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, 2009
or
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission
File Number: 000-20709
D&E Communications, Inc.
(Exact name of registrant as specified in its charter)
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|
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PENNSYLVANIA
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23-2837108
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification Number)
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124 East Main Street,
P. O. Box 458
Ephrata, Pennsylvania
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17522-0458
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(Address of principal executive offices)
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(Zip Code)
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Registrants 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 has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
¨
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the
definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
¨
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Accelerated filer
x
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Non-accelerated filer
¨
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Smaller reporting company
¨
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
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Class
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Outstanding at April 24, 2009
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Common Stock, par value $0.16 per share
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14,419,226 Shares
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D&E Communications, Inc. and Subsidiaries
Form 10-Q
TABLE OF CONTENTS
i
Form 10-Q Part I Financial Information
Item1. Financial Statements
D&E Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per-share amounts)
(Unaudited)
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|
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Three Months Ended
March 31,
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2009
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2008
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OPERATING REVENUES
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Communication service revenues
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$
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34,773
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$
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36,613
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Communication products sold
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344
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459
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Other
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822
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725
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Total operating revenues
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35,939
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37,797
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OPERATING EXPENSES
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Communication service expenses (exclusive of depreciation and amortization below)
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11,268
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12,256
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Cost of communication products sold
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260
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|
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372
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Depreciation and amortization
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7,058
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|
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7,848
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Marketing and customer services
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3,273
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3,540
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General and administrative services
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5,374
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5,659
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Total operating expenses
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27,233
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29,675
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Operating income
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8,706
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8,122
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|
|
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|
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|
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OTHER INCOME (EXPENSE)
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Interest expense, net of interest capitalized
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(2,902
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)
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(3,349
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)
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Other, net
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593
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3,418
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|
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|
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Total other income (expense)
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(2,309
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)
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69
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Income before income taxes
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6,397
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8,191
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INCOME TAXES
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2,345
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3,043
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NET INCOME
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4,052
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5,148
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NONCONTROLLING INTERESTS
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Dividends on utility preferred stock
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16
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16
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NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
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$
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4,036
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$
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5,132
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Weighted average common shares outstanding (basic)
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14,403
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14,462
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Weighted average common shares outstanding (diluted)
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14,418
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14,514
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BASIC AND DILUTED EARNINGS PER COMMON SHARE
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Earnings per common share
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$
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0.28
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$
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0.35
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|
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Dividends per common share
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$
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0.13
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$
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0.13
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|
|
|
|
|
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See notes to condensed consolidated financial statements.
1
D&E Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
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March 31,
2009
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December 31,
2008
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$
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15,052
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$
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18,280
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Accounts receivable, net of reserves of $507 and $466
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12,492
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13,086
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Inventories-materials and supplies
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2,536
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2,651
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Prepaid expenses
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5,206
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9,367
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Other
|
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2,177
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|
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2,500
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|
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TOTAL CURRENT ASSETS
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37,463
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45,884
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PROPERTY, PLANT AND EQUIPMENT
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In service
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419,292
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417,209
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Under construction
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7,307
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5,235
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426,599
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422,444
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Less accumulated depreciation
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263,073
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258,642
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|
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163,526
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163,802
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OTHER ASSETS
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Goodwill
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138,441
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138,441
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Intangible assets, net of accumulated amortization
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96,018
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97,344
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Other
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7,898
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7,449
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242,357
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243,234
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TOTAL ASSETS
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$
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443,346
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$
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452,920
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LIABILITIES AND EQUITY
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CURRENT LIABILITIES
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Long-term debt maturing within one year
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$
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7,077
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$
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7,076
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Accounts payable and accrued liabilities
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12,213
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10,690
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Accrued taxes
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|
393
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|
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|
543
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Accrued interest and dividends
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1,082
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|
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1,178
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Advance billings, customer deposits and other
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4,023
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|
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4,706
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Derivative financial instruments
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|
|
2,505
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|
|
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3,091
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|
|
|
|
|
|
|
|
|
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TOTAL CURRENT LIABILITIES
|
|
|
27,293
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|
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27,284
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LONG-TERM DEBT
|
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177,284
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179,054
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OTHER LIABILITIES
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Deferred income taxes
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50,794
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50,071
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Defined benefit plans
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22,925
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34,749
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Other
|
|
|
5,648
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5,181
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|
|
|
|
|
|
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|
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79,367
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|
|
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90,001
|
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COMMITMENTS AND CONTINGENCIES
|
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EQUITY
|
|
|
|
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|
Common shareholders equity:
|
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|
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Common stock, par value $0.16, authorized shares-100,000; issued shares-16,285 at March 31, 2009 and 16,187 at December 31, 2008;
outstanding shares-14,412 at March 31, 2009 and 14,410 at December 31, 2008
|
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2,605
|
|
|
|
2,590
|
|
Additional paid-in capital
|
|
|
164,684
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|
|
|
164,526
|
|
Accumulated other comprehensive loss
|
|
|
(20,875
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)
|
|
|
(21,908
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)
|
Retained earnings
|
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|
32,143
|
|
|
|
29,917
|
|
Treasury stock at cost, 1,873 shares at March 31, 2009 and 1,777 shares at December 31, 2008
|
|
|
(20,601
|
)
|
|
|
(19,990
|
)
|
|
|
|
|
|
|
|
|
|
Total common shareholders equity
|
|
|
157,956
|
|
|
|
155,135
|
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Noncontrolling interests:
|
|
|
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|
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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 shares
|
|
|
1,446
|
|
|
|
1,446
|
|
|
|
|
|
|
|
|
|
|
TOTAL EQUITY
|
|
|
159,402
|
|
|
|
156,581
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
443,346
|
|
|
$
|
452,920
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
2
D&E Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,052
|
|
|
$
|
5,148
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,058
|
|
|
|
7,848
|
|
Bad debt expense
|
|
|
126
|
|
|
|
38
|
|
Deferred income taxes
|
|
|
83
|
|
|
|
456
|
|
Stock-based compensation expense
|
|
|
139
|
|
|
|
119
|
|
Gain on retirement of property, plant and equipment
|
|
|
|
|
|
|
(11
|
)
|
Termination of lease guarantee
|
|
|
|
|
|
|
(2,904
|
)
|
Note receivable reserve
|
|
|
|
|
|
|
200
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
468
|
|
|
|
1,213
|
|
Inventories
|
|
|
115
|
|
|
|
134
|
|
Prepaid expenses
|
|
|
4,119
|
|
|
|
(2,608
|
)
|
Accounts payable and accrued liabilities
|
|
|
865
|
|
|
|
(1,586
|
)
|
Accrued taxes and accrued interest
|
|
|
(246
|
)
|
|
|
958
|
|
Advance billings, customer deposits and other
|
|
|
(683
|
)
|
|
|
(145
|
)
|
Defined benefit plans
|
|
|
(10,724
|
)
|
|
|
(928
|
)
|
Other, net
|
|
|
300
|
|
|
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
5,672
|
|
|
|
7,516
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(4,957
|
)
|
|
|
(7,599
|
)
|
Proceeds from sales of property, plant and equipment
|
|
|
158
|
|
|
|
288
|
|
Collection of note receivable
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Investing Activities
|
|
|
(4,799
|
)
|
|
|
(7,277
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Dividends on common stock
|
|
|
(1,726
|
)
|
|
|
(1,736
|
)
|
Preferred dividends on noncontrolling interests
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Payments on long-term debt
|
|
|
(1,768
|
)
|
|
|
(2,517
|
)
|
Proceeds from issuance of common stock and stock options exercised
|
|
|
20
|
|
|
|
22
|
|
Excess tax benefits from stock compensation plans
|
|
|
|
|
|
|
37
|
|
Purchase of treasury stock
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Financing Activities
|
|
|
(4,101
|
)
|
|
|
(4,210
|
)
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(3,228
|
)
|
|
|
(3,971
|
)
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
18,280
|
|
|
|
17,845
|
|
|
|
|
|
|
|
|
|
|
END OF PERIOD
|
|
$
|
15,052
|
|
|
$
|
13,874
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,941
|
|
|
$
|
3,097
|
|
Cash paid for income taxes (income tax refund received)
|
|
|
(4,419
|
)
|
|
|
1,800
|
|
See notes to condensed consolidated financial statements.
