-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EmkSpAFHo8DqFpOegFnAR8NVTXhNTSqeu85AU04ewnm1Y6DYjPuhi7gO6RWHUaR1 23rotPUFVgQe0zs35MAR4A== 0000893220-02-001379.txt : 20021114 0000893220-02-001379.hdr.sgml : 20021114 20021114152855 ACCESSION NUMBER: 0000893220-02-001379 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: D&E COMMUNICATIONS INC CENTRAL INDEX KEY: 0001011737 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 232837108 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20709 FILM NUMBER: 02824916 BUSINESS ADDRESS: STREET 1: BROSSMAN BUSINESS COMPLEX STREET 2: 124 EAST MAIN ST PO BOX 458 CITY: EPHRATA STATE: PA ZIP: 17560 BUSINESS PHONE: 7177334101 MAIL ADDRESS: STREET 1: BROSSMAN BUSINESS COMPLEX STREET 2: 124 EAST MAIN STREET CITY: EPHRATA STATE: PA ZIP: 17560 10-Q 1 w65743e10vq.txt FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 000-20709 D&E Communications, Inc. (Exact name of registrant as specified in its charter) PENNSYLVANIA (State or other jurisdiction of incorporation or organization) I.R.S. Employer Identification Number: 23-2837108 Brossman Business Complex 124 East Main Street P.O. Box 458 Ephrata, Pennsylvania 17522 (Address of principal executive offices) Registrant's Telephone Number: (717) 733-4101 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- ---------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 8, 2002 ----- ------------------------------- Common Stock, par value $0.16 per share 15,424,016 Shares D&E Communications, Inc. and Subsidiaries Form 10-Q TABLE OF CONTENTS
Item No. Page - -------- ---- PART I. FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Operations - For the three months and nine months ended September 30, 2002 and 2001 ................................................... 1 Consolidated Balance Sheets - September 30, 2002 and December 31, 2001 ...................................... 2 Consolidated Statements of Cash Flows - For the nine months ended September 30, 2002 and 2001 ................................................... 3 Consolidated Statements of Shareholders' Equity - For the nine months ended September 30, 2002 and 2001 ................................................... 4 Notes to Consolidated Financial Statements ............................................. 5 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 17 3. Quantitative and Qualitative Disclosures About Market Risk ...................................................................... 46 4. Controls and Procedures ........................................................................ 46 PART II. OTHER INFORMATION 1. Legal Proceedings .............................................................................. 47 6. Exhibits and Reports on Form 8-K ............................................................... 47 SIGNATURES................................................................................................ 48 CERTIFICATIONS............................................................................................ 49
i Form 10-Q Part I - Financial Information Item 1. Financial Statements D & E Communications, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per-share amounts) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- OPERATING REVENUES Communication service revenues .................. $ 37,931 $ 15,925 $ 75,777 $ 45,938 Communication products sold ..................... 3,467 3,192 10,406 9,414 Other ........................................... 568 375 1,425 1,152 -------- -------- -------- -------- Total operating revenues ....................... 41,966 19,492 87,608 56,504 -------- -------- -------- -------- OPERATING EXPENSES Communication service expenses (exclusive of depreciation and amortization below) ............ 14,780 7,921 29,995 20,707 Cost of communication products sold ............. 2,625 2,431 8,493 7,474 Depreciation and amortization ................... 7,064 3,983 16,519 11,200 Marketing and customer services ................. 4,744 2,207 9,606 6,785 Merger-related costs ............................ -- -- 973 -- General and administrative services ............. 5,940 4,410 15,126 11,630 -------- -------- -------- -------- Total operating expenses ....................... 35,153 20,952 80,712 57,796 -------- -------- -------- -------- Operating income (loss) ....................... 6,813 (1,460) 6,896 (1,292) -------- -------- -------- -------- OTHER INCOME (EXPENSE) Equity in net income (losses) of affiliates ..... (914) 5,137 (2,091) 5,579 Interest expense ................................ (4,383) (682) (7,139) (1,600) Other-than-temporary loss on investments ........ -- -- (2,999) -- Other, net ...................................... 91 346 292 1,090 -------- -------- -------- -------- Total other income (expense) ................... (5,206) 4,801 (11,937) 5,069 -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and dividends on utility preferred stock ....................... 1,607 3,341 (5,041) 3,777 INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK Income taxes .................................... 1,037 (898) (1,170) (643) Dividends on utility preferred stock ............ 16 16 49 49 -------- -------- -------- -------- Total income taxes and dividends on utility preferred stock ..................... 1,053 (882) (1,121) (594) -------- -------- -------- -------- Income (loss) from continuing operations ...... 554 4,223 (3,920) 4,371 Discontinued operations: Loss from operations of discontinued D&E Wireless segment prior to December 31, 2001, net of income tax benefit of $390 and $1,942 ... -- (1,553) -- (4,552) Gain on disposal of discontinued D&E Wireless segment, net of operating losses during Phase-out period and net of income taxes of $138 and $29,337 ............................ (280) -- 55,506 -- Income (loss ) from operations of Conestoga Wireless and Paging, net of income tax or (benefit) of ($116), $3, ($242) and ($8) .... (283) 4 (450) (13) -------- -------- -------- -------- Income (loss) before extraordinary item ....... (9) 2,674 51,136 (194) Extraordinary item, income tax benefit of $107.. -- -- -- 107 -------- -------- -------- -------- NET INCOME (LOSS) ................................ $ (9) $ 2,674 $ 51,136 $ (87) ======== ======== ======== ======== Weighted average common shares outstanding ...... 15,401 7,379 11,188 7,384 BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE Income (loss) from continuing operations ........ $ 0.04 $ 0.57 $ (0.35) $ 0.59 Income (loss) from discontinued operations ...... (0.04) (0.21) 4.92 (0.62) Extraordinary item .............................. 0.00 0.00 0.00 0.02 -------- -------- -------- -------- Net income (loss) per common share ............. $ -- $ 0.36 $ 4.57 $ (0.01) ======== ======== ======== ======== Dividends per common share ...................... $ 0.13 $ 0.13 $ 0.38 $ 0.38 ======== ======== ======== ========
See notes to consolidated financial statements. 1 D & E Communications, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share amounts) (Unaudited)
SEPTEMBER 30, DECEMBER 31, 2002 2001 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents ................................................. $ 7,246 $ 615 Accounts receivable ....................................................... 20,031 10,105 Accounts receivable - PCS ONE ............................................. 2,804 5,938 Inventories, lower of cost or market, at average cost ..................... 3,549 1,781 Prepaid expenses .......................................................... 4,626 3,817 Other ..................................................................... 932 494 --------- --------- TOTAL CURRENT ASSETS .................................................... 39,188 22,750 --------- --------- INVESTMENTS Investments in and advances to affiliated companies ...................... 5,356 6,431 Investments available-for-sale ............................................ 1,077 4,425 --------- --------- 6,433 10,856 --------- --------- PROPERTY, PLANT AND EQUIPMENT In service ................................................................ 301,819 178,274 Under construction ........................................................ 7,085 5,034 --------- --------- 308,904 183,308 Less accumulated depreciation ............................................. 99,716 88,163 --------- --------- 209,188 95,145 --------- --------- OTHER ASSETS Assets held for sale ...................................................... 18,715 -- Goodwill .................................................................. 222,289 5,126 Intangible assets, net of amortization .................................... 36,898 1,017 Deferred income taxes ..................................................... -- 905 Other ..................................................................... 19,178 7,079 --------- --------- 297,080 14,127 --------- --------- TOTAL ASSETS .............................................................. $ 551,889 $ 142,878 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Borrowings under line of credit ........................................... $ -- $ 1,757 Long-term debt maturing within one year ................................... 129 52 Accounts payable and accrued liabilities .................................. 19,146 16,319 Accrued taxes ............................................................. 21,081 352 Accrued interest and dividends ............................................ 1,620 333 Advance billings, customer deposits and other ............................. 4,867 3,668 --------- --------- TOTAL CURRENT LIABILITIES ............................................... 46,843 22,481 --------- --------- LONG-TERM DEBT .................................................................... 245,000 58,124 --------- --------- OTHER LIABILITIES Equity in net losses of discontinued D&E Wireless operations in excess of investments and advances ........................ -- 10,388 Deferred income taxes ..................................................... 38,903 -- Other ..................................................................... 10,440 6,564 --------- --------- 49,343 16,952 --------- --------- PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 4 1/2%, par value $100, cumulative, callable at par at the option of the Company, authorized 20,000 shares, outstanding 14,456 shares .................................. 1,446 1,446 --------- --------- COMMITMENTS SHAREHOLDERS' EQUITY Common stock, par value $0.16, authorized shares 30,000,000 ............... 2,508 1,219 Outstanding shares: 15,418,317 at September 30, 2002 7,362,226 at December 31, 2001 Additional paid-in capital ................................................ 157,897 39,956 Accumulated other comprehensive income (loss) ............................. (3,050) (2,833) Retained earnings ......................................................... 57,006 10,637 Treasury stock at cost, 276,908 shares at September 30, 2002 276,900 shares at December 31, 2001 ..................................... (5,104) (5,104) --------- --------- 209,257 43,875 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................ $ 551,889 $ 142,878 ========= =========
See notes to consolidated financial statements. 2 D & E Communications, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30 ------------------------------- 2002 2001 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS ............................................ $ 16,070 $ 7,531 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures, net of proceeds from sales and removal costs ............................................................ (16,227) (28,217) Business acquisition costs, net of cash acquired of $1,003 ....... (158,677) -- Proceeds from sale of temporary investments ...................... -- 34,671 Purchase of temporary investments ................................ -- (26,002) Investments in and advances to affiliates ........................ (1,567) (9,259) Returns of investments and repayments from affiliates ....................................................... 550 453 --------- --------- Net Cash Used In Investing Activities from Continuing Operations (175,921) (28,354) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends on common stock ........................................ (4,574) (2,579) Payments on long-term debt ....................................... (44,991) (51) Proceeds from long-term debt financing ........................... 160,000 -- Payment of debt issuance costs ................................... (7,999) -- Net proceeds from (payments on) revolving lines of credit ........................................................... (11,757) 25,233 Proceeds from issuance of common stock ........................... 739 263 Purchase of treasury stock ....................................... -- (931) --------- --------- Net Cash Provided By Financing Activities from Continuing Operations .......................................... 91,418 21,935 --------- --------- CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS ......................... (68,433) 1,112 CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS Cash Provided by (Used in) Operating Activities of Discontinued Operations .......................................... (382) 865 Cash Provided by (Used in) Investing Activities of Discontinued Operations .......................................... 75,446 (4,944) --------- --------- Net Cash Provided By (Used In ) Discontinued Operations .......... 75,064 (4,079) --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 6,631 (2,967) CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD ............................................ 615 3,527 --------- --------- END OF PERIOD .................................................. $ 7,246 $ 560 ========= =========
See notes to consolidated financial statements. 3 D&E Communications, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity For the nine months ended September 30, 2002 and 2001 (In thousands) (Unaudited)
2002 2001 ---------------------- ----------------------- SHARES AMOUNT SHARES AMOUNT ------ -------- ------ --------- COMMON STOCK Balance at beginning of year ......................... 7,639 $ 1,219 7,608 $ 1,214 Common stock issued for acquisition .................. 7,877 1,260 -- -- Common stock issued for Employee Stock Purchase, Long-Term Incentive and Dividend Reinvestment Plans .. 137 22 24 3 Common stock issued for stock options exercised ...... 42 7 -- -- ------ -------- ------ --------- Balance at September 30 .............................. 15,695 2,508 7,632 1,217 ------ -------- ------ --------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of year ......................... 39,956 39,374 Common stock issued for acquisition .................. 115,668 -- Common stock issued for Employee Stock Purchase, Long- Term Incentive and Dividend Reinvestment Plans ....... 1,890 442 Common stock issued for stock options exercised ...... 383 -- -------- --------- Balance at September 30 .............................. 157,897 39,816 -------- --------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance at beginning of year ......................... (2,833) 467 Unrealized gain (loss) on investments ................ (2,042) 1,584 Loss realized on other-than-temporary decline in value of investments, net of tax ........................... 1,825 -- -------- --------- Balance at September 30 .............................. (3,050) 2,051 -------- --------- RETAINED EARNINGS Balance at beginning of year ......................... 10,637 18,366 Net income (loss) .................................... 51,135 (87) Dividends on common stock: $.38, $.38 per share ...... (4,766) (2,761) -------- --------- Balance at September 30 .............................. 57,006 15,518 -------- --------- TREASURY STOCK Balance at beginning of year ......................... (277) (5,104) (226) (4,059) Treasury stock acquired .............................. -- -- (52) (995) ------ -------- ------- --------- Balance at September 30 .............................. (277) (5,104) (278) (5,054) ------ -------- ------- --------- TOTAL SHAREHOLDERS' EQUITY ........................... 15,418 $209,257 7,354 $ 53,548 ====== ======== ======= =========
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ----------------------- 2002 2001 2002 2001 ------- -------- -------- ------- COMPREHENSIVE INCOME (LOSS) Net income (loss) ....................................... $ (9) $ 2,674 $ 51,135 $ (87) Unrealized gain (loss) on investments, net of income taxes of ($105), $277, ($1,303) and $941 .............. (174) 429 (2,042) 1,584 Loss realized on other-than-temporary decline in value of investments, net of tax of $1,387 ..................... -- -- 1,825 -- ------- -------- -------- -------- Total comprehensive income (loss) ....................... $ (183) $ 3,103 $ 50,918 $ 1,497 ======= ======== ======== ========
See notes to consolidated financial statements. 4 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) (1) BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of D&E Communications, Inc. and its wholly owned subsidiaries. D&E Communications, Inc., including its subsidiary companies, is defined and referred to herein as D&E. On May 24, 2002, D&E completed its acquisition of Conestoga Enterprises, Inc. (Conestoga). The following subsidiaries of Conestoga are included in D&E's September 30, 2002 results since the date of the completion of the acquisition: o The Conestoga Telephone and Telegraph Company and Buffalo Valley Telephone Company, which are incumbent rural local exchange carriers providing both regulated and nonregulated communication services; o CEI Networks, Inc., which provides long distance and competitive local telephone services; o Infocore, Inc., which provides communication consulting services including the design and installation of communications systems; o Conestoga Investment Corporation, an investment holding company; o Conestoga Mobile Systems, which provides paging communication services and has been reported as a discontinued operation; and o Conestoga Wireless Company, which provides wireless personal communication services (PCS) and has been reported as a discontinued operation. The accompanying financial statements are unaudited and we have prepared them pursuant to generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly our results of operations, financial position and cash flows for the periods presented. Certain items in the financial statements for the three months and nine months ended September 30, 2001 have been reclassified for comparative purposes to conform to the current period's presentation. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations. The use of generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. We believe that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with D&E's financial statements and notes thereto included in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001 and with D&E's Current Report on Form 8-K related to the completion of its acquisition of Conestoga filed with the Securities and Exchange Commission on June 10, 2002. 5 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) (2) ACQUISITION OF BUSINESS On May 24, 2002, we completed the acquisition of Conestoga Enterprises, Inc. (Conestoga), a neighboring rural local telephone company providing integrated communications services throughout the eastern half of Pennsylvania. The acquisition was completed through the merger of Conestoga with and into D&E Acquisition Corp., a wholly owned subsidiary of D&E, pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of January 9, 2002. As of September 30, 2002, the purchase price allocation has been determined by D&E based on preliminary reports of independent appraisers. The allocation includes recognition of further adjustments to tangible assets and liabilities to state them at their fair values, and recognition of additional identifiable intangible assets at their fair values. The residual effect of such adjustments was recorded as goodwill. D&E will finalize the valuation during the fourth quarter of 2002. The preliminary purchase-price allocation for the Conestoga acquisition follows: Consideration paid: Cash consideration to Conestoga stockholders $149,422 Transaction costs ($937 paid in 2001 and $5,401 paid in 2002) 6,375 D&E stock to Conestoga stockholders (7,876,655 shares) at $14.57 per share 114,763 based on 3-day average market price per share prior to close of the merger on May 24, 2002 Fair value of Conestoga stock options 2,165 ------- Purchase price 272,725 ------- Assets acquired: Cash $1,003 Accounts receivable 10,144 Inventories 2,016 Prepaid expenses 14,596 Other current assets 103 Property, plant and equipment 112,259 Other non-current assets 5,399 Net assets of wireless and paging operations, held for sale 18,715 Customer base (3-8 year life) 38,000 Goodwill 217,143 -------- Total assets acquired $419,378 ======== Liabilities assumed: Long-term debt and lines of credit $79,178 Accounts payable and accrued liabilities 8,246 Accrued transaction costs of Conestoga ($4,857 paid through September 30, 2002) 5,704 Accrued taxes 10,212 Advance billings, customer deposits and other 1,208 Deferred income taxes 35,462 Other 3,877 Capital lease obligations 2,766 ------- Total liabilities assumed 146,653 ------- Net assets acquired $272,725 =======
6 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) As part of the purchase price, D&E has accrued approximately $3,099 for the estimated costs of severance and retention bonuses to be paid to Conestoga employees. Also included in the opening balance sheet were $2,605 of unpaid merger advisor fees. These accruals comprise the accrued transaction costs of Conestoga. The statement of operations include $973 of costs related to the merger including $839 of costs related to an abandoned debt offering contemplated to finance the acquisition, as well as $134 of severance costs for terminating certain D&E employees as a result of the merger. D&E terminated 43 employees as of September 30, 2002 and approximately 10 additional employees will be terminated. Most of the remaining severance payments will be made during the remainder of 2002. The following unaudited pro forma combined results of operations is provided for illustrative purposes only and assumes that the Conestoga acquisition had occurred as of the beginning of each of the periods presented. The following unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if this acquisition had actually occurred during those periods, nor of the results that D&E may experience in the future.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------ ------------------------ 2001 2002 2001 ------- -------- -------- Pro forma operating revenues $41,512 $122,885 $120,342 Pro forma income (loss) before extraordinary items $ 3,479 $ 52,178 $ 2,148 Pro forma net income $ 3,479 $ 52,178 $ 2,225 Pro forma income (loss) per share $ 0.23 $ 3.46 $ 0.15
(3) INTANGIBLE ASSETS On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which addresses the accounting for goodwill and intangible assets subsequent to their acquisition. With the adoption of SFAS 142, goodwill is no longer subject to amortization. As an indefinite lived asset, goodwill is still subject to at least an annual assessment for impairment. We have completed our transitional intangible impairment test, and based upon a discounted future cash flows model, the goodwill has been deemed to not be impaired. SFAS 142 also requires that goodwill and indefinite-lived intangible assets be tested annually for impairment using a two-step process. The first step is to identify a potential impairment by comparing the fair value of reporting units to their carrying value and, upon adoption, must be measured as of the beginning of the fiscal year. As of January 1, 2002, the results of the first step indicated no potential impairment of the D&E's goodwill. We will perform this assessment annually during the fourth quarter beginning in the fourth quarter of 2002. Should the results of the first step of the impairment testing indicate a potential impairment, the second step would be completed to measure the amount of any impairment loss. The annual assessment will be performed by an independent appraisal firm. In performing the evaluation to determine if an impairment exists, the appraisal firm is expected to use information from various sources including, but not limited to, current stock price, transactions involving similar companies, 7 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) the business plan prepared by management and current and past operating results of the Company among other information. The estimates used by the appraisal firm may be different from those used by management in the preparation of its business plan or from the current operating results of the Company and those differences may be material. The assessment could be impacted by future events such as, the stock price of the Company, being either higher or remaining at current or lower prices for a significant period of time, transactions announced or completed prior to the completion of the evaluation, regulatory or other developments as well as the actual operating results of the Company. The elimination of goodwill amortization, net of tax, would have reduced net loss by approximately $253 for the three months and $726 for the nine months ended September 30, 2001, or $0.03 and $0.06 respectively per basic and diluted share. Pro forma net loss and loss per share information are shown as if the provisions of SFAS No. 142 were in effect for fiscal 2001.
