completed on January
14, 2003. Upon completion of the sale, and subject to certain purchase
price adjustments to be determined after closing, D&E received $10,000 in
cash and a $10,000 face value secured promissory note issued by Keystone.
The promissory note requires monthly principal payments for 48 months
beginning in January 2005. The note bears interest from the date of the
note, at the 60 day LIBOR rate plus 5% and is receivable beginning on
December 31, 2003 and on the last day of each quarter thereafter. As this
note receivable is from a highly leveraged entity and the business sold
has not generated positive cash flows, D&E will record value to the note
when cash recoveries are received. The note carries certain rights where
we can convert a portion or all of the principal balance of the note into
equity interests of Keystone. The conversion period begins on December 31,
2004 and ends May 1, 2005.
The results of operations of the Conestoga wireless segment held for
sale are not reported in discontinued operations because D&E has
continuing involvement after the sale as a result of D&E's continued
guarantees on wireless tower site leases and D&E's responsibilities under
a Build-to-Suit Agreement. No gain or loss was recorded as a result of the
sale. However a loss of
12
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
$675 related to D&E's estimated commitments in the Build-to-Suit Agreement
has been recorded in communication services expenses in 2002. The fair
value of the Conestoga wireless segment of $6,450 included in the final
purchase price allocation was determined as follows:
Cash ......................................................... $ 10,000
Less: costs to sell and purchase price adjustments ........... (350)
Fair value of lease guarantees ............................... (3,200)
--------
Total ........................................................ $ 6,450
========
The carrying amounts of the major classes of assets included as part
of the Conestoga wireless business sold are as follows:
December 31, 2002
-----------------
Inventories ..................................................... $ 166
Property and equipment .......................................... 9,084
PCS licenses .................................................... 400
-------
Total assets sold .......................................... 9,650
-------
Less: Fair value of lease guarantees remaining with D&E ....... (3,200)
-------
Net assets sold ............................................ $ 6,450
=======
(8) INVESTMENTS IN AFFILIATED COMPANIES
D&E owns a one-third investment in EuroTel, a domestic corporate
joint venture. EuroTel holds a 100% investment in PenneCom, B.V.
(PenneCom), an international telecommunications holding company, and holds
a 27.85% investment in Pilicka, a telecommunications company located in
Poland. D&E also owns a 28.88% direct investment in Pilicka. D&E accounts
for both its investment in EuroTel and its investment in Pilicka using the
equity method of accounting.
In July 2002, EuroTel initiated a legal action against an investment
bank, and an individual, alleging violations of applicable law relating to
the advice given by the investment bank and the individual to a
prospective buyer not to close on the purchase of Pilicka. Management of
EuroTel believes that, based on the advice of its legal counsel, the suit
is meritorious. However, the ultimate outcome of the litigation cannot be
determined and no amount has been recognized for possible collection of
any claims in the litigation. Legal costs are expected to continue to be
incurred in pursuit of such litigation.
The summarized results of operations of EuroTel were as follows:
Three months ended March 31,
----------------------------
2003 2002
---- ----
Net sales $ -- $ 2,308
Net loss (959) (692)
Our share of loss (320) (231)
13
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
The summarized results of operations of Pilicka were as follows:
Three months ended March 31,
2003 2002
---- ----
Net sales $2,350 $2,308
Net loss (827) (788)
Our share of loss (239) (244)
(9) LONG-TERM DEBT
The following table sets forth the total long-term debt outstanding:
Interest March 31, December 31,
Rate Maturity 2003 2002
-------- -------- --------- ------------
Senior Secured Revolving Credit Facility .... 5.30% 2009 $ 41,550 $ 32,250
Senior Secured Term Loan B .................. 5.34% 2010 119,000 125,000
Senior Secured Term Loan A .................. 5.44% 2011 47,500 50,000
Secured Term Loan ........................... 9.34% 2014 20,000 20,000
Secured Term Loan ........................... 9.36% 2014 15,000 15,000
Capital lease obligations ................... 2,816 2,848
-------- --------
245,866 245,098
Less current maturities ..................... 135 132
-------- --------
Total long-term debt ........................ $245,731 $244,966
======== ========
The Senior Secured Credit Facility includes a mandatory repayment of
principal from any single asset sale or series of related transactions,
which total more than $1,000. Consequently, as a result of the collection
of $10,000 from the sale of Conestoga Wireless, D&E made the following
payments in the first quarter of 2003 that permanently reduced the total
loan availability:
Senior Secured Revolving Credit Facility ......................... $1,500
Senior Secured Term B ............................................ 6,000
Senior Secured Term A ............................................ 2,500
D&E's indebtedness requires the Company to maintain compliance with
certain financial and operational covenants. The most restrictive covenant
is the total leverage ratio. The tax liability incurred by D&E in
connection with the sale of its PCS ONE partnership interest in April
2002, $20,500, was originally scheduled to be paid prior to the closing of
the credit agreement but was deferred and paid in March 2003. As a result,
for the purposes of calculating compliance with the debt service coverage
ratio in the credit agreement for the quarter ended March 31, 2003, such
tax liability was excluded, with the consent of the lenders, from the
covenant calculation. As such, D&E was in compliance with all covenants at
March 31, 2003.