3
D&E Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity and Comprehensive Income (Loss)
For the three months ended March 31, 2009 and 2008
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
COMMON STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
16,187
|
|
|
$
|
2,590
|
|
|
|
16,092
|
|
|
$
|
2,575
|
|
Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment, Stock Compensation Plan and Policy for
Non-Employee Directors
|
|
98
|
|
|
|
15
|
|
|
|
49
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31
|
|
16,285
|
|
|
|
2,605
|
|
|
|
16,141
|
|
|
|
2,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
164,526
|
|
|
|
|
|
|
|
163,560
|
|
Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment, Stock Compensation Plan and Policy for
Non-Employee Directors
|
|
|
|
|
|
158
|
|
|
|
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31
|
|
|
|
|
|
164,684
|
|
|
|
|
|
|
|
163,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
(21,908
|
)
|
|
|
|
|
|
|
(7,216
|
)
|
Reclassification adjustment for realized loss on derivative financial instruments, net of tax
|
|
|
|
|
|
482
|
|
|
|
|
|
|
|
22
|
|
Defined benefit plans, net of tax
|
|
|
|
|
|
644
|
|
|
|
|
|
|
|
148
|
|
Unrealized loss on derivative financial instruments, net of tax
|
|
|
|
|
|
(93
|
)
|
|
|
|
|
|
|
(896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31
|
|
|
|
|
|
(20,875
|
)
|
|
|
|
|
|
|
(7,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
29,917
|
|
|
|
|
|
|
|
48,147
|
|
Net income
|
|
|
|
|
|
4,052
|
|
|
|
|
|
|
|
5,148
|
|
Dividends on common stock: $0.13 per share for each period
|
|
|
|
|
|
(1,810
|
)
|
|
|
|
|
|
|
(1,817
|
)
|
Preferred dividends on noncontrolling interests
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31
|
|
|
|
|
|
32,143
|
|
|
|
|
|
|
|
51,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TREASURY STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
(1,777
|
)
|
|
|
(19,990
|
)
|
|
|
(1,667
|
)
|
|
|
(19,192
|
)
|
Treasury stock acquired
|
|
(96
|
)
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31
|
|
(1,873
|
)
|
|
|
(20,601
|
)
|
|
|
(1,667
|
)
|
|
|
(19,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMMON SHAREHOLDERS EQUITY
|
|
14,412
|
|
|
|
157,956
|
|
|
|
14,474
|
|
|
|
190,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCONTROLLING INTERESTS PREFERRED STOCK OF UTILITY SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year and at March 31
|
|
14
|
|
|
|
1,446
|
|
|
|
14
|
|
|
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL EQUITY
|
|
|
|
|
$
|
159,402
|
|
|
|
|
|
|
$
|
192,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
$
|
4,052
|
|
|
$
|
5,148
|
|
Reclassification adjustment for realized loss on derivative financial instruments, net of income taxes of $342 and
$16
|
|
|
|
482
|
|
|
|
22
|
|
Defined benefit plans, net of income taxes of $457 and $105
|
|
|
|
644
|
|
|
|
148
|
|
Unrealized loss on derivative financial instruments, net of income taxes of ($66) and ($636)
|
|
|
|
(93
|
)
|
|
|
(896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
5,085
|
|
|
|
4,422
|
|
Comprehensive income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common shareholders
|
|
|
|
|
|
|
|
|
$
|
5,069
|
|
|
$
|
4,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
1.
|
Summary of Significant Accounting Policies
|
Basis of
Presentation
The accompanying condensed 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 or the Company.
The accompanying financial statements are unaudited and have been prepared pursuant to generally accepted accounting principles (GAAP) and
the rules and regulations of the United States Securities and Exchange Commission (SEC). The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. In the opinion of management, the financial statements include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Companys results of
operations, financial position and cash flows for the periods presented. 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 accounting principles generally accepted in
the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ from those estimates. D&E believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read
in conjunction with D&Es financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Operating results for the three months ended March 31, 2009 are not
necessarily indicative of the results for the year ended December 31, 2009.
For comparative purposes, certain amounts have been
reclassified to conform to the current-year presentation. The reclassifications had no impact on net income or loss.
2.
|
Recent Accounting Pronouncements
|
In September
2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a market-based hierarchy for measuring fair value, and expands disclosures about fair value measurements. In defining fair value, the Statement emphasizes a market-based measurement approach that is based on the assumptions that market
participants would use in pricing an asset or liability. The Statement does not require any new fair value measurements, but does generally apply to other accounting pronouncements that require or permit fair value measurements. In February 2008,
the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delayed for one year the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. Nonfinancial
5
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
instruments affected by this deferral include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and
nonfinancial assets acquired and liabilities assumed in a business combination. Effective January 1, 2008, the Company adopted SFAS 157 for financial assets and financial liabilities recognized at fair value on a recurring basis, in particular
its interest rate swap derivatives. The partial adoption of SFAS 157 for these items did not have a material impact on the Companys financial position, results of operations and cash flows. Effective January 1, 2009, the Company adopted
SFAS 157 for nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities did not have a material impact on the Companys financial position, results of operations and cash
flows. However, the full adoption of SFAS 157 will prospectively impact the fair value measurements used when evaluating goodwill, other intangible assets, and long-lived assets for impairment.
Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS
141R defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses. Under SFAS 141R, all business combinations are accounted for by applying the acquisition method (previously referred
to as the purchase method), under which the acquirer measures all identified assets acquired, liabilities assumed, and noncontrolling interests in the acquiree at their acquisition date fair values. Certain forms of contingent consideration and
certain acquired contingencies are also recorded at their acquisition date fair values. SFAS 141R also requires that most acquisition related costs be expensed in the period incurred. In addition, SFAS 141R amends SFAS No. 109, Accounting
for Income Taxes, to require us to recognize changes to valuation allowances for acquired deferred tax assets and changes to unrecognized tax benefits related to acquired income tax uncertainties as adjustments to income tax expense, rather
than as adjustments to goodwill. The adoption of SFAS 141R did not have a material impact on the Companys financial position, results of operations and cash flows. However, the Statement may have an impact on the accounting treatment for any
future business combinations. Additionally, the adoption of SFAS 141R affects the Companys accounting treatment for changes to its unrecognized tax benefits and any changes are recognized in income tax expense.
Effective January 1, 2009, the Company adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements an
amendment of ARB No. 51 (SFAS 160). SFAS 160 requires a company to recognize noncontrolling interests (previously referred to as minority interests) as a separate component in the equity section of the consolidated
statement of financial position. It also requires the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated statement of operations. In addition, SFAS 160 requires changes in
ownership interest to be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary
be measured at fair value. As a result of the adoption of SFAS 160, the Company recharacterized its preferred stock of a utility subsidiary as a noncontrolling interest and a component of equity. Prior year amounts have been reclassified to conform
to the current year presentation.
Effective January 1, 2009, the Company adopted SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires a company with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related
6
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and how derivative
instruments and related hedged items affect a companys financial position, financial performance, and cash flows. The adoption of SFAS 161 only affected disclosures (see Note 9), thus its adoption had no impact on the Companys financial
position, results of operations and cash flows.
In April 2009, the FASB issued three related Staff Positions (FSP) to provide
additional application guidance and improve disclosures relating to fair value measurements and other-than-temporary impairments. FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
(FSP FAS 157-4), provides additional guidance on determining fair value when a formerly active market has become inactive or market activity has
significantly decreased, or where transactions are distressed (not orderly). FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments
(FSP FAS 115-2 and FAS 124-2), provides
guidance on other-than-temporary impairments for debt securities classified as available-for-sale and held-to-maturity and improves the presentation and disclosures of other-than-temporary impairments for debt and equity securities in the financial
statements. FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments
(FSP FAS 107-1 and APB 28-1), requires disclosures about fair value of financial instruments in interim as well
as annual financial statements. All three FSPs are effective for interim and annual periods ending after June 15, 2009. The adoptions of FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB 28-1 are not expected to have a
material impact on the Companys financial position, results of operations and cash flows.
The Company finalized an agreement
on May 9, 2008 to restructure the terms of its note receivable from eCommunications Systems Corporation (eComm), which was received as partial consideration for the sale of the assets of our commercial voice equipment and service
operations in September 2006. The Company received the scheduled payments due on this note from the date of the restructured agreement through December 2008 but has not received the scheduled payments due on the note thereafter. As a result, the
Company recorded an additional non-cash impairment charge of $700 in the fourth quarter of 2008. The Company will continue to evaluate whether events and circumstances have occurred that indicate that the note receivable may not be recoverable.
The note receivable from eComm is reported in other long-term assets in the consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Note receivable
|
|
$
|
2,101
|
|
|
$
|
2,101
|
|
Loss reserves
|
|
|
(1,074
|
)
|
|
|
(1,074
|
)
|
|
|
|
|
|
|
|
|
|
Net note receivable
|
|
$
|
1,027
|
|
|
$
|
1,027
|
|
|
|
|
|
|
|
|
|
|
Interest income on the note will only be recognized after the note principal is fully repaid.
7
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
4.
|
Goodwill and Intangible Assets
|
Goodwill and
intangible assets are primarily the result of D&Es May 24, 2002 acquisition of Conestoga Enterprises, Inc. (CEI), a neighboring rural local telephone company providing integrated communications services in markets
throughout the eastern half of Pennsylvania, including two rural local exchange carriers, Conestoga Telephone and Telegraph Company and Buffalo Valley Telephone Company (CEI RLECs). The CEI RLECs are operating units included in the
Wireline segment and provide communication services to customers in specific franchise areas.
The franchise intangible assets
(franchises) represent the value attributed to the rights of the CEI RLECs to operate as telecommunications carriers in their franchise areas as certified by the Pennsylvania Public Utility Commission (PA PUC) and the
economic advantage of having an established network infrastructure to provide wireline telecommunications services in the specific franchise area. Franchise value largely reflects the (i) reasonable expectation that, as a current customer
leaves, a new customer at the same address will likely take its place and (ii) as potential customers inhabit new construction within the RLECs franchise territory, there is a reasonable expectation that they will become customers of the
RLEC. At the acquisition date, the Company recognized the franchises at their estimated fair value and, based on the aforementioned regulatory, competitive, and economic factors, determined that the franchise intangible assets had indefinite lives
in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). The franchise assets are evaluated each reporting period to determine whether events and circumstances continue to support an indefinite
useful life.
SFAS No. 142 requires that goodwill and intangible assets with indefinite lives be subject to at least an annual
assessment for impairment, and between annual tests in certain circumstances, by comparing the assets carrying value to its fair value. Each reporting period, the Company reviews whether events have occurred or circumstances have changed that
indicate the fair value of a reporting unit may be below its carrying value. The Company evaluated whether an interim impairment test was necessary in the first quarter of 2009, based on the decline in the Companys market
capitalization. Management evaluated the facts and circumstances present in the first quarter of 2009 and determined that an interim impairment test was not required. Managements determination was based on its assessment that the
Companys strategic business plans and long-range planning forecasts are still valid and the Companys first quarter 2009 operating results and cash flows are consistent with managements expectations. Management believes the
decline in the Companys market capitalization was not related to changes in our business but rather to negative market conditions resulting from the credit crisis and the economic recession.