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- ----------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2002 2001 - ------------------------------ ------- --------- ---------- --------- Income (loss) before extraordinary item ($ 9) $ 2,674 $ 51,136 ($ 194) Extraordinary item -- -- -- 107 ------ --------- ---------- ------- Reported net income (loss) ($ 9) $ 2,674 $ 51,136 ($ 87) Add: Goodwill amortization -- 253 -- 726 ------ --------- ---------- ------- Adjusted net income (loss) ($ 9) $ 2,927 $ 51,136 639 ------- --------- ---------- ------- Basic and diluted earnings per share: Income (loss) before extraordinary item ($0.00) $ 0.36 $ 4.57 ($ 0.03) Extraordinary item -- -- -- 0.02 ----- --------- ---------- ------- Reported net income (loss) ($0.00) $ 0.36 $ 4.57 ($ 0.01) Add: Goodwill amortization -- 0.04 -- 0.10 ----- --------- ---------- ------- Adjusted net income (loss) ($0.00) $ 0.40 $ 4.57 $ 0.09 ----- --------- ---------- -------
As a result of the Conestoga acquisition described in Note 2 as well as previous acquisitions, the intangible assets and related accumulated amortization recorded on our balance sheets are as follows:
AS OF SEPTEMBER 30, 2002 AS OF DECEMBER 31, 2001 ----------------------------- ----------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ ------- ------------- Customer base $ 38,000 $ (1,886) $ -- $ -- Non-compete agreements 1,424 (640) 1,450 (433) ----- ----- ----- ----- Total $ 39,424 $ (2,526) $ 1,450 $ (433) ====== ===== ===== ===
8 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) Aggregate amortization expense related to these intangible assets recorded for the nine-months ended September 30, 2002 was $2,093. Estimated amortization expense for succeeding years is as follows: For the year ended: December 31, 2002 $3,579 December 31, 2003 5,944 December 31, 2004 5,944 December 31, 2005 5,041 December 31, 2006 4,326
(4) DISCONTINUED OPERATIONS D&E WIRELESS D&E's fifty percent partnership interest in D&E/Omnipoint Wireless Joint Venture, L.P. (PCS ONE) and the related contract services D&E provides to PCS ONE constitute a separate segment of our business. On October 17, 2001, D&E entered into a definitive agreement to sell its interest in PCS ONE to VoiceStream Wireless Corporation for $117,000 less working capital and long-term debt adjustments. The assets and liabilities and results of operations of D&E Wireless are reported as discontinued operations in accordance with APB Opinion No. 30 with a measurement date of December 31, 2001. The only assets or liabilities held for sale were the equity in net losses of PCS ONE, which were classified as equity in net losses of discontinued D&E Wireless operations in excess of investments and advances in the balance sheet. In accordance with EITF 85-36, beginning January 1, 2002, through disposal date (the phase-out period), losses from D&E Wireless were deferred because it was reasonably assured that the ultimate disposition of this business would result in the recognition of a gain. Losses were deferred until a gain on sale was recognized. On April 1, 2002, D&E consummated its sale of PCS ONE. The related contract services D&E provided to PCS ONE were terminated subsequent to the sale, after a six month post closing period. Upon completion of the sale, we received $74,168 in cash, subject to post closing adjustments as set forth in the sale agreement. These adjustments were finalized in the third quarter of 2002 and resulted in additional cash proceeds of $2,287, which were collected in October, 2002. In addition, we received equipment with a fair value of approximately $2,014. Selling and other estimated costs, offset by post-closing adjustments, are approximately $1,542 and associated income taxes are estimated at $29,325. The gain on sale recognized was $55,413 after eliminating the $10,098 liability for the equity in net losses of discontinued D&E Wireless operations in excess of investments and advances. The proceeds from the sale of PCS ONE were used to help finance the acquisition of Conestoga Enterprises, Inc. (see Note 2). 9 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) Summarized financial information for the discontinued operations of D&E Wireless Services is as follows:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------------- ----------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Revenue $ 729 $ 3,133 $ 4,741 $ 8,704 Expenses 709 2,822 4,299 7,932 -------- -------- -------- -------- Operating income 20 311 442 772 Equity in net loss of PCS ONE -- (2,315) (1,605) (7,359) Phase-out losses deferred until sale -- -- 1,268 -- Gain on sale of PCS ONE (162) -- 84,738 -- Other income -- 61 -- 93 -------- -------- -------- -------- Income (loss) from D&E wireless Operations before taxes (142) (1,943) 84,843 (6,494) Income taxes 138 (390) 29,337 (1,942) -------- -------- -------- -------- Income (loss) from D&E wireless Operations, net of taxes $ (280) $ (1,553) $ 55,506 $ (4,552) -------- ======== ======== ========
The summarized results of operations of PCS ONE were as follows:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ --------------------------- 2002 2001 2002 2001 ----- -------- ------- ------- Net sales $ -- $ 13,485 $12,312 $33,751 Net loss $ -- $ (4,630) (3,211) (14,718) Our share of loss $ -- $ 2,315 (1,605) (7,359)
CONESTOGA WIRELESS On May 24, 2002, we acquired Conestoga Enterprises, Inc. (see Note 2). From the date of acquisition, D&E had committed to a plan to sell the assets of Conestoga's wireless segment. As such, the assets and results of operations of the Conestoga wireless segment are reported as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." The assets are not depreciated while they are held for sale. On November 12, 2002, we entered into a definitive agreement to sell substantially all of the assets of the Conestoga wireless segment to Keystone Wireless, LLC ("Keystone"), a Delaware limited liability company. Keystone is an affiliate of PC Management, Inc., a Ft. Myers-based company that owns and manages wireless communications systems throughout the United States. Upon completion of the sale, CWC will receive $10.0 million in cash and D&E will receive $10.0 million in a secured promissory note issued by Keystone, each subject to certain purchase price adjustments to be determined after closing. Proceeds from the sales price, including adjustments, less costs to sell are estimated at the $18,500 value recorded in the balance sheet and there will be no gain or loss recorded as a result of a sale. The sale is subject to final regulatory approval by the Federal Communications Commission and other customary closing conditions. 10 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) The carrying amount of the major classes of assets included as part of the Conestoga wireless business to be sold, excluding Paging Services assets listed below, are as follows:
SEPTEMBER 30, 2002 ------------------ Inventories $ 1,250 Property & equipment 16,050 PCS licenses 1,200 ------- Total $18,500 -------
Summarized income statement information for the discontinued operations of the Conestoga wireless segment were as follows:
MAY 24, 2002 TO THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, 2002 SEPTEMBER 30, 2002 SEPTEMBER 30, 2002 --------------- -------------------- -------------------- Revenue $ 765 $ 3,271 $ 4,036 Expenses 1,045 3,687 4,732 ----- ----- ----- Operating loss (280) (416) (696) Income taxes (benefit) (121) (123) (244) ---- ----- ----- Loss from Conestoga wireless operations, net of taxes $ (159) $ (293) $ (452) --- --- ---
PAGING SERVICES During the third quarter, we committed to a plan to sell the assets of Conestoga Mobile Systems' and D&E's paging operations. We expect to sell the business within a year. No liabilities are expected to be included as part of the sale. The carrying amount of the major classes of assets included as part of the business to be sold are as follows:
SEPTEMBER 30, 2002 ------------------ Inventories $ 47 Property & equipment 168 ---- Total $215 ----
Summarized income statement information for the discontinued operations of the paging services were as follows:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------- --------------------- 2002 2001 2002 2001 ------ ------ ------- ------ Revenue $ 183 $ 24 $ 294 $ 78 Expenses 166 17 290 99 --- -- --- --- Operating income (loss) 17 7 4 ( 21) Income taxes (benefit) 7 3 2 ( 8) ---- -- ---- ----- Income (loss) from Paging operations, net of taxes $ 10 $ 4 $ 2 ($ 13)
11 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) (5) INVESTMENTS IN AFFILIATED COMPANIES As of December 31, 2001, we owned a one-third investment in EuroTel L.L.C. (EuroTel), a domestic corporate joint venture. EuroTel held a 100% investment in PenneCom, B.V. (PenneCom), an international telecommunications holding company that held a 100% investment in Pilicka Telefonia, Sp.zo.o (Pilicka), a telecommunications company located in Poland. As of December 31, 2001, PenneCom was indebted to EuroTel for $10,656 and to the investors in EuroTel for $36,751 (including $14,623 to D&E). PenneCom agreed with EuroTel and the EuroTel investors to satisfy a portion of its indebtedness to EuroTel and the founders by transferring PenneCom's entire equity interests in Pilicka to EuroTel and the founders. PenneCom satisfied $3,384 of its indebtedness to EuroTel by transferring 22.56% of the capital stock of Pilicka to EuroTel, satisfied $4,650 of its indebtedness to D&E by transferring 31.00% of the capital stock of Pilicka to D&E, and satisfied $6,966 of indebtedness to the other EuroTel investors by transferring 46.44% of the capital stock of Pilicka to the other EuroTel investors. The total amount of indebtedness satisfied by PenneCom was equal to the total estimated fair value of Pilicka at December 31, 2001. These transactions were effective as of January 1, 2002. As a result of the transactions described above, D&E now has a 31.00% direct ownership in Pilicka and an indirect 7.52% ownership in Pilicka, through its continuing one-third interest in EuroTel. D&E accounts for both its investment in EuroTel and its investment in Pilicka using the equity method of accounting. The summarized results of operations of EuroTel were as follows:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------- --------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Net sales $ -- $ 1,868 $ -- $ 5,542 Net income (loss) (1,683) 15,411 (2,730) 16,737 Our share of income (loss) (561) 5,137 (910) 5,579
The summarized results of operations of Pilicka were as follows:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- 2002 2002 -------- -------- Net sales $2,235 $ 6,958 Net loss $ (753) $(2,677) Our share of loss $ (234) $ (830) Investment amortization $ (119) $ (351) Total loss $ (353) $(1,181)
12 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) (6) ACCOUNTING CHANGES AND RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this Statement are effective for exit or disposal activities initiated after December 31, 2002 and are not expected to have a material effect on the Company's results of operations, financial position or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002" ("SFAS No. 145"), which rescinded or amended various existing standards. One change addressed by this Statement pertains to treatment of extinguishments of debt as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and states that an extinguishment of debt cannot be classified as an extraordinary item unless it meets the unusual or infrequent criteria outlined in Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB No. 30"). The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002 and provide that extinguishments of debt that were previously classified as an extraordinary item in prior periods that do not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. The adoption of SFAS No. 145 is not expected to have a material effect on the Company's results of operations, financial position or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), and the accounting and reporting provisions of APB No. 30. However, certain provisions of SFAS No. 121 and APB No. 30 have been maintained. The Company adopted SFAS No. 144 effective January 1, 2002. We have determined that there is no impairment to any long-lived assets. We have also accounted for the planned sale of the Conestoga wireless operations and the combined Conestoga and D&E paging operations in accordance with SFAS 144 (Note 3). In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). This Statement establishes common accounting practices relating to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The Company will adopt SFAS No. 143 on January 1, 2003. The adoption is not expected to have a material effect on the Company's results of operations, financial position or cash flows. (7) LONG-TERM DEBT During the second quarter of 2002 in connection with the Conestoga acquisition (Note 2), we incurred additional indebtedness to finance a portion of the acquisition and to repay certain existing indebtedness and related fees and we also assumed certain existing indebtedness of Conestoga. The following table sets forth total long-term debt outstanding: 13 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited)
INTEREST RATE AT SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DESCRIPTION 2002 Maturity 2002 2001 - -------------------------- ------------------ -------- ------------- ------------ Senior Secured Revolving Credit Facility 5.81% 2009 $ 32,250 $ 8,000 Senior Secured Term Loan B 5.95% 2010 125,000 -- Senior Secured Term Loan A 6.07% 2011 50,000 50,000 Secured Term Loan 9.34% 2014 20,000 -- Secured Term Loan 9.36% 2014 15,000 -- Capital lease obligations 2,879 176 ---------- ------- 245,129 58,176 Less current maturities 129 52 ---------- ------- Total long-term debt $ 245,000 $58,124 ========== =======
Senior Secured Revolving Credit Facility: The Senior Secured Revolving Credit Facility ("Credit Facility") is a $75,000 8 1/2-year senior secured reducing revolving credit facility. The Credit Facility requires interest only payments for two years initially with increasing quarterly principal reductions of the amount available to borrow beginning in the third quarter of 2004 and continuing through the fourth quarter of 2009. Interest is payable at a base rate or at one, two, three or six month LIBOR rates plus an applicable margin based on our leverage ratio. At September 30, 2002 the interest rate was 5.81%. The Credit Facility also requires a quarterly commitment fee on the unused portion. Senior Secured Term Loan B: We have outstanding a new 8 1/2-year variable rate Senior Secured Term Loan B ("Term Loan B") for $125,000. Term Loan B bears interest at our option at either the U.S. prime rate plus 1.75% to 3.00% or at LIBOR plus 2.50% to 4.00%, depending on our total leverage ratio. At September 30, 2002 the average interest rate was 5.95%. Term Loan B requires interest only payments for two years initially with increasing quarterly principal payments beginning in the third quarter of 2004 and continuing through the fourth quarter of 2010. Senior Secured Term Loan A: The Secured Senior Term Loan A ("Term Loan A") bears interest at a base rate or at either the U.S. prime rate plus 2.00% to 3.125% or at LIBOR plus 2.625% to 4.125%, depending on our leverage ratio. At September 30, 2002 the average interest rate was 6.07%. The Term Loan A requires interest only payments for three years initially with increasing quarterly principal payments beginning in the third quarter of 2004 and continuing through the second quarter of 2011. 9.34% Secured Term Loan: The 9.34% Secured Term Loan was assumed as a result of the Conestoga acquisition (Note 2) and has been recorded at its book value, which approximates fair value. The 9.34% Secured Term Loan requires interest to be paid quarterly at the stated rate and also requires principal to be paid in quarterly installments of $500 beginning in 2005 and continuing through 2014. 14 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) 9.36% Secured Term Loan: The 9.36% Secured Term Loan was assumed as a result of the Conestoga acquisition (Note 2) and has been recorded at its book value, which approximates fair value. The 9.36% Secured Term Loan requires interest to be paid quarterly at the stated rate and also requires principal to be paid in quarterly installments of $375 beginning in 2005 and continuing through 2014. Our indebtedness requires that we maintain certain financial and operational covenants. The most restrictive covenant is the total leverage ratio. At September 30, 2002, we were in compliance with all covenants. We are also required to maintain interest rate protection on one-half of the total amount of senior indebtedness outstanding, with a weighted average life of at least 2 years, beginning on November 24, 2002. Based on the borrowing rate currently available to us for bank loans, the book value of long-term debt approximates the fair market value. Maturities of long-term debt, for each year ending December 31, 2002 through 2006, are as follows:
YEAR AGGREGATE AMOUNT ---- ---------------- 2002 $ -- 2003 -- 2004 2,500 2005 5,000 2006 5,000
At December 31, 2001, we had $1,757 outstanding under our lines of credit with domestic banks. As of May 24, 2002 in connection with the obtaining of our new revolving credit facility, we terminated our lines of credit and repaid all amounts outstanding. Capital lease obligations: As a result of the Conestoga acquisition, we assumed a long-term lease agreement for a building that requires monthly rent payments of approximately $24, including interest at 7.95% through April 2020. In addition, D&E has equipment leases that require monthly payments of $5 through October 2004. (8) INVESTMENTS, AVAILABLE-FOR-SALE During the second quarter of 2002, the company determined that the decline in value of two of its available-for-sale securities was other than temporary. As such, D&E recorded a $2,999 realized loss with a corresponding tax benefit of $1,174. (9) BUSINESS SEGMENT DATA Our segments, excluding the Wireless Services and Paging segments, which are now reported as discontinued segments, are RLEC, CLEC, Internet Services and Systems Integration. In the first quarter of 2002 we renamed our ILEC segment our "RLEC" segment and our Networking Services segment our "Systems Integration" segment to better define these businesses. The measure of profitability for our segments is operating income. 15 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 1. Notes to Consolidated Financial Statements (Dollar amounts are in thousands) (Unaudited) Financial results for D&E's business segments are as follows:
EXTERNAL REVENUES INTERSEGMENT REVENUES OPERATING INCOME (LOSS) -------------------------- --------------------------- -------------------------- THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- -------------------------- SEGMENT 2002 2001 2002 2001 2002 2001 ------- ------- ------- ------- ------- ------- ------ RLEC .............. $25,518 $10,754 $ 2,384 $ 1,372 $ 9,027 $ 1,230 CLEC .............. 7,716 1,560 146 108 (1,253) (1,186) Internet Services . 1,226 583 107 7 (94) (593) Systems Integration 6,201 6,035 7 44 (567) (855) Corporate, Other and Eliminations . 1,305 560 (2,644) (1,531) (300) (56) ------- ------- ------- ------- ------- ------- Total ............. $41,966 $19,492 $ -- $ -- $ 6,813 $(1,460) ======= ======= ======= ======= ======= =======
EXTERNAL REVENUES INTERSEGMENT REVENUES OPERATING INCOME (LOSS) -------------------------- --------------------------- -------------------------- THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- -------------------------- SEGMENT 2002 2001 2002 2001 2002 2001 ------- ------- ------- -------- -------- -------- -------- RLEC .............. $ 50,985 $ 30,787 $ 4,185 $ 3,557 $ 13,029 $ 6,134 CLEC .............. 13,308 4,970 373 219 (3,138) (2,776) Internet Services . 3,086 1,201 150 18 (563) (1,733) Systems Integration 17,687 17,384 32 82 (1,895) (2,768) Corporate, Other and Eliminations . 2,542 2,162 (4,740) (3,876) (537) (149) ------- -------- ------- ------- ------- -------- Total ............. $ 87,608 $ 56,504 $ -- $ -- $ 6,896 $ (1,292) ======= ======== ======= ======= ======= ========