14
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)
(10) BUSINESS SEGMENT DATA
Our segments, excluding the Paging segment, which is now reported as
a discontinued segment, are RLEC, CLEC, Internet Services, Systems
Integration and Conestoga Wireless. 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
March 31, March 31, March 31,
Segment 2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
RLEC $25,746 $10,600 $ 1,956 $ 846 $ 7,712 $ 2,290
CLEC 8,386 1,689 150 107 (961) (873)
Internet Services 1,269 880 151 6 (176) (288)
Systems Integration 5,171 5,490 10 7 (1,163) (697)
Conestoga Wireless 456 -- 4 -- (380) --
Corporate, Other
and Eliminations 1,057 918 (2,271) (966) 171 (195)
------- ------- ------- ------- ------- -------
Total $42,085 $19,577 $ -- $ -- $ 5,203 $ 237
======= ======= ======= ======= ======= =======
Segment Assets
--------------
March December
Segment 31, 2003 31, 2002
------- -------- --------
RLEC $487,639 $489,950
CLEC 63,967 62,973
Internet Services 6,357 8,068
Systems Integration 19,879 20,358
Conestoga Wireless 552 8,511
Corporate, Other
and Eliminations 6,950 11,958
-------- --------
Total $585,344 $601,818
======== ========
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
March 31,
2003 2002
---- ----
Operating income from reportable segments ................. $ 5,032 $ 432
Corporate, other and eliminations ......................... 171 (195)
Equity in net losses of affiliates ........................ (678) (475)
Interest expense .......................................... (4,595) (708)
Other, net ................................................ 856 7
------- -------
Income (loss) from continuing operations before income
taxes and dividends on utility preferred stock .......... $ 786 $ (939)
======= =======
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 of Form 10-Q, as well as our audited consolidated
financial statements for the year ended December 31, 2002 as filed on Form
10-K with the SEC. Monetary amounts presented in the following discussion
are rounded to the nearest thousand dollars. Certain items in the
financial statements for the three months ended March 31, 2002 have been
reclassified for comparative purposes.
OVERVIEW
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.
We are a provider of integrated communications services to
residential and business customers throughout the eastern half of
Pennsylvania. We operate rural telephone companies, or rural local
exchange carriers, or ("RLECs"), in parts of Berks, Lancaster, Union
counties and smaller portions of three other adjacent counties in
Pennsylvania, and competitive local telephone companies, or CLECs, 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 including the
related communications and computer equipment in areas that extend beyond
the markets listed above.
Our segments, excluding our paging services, which, as discussed
below, is now reported as a discontinued business, are RLEC, CLEC,
Internet Services, Systems Integration and Conestoga Wireless. 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 charges paid by long distance,
wireless and other telecommunications companies for access to our network
in connection with the completion of long distance telephone calls. 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 a telemarketer
call-blocking service. Regional long distance revenue is derived from
providing regional long distance services to our RLEC customers.
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)
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 charges paid by long
distance and other telecommunication companies for access to our network
in connection with the completion of long distance telephone and local
calls. 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 a
telemarketer call-blocking service. 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.
Conestoga Wireless revenue was derived from providing wireless
Personal Communication Service, including local and long distance
telephone services, and from the sale of wireless communications
equipment. We market these products and services in certain of our RLEC
and CLEC markets. We sold this segment on January 14, 2003.
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 service. Our Systems Integration
business incurs expenses primarily related to wages and employee benefit
costs, and equipment and materials used in the course of the installation
and provision of our products and services. Our Conestoga Wireless Segment
incurs costs related to network facilities to provide wireless Personal
Communication Service, engineering costs, network access costs and costs
of wireless communications equipment sold.
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
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)
therefore tend to result in incremental revenue. We believe that our
additional capital expenditures relating to our investment in software and
systems will maintain our competitive position in the marketplace.
We own a one-third investment in EuroTel L.L.C. (EuroTel), a
domestic corporate joint venture. EuroTel holds a 27.85% investment in
Pilicka Telefonia, Sp.zo.o (Pilicka), a telecommunications company located
in Poland. Also, we own 28.88% and the other EuroTel founders own 43.27%
of Pilicka. As such, we have a 28.88% direct ownership in Pilicka and a
9.28% indirect ownership in Pilicka, through our 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, D&E consummated the 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, D&E 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 $2,294, which were collected in October 2002.
In addition, we received equipment with a fair value of approximately
$2,014. Selling and other estimated costs were approximately $3,836 and
the gain on sale was $84,738 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 associated income taxes were $29,301
resulting in an after tax gain of $55,437.
Conestoga's wireless business was sold on January 14, 2003, and
Conestoga and D&E's paging businesses are classified as assets held for
sale on the balance sheet. The paging business has been reported as a
discontinued operation. On January 28, 2003, we entered into a definitive
sales agreement to sell Conestoga and D&E's paging businesses and expect
to close the sale during the second quarter of 2003. Conestoga Wireless is
included as part of operating activity and not as a discontinued operation
because under accounting rules there is deemed to be continuing
involvement as a result of our commitment to building out tower sites and
a continuing lease guarantee related to certain tower sites.
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)
RESULTS OF OPERATIONS
The following table is a summary of our operating results by segment for
the three months ended March 31, 2003 and 2002:
CORPORATE,
INTERNET SYSTEMS CONESTOGA OTHER AND TOTAL
RLEC CLEC SERVICES INTEGRATION WIRELESS ELIMINATIONS COMPANY
---- ---- -------- ----------- --------- ------------ -------
MARCH 31, 2003 (1)
Revenues - External $25,746 $ 8,386 $ 1,269 $ 5,171 $ 456 $ 1,057 $42,085
Revenues - Intercompany 1,956 150 151 10 4 (2,271) --
------- ------- ------- ------- ------- ------- -------
Total Revenues 27,702 8,536 1,420 5,181 460 (1,214) 42,085
------- ------- ------- ------- ------- ------- -------
Depreciation and Amortization 7,766 975 169 424 -- 217 9,551
Other Operating Expense 12,224 8,522 1,427 5,920 840 (1,602) 27,331
------- ------- ------- ------- ------- ------- -------
Total Operating Expenses 19,990 9,497 1,596 6,344 840 (1,385) 36,882
------- ------- ------- ------- ------- ------- -------
Operating Income (Loss) 7,712 (961) (176) (1,163) (380) 171 5,203
------- ------- ------- ------- ------- ------- -------
MARCH 31, 2002 (1)
Revenues - External $10,600 $ 1,689 $ 880 $ 5,490 $ -- $ 918 $19,577
Revenues - Intercompany 846 107 6 7 -- (966) --
------- ------- ------- ------- ------- ------- -------
Total Revenues 11,446 1,796 886 5,497 -- (48) 19,577
------- ------- ------- ------- ------- ------- -------
Depreciation and Amortization 3,117 245 98 314 -- 107 3,881
Other Operating Expenses 6,039 2,424 1,076 5,880 -- 40 15,459
------- ------- ------- ------- ------- ------- -------
Total Operating Expenses 9,156 2,669 1,174 6,194 -- 147 19,340
------- ------- ------- ------- ------- ------- -------
Operating Income (Loss) 2,290 (873) (288) (697) -- (195) 237
------- ------- ------- ------- ------- ------- -------
- ----------
(1) We acquired Conestoga Enterprises, Inc. on May 24, 2002.