The Company will complete its annual impairment evaluation as of April 30, 2009 in conjunction with the preparation of the Form 10-Q for the
quarterly period ended June 30, 2009. In evaluating impairment, we estimate the sum of the expected future cash flows derived from such goodwill and intangible assets. The Company considers the effects of competition, the regulatory environment
and current economic factors in its estimates of the expected future cash flows derived from such intangibles. Such evaluations for impairment are significantly impacted by estimates of future cash flows, the market price of our stock and other
factors. Significant judgment is required to determine the fair value, the estimation of future cash flows, the estimation of discount rates and other assumptions. Changes in these estimates and assumptions could have a significant impact on the
fair value of the goodwill and intangible assets. If forecasts and assumptions used in the assessment analysis change in the future, significant impairment charges could result.
8
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
The intangible assets and accumulated amortization recorded on the Companys balance sheets are
as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Indefinite-lived intangibles:
|
|
|
|
|
|
|
|
|
FCC licenses
|
|
$
|
898
|
|
|
$
|
898
|
|
Franchises
|
|
|
59,000
|
|
|
|
59,000
|
|
Finite-lived intangibles:
|
|
|
|
|
|
|
|
|
Customer relationships:
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
72,006
|
|
|
|
72,006
|
|
Accumulated amortization
|
|
|
(35,886
|
)
|
|
|
(34,560
|
)
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
96,018
|
|
|
$
|
97,344
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense related to the finite-lived intangible assets recorded for the
three months ended March 31, 2009 and 2008 was $1,326 and $1,326, respectively.
The following table sets forth the
total long-term debt outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
Average
Interest Rate
|
|
|
Maturity
|
|
March 31,
2009
|
|
December 31,
2008
|
Senior Secured Term Loan A
|
|
3.16
|
%
|
|
2011
|
|
$
|
27,104
|
|
$
|
27,604
|
Senior Secured Term Loan B
|
|
5.96
|
%
|
|
2011
|
|
|
135,771
|
|
|
136,146
|
Secured Term Loans
|
|
9.00
|
%
|
|
2014
|
|
|
20,125
|
|
|
21,000
|
Capital lease obligation
|
|
|
|
|
|
|
|
1,361
|
|
|
1,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,361
|
|
|
186,130
|
Less current maturities
|
|
|
|
|
|
|
|
7,077
|
|
|
7,076
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
|
$
|
177,284
|
|
$
|
179,054
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the first
quarter of 2009 and 2008 was 36.7% and 37.2%, respectively. The effective tax rate for both quarters is higher than the federal statutory rate of 35%, primarily due to state income taxes, net of federal tax benefits.
9
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
7.
|
Earnings per Common Share
|
Basic earnings per share
amounts are based on net income or loss attributable to common shareholders divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share amounts are based on net income or loss
attributable to common shareholders 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 exercises of employee stock options and
contingently issuable shares. Options to purchase 335,027 and 179,679 shares for the three months ended March 31, 2009 and 2008, respectively, were not included in the computation of earnings per share assuming dilution because their effect on
earnings per share would have been antidilutive.
The following table shows how earnings per share were computed for the periods presented:
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
2009
|
|
2008
|
Net income attributable to common shareholders
|
|
$
|
4,036
|
|
$
|
5,132
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Weighted average shares outstanding (thousands)
|
|
|
14,403
|
|
|
14,462
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.28
|
|
$
|
0.35
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Weighted average shares outstanding (thousands)
|
|
|
14,403
|
|
|
14,462
|
Incremental shares from assumed stock option exercises and contingently issuable shares (thousands)
|
|
|
15
|
|
|
52
|
|
|
|
|
|
|
|
Adjusted weighted average shares outstanding (thousands)
|
|
|
14,418
|
|
|
14,514
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.28
|
|
$
|
0.35
|
|
|
|
|
|
|
|
10
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
8.
|
Stock-Based Compensation
|
Stock Options
A summary of stock option activity and related information for the three months ended March 31, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
Options
|
|
Average
Weighted
Exercise
Price
|
|
Options
|
|
Average
Weighted
Exercise
Price
|
Outstanding at beginning of period
|
|
335,027
|
|
$
|
10.77
|
|
270,352
|
|
$
|
10.60
|
Granted
|
|
|
|
|
|
|
67,675
|
|
|
11.48
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
335,027
|
|
$
|
10.77
|
|
338,027
|
|
$
|
10.78
|
|
|
|
|
|
|
|
|
|
|
|
There were a total of 271,777 stock options exercisable at March 31, 2009 with a
weighted-average exercise price of $13.11. The weighted average remaining contractual term was approximately 4.3 years for stock options outstanding as of March 31, 2009. There was no intrinsic value for stock options outstanding as of
March 31, 2009, since the exercise price for all stock options outstanding exceeded the March 31, 2009 closing price of the Companys stock.
Compensation expense related to stock options in the three months ended March 31, 2009 and 2008 was $51 and $35, respectively. The related tax benefits for the three months ended March 31, 2009 and 2008 were
$21 and $15, respectively. As of March 31, 2009, there was $196 of total unrecognized compensation expense related to stock options, which is expected to be recognized over the period from April 2009 to December 2010.
Performance Restricted Shares
A summary of
performance restricted share award activity and related information for the three months ended March 31, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Non-vested at beginning of period
|
|
48,862
|
|
$
|
11.95
|
|
51,667
|
|
|
$
|
9.98
|
Granted
|
|
42,870
|
|
|
7.01
|
|
31,195
|
|
|
|
11.48
|
Forfeited
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
3.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at end of period
|
|
91,732
|
|
$
|
9.64
|
|
80,362
|
|
|
$
|
10.77
|
|
|
|
|
|
|
|
|
|
|
|
|
The vesting period for the grants is three years. For shares granted in 2009, participants are
issued restricted shares of common stock with reinvested dividend and voting rights. For share grants in 2008 and prior years, each performance restricted share is equal to one share of common stock for dividend (but not voting) purposes, and the
participant is entitled to dividend equivalent shares, which are reinvested in additional performance restricted shares. Performance restricted shares and dividend equivalents are forfeited if the performance target is not met during the performance
period. At the end of the vesting period for shares granted in 2008 and prior years, any performance restricted shares that have been earned will be converted to shares of common stock through the issuance of shares.
11
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
The fair value of non-vested performance restricted shares recognized as compensation expense in the
three months ended March 31, 2009 and 2008 was $66 and $66, respectively. The related tax benefits for the three months ended March 31, 2009 and 2008 were $27 and $27, respectively. As of March 31, 2009, there was $541 of total
unrecognized compensation expense related to performance restricted shares, which is expected to be recognized over the period from April 2009 to December 2011.
In the three months ended March 31, 2009, 43,931 vested performance restricted shares, including dividend equivalents, were converted to shares of common stock.
2001 Stock Compensation Plan and Policy for Non-Employee Directors
The Company issued 681 common shares with a fair value of $5 to certain non-employee directors in the three months ended March 31, 2009. No shares were issued to non-employee directors in the three months ended
March 31, 2008. The fair value of shares issued to non-employee directors recognized as expense in the three months ended March 31, 2009 and 2008 was $22 and $18, respectively. The related tax benefits for the three months ended
March 31, 2009 and 2008 were $9 and $7, respectively.
Fair Value Measurements
SFAS 157 defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date in the principal or most advantageous market for that asset or liability. When determining fair value measurements, we consider assumptions that market participants would use in pricing the asset or
liability, rather than entity-specific assumptions.
The fair value hierarchy established in SFAS 157 prioritizes the inputs to valuation
techniques used in measuring fair value into three levels, as follows:
|
|
|
Level 1: Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
|
|
|
|
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data.
|
|
|
|
Level 3: Unobservable inputs that represent an entitys own assumptions based on items that market participants would consider in determining fair value.
|
12
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
The fair value of our financial instruments measured on a recurring basis was determined using the
following inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2009 Using
|
|
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Interest rate swaps
|
|
$
|
2,954
|
|
$
|
|
|
$
|
2,954
|
|
$
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008 Using
|
|
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Interest rate swaps
|
|
$
|
3,661
|
|
$
|
|
|
$
|
3,661
|
|
$
|
|
The fair value of interest rate swap agreements is derived from models using LIBOR rates, which
were observable at quoted intervals for the full term of the agreements.
Derivative Financial Instruments
The Company utilizes interest rate swap derivatives to manage interest rate risk and changes in market conditions related to interest rate payments on its
variable rate debt obligations. These swap agreements provide for the exchange of variable rate payments for fixed rate payments without the exchange of the underlying notional amounts by agreeing to pay an amount equal to a specified fixed rate of
interest times the notional principal amount and to receive in turn an amount equal to a specified variable rate of interest times the same notional amount.
At March 31, 2009, the Company had interest rate swap agreements with a total notional amount of $132,000 and maturity dates ranging from September 2009 to October 2010. The Company recognizes all derivatives on
the balance sheet at fair value. Changes in the fair value for the effective portion of the gain or loss on a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in Accumulated Other
Comprehensive Income (Loss) (AOCI) and reclassified into earnings as the underlying hedged items affect earnings. Amounts reclassified into earnings related to interest rate swap agreements are included in interest expense. The
ineffective portion of the gain or loss on a derivative is recognized in earnings within other income or expense.