SEGMENT ASSETS ------------------------------ SEPTEMBER DECEMBER SEGMENT 30, 2002 31, 2001 ------- --------- --------- RLEC .............. $ 449,752 $ 151,303 CLEC .............. 57,244 12,232 Internet Services . 4,216 1,775 Systems Integration 15,708 14,787 Corporate, Other and Eliminations . 24,969 (37,219) --------- --------- Total ............. $ 551,889 $ 142,878 ========= =========
The following table shows a reconciliation of the results for the business segments to the applicable line items in the consolidated financial statements as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Operating income (loss) from reportable segments $ 7,113 $(1,404) $ 7,433 $(1,143) Corporate, other and eliminations .............. (300) (56) (537) (149) Equity in net income (losses) of affiliates .... (914) 5,137 (2,091) 5,579 Interest expense ............................... (4,383) (682) (7,139) (1,600) Loss on investments ............................ -- -- (2,999) -- Other, net ..................................... 91 346 292 1,090 ------- ------- ------- ------- Income (loss) from continuing operations before income taxes and dividends on utility preferred stock .................... $ 1,607 $ 3,341 $(5,041) $ 3,777 ======= ======= ======= =======
16 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) The following discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this quarterly report on Form 10-Q. Monetary amounts presented in the following discussion are rounded to the nearest thousand dollars. Certain items in the financial statements for the three months and nine months ended September 30, 2001 have been reclassified for comparative purposes. OVERVIEW We are a leading rural local telephone company providing integrated communications services to residential and business customers in markets throughout the eastern half of Pennsylvania. We operate an incumbent rural local telephone company, or RLEC, in parts of Berks, Lancaster, Union and smaller portions of three other adjacent counties in Pennsylvania, and a competitive local telephone company, or CLEC, in the Lancaster, Harrisburg, Reading, Altoona, Pottstown, State College and Williamsport, Pennsylvania metropolitan areas, which we refer to as our edge-out markets. We offer our customers a comprehensive package of communications services including local and long distance telephone, high speed data, and Internet access services. We also provide business customers with integrated voice and data network solutions. Our segments, excluding the wireless services and paging segments, which, as discussed below, are now reported as discontinued segments, are RLEC, CLEC, Internet Services and Systems Integration. In the first quarter of 2002 we renamed our ILEC segment our "RLEC" segment and our Networking Services segment our "Systems Integration" segment to better define these businesses. The measure of profitability for our segments is operating income. Our RLEC revenue is derived primarily from network access charges, local telephone service, enhanced telephone services and regional toll service. Network access revenue consists of switched access paid by long distance companies who utilize our network for the origination and completion of toll calls and special access paid by telecommunication companies and end-users for the installation and use of dedicated circuits. Local telephone service revenue consists of charges for local telephone services, including monthly charges for basic local service. Enhanced telephone services revenue is derived from providing special calling features, such as call waiting, caller ID, voicemail and PhoneGuard(TM), a telemarketer call-blocking service. Regional long distance revenue is derived from providing regional long distance services to our RLEC customers. Our CLEC revenue is derived primarily from network access charges, local telephone service, enhanced telephone services and long distance service revenue. Network access revenue consists of switched access paid by long distance companies who utilize our network for the origination and completion of toll calls and special access paid by telecommunication companies and end-users for the installation and use of dedicated circuits. Local telephone service revenue consists of charges for local telephone services, including monthly charges for basic local service. Enhanced telephone services revenue is derived from providing special calling features, such as call waiting, 17 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) caller ID, voicemail and PhoneGuard(TM). Long distance revenue consists of charges for both national and regional long distance services, a portion of which is provided on a resale basis. Our Internet Services revenue is derived from dial-up and high speed Internet access services, in addition to web hosting services. We market these services primarily in our RLEC and CLEC service areas. Our Systems Integration revenue is derived from sales of services that support the design, implementation and maintenance of local and wide area networks and telecommunications systems. In addition, we sell data and voice communications equipment and provide custom computer programming service. We market these products and services primarily in our RLEC and CLEC service areas. Our operating costs and expenses primarily include wages and related employee benefit costs, depreciation and amortization, selling and advertising, software and information system services and general and administrative expenses. Our RLEC segment incurs costs related to network access charges, directory expense and other operations expenses such as digital electronic switch expense, engineering and testing costs. Our CLEC incurs costs related to leased network facilities associated with providing local telephone service to customers, engineering costs and network access costs for local calls and long distance expense. Our Internet Services segment incurs leased network facilities costs for our dial-up Internet service and for our DSL Internet service. Our Systems Integration business incurs expenses primarily related to equipment and materials used in the course of the installation and provision of service. We incur access line-related capital expenditures associated with access line additions, expenditures for upgrading existing facilities and costs related to the provision of DSL and dial-up Internet services in our RLEC and CLEC territories. We believe that our capital expenditures related to CLEC access line growth are generally associated with additional customers and therefore tend to result in incremental revenue. We believe that our additional capital expenditures relating to our investment in software and systems will provide us with a competitive advantage in the marketplace and generally allow for corresponding reductions in operating expenses through increased operating efficiencies. As of December 31, 2001, we owned a one-third investment in EuroTel L.L.C. (EuroTel), a domestic corporate joint venture. EuroTel held a 100% investment in PenneCom, B.V. (PenneCom), an international telecommunications holding company that held a 100% investment in Pilicka Telefonia, Sp.zo.o (Pilicka), a telecommunications company located in Poland. As of December 31, 2001, PenneCom was indebted to EuroTel and the investors in EuroTel, including D&E. PenneCom agreed with EuroTel and the EuroTel investors to satisfy a portion of its indebtedness to EuroTel and the founders by transferring PenneCom's entire equity interests in 18 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) Pilicka to EuroTel and the founders. The total amount of indebtedness satisfied by PenneCom was equal to the total estimated fair value of Pilicka at December 31, 2001. As a result of these transactions, we now have a 31.00% direct ownership in Pilicka and a 7.52% indirect ownership in Pilicka, through our continuing one-third interest in EuroTel. We account for both our investment in EuroTel and Pilicka using the equity method of accounting. We currently are exploring strategic alternatives with regard to these investments. On April 1, 2002, we completed the sale of our investment in PCS ONE, whose results, along with related contract services provided to PCS ONE, have been reported as a discontinued segment. On May 24, 2002, we completed our acquisition of Conestoga Enterprises, Inc. ("Conestoga"), a neighboring rural local exchange carrier providing integrated communications services throughout the eastern half of Pennsylvania. The acquisition was completed through the merger of Conestoga with and into D&E Acquisition Corp. (the "Merger Sub"), a wholly-owned subsidiary of D&E, pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of January 9, 2002 (the "Merger Agreement"), by and among D&E, Conestoga and the Merger Sub (the "Merger"). We paid cash consideration of $149,422 and issued 7,876,655 shares of D&E common stock to Conestoga shareholders pursuant to the Merger Agreement. We also assumed existing indebtedness of Conestoga and outstanding options issued pursuant to Conestoga equity compensation plans. In connection with the Merger, we entered into an Amended and Restated Credit Agreement dated May 24, 2002 (the "Credit Agreement") with CoBank, ACB ("CoBank"), as a lender and administrative agent and certain other lenders. The Credit Agreement provides for a new $125 million 8-1/2 year variable rate senior secured term loan and a $25 million increase to our existing $50 million revolving credit facility provided by CoBank. The Credit Agreement is also the governing document for our existing $50 million term loan from CoBank. On May 24, 2002, we borrowed the $125 million term loan and $35 million under the revolving credit facility. These borrowings, along with proceeds from the sale of our interest in PCS ONE, were used to pay the cash portion of the Merger as well as to repay certain existing indebtedness and related fees and expenses. The $125 million term loan and borrowings under the $75 million revolving credit facility bear interest at our option at either the U.S. prime rate plus 1.75% to 3.00% or at LIBOR plus 2.50% to 4.00%, depending on our total leverage ratio. The $50 million term loan bears interest at our option at either the U.S. prime rate plus 2.00% to 3.125% or at LIBOR plus 2.625% to 4.125%, depending on our total leverage ratio. We are also required to maintain interest rate protection on one-half of the total amount of senior indebtedness outstanding, with a weighted average life of at least 2 years, beginning on November 24, 2002. Conestoga's wireless business and Conestoga and D&E's paging businesses are held for sale and have been reported as discontinued operations. 19 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) In connection with the integration of the Conestoga acquisition, we reviewed certain of our access line count methodologies. As a result of this process, the total number of our RLEC access lines was adjusted upward by 526 lines from the number of RLEC lines reported at June 30, 2002. In addition, the total number of our CLEC lines was adjusted downward by 2,879 lines from the number of CLEC lines reported at June 30, 2002. The count correction and conforming the methodology had no impact on revenues or expenses. We believe that at September 30, 2002 our count methodologies are applied consistently throughout our organization. 20 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) RESULTS OF OPERATIONS The following table is a summary of our operating results by segment for the three months ended September 30, 2002 and 2001:
CORPORATE, INTERNET SYSTEMS OTHER AND TOTAL RLEC CLEC SERVICES INTEGRATION ELIMINATIONS COMPANY ------- ------- -------- ----------- ------------ ------- THREE MONTHS ENDED SEPTEMBER 30, 2002 - -------------------- Revenues - External $25,518 $ 7,716 $ 1,226 $ 6,201 $ 1,305 $ 41,966 Revenues - Intercompany 2,384 146 107 7 (2,644) -- ------- ------- ------- ------- ------- -------- Total Revenues 27,902 7,862 1,333 6,208 (1,339) 41,966 ------- ------- ------- ------- ------- -------- Depreciation and Amortization 5,609 1,224 143 298 (210) 7,064 Other Operating Expenses 13,266 7,891 1,284 6,477 (829) 28,089 ------- ------- ------- ------- ------- -------- Total Operating Expenses 18,875 9,115 1,427 6,775 (1,039) 35,153 ------- ------- ------- ------- ------- -------- Operating Income (Loss) 9,027 (1,253) (94) (567) (300) 6,813 ------- ------- ------- ------- ------- -------- Adjusted EBITDA (1) 14,636 (29) 49 (269) ( 510) 13,877 ------- ------- ------- ------- ------- -------- Net cash provided by continuing operating activities 10,622 Net cash provided by / used in continuing investing activities (5,721) Net cash provided by / used in financing activities (4,545) THREE MONTHS ENDED SEPTEMBER 30, 2001 - -------------------- Revenues - External $10,754 $ 1,560 $ 583 $ 6,035 $ 560 $ 19,492 Revenues - Intercompany 1,372 108 7 44 (1,531) -- ------- ------- ------- ------- ------- -------- Total Revenues 12,126 1,668 590 6,079 (971) 19,492 ------- ------- ------- ------- ------- --------- Depreciation and Amortization 2,913 149 69 769 83 3,983 Other Operating Expense 7,983 2,705 1,114 6,165 (998) 16,969 ------- ------- ------- ------- ------- -------- Total Operating Expenses 10,896 2,854 1,183 6,934 (915) 20,952 ------- ------- ------- ------- ------- -------- Operating Income (Loss) 1,230 (1,186) (593) (855) (56) (1,460) ------- ------- ------- ------- ------- -------- Adjusted EBITDA (1) 4,143 (1,037) (524) (86) 27 2,523 ------- ------- ------- ------- ------- -------- Net cash provided by / used in continuing operating activities (207) Net cash provided by / used in continuing investing activities (7,697) Net cash provided by financing activities 2,138
21 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) The following table is a summary of our operating results by segment for the nine months ended September 30, 2002 and 2001:
CORPORATE, INTERNET SYSTEMS OTHER AND TOTAL RLEC CLEC SERVICES INTEGRATION ELIMINATIONS COMPANY ------- ------- -------- ----------- ------------ ------- NINE MONTHS ENDED SEPTEMBER 30, 2002 ------------------ Revenues - External $50,985 $13,308 $3,086 $ 17,687 $2,542 $ 87,608 Revenues - Intercompany 4,185 373 150 32 (4,740) -- ----- --- --- -- ------- ------ Total Revenues 55,170 13,681 3,236 17,719 (2,198) 87,608 ------ ------ ----- ------ ------- ------ Depreciation and Amortization 12,884 1,893 352 944 446 16,519 Other Operating Expenses 29,257 14,926 3,447 18,670 (2,107) 64,193 ------ ------ ----- ------ ------- ------ Total Operating Expenses 42,141 16,819 3,799 19,614 (1,661) 80,712 ------ ------ ----- ------ ------- ------ Operating Income (Loss) 13,029 (3,138) (563) (1,895) (537) 6,896 ------ ------- ----- ------- ----- ----- Adjusted EBITDA (1) 25,913 (1,245) (211) (951) (91) 23,415 ------ ------- ----- ----- ---- ------ Net cash provided by Continuing operating activities 16,070 Net cash provided by/used in Continuing investing activities (175,921) Net cash provided by Financing activities 91,418
CORPORATE, INTERNET SYSTEMS OTHER AND TOTAL RLEC CLEC SERVICES INTEGRATION ELIMINATIONS COMPANY ------- ------- -------- ----------- ------------ ------- NINE MONTHS ENDED SEPTEMBER 30, 2002 ------------------ Revenues - External $ 30,787 $ 4,970 $ 1,201 $ 17,384 $ 2,162 $ 56,504 Revenues - Intercompany 3,557 219 18 82 (3,876) -- ----- --- -- -- ------- ------ Total Revenues 34,344 5,189 1,219 17,466 (1,714) 56,504 ------ ----- ----- ------ ------- ------ Depreciation and Amortization 8,092 565 164 2,075 304 11,200 Other Operating Expense 20,118 7,400 2,788 18,159 (1,869) 46,596 ------ ----- ----- ------ ------- ------ Total Operating Expenses 28,210 7,965 2,952 20,234 (1,565) 57,796 ------ ----- ----- ------ ------- ------ Operating Income (Loss) 6,134 (2,776) (1,733) (2,768) (149) (1,292) ----- ------- ------- ------- ----- ------- Adjusted EBITDA (1) 14,226 (2,211) (1,569) (693) 155 9,908 ------ ------- ------- ----- --- ----- Net cash provided by continuing operating activities 7,531 Net cash provided by/used in continuing investing activities (28,354) Net cash provided by financing activities 21,935
22 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) - --------------- (1) We compute Adjusted EBITDA by adding depreciation and amortization expense to operating income. Adjusted EBITDA is presented because we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. However, other companies in our industry may calculate Adjusted EBITDA differently than we do. Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered as a substitute for cash flow from operating activities as a measure of liquidity or a substitute for net income as an indicator of operating performance or any other measure of performance derived in accordance with generally accepted accounting principles. CONSOLIDATED OPERATIONS Three months ended September 30, 2002 compared to the three months ended September 30, 2001 Consolidated operating revenues from continuing operations increased $22,474, or 115.3%, to $41,966 for the three months ended September 30, 2002 from $19,492 in the same period of 2001. The revenue increase was primarily due to $24,456 in incremental revenue attributable to the acquisition of Conestoga on May 24, 2002 offset by a $1,010 reduction in D&E's RLEC network access revenues and a $1,454 decline in D&E's system integration revenues. Consolidated operating income from continuing operations increased $8,273 to an income of $6,813 for the three months ended September 30, 2002 from a loss of $1,460 in the same period of 2001. The increase was primarily related to $5,657 in incremental income attributable to the acquisition of Conestoga. The increase was also partially attributable to improved operating results in D&E's RLEC and Internet Services segments and the discontinuance of goodwill amortization in 2002 due to the adoption of SFAS 142. Goodwill amortization resulted in $384 of expense in the period for 2001. Other income and expense was a net expense of $5,206 in the third quarter of 2002 compared to a net income of $4,801 in the same period of the prior year. This net decrease in other income of $10,456 is primarily attributable to (i) a $6,051 decrease in European affiliate income recognized in the third quarter of 2002 as a result of a portion of an arbitration award being included in European affiliate income in the third quarter 2001 and (ii) a $3,701 increase in interest expense in the third quarter of 2002, as a result of increased borrowings to finance the acquisition of Conestoga. Income taxes were $1,037 in the third quarter of 2002 compared to a benefit of $898 in the same period of 2001. Adjustments to the gain for discontinued operations from D&E Wireless resulted in an after-tax loss of $280 in the third quarter of 2002 primarily from the final post-closing adjustments and 23 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) transition activity related to the sale of our wireless partnership interest, compared with the loss from D&E's Wireless operations of $1,553 in the third quarter of 2001. The discontinued operations of Conestoga Wireless business and our Paging Service businesses for the third quarter of 2002 was a loss of $283 after taxes as compared to income of $4 from D&E's paging services in 2001. Our net loss was $9, or $0.00 per share in the third quarter of 2002 compared to a net income of $2,674, or $0.36 per share in the third quarter of 2001. Nine months ended September 30, 2002 compared to the nine months ended September 30, 2001 Consolidated operating revenues from continuing operations increased $31,104 or 55.1% to $87,608 for the nine months ended September 30, 2002 from $56,504 in the same period of 2001. The revenue increase was primarily due to $31,798 in incremental revenue attributable to the acquisition of Conestoga on May 24, 2002 as well as an increase of approximately 45% in the number of D&E's customers in our Internet Services segment and 47% more access lines in our CLEC segment before including Conestoga's lines. These revenue increases were offset by decreases in D&E's system integration revenues. Consolidated operating income from continuing operations increased $8,188 to an income of $6,896 for the nine months ended September 30, 2002 from a loss of $1,292 in the same period of 2001. The increase was primarily related to $7,431 incremental income attributable to the acquisition of Conestoga, improved operating results in D&E's Internet Services and Systems Integration segments and the discontinuance of goodwill amortization in 2002 due to the adoption of SFAS 142, which resulted in $1,099 of amortization expense in the period for 2001. The increases were partially offset by $839 of financing costs expensed as merger-related costs associated with an abandoned debt offering, $134 of severance charges expensed as merger-related costs for D&E employees terminated as a result of the merger, $285 of stay bonuses to D&E employees working during transition and a charge to bad debt expense of $651 for WorldCom receivables as a result of their bankruptcy filing. Other income and expense was a net expense of $11,937 in the first nine months of 2002 compared to a net income of $5,069 in the same period of the prior year. This net decrease in other income of $17,006 is primarily attributable to (i) a $7,670 decrease in European affiliate income recognized in the first nine months of 2002 as a result of a portion of an arbitration award being included in European affiliate income in the first nine months of 2001; (ii) a $5,539 increase in interest expense in the first nine months of 2002, as a result of increased borrowings to finance the acquisition of Conestoga; and (iii) the recognition of a loss of $2,999 in 2002 in the nine months ended September 30, 2002 for the decline in market value of certain publicly traded investments that were determined to be other than temporary declines. 