CONSOLIDATED OPERATIONS
Three months ended March 31, 2003 compared
to the three months ended March 31, 2002
Consolidated operating revenues from continuing operations increased
$22,508, or 115.0%, to $42,085 for the first quarter of March 31, 2003,
from $19,577 in the same period of 2002. The revenue increase was
primarily due to the inclusion of Conestoga's revenues, totaling $24,051,
with no amount included in 2002 prior to its acquisition on May 24, 2002.
The former D&E operating divisions realized a $1,543 decrease in revenues
with increased revenues primarily from an increase in the number of
customers in our Internet Services and CLEC segments more than offset by a
decrease in our Systems Integration segment revenues. This decrease is
primarily related to reductions in customer spending for communications
related infrastructure that we believe is a result of a slowing economy.
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)
Consolidated operating income from continuing operations increased
$4,966, to $5,203, for the first quarter of 2003, from $237 in the same
period of 2002. Operating income as a percentage of revenue increased to
12.4% in the first quarter of 2003 compared to 1.2% in the same period of
2002. The improvement was primarily attributable to the Conestoga
acquisition.
Other income and expense was a net expense of $4,417 in the first
quarter of 2003 compared to a net expense of $1,176 in the same period of
2002. Our equity in the losses of our European affiliates increased to
$678 in the first quarter of 2003 from $475 in the same period of 2002.
Interest expense increased to $4,595 in the first quarter of 2002,
compared to $708 in the same period of 2002, primarily as a result of
increased borrowings to complete the Conestoga acquisition on May 24,
2002. Other income increased $849 in 2003 from the prior year, primarily
from a $1,204 dividend received, and discounted to a present value of
$801, on our investment in our primary lender compared with $94 received
in the first quarter of 2002.
Income taxes were $315 in the first quarter of 2003 compared to a
benefit of $150 in the same period of 2002. Discontinued paging operations
resulted in a loss of $7 after tax in the first quarter of 2002 versus a
loss of $3 in the first quarter of 2002, which did not include Conestoga's
paging business before the acquisition. In 2003 we recorded $260 of income
after taxes for the cumulative effect of adopting Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" effective January 1, 2003. The adjustment represents the
cumulative estimate of cost of removal charged to depreciation expense in
earlier years. Our net income was $708, or $0.05 per share (including
$0.02 for the cumulative effect of SFAS No. 143), in the first quarter of
2003 compared to a net loss of $808, or $0.11 per share, in the first
quarter of 2002.
RLEC SEGMENT RESULTS
THREE MONTHS ENDED MARCH 31,
2003 2002 % CHANGE
-------- -------- --------
Revenues:
Local Telephone Service $ 8,085 $ 3,537 128.6%
Network Access 14,019 5,709 145.6%
Other 5,598 2,200 154.5%
-------- --------
Total Revenues 27,702 11,446 142.0%
-------- --------
Depreciation and Amortization 7,766 3,117 149.1%
Other Operating Expenses 12,224 6,039 102.4%
-------- --------
Total Operating Expenses 19,990 9,156 118.3%
-------- --------
Operating Income $ 7,712 $ 2,290 236.8%
-------- --------
Access Lines at March 31 144,934 62,104 133.4%
-------- --------
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)
RLEC segment revenues increased $16,256, or 142.0%, to $27,702 in
2003, from $11,446 in 2002. The increase was primarily attributable to the
inclusion of Conestoga's revenues, totaling $15,983 with no amount
included in 2002 prior to its acquisition on May 24, 2002. The revenue
increase also included a rate increase in local telephone service in July
2002. We have filed another rate rebalancing request with the Pennsylvania
Public Utility Commission on April 30, 2003. The request, to be effective
July 1, 2003, is designed to be revenue-neutral, with no impact on our
RLECs' total operating revenues. In our original D&E RLEC division, we
experienced an increase of $211 in basic local telephone service and an
increase of $299 in network access offset by decreases of $183 in regional
long distance toll service and decreases of $54 in other revenues.
RLEC operating expenses increased $10,834 or 118.3%, to $19,990 in
the first quarter of 2003, from $9,156 in the same period of the prior
year. The first quarter of 2003 expenses included $11,239 from the
Conestoga acquisition, while our D&E RLEC experienced a decrease of $405,
with depreciation expense increasing $268, direct cost of operations
decreasing $199 and general and administrative expense decreasing $417,
both largely relating to reduced computer costs, and other operating
expenses decreasing $57.
CLEC SEGMENT RESULTS
THREE MONTHS ENDED MARCH 31,
2003 2002 % CHANGE
-------- -------- --------
Revenues:
Local Telephone Service $ 2,208 $ 560 294.3%
Network Access 1,238 384 222.4%
Long Distance 4,927 775 535.7%
Other 163 77 111.7%
-------- --------
Total Revenues 8,536 1,796 375.3%
-------- --------
Depreciation and Amortization 975 245 298.0%
Other Operating Expenses 8,522 2,424 251.6%
-------- --------
Total Operating Expenses 9,497 2,669 255.8%
-------- --------
Operating Loss $ (961) $ (873) (10.1%)
-------- --------
Access Lines at March 31 33,276 8,420 295.2%
CLEC segment revenues increased $6,740 or 375.3%, to $8,536 in the
first quarter of 2003, from $1,796 in the same period of 2002. The
increase was primarily attributable to the inclusion of Conestoga's
revenues, totaling $5,952 with no amount included in 2002 prior to its
acquisition on May 24, 2002. The increase was also related to our original
D&E CLEC's addition of access lines for new customers that primarily
increased local telephone service revenues $293, increased network access
revenues by $192, long distance revenues by $230 and other miscellaneous
revenues increased $73.