The fair value of
derivative financial instruments is reported in the consolidated balance sheet as of March 31, 2009 as follows:
|
|
|
|
|
|
Fair Value
|
Interest rate swap agreements designated as cash flow hedges:
|
|
|
|
Current liabilities derivative financial instruments
|
|
$
|
2,505
|
Other liabilities other
|
|
|
449
|
|
|
|
|
|
|
$
|
2,954
|
|
|
|
|
13
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
The effect of derivative financial instruments designated as cash flow hedges on our consolidated
statement of operations for the three months ended March 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
(Loss) Recognized in
AOCI on Derivative
(Effective Portion)
|
|
|
Location of Gain
(Loss) Reclassified
from AOCI into
Income
(Effective Portion)
|
|
Amount of Gain
(Loss) Reclassified
from AOCI into
Income
(Effective Portion)
|
|
Interest rate swaps
|
|
$
|
(159
|
)
|
|
Interest expense
|
|
$
|
(824
|
)
|
No hedge ineffectiveness has been recorded for existing derivative instruments based on
calculations in accordance with SFAS 133, as amended.
Concentrations of Credit Risk
Financial instruments that subject D&E to concentrations of credit risk consist primarily of trade receivables, a note receivable and interest rate
swap agreements. Concentrations of credit risk with respect to trade receivables are primarily limited due to the large number of residential and business customers in D&Es customer base. While D&E may be exposed to credit losses due
to the nonperformance of the counterparty to the Companys interest rate swap agreements, the Company considers the risk remote.
10.
|
Employee Benefit Plans
|
The costs for the
Companys pension plans and postretirement benefits other than pensions consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Components of Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
342
|
|
|
$
|
390
|
|
|
$
|
|
|
|
$
|
1
|
|
Interest cost
|
|
|
1,081
|
|
|
|
1,061
|
|
|
|
34
|
|
|
|
36
|
|
Expected return on plan assets
|
|
|
(1,228
|
)
|
|
|
(1,044
|
)
|
|
|
(5
|
)
|
|
|
(7
|
)
|
Amortization of prior service cost
|
|
|
|
|
|
|
(33
|
)
|
|
|
(40
|
)
|
|
|
(41
|
)
|
Amortization of net loss
|
|
|
177
|
|
|
|
313
|
|
|
|
12
|
|
|
|
15
|
|
Curtailment gain-plan freeze
|
|
|
(982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
(610
|
)
|
|
$
|
687
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 29, 2009, the Company approved an amendment to the D&E Communications, Inc.
Employees Retirement Plan which will discontinue future benefit accruals to all active participants effective January 1, 2010. Following this amendment, all active participants will continue to have an accrued benefit reflective of their
service credit and eligible wages through December 31, 2009. As a result of this amendment, the Company recognized a curtailment gain of $982 in the first quarter of 2009. The amendment did not have any effect on the Companys pension plan
for employees covered by a collective bargaining agreement.
During the three months ended March 31, 2009, D&E contributed $10,100
to its defined benefit pension plans and made no contribution to its other postretirement benefit plan. The Company presently anticipates making additional contributions in the amount of $4,200 to its defined benefit plans during the remainder of
2009.
14
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 1. Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per-share
amounts)
(Unaudited)
11.
|
Business Segment Data
|
D&Es business
segments are: Wireline, Systems Integration and Corporate and Other. The measure of profitability that management uses to evaluate performance of its business segments is operating income (loss).
Financial results for D&Es business segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Revenues
|
|
Intersegment Revenues
|
|
|
Operating Income (Loss)
|
|
|
|
Three months ended
March 31,
|
|
Three months ended
March 31,
|
|
|
Three months ended
March 31,
|
|
Segment
|
|
2009
|
|
2008
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Wireline
|
|
$
|
34,787
|
|
$
|
36,489
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
9,105
|
|
|
$
|
8,632
|
|
Systems Integration
|
|
|
706
|
|
|
890
|
|
|
|
|
|
|
|
|
|
|
(79
|
)
|
|
|
(161
|
)
|
Corporate and Other
|
|
|
446
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
(320
|
)
|
|
|
(349
|
)
|
Eliminations
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,939
|
|
$
|
37,797
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,706
|
|
|
$
|
8,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
Segment
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Wireline
|
|
$
|
445,312
|
|
|
$
|
441,189
|
|
Systems Integration
|
|
|
1,102
|
|
|
|
1,245
|
|
Corporate and Other
|
|
|
450,502
|
|
|
|
451,567
|
|
Eliminations
|
|
|
(453,570
|
)
|
|
|
(441,081
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
443,346
|
|
|
$
|
452,920
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2009
|
|
|
2008
|
|
Operating income from reportable segments
|
|
$
|
9,026
|
|
|
$
|
8,471
|
|
Corporate and other operating loss
|
|
|
(320
|
)
|
|
|
(349
|
)
|
Interest expense
|
|
|
(2,902
|
)
|
|
|
(3,349
|
)
|
Other, net
|
|
|
593
|
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
6,397
|
|
|
$
|
8,191
|
|
|
|
|
|
|
|
|
|
|
15
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
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, plans, or similar words or expressions. In particular, statements, expressed or implied, concerning future operating results,
the ability to generate income or cash flows, or our capital resources or financing plans are forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Our actual performance or achievements may differ
materially from those contemplated by these forward-looking statements. These forward-looking statements involve certain risks and uncertainties, including, but not limited to:
|
|
|
changes in the competitive and technological environment in which we operate;
|
|
|
|
our ability to further penetrate our markets and the related cost of that effort;
|
|
|
|
reductions in rates or call volume that generate network access revenues;
|
|
|
|
government and regulatory policies at both the federal and state levels, including potential intercarrier compensation reform;
|
|
|
|
current economic conditions;
|
|
|
|
a decline in value of our pension fund assets;
|
|
|
|
our current level of debt financing;
|
|
|
|
potential future goodwill or intangible asset impairment charges; and
|
|
|
|
our ability to fund necessary investment in plant and equipment.
|
You should understand that various factors, in addition to those discussed 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.
16
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Overview
This Overview is intended to provide a context for the following Managements Discussion and Analysis of Financial Condition and Results of Operations. Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, included in this quarterly report on Form 10-Q, as well as our audited consolidated financial statements for the
year ended December 31, 2008, as filed on Form 10-K with the Securities and Exchange Commission (SEC). We have attempted to identify the most important matters on which our management focuses in evaluating our financial condition
and operating performance and the short-term and long-term opportunities, challenges and risks (including material trends and uncertainties) which we face. We also discuss the actions we are taking to address these opportunities, challenges and
risks. The Overview is not intended as a summary of, or a substitute for review of, Managements Discussion and Analysis of Financial Condition and Results of Operations.
Business Segments
Our business
segments are Wireline, Systems Integration and Corporate and Other. The measure of profitability that management uses to evaluate performance of its business segments is operating income (loss) because individual segments are not charged an
allocation for such items as interest and income taxes that are reported below operating income on the statement of income.
Our Wireline
segment includes three rural local exchange carriers (RLEC), providing services in parts of Berks, Lancaster, Union and smaller portions of five other adjacent counties in Pennsylvania, and a competitive local exchange carrier
(CLEC), providing services in the Lancaster, Reading, Harrisburg, State College, Pottstown, Williamsport and Altoona, Pennsylvania metropolitan areas. We offer our Wireline customers a comprehensive package of communications services,
including local telephone service, enhanced telephone services, network access services, long-distance toll services, dedicated data circuits, and communication services, such as broadband and dial-up Internet access services, business continuity
and co-location services, web-hosting services, directory and other revenue sources such as video and VoIP services.
Our Systems
Integration segment provides business customers with professional data and information technology services, network design, monitoring, security assessments and penetration tests. We also sell equipment used in providing these services. We offer
customers our Managed Services products, which are internal monitoring (within the customers enterprise), external monitoring (devices outside the customers enterprise) and comprehensive security assessments and management. Our
complement of Managed Services fills the needs of our customers by allowing them to improve reliability, provide higher levels of service and save money through efficient device management and planning.
Our Corporate and Other segment includes real estate leasing and related support services, Haywire computer support services, which allow us to
handle new computer set-up, installation, troubleshooting and preventive maintenance services for our customers, and applications provided by our Jazzd Internet service provider which offers customers the convenience of using a web portal
(www.dejazzd.net) that showcases content and technologies like news, weather, shopping and music.
17
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
As of March 31, 2009, we served 117,872 RLEC access lines, 46,747 CLEC access lines, 44,216
digital subscriber lines (DSL)/high-speed Internet subscribers, 1,986 dial-up Internet access subscribers, 8,528 video subscribers and 985 web-hosting customers resulting in total customer connections of 220,334. For the quarter ended
March 31, 2009, we generated total consolidated revenues of $35,939, consolidated operating income of $8,706 and consolidated net income of $4,052.
Revenues, Expenses and Capital Expenditures
Our Wireline and Systems Integration revenue is derived
primarily from the provision of services and sales of equipment described above. A significant portion of our Wireline revenue consists of monthly recurring charges billed to our customers for the services that we provide to them.
Our RLECs intrastate services are subject to regulation by the Pennsylvania Public Utility Commission (PA PUC). We have entered into a
regulatory framework, commonly known as our Chapter 30 Plan, with the PA PUC for our intrastate operations under which we agreed to meet certain broadband service delivery parameters in exchange for a price-cap formula, rather than rate-of-return
regulation, in determining our pricing for intrastate services. Prices for our RLECs interstate services, consisting primarily of subscriber line charges and access charges for interstate and international toll calls, are regulated by the
Federal Communications Commission (FCC) based on rate of return regulations and the average schedule formulas proposed by the National Exchange Carrier Association, Inc. (NECA).
Our operating costs and expenses primarily include wages and related employee benefit costs, depreciation and amortization, cost of services, selling and
advertising, software and information system services and general and administrative expenses. Our Wireline segment incurs costs related to network access charges, leased network facilities associated with providing local telephone service to CLEC
customers, leased network facilities costs for our broadband and dial-up Internet access services, and other operations expenses such as network switching expense, engineering and outside plant costs. Our Systems Integration segment incurs expenses
primarily related to wages and employee benefit costs, and equipment and materials used in the provision of our services and sales of computer equipment.