24 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) Income taxes were a benefit of $1,170 in the first nine months of 2002 compared to a benefit of $643 in the same period of 2001. Discontinued operations of D&E Wireless resulted in an income of $55,506 after tax in the first nine months of 2002 primarily from the completion of the sale of our wireless partnership interest, compared with the loss from operations of $4,552 in the first nine months of 2001. The discontinued operations of the Conestoga Wireless business and our Paging Services businesses included in the first nine months of 2002 were a loss of $450 after taxes as compared to an after tax loss of $13 from D&E's paging services in 2001. Our net income was $51,136, or $4.57 per share in the first nine months of 2002 compared to a net loss of $87, or $0.01 per share in the first nine months of 2001. RLEC SEGMENT RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- -------------------------------- 2002 2001 Change 2002 2001 Change ------ ------ ------ ------- ------ ------ Revenues: Local Telephone Service $ 8,270 $ 3,029 $ 5,241 $ 16,695 $ 9,060 $ 7,635 Network Access 13,723 6,925 6,798 27,680 19,320 8,360 Other 5,909 2,172 3,737 10,795 5,964 4,831 ------ ------ ------ ------ ------ ------ Total Revenues 27,902 12,126 15,776 55,170 34,344 20,826 ------ ------ ------ ------ ------ ------ Depreciation and Amortization 5,609 2,913 2,696 12,884 8,092 4,792 Other Operating Expenses 13,266 7,983 5,283 29,257 20,118 9,139 ------ ------ ------ ------ ------ ------ Total Operating Expenses 18,875 10,896 7,979 42,141 28,210 13,931 ------ ------ ----- ------ ------ ------ Operating Income 9,027 1,230 7,797 13,029 6,134 6,895 ------ ------ ------ ------ ------ ------ Access Lines at Sept. 30 146,619 61,962 146,619 61,962 ------- ------ ------- ------
RLEC segment revenues increased $15,776 to $27,902 for the three months ended September 30, 2002 from $12,126 in the same period of 2001. The Conestoga acquisition added $16,172 while our D&E RLEC revenue decreased $396 from the same period of 2001. Our D&E local telephone service revenues increased $804 or 26.6% to $3,833 in the third quarter of 2002, from $3,029 in the same period of 2001, driven by rate increases effective in December 2001 and July 2002. We experienced a decrease of $1,010 or 14.6% to $5,915 in D&E's network access revenues in the third quarter of 2002, from $6,925 in the same period of 2001, as a result of lower call volumes and a decrease in certain network access rate elements. The access line increase was 25 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) the net result of 648 fewer D&E lines compared to a year earlier, primarily relating to the loss of 488 lines from one customer that relocated its customer service operations outside of our territory, and 84,895 Conestoga lines acquired; plus 410 additions from net adjusted line counts. RLEC operating expenses increased $7,979 to $18,875 in the third quarter of 2002 from $10,896 in the same period of the prior year. The Conestoga acquisition added $9,274 while our D&E RLEC expense decreased $1,295. Depreciation expense increased $2,696 as a result of tangible and intangible assets from the Conestoga acquisition and D&E's capital additions. In the third quarter of 2002, we charged bad debt expense $162 for WorldCom receivables as a result of their bankruptcy filing. RLEC segment revenues increased $20,826 to $55,170 in the first nine months of 2002 from $34,344 in the same period of 2001. The Conestoga acquisition added $20,921 while our D&E RLEC revenue decreased $95 from the same period of 2001. Our D&E local telephone service revenues increased $1,824 or 20.1% to $10,884 in the first nine months of 2002, from $9,060 in the same period of 2001, driven by rate increases effective in December 2001 and July 2002. We experienced a decrease of $2,088 or 10.8% to $17,232 in D&E's network access revenues in the first nine months of 2002, from $19,320 in the same period of 2001, as a result of lower call volumes and a decrease in certain network access rate elements. RLEC operating expenses increased $13,931 to $42,141 in the first nine months of 2002 from $28,210 in the same period of the prior year. The increase was primarily attributable to increased operating expenses from incremental costs associated with the Conestoga acquisition as well as financing costs expensed during the second quarter of 2002 related to an abandoned debt offering, severance related costs and a charge to bad debt expense of $590 for WorldCom receivables as a result of their bankruptcy filing. Depreciation and amortization expense increased $4,792 as a result of tangible and intangible assets from the Conestoga acquisition and D&E's capital additions, primarily a new building placed into service in July 2001. 26 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) CLEC SEGMENT RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30, ------------------------------- -------------------------------- 2002 2001 CHANGE 2002 2001 CHANGE ------ ------ ------ ------- ------ ------ Revenues: Local Telephone Service $1,963 $442 $1,521 $3,564 $1,073 $2,491 Network Access 1,088 295 793 2,083 1,040 1,043 Long Distance 4,658 872 3,786 7,711 2,454 5,257 Other 153 59 94 323 622 (299) ------ ------ ------ ------- ----- ------ Total Revenues 7,862 1,668 6,194 13,681 5,189 8,492 ------ ------ ------ ------- ----- ------ Depreciation and Amortization 1,224 149 1,075 1,893 565 1,328 Other Operating Expenses 7,891 2,705 5,186 14,926 7,400 7,526 ------ ------ ------ ------- ----- ------ Total Operating Expenses 9,115 2,854 6,261 16,819 7,965 8,854 ------ ------ ------ ------- ----- ------ Operating Loss (1,253) (1,186) (67) (3,138) (2,776) (362) ------ ------ ------ ----- ----- ------ Access Lines at Sept. 30 28,387 6,785 28,387 6,785 ------ ----- ------ -----
CLEC segment revenues increased $6,194 to $7,862 in the third quarter of 2002 from $1,668 in same period of 2001. Of this increase, the Conestoga acquisition added $5,592 while our D&E CLEC revenue increased $602 from the same period of 2001. The D&E increase was primarily from the addition of access lines for new customers that increased basic area service revenues. The access line increase was the result of 3,187 additional D&E lines compared to a year earlier and 20,420 Conestoga lines acquired plus growth of 874 lines in the quarter offset by a 2,879 line count decrease from correcting a Conestoga line count error and conforming the count methodology to D&E's methodology. The count correction and conforming the methodology had no impact on revenue or expenses. CLEC operating expenses increased $6,261 to $9,115 in the third quarter of 2002 from $2,854 in the same period of the prior year. The increase was primarily related to the Conestoga acquisition and additional network operating costs consistent with the larger customer base, higher depreciation expense for additional equipment added and increased sales and marketing expense related to commencement of operations in our Harrisburg, Pennsylvania market. CLEC segment revenues increased $8,492 to $13,681 in the first nine months of 2002 from $5,189 in same period of 2001.The Conestoga acquisition added $7,638 while our D&E CLEC revenue increased $854 from the same period of 2001. The D&E increase was primarily from the addition of access lines for new customers that increased basic area service revenues. 27 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) CLEC operating expenses increased $8,854 to $16,819 in the first nine months of 2002 from $7,965 in the same period of the prior year. The increase was primarily related to the Conestoga acquisition and additional network operating costs consistent with the larger customer base, higher depreciation expense for additional equipment added and increased sales and marketing expense related to commencement of operations in our Harrisburg, Pennsylvania market. The expenses included a charge to bad debt expense of $62 for WorldCom receivables as a result of their bankruptcy filing. INTERNET SERVICES SEGMENT RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- -------------------------------- 2002 2001 CHANGE 2002 2001 CHANGE ------ ------ ------ ------- ------ ------ Revenues $1,333 $590 $743 $3,236 $1,219 $2,017 Depreciation and Amortization 143 69 74 352 164 188 Other Operating Expenses 1,284 1,114 170 3,447 2,788 659 ----- ----- --- ------- ------ --- Total Operating Expenses 1,427 1,183 244 3,799 2,952 847 ----- ----- --- ----- ----- --- Operating Loss (94) (593) 499 (563) (1,733) 1,170 ---- ----- --- ----- ----- ----- Customers at September 30 DSL 5,138 1,791 5,138 1,791 Dial-up Access 12,417 8,431 12,417 8,431 Web-hosting Services 590 406 590 406
Internet Services segment revenues increased 125.9% to $1,333 in the third quarter of 2002 from $590 in the same period of 2001. This revenue increase is primarily attributable to significant increases in subscribers for dial-up, DSL and web-hosting services in the third quarter of 2002 from the third quarter 2001. The Conestoga acquisition accounted for $269 of the revenue increase. Management anticipates an increase in fourth quarter revenue when the dial-up access service is expected to be offered in the Conestoga territories. Internet Services segment operating expenses increased 20.7% to $1,427 in the third quarter of 2002 from $1,183 in the same period of the prior year. The direct cost of operations increased as a result of providing service to the larger customer base; however, the spreading of fixed operating costs over a larger revenue base improved operating margins. Management anticipates an increase in fourth quarter expenses when the Internet access service is expected to be offered in the Conestoga territories. 28 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) Internet Services segment revenues increased $2,017 or 165.2% to $3,236 in the first nine months of 2002 from $1,219 in the same period of 2001. Dial-up services for single user residential and business customers, as well as DSL customers and web-hosting subscriber increases accounted for $1,670 of the revenue increase, with $346 of the increase attributable to the Conestoga acquisition. Internet Services segment operating expenses increased $847 or 28.7% to $3,799 in the first nine months of 2002 from $2,952 in the same period of the prior year. The direct cost of operations increased as a result of providing service to the larger customer base; however, the spreading of fixed operating costs over a larger revenue base improved operating margins. SYSTEMS INTEGRATION SEGMENT RESULTS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30, ------------------------------- -------------------------------- 2002 2001 Change 2002 2001 Change ------ ------ ------ ------- ------ ------ Revenues $6,208 $6,079 $129 $17,719 $17,466 $253 Depreciation and Amortization 298 769 (471) 944 2,075 (1,131) Other Operating Expenses 6,477 6,165 312 18,670 18,159 511 ----- ----- --- ------ ------ --- Total Operating Expenses 6,775 6,934 (159) 19,614 20,234 (620) ----- ----- --- ------ ------ --- Operating Loss (567) (855) 288 (1,895) (2,768) 873 ----- ----- --- ----- ----- ---
Systems Integration segment revenues increased $129 or 2.1% to $6,208 in the third quarter of 2002 from $6,079 in the same period of 2001. The Conestoga acquisition added $1,594, while D&E's product sales decreased $648 and D&E's service revenues decreased $806 from the third quarter of 2001. We believe these decreases partially relate to the effects of a slowing economy and reductions in customer spending for communications related infrastructure and consulting services. Systems Integration segment operating expenses decreased $159 or 2.2% to $6,775 in the third quarter 2002 from $6,934 in the same period of the prior year. The decrease in depreciation and amortization primarily relates to the discontinuance of amortizing goodwill from two acquisitions in 2000 due to the adoption of a new accounting pronouncement, which amounted to $384 in the third quarter of 2001. Other operating expense changes in the third quarter of 2002 primarily related to decreased cost of equipment sold and lower computer services expense from temporarily reassigning staff. 29 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) Systems Integration segment revenues increased $253 or 1.5% to $17,719 in the first nine months of 2002 from $17,466 in the same period of 2001. The Conestoga acquisition added $2,204, while D&E's product sales decreased $233 and D&E's service revenues decreased $1,707 from the first nine months of 2001. We believe the decrease partially relates to the effects of a slowing economy and reductions in customer spending for communications related infrastructure and consulting services. Systems Integration segment operating expenses decreased $620 or 3.1% to $19,614 in the first nine months of 2002 from $20,234 in the same period of the prior year. The decrease in depreciation and amortization primarily relates to the discontinuance of amortizing goodwill from two acquisitions in 2000 due to the adoption of a new accounting pronouncement, which amounted to $1,099 for the nine months ended September 30, 2001. Other operating expense changes in the first nine months of 2002 primarily related to increased cost of equipment sold offset by lower computer services expense. OTHER INCOME (EXPENSE) Other income (expense) for the three months ended September 30, 2002 was a net expense of $5,206, compared to a net income of $4,801 in the same period of 2001. The equity in the operations of our European affiliates decreased to a loss of $914 in the third quarter of 2002 from an income $5,137 in 2001 as a result of a portion of an arbitration award included in 2001. Interest expense increased to $4,383 from $682 in the third quarter of 2001, as a result of increased borrowings for the Conestoga acquisition and capital expenditures. Other income (expense) for the first nine months of 2002 was a net expense of $11,937, compared to a net income of $5,069 in the same period of 2001. The equity in the operations of our European affiliates decreased to a loss of $2,091 in the first nine months of 2002 from an income of $5,579 in 2001 as a result of a portion of an arbitration award included in 2001. Interest expense increased to $7,139 from $1,600 in the first nine months of 2001, as a result of increased borrowings for the Conestoga acquisition and capital expenditures. A loss of $2,999 was recognized in 2002 for the decline in market value of certain publicly traded investments that were determined to be other than temporary declines. INCOME TAXES Income tax expense was $1,037 in the third quarter of 2002 compared to a benefit of $898 in the same period of 2001. The change in tax primarily resulted from the $5,137 of European income in 2001 having its tax provision being offset by a benefit from the reversal of a related valuation allowance on deferred tax assets from previous net operating losses on European investments. 30 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) Income taxes were a benefit of $1,170 in the first nine months of 2002 compared to a benefit of $643 in the same period of 2001. The change in tax primarily resulted from the taxable income in 2001 changing to a taxable loss in 2002 and the change in the valuation allowance for European results in 2001. DISCONTINUED OPERATIONS On April 1, 2002, we completed the sale of our investment in PCS ONE, which has been reported as a discontinued segment. For the three months ended September 20, 2002, we reported a $280 loss from the discontinued D&E Wireless segment resulting primarily from an adjustment to the gain on sale as well as the closing out of contract services provided to PCS ONE. In the third quarter in 2001, the wireless services segment incurred a loss of $1,553. For the year-to-date period ended September 30,2002, the discontinued D&E wireless services segment recognized a $55,506 gain primarily from the sale of our interest in PCS ONE as well as related contract services provided to PCS ONE. The comparable period in 2001 included a loss of $4,552 from the operations of the D&E wireless services segment. On May 24, 2002, concurrent with the completion of the Conestoga acquisition, we classified the Conestoga wireless business as a discontinued operation. Conestoga Wireless recorded a loss after taxes of $283 for the third quarter of 2002 and a loss of $450 for the period from acquisition through September 30, 2002. During the third quarter 2002 the Paging Services business was reported as discontinued. Paging Services recorded an income after taxes of $11 for the third quarter of 2002 and $2 for the nine months ended September 30, 2002. In 2001, our D&E Paging Services business reported income of $4 in the third quarter and a nine-month loss of $13. EXTRAORDINARY ITEM As a result of moving to an alternative form of regulation during the first quarter of 2001, in accordance with SFAS 101 "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB No. 71," $107 of previously established regulatory tax liabilities were eliminated. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES We have historically generated cash from our operating activities. Our overall capital resource strategy is to finance capital expenditures for new and existing lines of businesses and acquisitions partly with operating cash and through external sources, such as bank borrowings and offerings of debt or equity securities. 