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)
Operating expenses for the CLEC segment increased $6,828 or 255.8%,
to $9,497 in the first quarter of 2003, from $2,669 in the same period of
2002. In addition to $6,477 of expenses from the Conestoga acquisition,
our D&E CLEC experienced expense increases of $351 related to additional
network access expense 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 since the first quarter of 2002.
INTERNET SERVICES SEGMENT RESULTS
THREE MONTHS ENDED MARCH 31,
2003 2002 % CHANGE
------- ------- --------
Revenues $ 1,420 $ 886 60.3%
Depreciation and Amortization 169 98 72.4%
Other Operating Expenses 1,427 1,076 32.6%
------- -------
Total Operating Expenses 1,596 1,174 35.9%
------- -------
Operating Loss $ (176) $ (288) 38.9%
------- -------
Customers at March 31
DSL 6,124 2,482 146.7%
Dial-up Access 12,967 11,533 12.4%
Web-hosting Services 701 515 36.1%
Internet Services segment revenues increased $534, or 60.3%, to
$1,420 in the first quarter of 2003, from $886 in the same period of 2002.
The increase was primarily attributable to the inclusion of Conestoga's
revenues, totaling $332 with no amount included in 2002 prior to its
acquisition on May 24, 2002. The remaining increase resulted from an
increase in the number of dial-up single user residential and business
customers, as well as DSL customers and web hosting subscribers in our
original market areas and the expansion into parts of Conestoga's
territory.
Operating expenses for the Internet Services segment increased $422,
or 35.9%, to $1,596 in the first quarter of 2003, from $1,174 in the same
period of 2002. The increased expenses were primarily related to including
the Conestoga operations.
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)
SYSTEMS INTEGRATION SEGMENT RESULTS
THREE MONTHS ENDED MARCH 31,
2003 2002 % CHANGE
------- ------- --------
Revenues $ 5,181 $ 5,497 (5.7%)
Depreciation and Amortization 424 314 35.0%
Other Operating Expenses 5,920 5,880 0.7%
------- -------
Total Operating Expenses 6,344 6,194 2.4%
------- -------
Operating Loss $(1,163) $ (697) (66.9%)
------- -------
Systems Integration segment revenues decreased $316, or 5.7%, to
$5,181 in the first quarter of 2003, from $5,497 in the same period of
2002. The change was attributable to an increase of $1,810 from inclusion
of Conestoga's revenues in 2003 that was offset by a decline of $2,126 in
our original D&E Systems Integration business. The decreases included a
reduction of $1,555 in telecommunications and computer equipment sold,
$565 in computer services revenue and $6 other miscellaneous revenues.
This decline was primarily related to reductions in customer spending for
communications related infrastructure that we believe is a result of a
slowing economy.
Operating expenses for the Systems Integration segment increased
$150, or 2.4%, to $6,344 in the first quarter 2003, from $6,194 in the
same period of 2002. In addition to $2,013 of increased expenses from
Conestoga in 2003, the cost of products sold decreased by $1,197 in 2003
from the first quarter of 2002 in our original D&E Systems Integration
business and other operating expenses decreased $666.
CONESTOGA WIRELESS SEGMENT RESULTS
Conestoga Wireless segment revenues were $460 for the two weeks
before the business was sold on January 14, 2003. There was no activity
recorded in 2002 before the May 24, 2002 Conestoga acquisition. Expenses
for the final period were $840 resulting in an operating loss of $380. See
the Section titled "Factors Affecting Our Prospects."
OTHER INCOME (EXPENSE)
Other income and expense was a net expense of $4,417 in the first
quarter of 2003, compared to a net expense of $1,176 in the same period of
2002. Our equity in the losses of our European affiliates increased to
$678 in the first quarter of 2003, from $475 in the same period of 2002.
Interest expense increased to $4,595 in the first quarter of 2002,
compared to $708 in the same period of 2002, primarily as a result of
increased borrowings to complete the Conestoga acquisition on May 24,
2002. Other income increased $849 in 2003 from the prior year, primarily
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)
from a $1,204 dividend received, and discounted to a present value of
$801, on our investment in our primary lender, compared with $94 received
in the first quarter of 2002.
INCOME TAXES
Income taxes were $315 in the first quarter of 2003 compared to a
benefit of $150 in the same period of 2002. The effective tax rate for
continuing operations was 40.1% for the first quarter of 2003 and a
benefit rate of 16.0% for the same period of the prior year.
DISCONTINUED OPERATIONS
Our paging operations resulted in a loss of $7 after a tax benefit
of $3 in the first quarter of 2003. The first quarter of 2002, not
including any Conestoga paging, was a loss of $3 after a tax benefit of
$2. Management expects that the sale of our paging operations will close
in the second quarter of 2003. No liabilities are expected to be included
as part of the sale.
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.
Net cash provided by continuing operations was $8,970 in the first
quarter of 2003, compared with $424 in the same period of 2002. The
increase is primarily due to the inclusion of Conestoga's cash flow
activity in 2003.
Net cash provided by investing activities was $5,931 in the first
quarter of 2003, compared with a net cash use of $5,748 in the same period
of 2002. The proceeds from the Conestoga Wireless sale was $10,005, which
more than covered the $3,637 of capital additions and $437 of net increase
to investments and advances to affiliates. Capital additions in 2003 were
primarily for computer equipment, outside plant facilities and network
infrastructure. The 2002 cash use was primarily for $5,170 of capital
additions as well as $475 of Conestoga acquisition costs and a net
increase of $103 in investments and advances to affiliates. Capital
additions were primarily for digital electronic switching equipment and
network infrastructure expansion.