We incur access line-related capital expenditures associated with access line additions and costs related to the provision of broadband Internet services in our Wireline markets. Our capital expenditures related to
CLEC access line growth are generally associated with serving additional customers or servicing existing customers on our own facilities and, therefore, tend to result in incremental revenue or higher margins from those customers. We believe that
our additional capital expenditures relating to our investment in software and systems will allow us to remain competitive in the marketplace and generally allow for operating efficiencies.
18
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Business Strategy
Our primary business objective is to be a leading, regional broadband integrated communications service provider (ICP). To achieve this
objective:
|
|
|
We are continuing to pursue the goal of capturing as many broadband connections to customers homes and businesses as possible and have implemented an IP core
network, along with a softswitch platform, to more efficiently support and expand our voice and data delivery.
|
|
|
|
We are continuing to operate under a disciplined strategy of offering competitive communication services packages, primarily to business customers, with the goal to
increase our penetration in our CLEC markets.
|
|
|
|
We believe that the convergence and complexity of voice communications and data network technologies has increased the need for businesses to seek a single provider
for all of their communications, information technology, business continuity and co-location needs. Our goal is to provide our customers with solutions for most, if not all, of their communication and data technology needs.
|
Our DSL/high-speed Internet connections increased by 4,246, or 10.6%, and CLEC access lines increased by 726, or 1.6%,
from March 31, 2008 to March 31, 2009. Wireline communications services revenue increased $205 in the first quarter of 2009 compared to the first quarter of 2008 as a result of additional DSL/high-speed Internet customers, additional video
subscribers and revenue growth in other services provided that are not reflected in our total customer connection counts, such as transparent local area network services and business continuity and co-location services. Furthermore, our
Haywire computer support services, which allow us to handle new computer set-up, installation, troubleshooting and preventive maintenance services for our customers, is another example of our commitment to our broadband business. We also offer
our customers the convenience of using a web portal (www.dejazzd.net) that showcases content and technologies like news, weather, shopping and music.
Although access lines have decreased in our RLEC markets and the CLEC access line growth rates have slowed, our total revenue for private line circuits, dedicated circuits, Ethernet and IP VPN services, which are not
included in our total customer connection counts, has increased. The following table reflects private line circuit, dedicated circuit, Ethernet and IP VPN service revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
RLEC markets
|
|
$
|
1,899
|
|
$
|
1,772
|
|
7.2
|
%
|
CLEC markets
|
|
|
2,459
|
|
|
2,165
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,358
|
|
$
|
3,937
|
|
10.7
|
%
|
|
|
|
|
|
|
|
|
|
|
19
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Business Trends, Risks and Uncertainties
|
|
|
Convergence of technologies
|
One of
the critical drivers in the communications industry today is the convergence of voice and data communication technologies into various IP based platforms, all of which have the potential to provide VoIP, broadband services and IP video over
telephone companies copper and fiber networks, cable companies coaxial and fiber networks, wireless telephone companies wireless networks and satellite companies satellite networks. Although each of the networks has relative
strengths and weaknesses, they are all effectively in competition for the customers communications needs. These developments mean that we are competing for our existing customer base in our RLEC and CLEC territories with cable TV companies,
wireless telephone companies, satellite communications providers and VoIP providers. The decreases in the number of access lines in our RLEC territories reflect such increased competition, in addition to the elimination of lines by our customers as
they shift to DSL for high-speed Internet access.
We have competitive strengths and weaknesses in the competition for the customers
communications dollar. Cable TV companies are now delivering VoIP services with systems fully capable of providing IP telephony services. We offer video over a portion of our fiber-copper network in the area of Lewisburg, Pennsylvania in competition
with the video services offered by incumbent cable companies.
The competitive threat posed by the convergence of technologies makes our
commitment to customer service even more critical to the protection of our competitive position. We are a local company with local connections that can give individual, personalized service. We are also flexible enough to be able to provide an
individual response to customers needs. We feel that this responsiveness will be critical to our ability to successfully convince both our business and residential customers to see us as their preferred provider of integrated
communications services, particularly in light of the substantially greater resources of many of our competitors.
In order to remain
competitive and provide the broadband services required for high-speed data and video, we must continue to invest substantial amounts of capital in our infrastructure. We have installed significant amounts of fiber in our system. We have installed
gigabit networks, and believe that we have the expertise to lead the way to providing ubiquitous broadband access in our markets. In keeping with the foregoing, our 2009 capital budget is $18,000. However, our ability to invest in
infrastructure to remain competitive may be limited by our ability to generate cash flow from operations and our indebtedness of $184,361 as of March 31, 2009.
|
|
|
Pro-competitive regulatory environment
|
It is basic policy of the FCC and the PA PUC to encourage competition in the communications industry. Federal and state regulatory trends toward a more competitive marketplace through reduced competitive entry standards are likely to have
negative effects on our business and our ability to compete. The introduction of new competitors could have a negative effect on our RLEC operating results, yet at the same time present operating benefits in our CLEC markets. Competitors currently
have the opportunity to seek the removal of our RLECs federal rural exemption in order to have access to our customers by entering our territory and using our facilities through interconnection agreements to provide local services.
20
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
In our more competitive markets, the incumbent carrier, Verizon, enjoys certain business advantages,
including its size, financial resources, brand recognition and network connection to virtually all of our customers and potential customers in those areas. Similarly, in areas where we do, or may provide, video services, the incumbent cable
operators enjoy certain business advantages, including their size, financial resources, brand recognition and ownership of, or superior access, to programming.
|
|
|
Complex and uncertain regulatory environment
|
The United States communications industry is subject to federal, state and local 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.
Prices for RLECs interstate services, consisting primarily
of subscriber line charges and access charges for interstate and international toll calls, are regulated by the FCC based on the average schedule formulas proposed by NECA. If the FCC would disallow RLECs from receiving compensation for
interstate services based on the NECA average schedule formulas, our RLECs could experience a change in revenues. Changes in the average schedule formula amounts developed by NECA and implemented annually in July will impact the RLECs future
revenues.
The FCC and the PA PUC are reviewing potential modifications to the current systems of interstate and intrastate network access
rates that telecommunication companies charge each other for network access. The FCC released a Further Notice of Proposed Rulemaking in November 2008, seeking comment on three specific proposals to reform intercarrier compensation and universal
service funding. There has been no further action by the FCC while it waits for its chairman and commissioner vacancies to be filled. Intercarrier revenues are material to D&E and any changes in the manner in which they are determined could have
a material impact on our results of operations and financial condition. Until the FCC and the PA PUC adopt specific proposals, it is impossible to predict how much the proposed changes will affect our business and whether they will be favorable or
unfavorable. In addition, it is also unknown how these proposals impact NECA and its settlement process and how our CLEC operations would be impacted.
Our RLECs filed for changes in local and intrastate access rates to be effective July 1, 2006, in accordance with our Chapter 30 Plan. On July 11, 2007, the PA PUC rescinded its June 2006 order allowing the
increase in our access rates. Currently, we are proceeding with an appeal in the Commonwealth Court of Pennsylvania. We expect the case will be heard sometime in 2009 but cannot predict what the outcome of this appeal will be.
We had indebtedness
of $184,361 at March 31, 2009. Our indebtedness could restrict our operations because we will use a substantial portion of our cash flow from operations to pay principal and interest on our indebtedness, which will reduce the funds available
for working capital, capital expenditures, acquisitions and other general corporate purposes and make us more vulnerable to competitive pressures and economic or industry downturns. Our loan agreement requires us to maintain compliance with certain
financial and operational covenants.
21
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
|
|
|
Goodwill and intangible asset impairments
|
We test goodwill and indefinite-lived intangible assets on an annual basis by comparing the assets carrying value to its fair value, or between annual tests if events occur or circumstances change that indicate their fair value may be
less than carrying value. Factors that could reduce the fair value of our goodwill and intangible assets below carrying value include a sustained decline in our stock price and market capitalization, a reduction in expected future cash flows and
other factors. Significant judgment is required in developing the estimates and assumptions used in evaluations for impairment. Changes in these estimates and assumptions could have a significant impact on the fair value of the goodwill and
intangible assets and significant impairment charges could result. While any such impairment charge would be a non-cash expense, it could significantly reduce net income and shareholders equity and affect future compliance with our debt
covenants.
We evaluated whether an interim impairment test was necessary in the first quarter of 2009, based on the decline in our market
capitalization. We evaluated the facts and circumstances present in the first quarter of 2009 and determined that an interim impairment test was not required. Our determination was based on our assessment that our strategic business plans
and long-range planning forecasts are still valid and our first quarter 2009 operating results and cash flows are consistent with our expectations. We believe the decline in the Companys market capitalization was not related to changes in
our business but rather to negative market conditions related to the credit crisis and the economic recession. Note 4 to the Condensed Consolidated Financial Statements contains more information on our goodwill and intangible assets.
|
|
|
Defined benefit pension plans
|
Our
pension plan assets have declined in value by approximately 6% for the three months ended March 31, 2009. It is possible that a future decline in the value of plan assets could have a negative impact on the funded status of the plan. As a
result, our pension expense and cash contributions to the plans could increase in the future. On January 29, 2009, the D&E Communications, Inc. Employees Retirement Plan was amended to discontinue future benefit accruals to all active
participants effective January 1, 2010. Following this amendment to the plan, all active participants will continue to have an accrued benefit reflective of their service credit and eligible wages through December 31, 2009.