31 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) Net cash provided by continuing operations was $16,070 in the first nine months of 2002 compared with $7,531 in the same period of the prior year. As a result of the merger, the Company experienced improved operating efficiencies offset by higher cash operating expenses relating to the continued growth in our CLEC and Internet Services segments, payments for merger-related severance and payments assumed on liabilities from Conestoga. Net cash used in investing activities was $175,921 in the first nine months of 2002 primarily due to $158,677 in net cash expenditures related to the Conestoga acquisition. Other capital additions were $16,227 for the period. Capital additions primarily included $8,279 for network and outside plant infrastructure expansion plus $3,884 for CLEC switching equipment and line extensions and $1,818 for computers. In the first nine months of 2001, $28,217 was invested in capital additions including $8,566 for construction of an office building, $6,363 for computer equipment and software and $6,528 for network infrastructure equipment. Net cash provided by financing activities was $91,418 in the first nine months of 2002. Long-term debt was increased $160,000. The majority of the additional debt was used to fund the Conestoga acquisition. Of the remainder, $64,747 was used to repay other long-term loans and lines of credit and to pay debt issuance costs. During the nine months ended September 30, 2002, we paid quarterly dividends of $4,574, which included dividends paid on shares issued to Conestoga shareholders in the merger. In the first nine months of 2001, $25,233 was provided from bank lines of credit and $2,579 was used to pay quarterly dividends. During the fourth quarter 2002, management expects to repurchase 30,000 shares of D&E's common stock in a private transaction. EXTERNAL SOURCES OF CAPITAL AT SEPTEMBER 30, 2002 During the second quarter of 2002, we abandoned an offering of senior notes due to market conditions. We completed an amendment to our existing credit facility to provide a new 8 1/2-year variable rate senior secured term loan for $125,000 and a $25,000 increase to our existing 8 1/2-year revolving credit facility. In connection with the amended agreement, we incurred debt issuance costs of approximately $7,999, which will be amortized over the 8 1/2-year life of the debt. We amended our existing credit facility to, among other things, increase certain interest rate provisions, grant the lender a secured position with respect to all credit facility borrowings and include additional financial covenants. As of September 30, 2002, we had $285,000 in credit facilities consisting of the following: - $50,000 single draw 10-year term loan, of which $50,000 was outstanding, - $75,000 senior reducing revolving credit loan for 8 1/2 years, of which $32,250 was drawn, - $125,000 single draw 8 1/2-year term loan, of which $125,000 was outstanding, 32 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) - $35,000 single draw 12-year term loan, of which $35,000 was outstanding. The $50,000 term loan requires interest only payments for three years with increasing quarterly principal payments from the third quarter of 2004 through the second quarter of 2011. The revolving credit facility requires interest only payments for two years with increasing quarterly principal reductions of the amount available to borrow from the third quarter of 2003 through the fourth quarter of 2009. The $125,000 term loan requires interest only payments for two years with increasing quarterly principal payments from the third quarter of 2004 through the fourth quarter of 2010. The $35,000 term loan requires interest only payments for three years with equal quarterly payments from the first quarter of 2005 through the fourth quarter of 2014. Interest on both the $50,000 and $125,000 term loans and the revolving credit facility is payable at a base rate or at LIBOR rates plus an applicable margin based on our leverage ratio. Interest on the $35,000 term loan was fixed at 9.34% for $20,000 and 9.36% for the remaining $15,000 supplement. A commitment fee must be paid on the unused portion of the revolving credit facility. We are required to maintain interest rate protection on one-half of the total amount of senior indebtedness outstanding, with a weighted average life of at least 2 years, beginning on November 24, 2002. The credit facilities include a number of significant covenants that impose restrictions on our business. These covenants include, among others, restrictions on additional indebtedness, mergers, expansion of CLEC services into new markets, acquisitions and the disposition of assets, sale and leaseback transactions and capital lease payments. In addition, we are required to comply with financial covenants with respect to the maximum indebtedness to total capitalization ratio, a maximum leverage ratio, a debt service ratio and a fixed charge ratio. Upon completion of the sale of our interest in PCS ONE on April 1, 2002, we received approximately $74,168 and subsequently repaid the outstanding balances on our revolving credit facility and our bank lines of credit. As of May 24, 2002 we discontinued the previous two lines of credit totaling $20,000. For further information regarding our lines of credit and long-term debt, see Note 7 to our consolidated financial statements included in this Quarterly Report on Form 10-Q. COMMITMENTS, CONTINGENCIES AND PROJECTED USES OF CAPITAL Having completed the Conestoga acquisition, we believe that our most significant commitments, contingencies and projected uses of funds in 2002, other than for operations, include capital expenditures, the payment of annual common stock dividends and other contractual obligations. We hold a 31% direct interest in Pilicka and a 33% interest in EuroTel, both of which we account for under the equity method of accounting. Thus, neither the assets nor the liabilities of 33 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) Pilicka or EuroTel are presented on a consolidated basis on our balance sheets. We have committed to loan EuroTel, on an equal basis with the other investors in EuroTel, certain of its operating cash needs. In 2001, we made advances of $9,920 pursuant to this commitment. We advanced $912 in funds to EuroTel in the nine months ended September 30, 2002, and we expect that our total 2002 funding requirements for EuroTel will be approximately $1,500. We have provided a letter of commitment to advance funds to EuroTel for 2002. In connection with the sale of our D&E Wireless joint venture, we anticipate making a tax payment of approximately $22,500 in the first quarter of 2003. We expect that we will have to increase bank borrowing to meet this obligation. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our results of operations and financial condition is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts. On an on-going basis, we evaluate our estimates, including those related to intangible assets, income taxes, revenues, contingencies and impairment of long-lived assets. We base our estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, as further described below. Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001 provides a summary of all significant accounting policies that we follow in the preparation of our financial statements. We have identified the following critical accounting policies as those that are the most significant to our financial statement presentation and that require difficult, subjective and complex judgments: Revenue Recognition Revenues for all of our business segments are generally recorded when services are provided or products are delivered. Our RLEC and CLEC pricing is subject to oversight by both state and federal regulatory commissions. Such regulation also covers services, competition and other public policy issues. Different interpretations by regulatory bodies may result in adjustments in future periods to revenues derived from our RLEC and CLEC operations. We monitor these proceedings closely and make adjustments to revenue accordingly. We receive a portion of our interstate access revenues in our RLEC and CLEC segments from settlement pools in which we participate with other telephone companies through the National Exchange Carrier Association, Inc. (NECA). These pools were established at the direction of the 34 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) FCC and are funded by interstate access service revenues, which the FCC regulates. Revenues earned through this pooling process are initially recognized based on estimates and are subject to adjustments that may either increase or decrease the amount of interstate access revenues. If the actual amounts that we receive from the settlement pools differ from the amounts that we have recorded as accounts receivables on our balance sheets, we would be required to record the amount of such a reduction or increase as an adjustment to our earnings. Historically, we have not experienced significant adjustments to our revenues as a result of our participation in these pools. Regulated Asset Depreciation We use a composite group remaining life method and straight-line composite rates to depreciate the regulated property assets of our RLEC and CLEC segments. Under this method, when we replace or retire such assets, we deduct the net book value of these assets and charge it to accumulated depreciation. The effect of this accounting is to amortize any gains or losses on dispositions over the service lives of the remaining regulated telephone property assets rather than recognizing such gain or loss in the period of retirement. In addition, use of the composite group remaining life method requires that we periodically revise our depreciation rates. Such revisions are based on asset retirement activity, cost of removal and salvage values and often require that we make related estimates and assumptions. If actual outcomes differ from our estimates and assumptions, we may be required to adjust depreciation and amortization expense, which could impact our earnings. Goodwill and Intangible Assets Purchase price accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets and liabilities purchased. In our recording of the purchase of Conestoga Enterprises, we have engaged a valuation expert to assist us in determining the fair value of these assets and liabilities. Included in the preliminary asset valuation for this purchase was the valuation of intangible assets that will be amortized over their estimated useful lives. Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets" which requires that goodwill and indefinite-lived intangible assets resulting from business combinations no longer be amortized, but instead be reviewed for recoverability which may result in periodic write-downs. We will assess on an annual basis the fair values of the reporting units holding the goodwill and any intangibles and, if necessary, assess on an interim basis for any impairments. Any write-offs would result in a charge to earnings and a reduction in equity in the period. 35 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) SFAS 142 also requires that goodwill and indefinite-lived intangible assets be tested annually for impairment using a two-step process. The first step is to identify a potential impairment by comparing the fair value of reporting units to their carrying value and, upon adoption, must be measured as of the beginning of the fiscal year. As of January 1, 2002, the results of the first step indicated no potential impairment of the D&E's goodwill. We will perform this assessment annually during the fourth quarter beginning in the fourth quarter of 2002. Should the results of the first step of the impairment testing indicate a potential impairment, the second step would be completed to measure the amount of any impairment loss. The annual assessment as of October 31, 2002 will be performed by an independent appraisal firm and is expected to be completed by the time the annual report on Form 10-K for the year ended December 31, 2002 is filed. In performing the evaluation to determine if an impairment exists, the appraisal firm is expected to use information from various sources including, but not limited to, current stock price, transactions involving similar companies, the business plan prepared by management and current and past operating results of the Company among other information. The estimates used by the appraisal firm may be different from those used by management in the preparation of its business plan or from the current operating results of the Company and those differences may be material. The assessment could be impacted by future events such as, the stock price of the Company, being either higher or remaining at current or lower prices for a significant period of time, transactions announced or completed prior to the completion of the evaluation, regulatory or other developments as well as the actual operating results of the Company. Impairment of Long-Lived Assets Based upon the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we review assets and finite-lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Our assets subject to SFAS No. 144 include our property, plant and equipment and certain intangibles. A determination of impairment is made based on estimates of future cash flows. While we have never recorded an impairment charge under SFAS 144, future events or changes in circumstances could result in a charge to earnings. Investment in Unconsolidated Affiliates We have investments and advances to affiliated entities that are accounted for under the equity method of accounting. We periodically evaluate whether there have been declines in value in these investments, and if so, whether these declines are considered temporary or other-than-temporary. Other-than-temporary declines would be recognized as realized losses in earnings. Evidence of a loss in value includes, but is not limited to, our inability to recover the carrying 36 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) amount of the investment or the inability of the investee to sustain an earnings capacity, which would justify the carrying amount of the investment. The fair value of an investment that is less than its book value may indicate a loss in value of the investment. Our evaluations are based on many factors, including the duration and extent to which the fair value is less than carrying amount; the financial health of and business outlook for the investee, including industry performance, changes in technology, and operational and financing cash flow factors; and our intent and ability to hold the investment, including strategic factors. Retirement Benefits Retirement benefits are a significant cost of doing business and yet represent obligations that will be settled in the future. Retirement benefit accounting is intended to reflect the recognition of future benefit costs over the employee's approximate service period based on the terms of the plans and the investment and funding decisions made by a company. We record the costs of providing retirement benefits in accordance with SFAS No. 87 "Employers' Accounting for Pensions". Our estimates include assumptions regarding the discount rate to value the future obligation and the expected return on our plan assets. We use discount rates in line with current market interest rates on high quality fixed rate debt securities. Our return on assets is based on our current expectation of the long-term returns on assets held by the plan. Changes in these key assumptions can have a significant impact on the projected benefit obligations, funding requirements and periodic benefit costs that we incur. Income Taxes We file a consolidated federal income tax return. We have two categories of income taxes: current and deferred. Current taxes are those amounts we expect to pay when we file our tax returns. Since we must report some of our revenues and expenses differently for our financial statements than we do for income tax purposes, we record the tax effects of those differences as deferred tax assets and liabilities in our consolidated balance sheets. These deferred tax assets and liabilities are measured using the enacted tax rates that are currently in effect. Management judgment is required in determining the provision for current income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. A valuation allowance is established for any deferred tax asset that we may not be able to use in the preparation and filing of our future tax returns. We have recorded a valuation allowance due to uncertainties related to the ability to utilize some of the deferred tax assets, consisting primarily of equity income losses carried forward before they expire. 37 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this Statement are effective for exit or disposal activities initiated after December 31, 2002 and are not expected to have a material adverse effect on the Company's results of operations, financial position or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002" ("SFAS No. 145"), which rescinded or amended various existing standards. One change addressed by this Statement pertains to treatment of extinguishments of debt as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and states that an extinguishment of debt cannot be classified as an extraordinary item unless it meets the unusual or infrequent criteria outlined in Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB No. 30"). The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002 and provide that extinguishments of debt that were previously classified as an extraordinary item in prior periods that do not meet the criteria n APB No. 30 for classification as an extraordinary item shall be reclassified. The adoption of SFAS No. 145 is not expected to have a material affect on the Company's results of operations, financial position or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), and the accounting and reporting provisions of APB No. 30. However, certain provisions of SFAS No. 121 and APB No. 30 have been maintained. The Company adopted SFAS No. 144 effective January 1, 2002. We have determined that there is no impairment to any long-lived assets. We have also accounted for the planned sale of the Conestoga wireless operations and the combined Conestoga and D&E paging operations in accordance with SFAS 144 (Note 3). In June 2001, the FASB issued SFAS no. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). This Statement establishes common accounting practices relating to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The Company will adopt SFAS No. 143 on January 1, 2003. The adoption is not expected to have a material effect on the Company's results of operations, financial position or cash flows. 38 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) During the first quarter 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which addresses the accounting for goodwill and intangible assets subsequent to their acquisition. Annual goodwill amortization of approximately $1,440 ceased as of January 1, 2002 as a result of adopting SFAS 142. During the first quarter 2002, we also adopted Statement of Financial accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144) which addresses issues relating to the implementation of Financial Accounting Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." We have determined that there is no impairment to any long-lived assets. However, we have accounted for our planned sale of Conestoga's wireless segment and our paging services business in accordance with SFAS 144 as described in Note 3 to our consolidated financial statements included in this Form 10-Q. FORWARD-LOOKING STATEMENTS This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements provide our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may relate to our financial condition, results of operations, plans, objectives, future performance and business. Often these statements include words such as "believes," "expects," "anticipates," "estimates," "intends," "strategy," "plan," or similar words or expressions. In particular, statements, express or implied, concerning future operating results, the ability to generate income or cash flows, or our capital resources or financing plans are forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Our actual performance or achievements may differ materially from those contemplated by these forward-looking statements. You should understand that various factors, in addition to those discussed in the section titled "Factors Affecting Our Prospects" and elsewhere in this document, could affect our future results and could cause results to differ materially from those expressed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements contained or referred to in this report. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. 39 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) FACTORS AFFECTING OUR PROSPECTS THE COMMUNICATIONS INDUSTRY IS BECOMING INCREASINGLY COMPETITIVE, AND THIS COMPETITION HAS RESULTED IN PRICING PRESSURE ON OUR SERVICE OFFERINGS. As a provider of integrated communications services, we face competition from: o competitive local exchange carriers, including Verizon Communications, Adelphia Business Solutions (which has received regulatory approval to compete with us in our RLEC territory using its own facilities), Commonwealth Telephone Enterprises and XO Communications; o Internet service providers, including AOL, EarthLink and MSN; o cable television companies, including Adelphia Communications, Comcast, AT&T Broadband and Pencor Services; o wireless services providers, including AT&T Wireless, Cingular Wireless, Sprint PCS and T-Mobile; o providers of communications services such as long distance services, including, AT&T, MCI WorldCom and, as a consequence of its recently received regulatory approval to provide long distance services in Pennsylvania, Verizon Communications; and o systems integration providers, including Morefield Communications, Inc., IntelliMark IT Business Solutions and Weidenhammer Systems Corporation. Many of our competitors have substantially greater financial, technical and marketing resources, greater name recognition and more established relationships with a larger base of current and potential customers than us. Accordingly, it may be difficult to compete against these communications providers. WE ARE SUBJECT TO A COMPLEX AND UNCERTAIN REGULATORY ENVIRONMENT THAT MAY REQUIRE US TO ALTER OUR BUSINESS PLANS AND FACE INCREASED COMPETITION. The United States communications industry is subject to federal, state and other regulations that are continually evolving. As new communications laws and regulations are issued, we may be required to modify our business plans or operations and may not be able to do so in a cost-effective manner. Federal and state regulatory trends toward a more competitive marketplace through reduced competitive entry standards are likely to have negative effects on our business and our ability to compete. The regulatory environment governing ILEC operations has been and will likely continue to be very liberal in its approach to promoting competition and network access, which may increase the likelihood of new competitors offering similar services to our service areas. The introduction of new competitors could have a negative effect on our ILEC operating results yet at the same time present operating benefits to our CLEC business. 40 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) WE HAVE RECEIVED A LIMITED SUSPENSION FROM CERTAIN INTERCONNECTION REQUIREMENTS OF THE TELECOMMUNICATIONS ACT OF 1996. UPON EXPIRATION OF THE SUSPENSION, WE MAY BE SUBJECT TO ADDITIONAL COMPETITION FOR TELECOMMUNICATIONS SERVICES. Congress specifically recognized that the movement towards increased competition under the Telecommunications Act of 1996 (TA-96) requires accommodation for the different market characteristics of areas served by rural and small incumbent carriers. In this regard, the Pennsylvania Public Utility Commission (PA PUC) previously granted our RLECs a limited suspension until July 2002 from certain interconnection requirements of the TA-96. The suspension reduces our interconnection obligations in the RLEC territory by excluding us from requirements that would allow competitors access to our customers by relying upon our services and facilities. In June 2002, our RLECs petitioned the PA PUC for an extension of certain protections provided in the original suspension. Our RLECs anticipate PA PUC action on the petition by December 31, 2002. While the request is under review, the terms and conditions of the original suspension remain in effect. Although narrower in scope, the June 2002 petition, if granted, would continue to preclude the use of our RLEC services and facilities by a competitor. If our RLECs do not receive additional extensions of this suspension, competitors will be allowed to seek removal of our rural exemption for the purposes of using our services and facilities through interconnection agreements to provide competitive services. If this event were to occur, our RLECs would exercise their right to oppose before the PA PUC the competitor's request. The prospective competitor would have the burden of proof to show that the request is not unduly economically burdensome, is technically feasible, and is consistent with universal service principles. The introduction of new competitors could result in the loss of customers and have a negative effect on our operating results. However, such loss would be partially offset by charges paid to our RLECs by such competitors for utilization of our services and networks. WE MUST SECURE UNBUNDLED NETWORK ELEMENTS AT REASONABLE RATES OR CLEC GROWTH MAY BE DELAYED AND THE QUALITY OF SERVICE MAY DECLINE. In providing our CLEC service, we interconnect with and use other telephone companies' networks to access certain of their customers. Therefore, we depend, in certain circumstances, upon the technology and capabilities of these other telephone companies, the quality and availability of other telephone companies' facilities and other telephone companies' maintenance of these facilities. We must also maintain efficient procedures for ordering, provisioning, maintaining and repairing facilities from these other telephone companies. We may not be able to obtain the facilities and services of satisfactory quality that we require from other telephone companies, or on other satisfactory terms and conditions, in which case we may experience delays 41 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) in the growth of our competitive local exchange carrier networks and the degradation of the quality of our service to customers. We also provide digital subscriber line services. To provide unbundled DSL-capable lines that connect each end-user to our equipment, we rely on other telephone companies. The Telecommunications Act of 1996 generally requires that charges for these unbundled network elements be cost-based and nondiscriminatory. Charges for DSL-capable lines and other unbundled network elements may vary based on rates proposed by other telephone companies and approved by state regulatory commissions. Increases in these rates or reductions in ILEC unbundling obligations could harm our CLEC business. Many of the FCC's rules governing the rates, terms and conditions on which unbundled network elements are offered by ILECs are under challenge in various Courts of Appeal and the U.S. Supreme Court. Any decision which limits the FCC's ability to regulate the rates, terms and conditions on which unbundled network elements are offered to CLECs may adversely impact our ability to compete. Additionally, the FCC's rules concerning the availability of unbundled network elements and the regulatory status of the rates, terms and conditions on which they are offered are subject to revision. If the FCC constricts the list of elements it regulates as unbundled network elements, such an action may have an adverse impact on our ability to compete. IF WE EXPAND OUR CLEC OPERATIONS, THE SUCCESS OF THIS EXPANSION WILL BE DEPENDENT ON INTERCONNECTION AGREEMENTS, PERMITS AND RIGHTS-OF-WAY, AND THE FAILURE TO OBTAIN THESE AGREEMENTS AND PERMITS COULD HAMPER ANY SUCH EXPANSION. If we expand our CLEC operations, our success will depend, in part, on our ability to manage existing interconnection agreements and to enter into and implement new interconnection agreements with other telephone companies. Our failure to obtain these agreements and permits could hamper this expansion. Interconnection agreements are subject to negotiation and interpretation by the parties to the agreements and are subject to state regulatory commission, FCC and judicial oversight. If the terms of these interconnection agreements need to be renegotiated, we may not be able to renegotiate existing or enter into new interconnection agreements in a timely manner or on favorable terms. We must also maintain existing, and obtain new, local permits, including rights to utilize underground conduit and pole space and other rights-of-way. We may not be able to maintain our existing permits and rights or obtain and maintain other required permits and rights on acceptable terms. Cancellation or nonrenewal of interconnection agreements, permits, rights-of-way or other arrangements could significantly harm our business. DEMAND FOR OUR SYSTEMS INTEGRATION OFFERINGS IS SENSITIVE TO DOWNTURNS IN THE UNITED STATES ECONOMY GENERALLY. 42 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) Unlike our RLEC, CLEC and Internet services businesses which generate revenues of a monthly recurring nature, demand for our systems integration offerings is generally more sensitive to downturns in the United States economy. In an economic downturn, consumers and businesses often curtail spending on voice and data network infrastructure. As a result, we may experience lower than expected revenues for our systems integration business during an economic downturn. Reduced demand for our systems integration offerings could adversely affect the operating profitability of our systems integration segment, which could have an adverse effect on our operating results and financial condition. OUR CHAIRMAN AND FOUR OTHER MEMBERS OF OUR BOARD OF DIRECTORS CAN SIGNIFICANTLY INFLUENCE THE ELECTION OF DIRECTORS AND OTHER MATTERS IN THEIR CAPACITIES AS TRUSTEES OF A VOTING TRUST. Certain of our shareholders are parties to a Voting Trust Agreement, dated as of November 19, 1992, pursuant to which the voting trustees have the right to exercise sole voting power on all matters submitted to our shareholders for a vote. The trustees of the voting trust are our chairman and four of our other directors. The shares represented by the voting trust are voted in accordance with resolutions adopted by a majority of the voting trustees. The Voting Trust Agreement will expire on November 19, 2002. It is our understanding that the parties to the voting trust intend to renew this agreement, although the terms, including the number of shares covered by the agreement, of any such renewal may differ from the terms of the current agreement. As of November 8, 2002, the voting trust beneficially owned 18.8% of our outstanding shares of common stock. As a result, these directors are able to significantly influence the election of directors and other matters submitted to shareholders for a vote. There can be no assurance that the interests of the trustees of the voting trust will not conflict with the interests of our other security holders. WE MAY BE UNABLE TO INTEGRATE SUCCESSFULLY THE BUSINESS OPERATIONS OF D&E AND CONESTOGA AND SUCH INABILITY COULD HAVE AN ADVERSE IMPACT ON OUR PROFITABILITY. The integration of the systems and operations of D&E and Conestoga will involve significant risks. D&E and Conestoga have different operating support systems, including billing, accounting, order management, toll rating, trouble reporting and customer service systems, which may be difficult to integrate. In addition, some of Conestoga's employees are members of a labor union and are subject to the terms of a collective bargaining agreement. Because D&E employees are not unionized, management of the combined company may face difficulties in integrating employees with different work rules. Even if integration of the operating systems and employees is ultimately successful, the amount of management attention diverted to integration efforts may limit their ability to work on other business matters. 43 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) OUR INCREASED INDEBTEDNESS COULD RESTRICT OUR OPERATIONS. As of September 30, 2002, we had approximately $245,129 of total indebtedness, including current maturities, which increased in connection with the Conestoga acquisition. This increased indebtedness could restrict our operations due to the following factors, among others: o we will use a substantial portion of our cash flow from operations, if any, to pay principal and interest on our indebtedness, which would reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes; o our indebtedness may limit our ability to obtain additional financing on satisfactory terms, if at all; o insufficient cash flow from operations may cause us to attempt to sell assets, restructure or refinance our debt, or seek additional equity capital, which we may be unable to do at all or on satisfactory terms; o our level of indebtedness may make us more vulnerable to economic or industry downturns; o we may not have the ability to pay dividends to our shareholders; and o our debt service obligations increase our vulnerabilities to competitive pressures, as we may be more leveraged than many of our competitors. OUR CREDIT FACILITIES CONTAIN COVENANTS THAT COULD SIGNIFICANTLY RESTRICT OUR OPERATIONS. The agreements governing our indebtedness contain covenants imposing financial and operating restrictions on our business. These restrictions may limit our ability to take advantage of potential business opportunities as they arise and adversely affect the conduct of our business. These covenants will place restrictions on our ability and the ability of our subsidiaries to, among other things: o incur more indebtedness o pay dividends, redeem or repurchase our stock or make other distributions; o make acquisitions or investments; o use assets as security in other transactions; o enter into transactions with affiliates; o merge or consolidate with others; o dispose of assets or use asset sale proceeds; o create liens on our assets; o expand our CLEC marketing areas; and o extend credit. 44 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts are in thousands) In addition, our credit facilities require that we maintain specified financial ratios. Our ability to maintain these financial ratios can be affected by operating performance or other events beyond our control. Accordingly, we cannot assure you that we will meet these ratios. Our ability to comply with the provisions governing our indebtedness may be adversely affected by our operations and by changes in economic or business conditions or other events beyond our control. In addition, our failure to comply with our indebtedness-related obligations could result in an event of default under our credit facilities or future indebtedness. THE INABILITY TO SELL THE WIRELESS BUSINESS OF CONESTOGA WOULD RESULT IN A REDUCTION OF OUR EXPECTED RESOURCES AVAILABLE FOR THE OPERATION OF OUR BUSINESS, AND MAY ADVERSELY AFFECT THE CONTINUING OPERATIONS OF THE BUSINESS. We intend to dispose of Conestoga's wireless assets and business. Until the Conestoga wireless business is sold, we will continue to operate this business, which incurred operating losses of $8.2 million for the year ended December 31, 2001. The continued operation of the wireless business will negatively impact our results from discontinued operations and may adversely affect our business by requiring additional financing to fund operations. The proceeds to be realized by us from a sale of Conestoga's wireless assets and business are uncertain. In addition, pursuant to certain non-competition covenants in our agreement with VoiceStream Wireless Corporation, for three years following the sale of our interest in PCS ONE, we may be restricted from providing mobile voice wireless communications services in the York-Hanover, Lancaster and Reading, Pennsylvania markets. As a result of the restrictions imposed by these non-competition covenants, we may be required within 240 days after the Conestoga acquisition to dispose of that portion of Conestoga's wireless business operated in the Reading, Pennsylvania market, which represents approximately 37% of the population area serviced by such business. Due to the significant amount of fixed costs associated with Conestoga's wireless business, if we were unable to dispose of that portion of the Conestoga wireless business and were restricted from providing services in the Reading, Pennsylvania market, we may incur significantly greater losses from that business than those previously incurred by Conestoga. On November 12, 2002, we entered into a definitive agreement to sell substantially all of the assets of the Conestoga wireless business to Keystone Wireless, LLC ("Keystone"), a Delaware limited liability company. Keystone is an affiliate of PC Management, Inc., a Ft. Myers-based company that owns and manages wireless communications systems throughout the United States. Upon completion of the sale, we will receive $10.0 million in cash and $10.0 million in a secured promissory note issued by Keystone, each subject to certain purchase price adjustments to be determined after closing. The sale is subject to final regulatory approval by the Federal Communications Commission and other customary closing conditions. 45 D&E Communications, Inc. and Subsidiaries Part I - Financial Information (continued) Item 3. Quantitative and Qualitative Disclosure About Market Risks D&E does not invest in derivative financial instruments or other market risk sensitive instruments for the purpose of managing its foreign currency exchange rate risk or for any other purpose. We will enter into an interest rate protection agreement on one-half of the total amount of senior indebtedness outstanding, with a weighted average life of at least 2 years, by November 24, 2002 as required by the loan agreement. Item 4. Controls and Procedures The Chief Executive Officer and the Chief Financial Officer of D&E Communications (its principal executive officer and principal financial officer respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this report, D&E Communications' disclosure controls and procedures: are effective to ensure that information required to be disclosed by D&E Communications in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and include controls and procedures designed to ensure that information required to be disclosed by D&E Communications in such reports is accumulated and communicated to the company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in D&E Communications' internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. 46 D&E Communications, Inc. and Subsidiaries Part II - Other Information Item 1. Legal Proceedings We are involved in various legal proceedings arising in the ordinary course of our business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
EXHIBIT IDENTIFICATION NO. OF EXHIBIT REFERENCE ------ -------------- --------- 4.1 Amendment to Credit Agreement dated September 12, 2002 by and among D&E Communications, Inc. and CoBank, ACB as administrative agent for the Lenders. Filed herewith. 10.1 Employment agreement dated May 24, 2002 between Albert H. Kramer and D&E Communications, Inc. Filed herewith. 99.1 Certification of Chief Executive Officer Filed herewith. 99.2 Certification of Chief Financial Officer. Filed herewith.