Net cash used in financing activities was $961 in the first quarter
of 2003, compared with $4,786 of net cash provided in the same period of
2002. In the first quarter of 2003, payment of dividends of $1,839 was the
major financing use of funds while long-term debt borrowing net of
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)
payments made on long-term debt provided $768 and common stock issuance
provided $110. On March 14, 2003, we borrowed $12,000 to use along with
cash from operations to pay $20,700 of federal taxes primarily related to
the sale of our D&E wireless investment. In the first quarter of 2002,
revolving lines of credit provided $5,562, of which $860 was used to pay
quarterly dividends.
OTHER
During 2002, we directly wrote off $632, related to the WorldCom
bankruptcy, in addition to our portion of losses that are shared through
the NECA settlement pool process. During April 2003 we sold our major
claims against WorldCom and recovered cash, $294 of which is a direct
recovery of our loss.
EXTERNAL SOURCES OF CAPITAL AT MARCH 31, 2003
As of March 31, 2003, our credit facility consists of Term Loan A,
(a $50,000 single draw 10-year senior term loan with a remaining balance
of $47,500), Term Loan B, (a $125,000 single draw 8.5-year senior term
loan with a remaining balance of $119,000) and an 8.5-year senior reducing
revolving credit facility, with a reduced total availability of $73,500,
of which $41,550 is borrowed. The revolving credit facility, of which
$31,950 was available as of March 31, 2003, is available to fund capital
expenditures, acquisitions, general corporate purposes and working capital
needs. In connection with the Conestoga acquisition, we acquired their
long-term loans of $35,000.
The Term Loan A for $47,500 requires interest only payments for
three years, with increasing quarterly principal payments from the third
quarter of 2004 through the second quarter 2011. The Term Loan B for
$119,000 requires interest only payments for two years, with increasing
quarterly principal payments from the third quarter of 2004 through the
fourth of quarter 2010. 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
2004 through the fourth quarter of 2010. Interest on both the loan and the
revolving credit facility is payable at a base rate or at LIBOR rates plus
an applicable margin based on our leverage ratio. A commitment fee must be
paid on the unused portion of the revolving credit facility. The $35,000
Conestoga loans require interest only payments for three years with equal
quarterly payments from the first quarter of 2005 through the fourth
quarter of 2014.
The credit facility includes a number of significant covenants that
impose restrictions on our business. These covenants include, among
others, restrictions on expansion of our CLEC business into new markets,
additional indebtedness, mergers, 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 and maximum
leverage ratio.
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)
Upon completion of the sale of Conestoga Wireless on January 14,
2003, we received approximately $10,005 and, as required by the Senior
Secured Credit Facility mandatory repayment terms, subsequently repaid
$2,500 of the Term A loan, $6,000 of the Term B loan and $1,500 on our
revolving credit facility. As of March 31, 2003, we had no other unsecured
lines of credit.
Our borrowing capacity at March 31, 2003, as limited by our
covenants, is $75,000 senior reducing revolving credit loan, reduced to
$73,500 for 8.5 years, of which $41,550 was drawn.
As of March 31, 2003, the full amount of the revolver was available
for borrowing without breaking any of the covenants. For further
information regarding our long-term debt, see note 9 to our consolidated
financial statements. Our ratio of total debt to total debt plus capital
increased to 55.0% at March 31, 2003 from 54.8% at December 31, 2002.
COMMITMENTS, CONTINGENCIES AND PROJECTED USES OF CAPITAL
We believe that our most significant commitments, contingencies and
projected uses of funds in 2003, other than for operations, include
capital expenditures, the payment of quarterly common stock dividends and
other contractual obligations. On April 24, 2003, we declared a quarterly
common stock dividend of $0.125 per share payable on June 15, 2003 to
holders of record on June 2, 2003. We expect that this dividend will
result in an aggregate payment of approximately $1,900. We believe that we
have adequate internal and external resources available to meet ongoing
operating requirements.
On May 24, 2002, pursuant to the merger agreement with Conestoga,
D&E assumed Conestoga's obligations under a Build-to-Suit Agreement
("BTS") with Mountain Union Telecom LLC ("Mountain Union"). The
obligations related to the construction of 20 wireless communications
towers for Conestoga's wireless subsidiary, Conestoga Wireless Company
("CWC"). In November 2002, D&E entered into an asset purchase agreement
with Keystone Wireless, LLC ("Keystone Wireless") for the sale of the
wireless telephone assets of CWC. Although D&E sold the assets of this
business on January 14, 2003, its obligations under the BTS were not
assumed by Keystone Wireless. Under the BTS, D&E is obligated to work with
Mountain Union to find and develop 20 wireless tower sites, and after
construction of each tower, enter into a long-term operating lease with
Mountain Union for space on the tower. At closing on the sale of CWC,
Keystone Wireless assumed 9 leases of tower space under the BTS. Keystone
Wireless is also contractually obligated to enter into up to 6 additional
operating leases for tower space under the BTS, provided that sites
therefore can be located and the towers built under the BTS. Consequently,
Keystone Wireless is committed to leasing space on a total of 15 towers
under the BTS, provided that sites therefore can be located and the towers
built under the BTS. Should any of the obligations under the BTS to build
20 towers remain unfulfilled, D&E could be subject to penalties for
nonperformance. Because the underlying assets of CWC were sold under the
asset purchase agreement, D&E has considered any remaining obligations and
potential
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)
penalties under the BTS a contingent liability. As of March 31, 2003, D&E
has recorded an estimated $675 for its remaining commitment under the BTS.