Conclusion
The foregoing
opportunities and risks require management to attempt to balance several aspects of our business. Our Wireline segment is the primary provider of cash flow both to pursue our business plan to be a leading, regional broadband integrated
communications provider and to provide a current return on investment to our shareholders in the form of a dividend. However, because our resources are limited, and the manner in which the communications industry will develop is uncertain, in terms
of technology, competition and regulation, we may not be able to pursue every possible avenue of development, and critical decisions will need to be made among various alternatives. These decisions can be made more difficult by our desire to balance
our short-term goals of maintaining our Wireline business and dividend return and our long-term goal of providing voice, data and video services on the next generation, IP-based network. Maintaining our dividend payout, which continues to be a
fundamental goal of our board of
22
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
directors and an expenditure that our management plans for annually, may be challenging due to payments of principal and interest on our long-term debt and
restrictions under our financing facilities, the latter including an annual limitation of $10,000 in dividends and stock repurchases, the requirement to remain in compliance with financial covenants and the capital requirements of our business
strategy.
Results of Operations
The
following table is a summary of our operating results by segment for the three months ended March 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Wireline
|
|
Systems
Integration
|
|
|
Corporate
and Other
|
|
|
Eliminations
|
|
|
Total
Company
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues External
|
|
$
|
34,787
|
|
$
|
706
|
|
|
$
|
446
|
|
|
$
|
|
|
|
$
|
35,939
|
Revenues Intercompany
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
34,796
|
|
|
706
|
|
|
|
446
|
|
|
|
(9
|
)
|
|
|
35,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
6,809
|
|
|
24
|
|
|
|
225
|
|
|
|
|
|
|
|
7,058
|
Other Operating Expenses
|
|
|
18,882
|
|
|
761
|
|
|
|
541
|
|
|
|
(9
|
)
|
|
|
20,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
25,691
|
|
|
785
|
|
|
|
766
|
|
|
|
(9
|
)
|
|
|
27,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
9,105
|
|
$
|
(79
|
)
|
|
$
|
(320
|
)
|
|
$
|
|
|
|
$
|
8,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues External
|
|
$
|
36,489
|
|
$
|
890
|
|
|
$
|
418
|
|
|
$
|
|
|
|
$
|
37,797
|
Revenues Intercompany
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
36,498
|
|
|
890
|
|
|
|
418
|
|
|
|
(9
|
)
|
|
|
37,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
7,614
|
|
|
45
|
|
|
|
189
|
|
|
|
|
|
|
|
7,848
|
Other Operating Expenses
|
|
|
20,252
|
|
|
1,006
|
|
|
|
578
|
|
|
|
(9
|
)
|
|
|
21,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
27,866
|
|
|
1,051
|
|
|
|
767
|
|
|
|
(9
|
)
|
|
|
29,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
8,632
|
|
$
|
(161
|
)
|
|
$
|
(349
|
)
|
|
$
|
|
|
|
$
|
8,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Operations
Three months ended March 31, 2009 compared to three months ended March 31, 2008
Operating Revenues
Consolidated revenues decreased $1,858, or 4.9%, to $35,939 for the quarter ended March 31, 2009,
from $37,797 for the same period in 2008. Wireline revenue decreased $1,702 primarily due to lower local telephone, network access and long distance revenues totaling $1,852, partially offset by an increase in communication services revenue of $205.
Systems Integration revenue declined $184 due to a decline in services and equipment sales revenue of $121 and $63, respectively. These revenue changes are more fully described in the Wireline and Systems Integration segment results.
23
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Operating Expenses
Consolidated operating expenses decreased $2,442, or 8.2%, to $27,233 for the quarter ended March 31, 2009, from $29,675 for the same period in 2008.
Depreciation and amortization in the Wireline segment decreased $805 primarily due to certain fixed assets becoming fully depreciated in June and July of 2008. Expenses also decreased approximately $884 due to a pension curtailment gain described
below, of which approximately $813, $44 and $27 were recorded in the Wireline, Systems Integration and Corporate and Other segments, respectively. Other Wireline operating expenses decreased $557 and Systems Integration operating expenses decreased
by $222. These expense changes are more fully described in the Wireline and Systems Integration segment results.
Operating Income
Consolidated operating income increased $584, to an operating income of $8,706 for the first quarter of 2009 compared to an operating
income of $8,122 in the same period of 2008. Operating income as a percentage of revenue was 24.2% in the first quarter of 2009, compared to 21.5% in the same period of 2008. The increase in operating income is a result of the decline in
depreciation expense of $790 and the decline in other operating expenses of $1,652, partially offset by the decline in operating revenue of $1,858.
Other Income (Expense)
Other income (expense) was a net expense of $2,309 in the first quarter of 2009, compared to a net
other income of $69 for the same period in 2008. Interest expense decreased to $2,902 in the first quarter of 2009, compared to $3,349 in the same period of 2008, as a result of reductions in debt and decreases in short-term interest rates. Other
income decreased $2,825 to $593 in 2009 compared to $3,418 in 2008. In the first quarter of 2008, we recorded $2,904 of income as a result of a lease guarantee termination.
Income Taxes
Income taxes were
$2,345 in the first quarter of 2009, compared to $3,043 for the same period in 2008. The effective income tax rates for the first quarter of 2009 and 2008 were 36.7% and 37.2%, respectively.
Net Income Attributable to Common Shareholders
Net income attributable to common shareholders was $4,036, or $0.28 per share, in the first quarter of 2009 compared to net income of $5,132, or $0.35 per share, in the first quarter of 2008. The primary reason for
the decrease was the reduction in other income as a result of the lease guarantee termination in the first quarter of 2008.
24
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Wireline Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
|
% Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local Telephone Service
|
|
$
|
12,111
|
|
$
|
12,387
|
|
$
|
(276
|
)
|
|
(2.2
|
)
|
Network Access
|
|
|
9,606
|
|
|
10,992
|
|
|
(1,386
|
)
|
|
(12.6
|
)
|
Long Distance
|
|
|
4,922
|
|
|
5,112
|
|
|
(190
|
)
|
|
(3.7
|
)
|
Communication Services
|
|
|
6,545
|
|
|
6,340
|
|
|
205
|
|
|
3.2
|
|
Directory
|
|
|
1,036
|
|
|
1,128
|
|
|
(92
|
)
|
|
(8.2
|
)
|
Other
|
|
|
576
|
|
|
539
|
|
|
37
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
34,796
|
|
|
36,498
|
|
|
(1,702
|
)
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
6,809
|
|
|
7,614
|
|
|
(805
|
)
|
|
(10.6
|
)
|
Other Operating Expenses
|
|
|
18,882
|
|
|
20,252
|
|
|
(1,370
|
)
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
25,691
|
|
|
27,866
|
|
|
(2,175
|
)
|
|
(7.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
$
|
9,105
|
|
$
|
8,632
|
|
$
|
473
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Connections at March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RLEC Access Lines
|
|
|
117,872
|
|
|
123,563
|
|
|
(5,691
|
)
|
|
(4.6
|
)
|
CLEC Access Lines
|
|
|
46,747
|
|
|
46,021
|
|
|
726
|
|
|
1.6
|
|
DSL/High-Speed Internet
|
|
|
44,216
|
|
|
39,970
|
|
|
4,246
|
|
|
10.6
|
|
Dial-up Access
|
|
|
1,986
|
|
|
2,984
|
|
|
(998
|
)
|
|
(33.4
|
)
|
Video
|
|
|
8,528
|
|
|
8,099
|
|
|
429
|
|
|
5.3
|
|
Web-hosting
|
|
|
985
|
|
|
1,013
|
|
|
(28
|
)
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
220,334
|
|
|
221,650
|
|
|
(1,316
|
)
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Basic local telephone service revenue decreased $390 primarily due to a decline in RLEC access lines. Local private network revenue increased $219 primarily due to growth in transparent local area network
(TLS) and virtual private network (IP VPN) services. Network access revenue declined primarily due to lower NECA settlements of $738, lower subscriber line charges of $161 as a result of the decline in RLEC access lines, a
revenue decrease of approximately $559 due to a change in the routing of long distance calls as described below, partially offset by a revenue increase of approximately $72 due to increased minutes of use primarily in the CLEC markets. Long distance
revenues decreased $237 primarily due to a reduction in the average rate per minute of use, partially offset by an increase in long distance circuit revenue of $47 due to growth in TLS revenue. Communication services revenue increased primarily from
additional DSL/high-speed Internet revenue of approximately $169 attributable to subscriber and TLS services growth, business continuity and co-location revenue of $48 and video revenue of $55, partially offset by a reduction in dial-up Internet
revenue of $67. The directory revenue decrease is in accordance with the terms of the contract under which the annual contractual revenue declines moderately each year over the period of the contract which ends in January 2010.
25
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Expenses
Depreciation and amortization expense decreased due to certain fixed assets becoming fully depreciated in June and July 2008, partially offset by the depreciation expense on fixed assets placed in service in the
current year. Network access expense decreased $462 primarily due to a change in the routing of long distance calls as described below. Wages decreased approximately $230 primarily due to a decline in the number of employees, partially offset by
one-time wage payments of $171 to employees who elected retirement as described below. Employee benefits decreased $919 primarily due to the pension curtailment gain described below. Corporate overhead expenses decreased $286 primarily due to lower
executive, accounting, legal and marketing expenses.
Leased communication facilities and costs of services expense increased approximately
$434 due to a first quarter 2008 expense reduction as result of a settlement with a vendor on an estimated amount owed to them.
Factors
Affecting Future Results
On April 30, 2009, our RLECs submitted their annual price-cap filings to the PA PUC, which seek increases
on various local service rates for two of our three RLECs to be effective July 1, 2009. The new rates are estimated to increase quarterly revenue by approximately $255. The actual quarterly revenue increase will be different to the extent that
the actual number of access lines in service when the new rates go into effect differ from the historical data used in developing the new rates.