(b) Reports on Form 8-K: A current report on Form 8-K dated July 23, 2002, was filed during the quarter ended September 30, 2002. The report announced the execution of a non-binding letter of intent regarding the potential sale of certain assets of Conestoga Wireless Corporation. 47 D&E Communications, Inc. and Subsidiaries Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. D&E Communications, Inc. Date: November 14, 2002 By: /s/ G. William Ruhl --------------------------------- G. William Ruhl Chief Executive Officer Date: November 14, 2002 By: /s/ Thomas E. Morell --------------------------------- Thomas E. Morell Senior Vice President, Chief Financial Officer and Treasurer 48 D&E Communications, Inc. and Subsidiaries OFFICER CERTIFICATIONS REQUIRED BY SECTION 13a-14 OF THE EXCHANGE ACT CERTIFICATIONS I, G. William Ruhl, certify that: 1. I have reviewed this quarterly report on Form 10-Q of D&E Communications, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 49 D&E Communications, Inc. and Subsidiaries b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ G. William Ruhl -------------------------- G. William Ruhl Chief Executive Officer 50 D&E Communications, Inc. and Subsidiaries I, Thomas E. Morell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of D&E Communications, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent 51 D&E Communications, Inc. and Subsidiaries evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Thomas E. Morell --------------------- Thomas E.Morell Chief Financial Officer 52 D&E Communications, Inc. and Subsidiaries INDEX TO EXHIBITS
Exhibit Identification No. of Exhibit Reference ------- -------------- --------- 4.1 Amendment to Credit Agreement dated September 12, 2002 by and among D&E Communications, Inc. and CoBank, ACB as administrative agent for the Lenders. Filed herewith. 10.1 Employment agreement dated May 24, 2002 between Albert H. Kramer and D&E Communications, Inc. Filed herewith. 99.1 Certification of Chief Executive Officer. Filed herewith. 99.2 Certification of Chief Financial Officer. Filed herewith.
EX-4.1 3 w65743exv4w1.txt AMENDMENT TO CREDIT AGREEMENT DATED 9/12/02 EXHIBIT 4.1 AMENDMENT TO CREDIT AGREEMENT This AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), is dated as of September 12, 2002 by and among D & E COMMUNICATIONS, INC., a Pennsylvania corporation (the "Borrower"), the Subsidiaries of the Borrower listed on the signature pages hereto (the "Subsidiary Guarantors" and collectively with the Borrower, the "Loan Parties"), COBANK, ACB, as administrative agent for the Lenders (as defined in the hereinafter defined Existing Credit Agreement) and a Lender (in such capacity, the "Administrative Agent") and each of the Lenders executing a signature page hereto. RECITALS WHEREAS, the Loan Parties, the Administrative Agent and the Lenders are parties to that certain Credit Agreement entered into as of May 24, 2002 (as heretofore amended, the "Existing Credit Agreement"; and as amended by this Amendment, the "Amended Credit Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Existing Credit Agreement); WHEREAS, the Loan Parties, the Administrative Agent and the Lenders desire to enter into this Amendment to amend certain provisions of the Existing Credit Agreement; and NOW, THEREFORE, in consideration of the premises and the agreements, covenants and provisions herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO EXISTING CREDIT AGREEMENT Subject to the satisfaction of the conditions precedent set forth in Section 3 of this Amendment, the Loan Parties, the Administrative Agent and the Lenders hereby agree that the Existing Credit Agreement be, and it hereby is, amended as follows: 1.1 General. Upon and after the date hereof, all references to the Existing Credit Agreement in that document or in any other Loan Document shall mean the Amended Credit Agreement. Except as expressly provided herein, the execution and delivery of this Amendment do not and will not amend, modify or supplement any provision of, or constitute a consent to or a waiver of any noncompliance with the provisions of, the Existing Credit Agreement, and, except as specifically provided in this Amendment, the Existing Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed. 1.2 Amendments to Sections 1.2(B) and (G). Each of Sections 1.2(B) and (G) of the Existing Credit Agreement is hereby amended by amending and restating such subsection in its entirety as follows: (B) Applicable Margins. From September 12, 2002 and continuing through the day immediately preceding the first Adjustment Date occurring after November 24, 2002, the applicable Base Rate Margin and LIBOR Margin shall be 3.00% and 4.00% per Amendment to Credit Agreement/ D&E annum, respectively for the Revolving Loans and Term Loan B, and 3.125% and 4.125% per annum, respectively for the Term Loan A. Commencing on such Adjustment Date, the applicable Base Rate Margin and LIBOR Margin for each Loan shall be for each Calculation Period the applicable per annum percentage set forth in the pricing table below opposite the Total Leverage Ratio of Borrower; provided, that effective upon the occurrence of an Event of Default and until such Event of Default is cured or waived the applicable Base Rate Margin and LIBOR Margin shall be 3.00% and 4.00% per annum, respectively, for the Revolving Loans and Term Loan B, and 3.125% and 4.125% per annum, respectively, for the Term Loan A. PRICING TABLE
- ------------------------------------------------------------------------------------------------------------------ Revolving Loans and Term Loan B Term Loan A - ------------------------------------------------------------------------------------------------------------------ Base Rate LIBOR Base Rate LIBOR Total Leverage Ratio Margin Margin Margin Margin - ------------------------------------------------------------------------------------------------------------------ > Than = To 4.5 3.00% 4.00% 3.125% 4.125% - ------------------------------------------------------------------------------------------------------------------ > Than = To 4.0 and < 4.5 2.75% 3.75% 2.875% 3.875% - ------------------------------------------------------------------------------------------------------------------ > Than = To 3.0 and < 4.0 2.50% 3.50% 2.625% 3.625% - ------------------------------------------------------------------------------------------------------------------ > Than = To 2.0 and < 3.0 2.00% 3.00% 2.250% 3.125% - ------------------------------------------------------------------------------------------------------------------ < 2.0 1.75% 2.50% 2.000% 2.625% - ------------------------------------------------------------------------------------------------------------------
(G) Selection, Conversion or Continuation of Loans; LIBOR and Long-Term Fixed Rate Availability. Provided that no Default or Event of Default has occurred and is then continuing, Borrower shall have the option to (i) select all or any part of a new borrowing to be a LIBOR Loan or, if the Term Loan A, a Long-Term Fixed Rate Loan, in a principal amount equal to $2,000,000 or any whole multiple of $500,000 in excess thereof, or a Base Rate Loan in a principal amount equal to $1,000,000 or any whole multiple of $250,000 in excess thereof, (ii) convert at any time all or any portion of a Base Rate Loan in a principal amount equal to $2,000,000 or any whole multiple of $500,000 in excess thereof into one or more LIBOR Loans or, if the Term Loan A, Long-Term Fixed Rate Loans, (iii) upon the expiration of any Interest Period, convert all or any part of any LIBOR or Long-Term Fixed Rate Loan into a Base Rate Loan, and (iv) upon the expiration of its Interest Period, continue any LIBOR or Long-Term Fixed Rate Loan in a principal amount of $2,000,000 or any whole multiple of $500,000 in excess thereof into one or more LIBOR or Long-Term Fixed Rate Loans for such new Interest Period(s) as selected by Borrower, subject to the other provisions herein. Each LIBOR Loan must be made under either the Term Loan A Facility, Term Loan B Facility or the Revolving Loan Facility, but may not be made under more than one concurrently. Each Long-Term 2 Amendment to Credit Agreement/ D&E Fixed Rate Loan may be made only under the Term Loan A. During any period in which any Default or Event of Default is continuing, as the Interest Periods for LIBOR or Long-Term Fixed Rate Loans then in effect expire, such Loans shall be converted into Base Rate Loans and the LIBOR and Long-Term Fixed Rate options will not be available to Borrower until all Events of Default are cured or waived. Notwithstanding the foregoing, there may be no more than a total of eight (8) Loans outstanding under the Facilities at any one time (including, as a single Loan, all amounts under a single Facility accruing interest at the Base Rate). 1.3 Amendment to Section 3.12. Section 3 of the Existing Credit Agreement is amended by adding to the end of such Section the following new Subsection 3.12: 3.12 CLEC Buildout. Borrower will not and will not permit any of its Subsidiaries to make any expenditures of any kind, including, without limitation, capital expenditures, operating expenses or other expenses under GAAP, related to the operation of a competitive local exchange carrier (CLEC), except in the Existing CLEC Markets, until such time as (i) the Excess Cash Flow from the Existing CLEC Markets determined on an aggregate basis is positive for at least (2) consecutive quarters; (ii) there exists at the time of any proposed CLEC expansion no currently existing Event of Default; (iii) the Borrower's Total Leverage Ratio is less than 3.50:l.00 for the two (2) consecutive quarters immediately preceding such proposed expansion; and (iv) the Borrower has delivered to the Administrative Agent a business plan and Projections for such expansion which demonstrate, based on reasonable assumptions, that (A) such business plan is fully funded with the liquidity resources then available to the Borrower and without need of additional financing, other than the Loans; (B) the Borrower will be in compliance with all covenants in Subsections 4.1 through 4.5 for the next succeeding twelve (12) calendar months after giving effect to such proposed expansion; and (C) the Borrower's Total Leverage Ratio, determined on a consolidated basis, will be less than 3.50:1.00 for the next succeeding twelve (12) calendar months after giving effect to such proposed expansion; provided, however, this covenant shall not restrict the Borrower or any of its Subsidiaries from making any expenditure in any Existing CLEC Market; provided, further, any Loan Party may continue to serve customers located outside of the Existing CLEC Markets who were customers of such Loan Party as of September 12, 2002 and who do not, in the aggregate, account for a material portion of the revenues from the CLEC operations of the Loan Parties. 1.4 Revised Exhibit 4.6(C). Exhibit 4.6(C) to the Existing Credit Agreement is amended by amending and restating such exhibit as set forth on Exhibit A hereto. 1.5 Amendment to Section 5.13(B). Subsection 5.13(B) of the Existing Credit Agreement is hereby amended by amending and restating such Subsection in its entirety as follows: (B) The Licenses are valid and in full force and effect without conditions except for such conditions as are generally applicable to holders of such Licenses. Except as set forth on Schedule 5.13(B), no event has occurred and is continuing which 3 Amendment to Credit Agreement/ D&E could reasonably be expected to (i) result in the imposition of a forfeiture or the revocation, termination or adverse modification of any such License or (ii) materially and adversely affect any rights of any Loan Party or its Subsidiaries or any other holder thereunder. Except as set forth on Schedule 5.13(B), each Loan Party has no reason to believe and has no knowledge that any License will not be renewed in the ordinary course. Neither any Loan Party nor any of its Subsidiaries is a party to any investigation, notice of violation, order or complaint issued by or before the FCC, and there are no proceedings pending by or before the FCC which could in any manner threaten or adversely affect the validity of any License. 1.6 Amendment to Section 9.2. Subsection 9.2 of the Existing Credit Agreement is hereby amended by amending and restating such Subsection in its entirety as follows: 9.2 Amendments and Waivers. Except as otherwise provided herein, no amendment, modification, termination or waiver of any provision of this Agreement, the Notes or any of the other Loan Documents, or consent to any departure by Loan Parties therefrom, shall in any event be effective unless the same shall be in writing and signed by Borrower and Requisite Lenders (or Administrative Agent, if expressly set forth herein, in any Note or in any other Loan Document); provided, that except to the extent permitted by any applicable Lender Addition Agreement, no amendment, modification, termination or waiver shall, unless in writing and signed by all Lenders, do any of the following: (i) increase any Lender's Pro Rata Share of any Loan Commitment; (ii) reduce the principal of, rate of interest on or fees payable with respect to any Loan; (iii) extend the Revolving Loan Expiration Date, the Term Loan A Maturity Date or Term Loan B Maturity Date or extend the date on which any Obligation is to be paid; (iv) change the aggregate unpaid principal amount of the Loans; (v) change the percentage of Lenders which shall be required for Lenders or any of them to take any action hereunder; (vi) release Collateral (except if the release of such Collateral is permitted under and effected in accordance with, including any consents and approvals required therein, Subsection 8.2(I) or any other Loan Document) or any guaranty of the Obligations (except to the extent expressly contemplated thereby); (vii) amend or waive this Subsection 9.2 or the definitions of the terms used in this Subsection 9.2 insofar as the definitions affect the substance of this Subsection 9.2; and (viii) consent to the assignment, delegation or other transfer by any Loan Party or its Subsidiaries of any of its rights and obligations under any Loan Document; provided, further, that no amendment, modification, termination or waiver affecting the rights or duties of Administrative Agent under any Loan Document shall in any event be effective, unless in writing and signed by Administrative Agent, in addition to Lenders required hereinabove to take such action. Each amendment, modification, termination or waiver shall be effective only in the specific instance and for the specific purpose for which it was given. No amendment, modification, termination or waiver of any provision of any Note shall be effective without the written concurrence of the holder of that Note. No notice to or demand on Borrower in any case shall entitle Borrower to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this Subsection 9.2 shall be binding upon each holder of the Notes at the time outstanding, each future holder of the Notes, and, if signed by Borrower, on Loan Parties. 4 Amendment to Credit Agreement/ D&E 1.7 Amendment to Subsection 10.1. Subsection 10.1 of the Existing Credit Agreement is hereby amended by amending and restating the following definitions in their entirety as follows: "Excess Cash Flow" means, for any fiscal quarter, (i) Operating Cash Flow for such fiscal quarter minus (ii) the sum of (a) Fixed Charges, (b) net changes in working capital for such quarter and (c) voluntary reductions of the Revolving Loan Commitment under Subsection 1.6(C); provided, however, corresponding voluntary prepayments of Revolving Loans are made as described in Subsection 1.7(A). "Existing CLEC Markets" means the following markets in Pennsylvania in which the Loan Parties operate a competitive local exchange carrier and includes branches or affiliates of CLEC customers in such markets located outside of such markets: Lancaster, Harrisburg, Reading, Altoona, Pottstown, State College and Williamsport. "Fixed Charges" means the sum of (i) scheduled principal payments, (ii) interest expense, (iii) income taxes, (iv) capital expenditures and (v) dividends and distributions to shareholders. "Intercreditor Agreement" means the Intercreditor Agreement, dated as of September 12, 2002, among Administrative Agent, CoBank and the Lenders, as amended, restated or otherwise modified. "Loan Commitment" and "Loan Commitments" mean, individually, each of the Revolving Loan Commitment, the Term Loan A Commitment and the Term Loan B Commitment, and collectively, the Revolving Loan Commitment, Term Loan A Commitment and the Term Loan B Commitment, as each such commitment is reduced from time to time as provided in this Agreement. "Long-Term Fixed Rate Loan" means a Term Loan A accruing interest at a rate determined by reference to the Long-Term Fixed Rate. SECTION 2. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Lenders to enter into this Amendment, each of the Loan Parties hereby represents and warrants to the Administrative Agent and the Lenders as follows: 2.1 Authorization of Amendment, Etc. Each Loan Party has the right and power, and has taken all necessary action, to authorize it to execute, deliver and perform its obligations under this Amendment in accordance with its terms. This Amendment has been duly executed and delivered by each Loan Party and is a legal, valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its terms. 2.2 Compliance of Amendment with Laws, Etc. The execution, delivery and performance of this Amendment in accordance with its terms do not and will not, by the passage 5 Amendment to Credit Agreement/ D&E of time, the giving of notice or otherwise, require any governmental approval or violate any applicable law relating to any Loan Party; (a) conflict with, result in a breach of or constitute a default under the articles or certificate of incorporation or bylaws of any Loan Party, any material provisions of any indenture, agreement or other instrument to which such Loan Party is a party or by which such Loan Party or any of its properties may be bound or any governmental approval relating to such Loan Party, or (b) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by any Loan Party. 2.3 Representations in Credit Agreement. After giving effect to revisions to the Schedules to the Credit Agreement set forth on Schedule A to the Joinder Agreement of CEI Networks, Inc., dated as of even date herewith, all of the representations and warranties set forth in the Amended Credit Agreement, will be accurate in all material respects as of the date hereof, except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct on and as of such date. SECTION 3. EFFECTIVENESS This Amendment shall become effective upon the satisfaction in full of each of the following conditions precedent: 3.1 Executed Amendment. This Amendment shall have been duly authorized and executed by the parties hereto, shall be in full force and effect, no default shall exist hereunder and original counterparts thereof shall have been delivered to the Administrative Agent. 