As part of the Company's acquisition of Conestoga, D&E assumed a
guarantee agreement with Mountain Union for lease obligations on the
wireless tower sites of Conestoga's wireless subsidiary. When D&E entered
into the asset purchase agreement with Keystone Wireless, whereby Keystone
Wireless was assigned the responsibility for the leases, Mountain Union
declined to release D&E from its guarantee. In the event of a default by
Keystone Wireless, D&E continues to guarantee the wireless tower site
lease payments, which cover a 10-year period commencing on the
commencement date of the lease of each tower. As such, the guarantee is a
continuing guarantee provided on an individual tower site basis. The lease
payments start at $1.5 per site per month, with provision for an increase
of 4% per year. The majority of these tower site leases and our guarantee
will expire in 2011 and thereafter. D&E has estimated and recorded the
fair value of the liability for the lease guarantees of $3,200 and that is
presented as an offset to the fair value of the Conestoga assets held for
sale at December 31, 2002.
We hold a 33% interest in EuroTel and a 28.88% interest in Pilicka,
both of which we account for under the equity method of accounting. Thus,
neither the assets nor the liabilities of EuroTel or Pilicka are presented
on a consolidated basis on our balance sheets. We have also committed to
loan EuroTel, on an equal basis with the other investors in EuroTel,
certain of its operating cash needs. In the first quarter of 2003, D&E
made advances of $458 to EuroTel and we expect that our total 2003
advances will be approximately $1,200 in the aggregate. Additionally, we
have provided a letter of commitment to advance funds to Pilicka for 2003
however, management does not anticipate having to advance funds to Pilicka
during 2003.
CRITICAL ACCOUNTING POLICIES
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 of America. 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.
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.
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)
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
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 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 original cost 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 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.
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)
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including our property, plant and equipment and
our finite-lived intangibles, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Recoverability is assessed based on future cash
flows expected to result from the use of the asset and its eventual
disposition. If the sum of the undiscounted cash flows is less than the
carrying value of the asset, an impairment loss is recognized. Any
impairment loss, if indicated, would be measured as the amount by which
the carrying amount of the asset exceeds the estimated fair value of the
asset. While we have never recorded a material impairment charge for
long-lived assets, future events or changes in circumstances could result
in a material charge to earnings.
IMPAIRMENT OF GOODWILL AND INDEFINITE-LIVED INTANGIBLES
Upon the adoption of SFAS 142, "Goodwill and Other Intangible
Assets," on January 1, 2002, goodwill and indefinite-lived intangibles are
no longer subject to amortization. Goodwill and indefinite-lived
intangibles are subject to at least an annual assessment for impairment by
comparing carrying value to fair value, which we will perform annually as
of April 30. There is a two-step process for assessment for impairment of
goodwill. The first step is to identify a potential impairment by
comparing the fair value of reporting units to their carrying value. If
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. We continually evaluate whether events and
circumstances have occurred that indicate the remaining balances of
goodwill and indefinite-lived intangibles may not be recoverable. In
evaluating impairment, we estimate the sum of the expected future cash
flows derived from such goodwill and indefinite-lived intangibles. Such
evaluations for impairment are significantly impacted by estimates of
future revenues, costs and expenses, the market price of our stock and
other factors. While we have never recorded a material impairment charge
for goodwill and indefinite-lived intangibles, future events or changes in
circumstances could result in a material 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 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.
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)
RETIREMENT BENEFITS
Retirement benefits are a significant cost of doing business, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FSAB")
issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and
clarifies the accounting guidance on derivative instruments (including
certain derivative instruments embedded in other contracts) and hedging
activities that fall within the scope of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 also amends
certain other existing pronouncements, which will result in more
consistent reporting of contracts that are derivatives in their entirety
or that contain
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)
embedded derivatives that warrant separate accounting. This Statement is
effective for contracts entered into or modified after June 30, 2003, with
certain exceptions, and for hedging relationships designated after June
30, 2003. The Company has not yet determined the impact this pronouncement
will have on the Company's financial position, results of operations or
cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123" ("SFAS No. 148"). This Statement provides alternative
methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation from the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). In addition, this Statement amends the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. As permitted by SFAS No. 148, D&E will continue to
account for the Company's stock-based compensation in accordance with APB
No. 25, and the adoption of SFAS No. 148 requires prominent disclosures
about the effects of SFAS No. 123 on reported income in the interim
financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). This Statement establishes
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. SFAS
No. 143 requires that companies recognize the fair value of a liability
for asset retirement obligations in the period in which the legal
obligations are incurred and capitalize that amount as a part of the book
value of the long-lived asset. That cost is then depreciated over the
remaining life of the underlying long-lived asset. D&E adopted SFAS No.
143 effective January 1, 2003 and recorded an after-tax benefit of
approximately $260 as a cumulative effect accounting adjustment in the
first quarter of 2003. The adjustment represents the cumulative estimate
of cost of removal charged to depreciation expense in earlier years.
In 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". D&E applied the initial recognition
and measurement provisions on a prospective basis effective December 31,
2002. This interpretation requires that, at the time a Company issues a
guarantee, the Company must recognize a liability for the fair value of
that obligation under the guarantee. As part of the Company's acquisition
of Conestoga, D&E assumed a guarantee agreement with Mountain Union for
lease obligations on the wireless tower sites of Conestoga's wireless
subsidiary. When D&E entered into the asset purchase agreement with
Keystone Wireless, whereby Keystone Wireless was assigned the
responsibility for the leases, Mountain Union declined to release D&E from
its guarantee. In the event of a default by Keystone Wireless, D&E
continues to guarantee the wireless tower site lease payments, which cover
a 10-year period commencing on the commencement date of the lease of each
tower. As such, the
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)
guarantee is a continuing guarantee provided on an individual tower site
basis. The lease payments start at $1.5 per site per month, with provision
for an increase of 4% per year. The majority of these tower site leases
and our guarantee will expire in 2011 and thereafter. D&E has estimated
and recorded the fair value of the liability for the lease guarantees of
$3,200 and that is presented as an offset to the fair value of the
Conestoga assets held for sale at December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities -- An Interpretation of
Accounting Research Bulletin (ARB) No. 51" ("FIN 46"). This interpretation
clarifies how to identify variable interest entities and how a company
should assess its interests in a variable interest entity to decide
whether to consolidate the entity. FIN 46 applies to variable interest
entities created after January 31, 2003, in which a company obtains an
interest after that date. Also, FIN 46 applies in the first fiscal quarter
or interim period beginning after June 15, 2003, to variable interest
entities in which a company holds a variable interest that it acquired
before February 1, 2003. D&E does not have any ownership in variable
interest entities.