In July 2008, we implemented changes in routing of our long distance toll usage in response to increases in wholesale interexchange carrier usage rates from our long distance provider. The routing changes were implemented to transport our
long distance usage in the most cost effective manner. Due to these routing changes, we estimate network access revenues could decrease approximately $550 and network access expenses could decrease approximately $400 resulting in a decrease in
operating income of $150 in the second quarter of 2009 compared to the second quarter of 2008. If the routing changes had not been implemented, we estimate the decrease in operating income would be greater than $150.
Depreciation and amortization expense is estimated to decline approximately $600 in the second quarter of 2009 compared to the second quarter of 2008
primarily due to certain fixed assets becoming fully depreciated in June and July 2008. We estimate a slight increase in depreciation expense in the last six months of 2009 compared to the same period of 2008 as a result of additional fixed assets
placed in service.
In January 2009, we amended one of our pension plans to discontinue future benefit accruals to all active participants
effective January 1, 2010. As a result of the amendment, we expect pension expense to decline approximately $1,900 in 2009 compared to 2008, primarily due to a pension curtailment gain of $982 in the first quarter of 2009 and a reduction in the
actuarial losses of the pension plans due to the liability gain associated with the plan amendment. Approximately $884 of the pension curtailment gain was recorded as a reduction of operating expenses and approximately $98 was capitalized.
26
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
The Company offered a one-time payment to all non-union employees who are or will be eligible for
unreduced retirement benefits by December 31, 2009. An eligible person needed to provide written notification to the Company as to his or her election to retire no later than March 31, 2009, in order to be eligible to receive the payment.
A total of eleven eligible employees elected to retire and are eligible for the one-time payment. The total cost of the one-time payments is $171 and was recognized in the first quarter of 2009. It is expected that, based on these eleven employee
retirements and provided none of these positions with the Company are replaced, the Company will realize a reduction in wages and payroll taxes of $270 in 2009 and of approximately $609 on an annual basis thereafter.
Other Competitive and Regulatory Matters
The federal USF program is currently under legislative and industry review as a result of the growth in the fund and changes within the telecommunications industry. The primary change triggering this review is the increase in the number of
Eligible Telecommunications Carriers (ETCs) receiving compensation from the USF. There are several FCC proceedings underway that are likely to change the way the universal service programs are funded and the way universal service funds
are distributed. The Federal/State Joint Board on Universal Service (Joint Board) released a recommended decision to the FCC to impose an interim cap on the amount of high-cost support that competitive ETCs (CETCs) receive.
On May 1, 2008, the FCC adopted an interim cap on payments to CETCs. The FCC capped total annual support for CETCs at the level they were eligible to receive in each state during March 2008, on an annualized basis. The Joint Board also issued a
subsequent recommended decision to the FCC to establish a provider of last resort fund, a mobility fund and a broadband fund. Each fund would have a separate distribution and allocation mechanism. We cannot estimate at this time what impact the
Joint Boards recommended changes would have on our RLECs. Finally, the FCC is considering proposals regarding the USF contribution methodology, which would change the type of service providers required to contribute to the fund and the basis
on which they would contribute. Although some companies are proposing a contribution methodology based on the amount of telephone numbers in service, we cannot estimate the impact that any proposed change in carrier contributions would have on our
companies until the FCC actually adopts a specific contribution methodology.
The PA PUC has a proceeding open to consider changes in
intrastate switched access rates and PA USF, along with the potential impact on local service rates, for rural local exchange carriers in Pennsylvania. On April 9, 2008, the PA PUC granted a further stay of this proceeding pending the outcome
of the FCCs Unified Intercarrier Compensation proceeding or for one year, whichever is earlier. On March 25, 2009, Embarq, the Pennsylvania Telephone Association (PTA) on behalf of rural RLECs and the Office of Consumer
Advocate filed an updated status report on intercarrier access reform and filed a joint motion for a further stay of this investigation. Verizon, Qwest and Sprint also filed their status reports and filed a motion for an immediate hearing and
reduction in access rates. The PA PUC is expected to rule on the motions sometime in second quarter 2009. We cannot predict what that decision or its impact may be on our Company at this time. In addition, on March 19, 2009, AT&T filed a
formal complaint against all rural RLECs claiming their intrastate switched access rates were unlawful and must be reduced immediately. At this time, no decision has been made on how to respond to the complaint. It is estimated that the complaint
will be concluded by the end of this year.
27
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
On April 9, 2008, the PA PUC also voted to open the above proceeding for the limited purpose of
re-examining whether the current residential local service rate cap of eighteen dollars for RLECs is appropriate, and whether the PA USF can be utilized by the RLECs for revenue support if their annual state regulatory price-cap guideline
(Chapter 30) rate increases result in rates that exceed the cap. Our RLECs are represented in this proceeding by the PTA. The PTA and other parties to this proceeding filed testimony and presented witnesses. Briefs were filed by all
parties and the Administrative Law Judges recommended decision is due to the PA PUC by July 27, 2009. Until the PA PUC adopts specific proposals, it is impossible to predict the effect on our business.
Systems Integration Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
%
Change
|
|
Revenues
|
|
$
|
706
|
|
|
$
|
890
|
|
|
$
|
(184
|
)
|
|
(20.7
|
)
|
Depreciation and Amortization
|
|
|
24
|
|
|
|
45
|
|
|
|
(21
|
)
|
|
(46.7
|
)
|
Other Operating Expenses
|
|
|
761
|
|
|
|
1,006
|
|
|
|
(245
|
)
|
|
(24.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
785
|
|
|
|
1,051
|
|
|
|
(266
|
)
|
|
(25.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
$
|
(79
|
)
|
|
$
|
(161
|
)
|
|
$
|
82
|
|
|
50.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications services revenue decreased $121 primarily due to the expiration of a customer
contract in December 2008. Communication products sold decreased $63 primarily due to a decline in computer equipment sales. Labor and benefits decreased $143 and $95, respectively, primarily due to a reduction in the number of employees. Costs of
products sold decreased $47 in conjunction with the decline in computer equipment sold.
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 with cash from operations and to finance acquisitions through external sources, such as
bank borrowings and offerings of debt or equity securities.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
5,672
|
|
|
$
|
7,516
|
|
Investing activities
|
|
|
(4,799
|
)
|
|
|
(7,277
|
)
|
Financing activities
|
|
|
(4,101
|
)
|
|
|
(4,210
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
$
|
(3,228
|
)
|
|
$
|
(3,971
|
)
|
|
|
|
|
|
|
|
|
|
28
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
The primary reason for the decrease in cash flow from operating activities in the first quarter of
2009 compared to the same period of 2008 was the $8,500 increase in pension plan contributions, partially offset by the effects of a $4,419 income tax refund in the first quarter of 2009 compared to income tax payments of $1,800 in the first quarter
of 2008. Pension plan contributions for the first quarters of 2009 and 2008 were $10,100 and $1,600, respectively.
Net cash used in
investing activities was $4,799 for the three months ended March 31, 2009 compared to $7,277 in the three months ended March 31, 2008. Payments for capital additions in the first three months of 2009 were $4,957 primarily for information
technology upgrades of approximately $1,200, communications network enhancements of approximately $1,900 and outside plant additions totaling approximately $1,500. In the first three months of 2008, capital additions were $7,599.
Net cash used in financing activities decreased due to lower payments on long-term debt of approximately $750, partially offset by treasury stock
purchases of $611 in the three months ended March 31, 2009. A voluntary payment on long-term debt of $750 was made in the three months ended March 31, 2008. There were no voluntary payments on long-term debt in the same period of 2009.
External Sources of Capital at March 31, 2009
As of March 31, 2009, our credit facility consisted of Term Loan A with an outstanding balance of $27,104, Term Loan B with an outstanding balance of $135,771, term loans with an outstanding balance of $20,125
and a $25,000 revolving credit facility to fund capital expenditures, acquisitions, general corporate purposes and working capital needs. Under the terms of the credit facility we are able to borrow up to $25,000 as long as we are in compliance with
the terms and conditions of the credit facility and as long as we remain in compliance with the financial covenant requirements contained in the credit facility, as described below, subsequent to borrowing under the revolver. Nine of the lenders in
our bank group participate on a pro-rata basis in the revolving credit facility and their commitments range from approximately 5% to 30% of the $25,000. Even though we have no immediate plans to use the revolving credit facility, we recently
confirmed with our lead lender that it is not aware of any lender participating in our revolving credit facility not being able to fund their respective percentages of the revolving credit facility. However, there can be no assurance that all
lenders will continue to be able to fund their respective percentages of the revolving credit facility in the future.
Term Loan A requires
interest payments and $500 quarterly principal payments, which continue through the first quarter of 2011, and one final principal payment in the second quarter of 2011. Term Loan B requires interest payments and $375 quarterly principal payments,
which continue through 2010, and four large quarterly principal payments in 2011. The revolving credit facility requires interest only payments until the final required payment on June 30, 2011. Interest on Term Loan A and the revolving credit
facility is payable at either, at our option, the U.S. prime rate plus 0.50% to 1.00% or at LIBOR rates plus 1.50% to 2.00%, with the applicable percentage based on our leverage ratio. Currently, Term Loan A interest is payable at the U.S. prime
rate plus 0.50% or a LIBOR rate plus 1.50%. Term Loan B bears interest at either, at our option, the U.S. prime rate plus 0.75% or a LIBOR rate plus 1.75%, regardless of the Companys leverage ratio. The term loans bear interest at a fixed rate
of 9.00% and require equal quarterly principal payments through the fourth quarter of 2014. A commitment fee of 0.25% must be paid on the unused portion of the revolving credit facility.
29
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
The credit facility includes a number of significant covenants that impose restrictions on our
business. These covenants include, among others, restrictions on 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 reflected in the table below. As of March 31, 2009, $25,000 of the revolving credit facility was available for borrowing and the full amount can be borrowed without violating any of the financial covenants.
The following table reflects the financial covenant ratio requirements and the actual ratios at March 31, 2009.
|
|
|
|
|
|
|
Ratio
|
|
Requirement
|
|
|
Actual
|
|
Total Leverage Ratio = Indebtedness divided by Cash Flow
|
|
<3.50
|
|
|
2.92
|
|
Total Indebtedness to Total Capitalization Ratio
|
|
<60
|
%
|
|
53.8
|
%
|
Proforma Debt Service Coverage Ratio = Cash Flow divided by next years Debt Service
|
|
>1.75
|
|
|
4.89
|
|
Fixed Charge Coverage Ratio = Cash Flow divided by Fixed Charges
|
|
>1.05
|
|
|
2.11
|
|
Commitments, Contingencies and Projected Uses of Capital
We believe that our most significant commitments, contingencies and projected uses of funds in 2009, other than for operations, include capital
expenditures, scheduled principal and interest payments on our long-term debt, the payment of common stock dividends, when and if declared by the board of directors, and other contractual obligations. On April 23, 2009, we declared a quarterly
common stock dividend of $0.125 per share payable on June 15, 2009, to holders of record on June 1, 2009. We expect that this dividend will result in an aggregate payment of approximately $1,795. Our 2009 capital budget is $18,000. We
believe that we have adequate internal and external resources available to meet our ongoing operating, capital expenditure and debt service requirements. Our ability to satisfy these obligations is dependent upon our future performance, which will
be affected by business, regulatory and other factors, many of which are beyond our control.
We contributed $10,100 to our pension plans
in the three months ended March 31, 2009 and estimate that we will contribute $4,200 to our pension plans in the remaining nine months of 2009, using cash on hand as of March 31, 2009 and cash generated from operations in 2009. We estimate
that contributions to the plans will be approximately $5,300 in 2010 and range from from $4,000 to $4,600 during the subsequent four years assuming that, among other things, actual plan asset investment returns are consistent with our long-term rate
of return assumptions. These estimates were developed as part of our 2009 valuation using plan assumptions at December 31, 2008. This level of funding is primarily necessitated by the decline in market value of our pension plan assets during
2008 and the first quarter of 2009. On January 29, 2009, the D&E Communications, Inc. Employees Retirement Plan was amended to discontinue future benefit accruals to all active participants effective January 1, 2010. Following
this amendment to the plan, all active participants will continue to have an accrued benefit reflective of their service credit and eligible wages through December 31, 2009. The plan amendment did not have any effect on our pension plan for
employees covered by a collective bargaining agreement.
30
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts are in thousands)
Our board of directors has approved a stock repurchase program authorizing the repurchase of up to
500,000 shares of our common stock. The repurchases may be made in the open market at prevailing market prices or in privately negotiated transactions in accordance with all applicable securities laws and regulations. The program may be suspended,
modified or discontinued at any time and does not have a set expiration date. We expect to fund the stock repurchases with cash provided by operations. During the three months ended March 31, 2009, we purchased 95,267 shares of treasury stock
for $611.
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 ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts and notes
receivable, asset depreciation, long-lived and indefinite-lived assets, goodwill, retirement benefits, network access costs, income taxes and contingencies. 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.
In Managements Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on
Form 10-K for the year ended December 31, 2008, we have identified our critical
accounting policies, as those that are the most significant to our financial statement presentation and that require difficult, subjective and complex judgments. There were no material changes to our critical accounting policies or estimates during
the three months ended March 31, 2009.
Recently Issued Accounting Pronouncements
The effects of recently issued accounting pronouncements on the Company are discussed in Note 2 to the Condensed Consolidated Financial Statements in Part
1, Item 1 of this Form 10-Q.
31
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Item 3. Quantitative and Qualitative Disclosures
About Market Risks
(Dollar amounts are in thousands)
Our
cash flows and earnings are exposed to fluctuations in interest rates due to our variable rate debt. 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 on Term Loan A as provided in our loan agreement. As of March 31, 2009, our debt, excluding capital lease obligations, can be categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Average
Rate
|
|
|
Fair Value
|
Fixed interest rates:
|
|
|
|
|
|
|
|
|
|
Term Loans (fixed to October 2014)
|
|
$
|
20,125
|
|
9.00
|
%
|
|
$
|
21,482
|
Senior Term Loans (fixed to various dates between
September 2009 through October 2010 with interest rate swaps)
|
|
|
132,000
|
|
6.04
|
%
|
|
|
129,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,125
|
|
6.43
|
%
|
|
|
151,001
|
Subject to interest rate fluctuations:
|
|
|
|
|
|
|
|
|
|
Senior Term Loans
|
|
|
30,875
|
|
3.14
|
%
|
|
|
30,070
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,000
|
|
5.88
|
%
|
|
$
|
181,071
|
|
|
|
|
|
|
|
|
|
|
If interest rates rise above the rates of the variable debt, we could incur extra annual interest
expense of $154 for each 50 basis points above the variable rates. If rates were to decline, we would realize reductions in annual interest expense of approximately $154 for each 50 basis point decrease in rates.
We have interest rate swap agreements with a bank that participates in our senior indebtedness to hedge against the effect of interest rate fluctuations.
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. As of March 31, 2009, our interest rate swap agreements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms of Swaps
|
|
Notional
Amount
|
|
Pay
Rate
|
|
|
Current
Received Rate
|
|
|
Fair Value of
Liability
|
09/21/07 to 09/21/09
|
|
$
|
50,000
|
|
7.16
|
%
|
|
2.98
|
%
|
|
$
|
1,018
|
08/01/07 to 09/21/09
|
|
|
25,000
|
|
6.81
|
%
|
|
2.98
|
%
|
|
|
467
|
07/31/08 to 07/28/10
|
|
|
15,000
|
|
5.32
|
%
|
|
2.93
|
%
|
|
|
469
|
10/29/08 to 10/29/10
|
|
|
42,000
|
|
4.52
|
%
|
|
2.93
|
%
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,000
|
|
|
|
|
|
|
|
$
|
2,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
As of March 31, 2009, the Company carried out an
evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to the Securities Exchange Act of 1934 (Exchange Act),
32
D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)
Rule 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in
Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. These controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuers management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals
under all potential conditions, regardless of how remote. There were no changes in the Companys internal controls over financial reporting during the first quarter of 2009 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
Attached as Exhibits 31 and 32 to this quarterly report are
certifications of the Chief Executive Officer and the Chief Financial Officer required in accordance with Rule 13a-14(a) of the Exchange Act. This portion of the Companys quarterly report includes the information concerning the controls
evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.
33
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
Item 1. Legal Proceedings
We are involved in various legal proceedings arising in the ordinary course of our business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on our consolidated financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
Our board of directors has approved a stock repurchase program authorizing the repurchase of
up to 500,000 shares of our common stock. The repurchases may be made in the open market at prevailing market prices or in privately negotiated transactions in accordance with all applicable securities laws and regulations. The program may be
suspended, modified or discontinued at any time, does not have a set expiration date and is subject to the covenant contained in our debt agreement, which limits annual dividend payments and stock repurchases to $10 million. We expect to fund the
stock repurchase with cash provided by operations. The treasury stock purchases for the first quarter of 2009 are reported in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities
|
Period
|
|
(a)
Total number of
shares (or units)
purchased
|
|
(b)
Average price
paid per share
(or unit)
|
|
(c)
Total number of
shares (or
units)
purchased as part of
publicly announced
plans or programs (1)
|
|
(d)
Maximum number
(or approximate
dollar value) of
shares (or units) that
may yet be
purchased
under the
plans or programs (1)
|
January 1, 2009 January 31, 2009
|
|
27,286
|
|
$
|
7.33
|
|
27,286
|
|
362,616
|
February 1, 2009 February 28, 2009
|
|
29,038
|
|
|
6.51
|
|
29,038
|
|
333,578
|
March 1, 2009 March 31, 2009
|
|
38,943
|
|
|
5.70
|
|
38,943
|
|
294,635
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
95,267
|
|
$
|
6.41
|
|
95,267
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On August 11, 2008, the Company announced that its board of directors approved a stock repurchase program authorizing the Company to repurchase up to 500,000 shares of its
common stock.
|
Our credit facility includes a number of significant covenants that impose restrictions on our business. These
covenants include, among others, restrictions on 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 leverage ratio, maximum indebtedness to total capitalization ratio, debt service coverage and fixed charge coverage. There is also an annual limitation of $10,000 on the payment of dividends and stock
repurchases.
34
D&E Communications, Inc. and Subsidiaries
Part II - Other Information
Item 3. Defaults Upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
|
|
|
|
|
Exhibit
No.
|
|
Identification of Exhibit
|
|
Reference
|
|
|
|
3.
|
|
Articles of Incorporation and By-laws:
|
|
|
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation
|
|
Incorporated herein by reference from Exhibit 1 to D&Es definitive proxy statement for its 2005 Annual Meeting of Shareholders filed March 17, 2005.
|
|
|
|
3.2
|
|
By-laws
|
|
Filed herewith.
|
|
|
|
10.
|
|
Material Contracts
|
|
|
|
|
|
10.1
|
|
D&E Communications, Inc. Exempt Employee Short-Term Incentive Plan
|
|
Incorporated herein by reference from Exhibit 99.1 to the Current Report on Form 8-K filed by D&E on February 2, 2009
|
|
|
|
31
|
|
Certification of the Chief Executive Officer and the Chief Financial Officer Required by Section 13a-14(a) of the Exchange Act
|
|
Filed herewith.
|
|
|
|
32
|
|
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith.
|
35
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 8, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ James W. Morozzi
|
|
|
|
|
|
|
|
|
James W. Morozzi
President & Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: May 8, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Thomas E. Morell
|
|
|
|
|
|
|
|
|
Thomas E. Morell
Senior Vice President, Chief
Financial
Officer, Secretary and Treasurer
|
36
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