In January 2003, the Emerging Issues Task Force issued EITF 00-21
"Revenue Arrangements with Multiple Deliverables" (EITF 00-21"). EITF
00-21 primarily addresses certain aspects of the accounting by a vendor
for arrangements under which it will perform multiple revenue-generating
activities. Specifically, it addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting. In applying EITF 00-21, separate contracts with the same
entity or related parties that are entered into at or near the same time
are presumed to have been negotiated as a package and should, therefore,
be evaluated as a single arrangement in considering whether there are one
or more units of accounting. That presumption may be overcome if there is
sufficient evidence to the contrary. EITF 00-21 also addresses how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. The provisions of EITF 00-21 are
effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. D&E is currently evaluating the impact this
statement will have on its financial position or results of operations.
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-
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)
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.
FACTORS AFFECTING OUR PROSPECTS
Our increased indebtedness could restrict our operations.
As of March 31, 2003, we had approximately $245,866 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:
- 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;
- our indebtedness may limit our ability to obtain additional financing on
satisfactory terms, if at all;
- 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;
- our level of indebtedness may make us more vulnerable to economic or
industry downturns;
- we may not have the ability to pay dividends to our shareholders; and
- our debt service obligations increase our vulnerabilities to competitive
pressures, as we may be more leveraged than many of our competitors.
The agreements governing our indebtedness could restrict our operations
and ability to make acquisitions.
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)
The agreements governing our indebtedness contain covenants imposing
financial and operating restriction 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 place restrictions on our ability and the
ability of our subsidiaries to, among other things;
- incur more indebtedness;
- pay dividends, redeem or repurchase our stock or make other
distributions;
- make acquisitions or investments;
- use assets as security in other transactions;
- enter into transactions with affiliates;
- merge or consolidate with others;
- dispose of assets or use asset sale proceeds;
- create liens on our assets;
- expand our CLEC marketing areas; and
- extend credit.
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's 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.
We have continuing involvement in the Conestoga wireless segment after its
sale which may adversely affect the continuing operations of the business.
In connection with the acquisition of Conestoga, we committed to a
plan to sell the assets of Conestoga's wireless segment. The sale was
completed on January 14, 2003. We will have
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)
continuing involvement after the sale as a result of our continued
guarantees of lease obligations on the wireless tower sites that were sold
and our responsibilities under build-to-suit agreements. Payments required
under the build-to-suit agreement and payments, if any, that become due
under the wireless tower site guarantees could restrict our operations by
reducing the funds available for working capital, capital expenditures,
acquisitions and other general corporate purposes.
The communications industry is increasingly competitive, and this
competition has resulted in pricing pressure on our service offerings. We
may experience increased competitive pressures which could have a negative
effect on our revenues and earnings.
As an integrated communications provider, we face competition from:
- competitive local exchange carriers, including Adelphia,
Commonwealth Telephone Enterprises and XO Communications;
- wireless service providers, including Cingular, Verizon Wireless,
AT&T Wireless, Nextel and T-Mobile
- internet service providers, including AOL, EarthLink and MSN;
- cable television companies, including Adelphia, Comcast and Pencor
Services;
- providers of communications services such as long distance services,
including, AT&T, Sprint, WorldCom and Verizon Communications; and
- systems integration providers, including Morefield, Williams,
IntelliMark and Weidenhammer Systems Corp.
Many of our competitors are, or are affiliated with, major
communications companies. These competitors have substantially greater
financial and marketing resources and greater name recognition and more
established relationships with a larger base of current and potential
customers than we. Accordingly, it may be more difficult to compete
against these large communications providers. In addition, we cannot
assure you that we will be able to achieve or maintain adequate technology
to remain competitive. Accordingly, it may be difficult to compete in any
of our markets.
We may be unable to secure unbundled network elements at reasonable rates,
in which case our 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,
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)
maintaining and repairing facilities from these other telephone companies.
We may not be able to obtain the facilities and services of satisfactory
quality we require from other telephone companies, or on other
satisfactory terms and conditions, in which case we may experience delays
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 (DSL) services. To provide
unbundled DSL-capable lines that connect each end-user to 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 could harm our CLEC business.
If we expand our CLEC operations, the success of this expansion will be
dependent on interconnection agreements, permits and rights-of-way. The
failure to obtain these agreements and permits on favorable terms 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.
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 we may not be able to do so
in a cost-effective manner. Federal and state regulatory trends toward a
more competitive market place through reduced competitive entry standards
are likely to have negative effects on our business and our ability to
compete. For example, the FCC is currently considering the issue of
wireless local number portability. The final disposition of this issue is
unclear at this time; however, the potential exists for a ruling that
would have a negative impact on our RLEC and CLEC operations. In this
regard, the regulatory environment governing ILEC operations has been and
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)
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 pro-competitive policies could have a negative effect on
our ILEC operating results yet at the same time present operating
opportunities to our CLEC business.
We no longer have a limited suspension from certain interconnection
requirements of the Telecommunications Act of 1996. As a result, we may be
subject to additional competition for telecommunications services.
Our RLEC services held a limited suspension until January 2003 from
certain interconnection requirements of the Telecommunications Act of
1996. The suspension protected the interconnection services in our RLEC
markets by excluding us from requirements to allow competitors to have
access to our customers by relying upon our services and facilities. Since
we, along with all other RLECs in Pennsylvania, did not receive additional
extensions of this suspension, competitors will be allowed to seek removal
of our rural exemption for the purposes of entering our territory and
using our services and facilities through interconnection agreements to
provide competitive services. The introduction of new competitors could
result in the loss of customers and have a negative effect on our revenues
and earnings.
The Systems Integration Segment could be affected by the overall economic
climate.
The sale of equipment and services in the Systems Integration
business is dependent upon the willingness of companies to invest in
improvements in their information and communications systems. General
economic conditions play a role in companies' investment decisions that
directly affect the potential sales of Systems Integration equipment and
services. The current economic climate may negatively impact the
willingness of companies to make these types of investments.
Impairment of Goodwill and Indefinite-Lived Intangibles.
The annual tests for impairment of goodwill and indefinite-lived
intangibles which we will perform as of April each year may result in an
unplanned expense and reduction of asset value if future cash flow
estimates are insufficient to justify the goodwill and indefinite-lived
intangible assets' carrying values.
38
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 3. Quantitative and Qualitative Disclosure
About Market Risks
(Dollar amounts are in thousands)
We are highly leveraged and, as a result, our cash flows and
earnings are exposed to fluctuations in interest rates. Our debt
obligations are U.S. dollar denominated. Our market risk, therefore, is
the potential loss arising from adverse changes in interest rates and
changes in our leverage ratio which may increase the margin added to the
interest rate as provided in our loan agreement. As of March 31, 2003, our
debt can be categorized as follows:
Fixed interest rates:
Secured Term Loans ........................................ $ 35,000
Subject to interest rate fluctuations:
Senior Secured Revolving Credit Facility .................. $ 41,550
Senior Secured Term Loans ................................. $ 166,500
As part of our loan covenant conditions, we have arranged interest
rate protection on one-half of the total amount of senior indebtedness
outstanding, with a weighted average life of at least 2 years. As of March
31, 2003, our bank debt is as follows:
AVERAGE
PRINCIPAL RATE FAIR VALUE
--------- ------- ----------
Rates fixed for two years through interest rate swaps ......... $ 35,000 6.29% $ 35,000
Rates fixed for three years through interest rate swaps ....... $ 35,000 6.93% $ 35,000
Rates fixed for four years through interest rate swaps ........ $ 35,000 7.23% $ 35,000
Fixed rate debt, rates fixed for twelve years ................. $ 35,000 9.35% $ 40,946
Total fixed rates 58% of total debt ........................... $140,000 6.37% $145,946
Variable rate debt 42% of total debt .......................... $103,050 5.33% $103,050
If interest rates rise above the rates of the variable debt, we
could realize additional interest expense of $515 for each 50 basis points
above the variable rates. If rates were to decline, we would realize less
interest expense of approximately $515 for each 50 basis point decrease in
rates.
The interest rate swaps were arranged to hedge against the effect of
interest rate fluctuations. The swaps were arranged with three banks that
participate in our senior indebtedness. Under these interest rate swap
contracts, we agree to pay an amount equal to a specified fixed-rate of
interest times a notional principal amount and to receive in turn an
amount equal to a specified variable-rate of interest times the same
notional amount. The notional amounts of the contracts are not exchanged.
Net interest positions are settled quarterly.
39
Form 10-Q
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 3. Quantitative and Qualitative Disclosure
About Market Risks
(Dollar amounts are in thousands)
AVERAGE
NOTIONAL AVERAGE RECEIVED
TERMS OF SWAPS AMOUNTS PAY RATE RATE FAIR VALUE
-------------- ------- -------- ---- ----------
11/25/02 to 11/25/04 $ 35,000 6.29% 5.17% $ 618
12/04/02 to 12/04/05 $ 35,000 6.93% 5.30% $ 865
11/25/02 to 11/25/06 $ 35,000 7.23% 5.17% $ 1,187
If interest rates rise above the rates fixed by these swaps, we
could realize other income of $525 for each 50 basis points above the
fixed rates. If rates were to decline, we would realize other expense of
approximately $525 for each 50 basis point decrease in rates.
Our cash and cash equivalents consist of cash and highly liquid
investments having initial maturities of three months or less. While these
investments are subject to a degree of interest rate risk, it is not
considered to be material.
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this report, the
Corporation carried out an evaluation, under the supervision and with the
participation of the Corporation's management, including the Corporation's
Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Corporation's Chief Executive Officer and Chief Financial Officer
concluded that the Corporation's disclosure controls and procedures are
effective. Disclosure controls and procedures are controls and procedures
that are designed to ensure that information required to be disclosed in
Corporation reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls
subsequent to the date we carried out this evaluation.
40
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
Item 1. Legal Proceedings
In July 2002, EuroTel initiated a legal action in United States District
Court for the Southern District of New York against an investment bank, and an
individual, alleging violations of applicable law relating to the advice given
by the investment bank and the individual to a prospective buyer not to close on
the purchase of Pilicka. Management of EuroTel believes that, based on the
advice of its legal counsel, the suit is meritorious. However, the ultimate
outcome of the litigation cannot be determined and no amount has been recognized
for possible collection of any claims in the litigation. Legal costs are
expected to continue to be incurred in pursuit of such litigation.
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 of
No. Exhibit Reference
- ------- ------- ---------
99.1 Certification of Chief Executive Officer Filed herewith.
99.2 Certification of Chief Financial Officer Filed herewith.
(b) Reports on Form 8-K:
One current report on Form 8-K dated January 29, 2003, was filed during
the quarter ended March 31, 2003. The report announced the completion of the
sale of the assets of the Company's subsidiary, Conestoga Wireless Company.
41
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: May 15, 2003
By: /s/ G. William Ruhl
----------------------------------------
G. William Ruhl
Chief Executive Officer
Date: May 15, 2003
By: /s/ Thomas E. Morell
----------------------------------------
Thomas E. Morell
Senior Vice President,
Chief Financial Officer and Treasurer
42
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
43
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: May 15, 2003
/s/ G. William Ruhl
--------------------------
G. William Ruhl
Chief Executive Officer
44
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
45
D&E Communications, Inc. and Subsidiaries
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: May 15, 2003
/s/ Thomas E. Morell
----------------------------
Thomas E. Morell
Chief Financial Officer
46