3.2 Payment of Fees. The Loan Parties shall reimburse the Lenders and the Administrative Agent for all costs associated with the negotiation, execution, enforcement and administration of this Amendment, including, without limitation, all reasonable attorneys' fees, costs and expenses incurred by the Lenders and the Administrative Agent. SECTION 4. MISCELLANEOUS 4.1 Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Amendment or its terms to produce or account for more than one of such counterparts. 4.2 Construction. This Amendment is a Loan Document executed pursuant to the Existing Credit Agreement and shall be construed, administered and applied in accordance with all of the terms and provisions of the Existing Credit Agreement. 4.3 Governing Law. This amendment shall be governed by, construed and enforced in accordance with the laws of the State of Colorado, without reference to the conflicts or choice of law principles thereof. 6 Amendment to Credit Agreement/ D&E 4.4 Successors and Assigns. This amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. [Signatures Begin on Next Page] 7 Witness the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above. D & E COMMUNICATIONS, INC., as Borrower By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Sr. VP, CFO & Treasurer THE DENVER AND EPHRATA TELEPHONE & TELEGRAPH COMPANY, as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Vice President & Treasurer D&E NETWORKS, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: VP, Secretary & Treasurer D & E WIRELESS, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Vice President & Treasurer D & E SYSTEMS, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Vice President & Treasurer [Signatures continued on following page.] 8 D & E INVESTMENTS, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Vice President & Treasurer D & E VENTURES, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: CFO, Secretary & Treasurer D&E MANAGEMENT SERVICES, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: VP, Secretary & Treasurer PCS LICENSES, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: VP, Secretary & Treasurer CONESTOGA ENTERPRISES, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Secretary & Treasurer [Signatures continued on following page.] 9 THE CONESTOGA TELEPHONE AND TELEGRAPH COMPANY, as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Vice President & Treasurer BUFFALO VALLEY TELEPHONE COMPANY, as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Vice President & Treasurer CONESTOGA MOBILE SYSTEMS, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Vice President & Treasurer CONESTOGA WIRELESS COMPANY, as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Vice President & Treasurer CONESTOGA INVESTMENT CORPORATION, as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: Vice President & Treasurer [Signatures continued on following page.] 10 INFOCORE, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E.Morell Title: VP, Secretary & Treasurer TELEBEAMUSA, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: VP, Secretary & Treasurer CEI NETWORKS, INC., as a Subsidiary Guarantor By: /s/ Thomas E. Morell ------------------------------------------ Name: Thomas E. Morell Title: VP, Secretary & Treasurer [Signatures continued on following page.] 11 COBANK, ACB, as Administrative Agent and a Lender By: /s/ Christopher J. Motl ------------------------------------------ Name: Christopher J. Motl Title: Vice President GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By: /s/ Molly S. Fergusson ------------------------------------------ Name: Molly S. Fergusson Title: Manager of Operations SUNTRUST BANK, as a Lender By: /s/ J. Eric Millham ------------------------------------------ Name: J. Eric Millham Title: Director WEBSTER BANK, as a Lender By: /s/ Elisabeth V. Piker ------------------------------------------ Name: Elisabeth V. Piker Title: Vice President BANK OF LANCASTER COUNTY, as a Lender By: /s/ Randall M. Johnston ------------------------------------------ Name: Randall M. Johnston Title: Vice President 12 NATIONAL CITY BANK, as a Lender By: /s/ Jon W. Peterson ------------------------------------------ Name: Jon W. Peterson Title: Senior Vice President FULTON BANK, as a Lender By: /s/ William T. Kepler ------------------------------------------ Name: William T. Kepler Title: Vice President IN WITNESS WHEREOF, I have executed this Compliance Certificate as of September, 12, 2002. /s/ Thomas E. Morell -------------------------------------------- [CHIEF EXECUTIVE OFFICER/CHIEF FINANCIAL OFFICER] D & E Communications, Inc. 13 EX-10.1 4 w65743exv10w1.txt EMPLOYMENT AGREEMENT - ALBERT H. KRAMER AND D&E EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of May 24, 2002 between Albert H. Kramer of 1932 Heatherton Drive, Lancaster, Pennsylvania 17601 (the "Executive") and D&E Communications, Inc. (the "Company"), recites and provides as follows: WHEREAS, the Executive has an employment agreement with Conestoga Enterprises, Inc. ("Conestoga"), dated as of April 1, 2001 (the "Conestoga Agreement"); WHEREAS, the Company and Conestoga entered into an Agreement and Plan of Merger, dated as of December 3, 2001, (the "Merger Agreement"), providing for the merger of Conestoga with and into a wholly owned subsidiary of the Company (the "Merger"); WHEREAS, it is acknowledged by the parties hereto that as a result of the consummation of the Merger and the transactions contemplated thereby, there will be a "change of control" (as defined by the Conestoga Agreement) of Conestoga; WHEREAS, Executive has agreed to release the Company and Conestoga from any claims he has under the Conestoga Agreement or due to his employment with Conestoga in exchange for the rights granted hereunder; WHEREAS, the Company expects that the Executive will make substantial contributions to the growth and prospects of the Company; and WHEREAS, the Company desires to obtain the services of the Executive, and the Executive desires to be employed by the Company, all on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein, the receipt and sufficiency of which are hereby acknowledged by each of the parties, the Company and the Executive agree as follows: 1. Employment. 1.1 Position. On the terms and subject to the conditions set forth herein, the Company hereby agrees to employ the Executive as Senior Vice President throughout the Employment Term (as defined below). 1.2 Duties and Responsibilities. The Executive shall have such duties and responsibilities that are consistent with his position as determined by the Chief Executive Officer and shall perform such duties and carry out such responsibilities to the best of his ability for the purpose of advancing the business of the Company and its subsidiaries. Subject to the provisions of Section 1.3 below, during the Employment Term the Executive shall devote his full business time, skill and attention to the business of the Company and its subsidiaries and shall not engage in any other business activity or have any other business affiliation, except with regard to (a) those business activities and affiliations in which the Executive was engaged prior to the effective date of this Agreement, but only to the extent fully disclosed to the Company; or (b) as specifically approved by the Board. 1.3 Other Activities. Anything in this Agreement to the contrary notwithstanding, as part of the Executive's business efforts and duties on behalf of the Company, he may participate fully in social, charitable and civic activities (including membership on the board of a non-profit charitable organization), he shall be permitted to make investment in other businesses and companies and, if specifically approved by the Board, he may serve on the boards of directors of other for profit companies, provided that such activities do not unreasonably interfere with the performance of and do not involve a conflict of interest with his duties or responsibilities hereunder. Notwithstanding the foregoing, the Executive shall not be required to receive the approval of the Board with regard to those board memberships which (a) the Executive held as of the effective date of this Agreement; and (b) have been fully disclosed to the Company. 2. Employment Term. Effective as of the date on which the Merger is consummated (the "Closing") and the Agreement and General Release between the Executive and the Company, attached hereto as Exhibit A, has become effective (the "Effective Date") and subject to the provisions of Section 4 hereof, the Company hereby agrees to employ Executive and Executive hereby agrees to become an employee of the Company, subject to the terms and conditions of this Agreement, for a period commencing on the Effective Date and ending on the second anniversary of the Effective Date (the "Initial Employment Term"). In addition, at the end of the first contract year of the Initial Employment Term and at the end of each contract year thereafter, unless the Company gives the Executive written notice that the Agreement shall not be further extended at least 60 days prior to the end of the then current contract year, the Agreement shall automatically extend for a period of one year (each an "Extension Term"). As used in this Agreement, "Employment Term" shall mean the Initial Employment Term and any Extension Term, as appropriate in the context used. 3. Compensation. During the Employment Term, the Company will pay and/or otherwise provide the Executive with compensation and related benefits as follows: 3.1 Change of Control Payment. Effective as of the Effective Date, and contingent on the occurrence of the Closing, the Company agrees to make a one time change of control payment to the Executive in the sum of $180,000 not later than one week following the Effective Date. 3.2 Base Salary. The Company agrees to pay the Executive, for services rendered hereunder, an initial base salary at the annual rate of $175,000 (the "Base Salary"). Base Salary will be reviewed by the Compensation Committee of the Board (the "Compensation Committee") in accordance with the schedule used with regard to comparable executives of the Company. The Base Salary shall be payable in equal periodic installments, not less frequently than monthly, less any sums which may be required to be deducted or withheld under applicable provisions of law. -2- 3.3 Incentive Compensation. Upon the execution of this Agreement by the Executive and the Company, the Company shall grant to the Executive an option to purchase 25,000 shares of common stock of the Company (the "Option") under an equity compensation plan sponsored by the Company (the "Incentive Compensation Plan") and subject to the terms of a stock option agreement which shall be substantially comparable to the stock option agreement used with respect to other comparable Company executives. Pursuant to the discretion of the Compensation Committee, during the Employment Term the Executive may be entitled to additional equity compensation grants under the Incentive Compensation Plan or any other equity compensation plan sponsored by the Company. 3.4 Retention Bonus. At the end of the Initial Employment Term, the Executive shall be entitled to receive a one-time retention bonus of $120,000.00, provided that (a) the Executive remains employed with the Company through the last day of the Initial Employment Term and (b) the Executive is not in default under this Agreement. 3.5 Short Term Incentive Plan. Executive shall be eligible to (a) participate in the Company's short term incentive plan; and (b) receive an amount equal to the annual incentive target established by the Compensation Committee. Payments under the Company's short term incentive plan shall be referred to herein as "Short Term Incentive Payments". 3.6 Benefits. During the Employment Term (and thereafter to the extent expressly provided herein), the Executive shall be entitled to participate in all of the Company's employee benefit plans applicable to the Company's comparable senior executives, according to the terms of those plans and shall receive credit for his employment with Conestoga for purposes of determining his vested benefit under the Company's employee benefits plan; provided, however, that (a) for purposes of the Company's qualified retirement plans or other comparable programs, the Executive shall be treated as a new hire except to the extent otherwise required by law or by the terms of the relevant plan; and (b) notwithstanding the above, the Executive's service with Conestoga and with the Company shall be fully credited in determining retirement eligibility under all such plans. In addition to the foregoing compensation, the Company agrees that during the Employment Term it shall continue to pay the Executive's monthly automobile lease through the end of the specified lease period, and thereafter, the Executive will receive the benefits provided under the Company car program provided by the Company to comparable senior executives. 3.7 Reimbursement of Expenses; Vacation. Executive shall be provided with reimbursement of reasonable expenses related to Executive's employment by the Company on a basis no less favorable than that which may be authorized from time to time for executives as a group, and shall be entitled to vacation and sick leave in accordance with the Company's vacation, holiday and other pay for time not worked policies. -3- 4. Termination of Employment. 4.1 By the Company For Cause. The Company may terminate Executive's employment under this Agreement at any time for Cause (as defined in Section 4.6) by delivery of written notice of termination to Executive (which notice shall specify in reasonable detail the basis upon which such termination is made) at least ten days prior to the termination date set forth in such notice. In the event Executive's employment is terminated for Cause, all provisions of this Agreement (other than Sections 6 through 15 hereof) shall terminate as of the date of termination. Notwithstanding the foregoing, the termination of this Agreement shall not result in the loss of any previously vested benefit or right of the Executive hereunder. In addition, upon termination of this Agreement, the Executive shall be entitled to the following payments (hereinafter referred to as the "Standard Termination Payments"): (a) any earned and unpaid Base Salary through the date of termination, (b) any unreimbursed business and entertainment expenses in accordance with the Company's policy, and (c) any unreimbursed medical, dental and other employee benefit expenses incurred in accordance with the Company's employee benefit plans. 4.2 Upon Death or Disability. (a) Death. If the Executive dies during the Initial Employment Term, all provisions of Section 3 of this Agreement (other than rights or benefits arising as a result of such death) and the Initial Employment Term shall be automatically terminated. Notwithstanding the foregoing, upon the termination of this Agreement as a result of the Executive's death during the Initial Employment Term, the Executive's beneficiary shall be entitled to (i) an amount equal to the Base Salary that the Executive would have been entitled to receive for the period commencing as of the date of his death through the initial Employment Term, (ii) the Standard Termination Payments and (iii) a Pro Rata Short Term Incentive Payment (as defined below) for the fiscal year during which such death occurs (the "Death Benefits"); provided, however, that the Death Benefits shall be reduced by any amount paid under the Company's employee benefit plans (or funded through Company payments) as a result of the Executive's death. The portion of the Death Benefits representing Base Salary through the Initial Employment Term shall be paid in a lump sum on a net present value basis, using a reasonable discount rate determined by the Board. Notwithstanding any provision in this Agreement to the contrary, in the event of Participant's death during the Initial Employment Term, (i) the Option granted pursuant to Section 3.3 shall fully vested and become exercisable; and (ii) the retention bonus described in Section 3.4 shall become fully earned despite non-attainment of the requirement set forth in Section 3.4(a); provided, however, that attainment of the condition set forth in Section 3.4(b) shall continue to be a condition to payment. (b) Disability. If the Executive is unable to perform his responsibilities under this Agreement by reason of physical or mental disability or incapacity ("Disability") and such disability or incapacity shall have continued for six consecutive months or any period aggregating six months within any 12 consecutive months, the Company may terminate this Agreement and the Employment Term at any time thereafter. In such event, the Executive shall be entitled to receive his normal compensation hereunder during said six month period. In addition, if the Company terminates this Agreement due to Disability during the Initial Employment Term the Executive shall be entitled to receive an amount equal to (i) the Base -4- Salary that he would have been entitled to receive for the period commencing as of the date of his termination of employment through the Employment Term, (ii) the Standard Termination Payments and (iii) a Pro Rata Short Term Incentive Payment for the fiscal year during which such disability occurs (the "Disability Benefits"); provided, however, that the Disability Benefits shall be reduced by any amount paid under the Company's employee benefit plans (or funded through Company payments) as a result of the Executive's Disability. (c) Pro Rata Incentive Payments. For purposes of this Section 4.2, in the event of the Executive's death or disability, a Pro Rata Short Term Incentive Payment shall mean an amount equal to the Executive's Short Term Incentive Payment for the fiscal year during which such death or Disability occurs, prorated by a fraction, the numerator of which is the number of days of employment elapsed during the fiscal year prior to termination of employment and the denominator of which is 365. 4.3 By the Company Without Cause. (a) The Company may terminate the Executive's employment under this Agreement without Cause, and other than by reason of his death or Disability, by sending written notice of termination to the Executive, which notice shall specify a date within ten (10) days after the date of such notice as the effective date of such termination (the "Termination Date"). From the date of such notice through the Termination Date, the Executive shall continue to perform the normal duties of his employment hereunder, and shall be entitled to receive when due all compensation and benefits applicable to the Executive hereunder. Thereafter, subject to Section 4.5 herein, the Company shall pay the Executive an amount equal to the Base Salary that the Executive would have been entitled to receive for the period commencing as of the Termination Date through the Employment Term in such periodic installments as were being paid immediately prior to the Termination Date. (b) The Company shall pay the Executive the Short Term Incentive Payment that the Executive would have been entitled to receive from the Termination Date through the Employment Term. (c) The Company shall also be obligated to pay to the Executive the Standard Termination Payments. (d) If the Executive is terminated by the Company without Cause during the Initial Employment Term, then for the period commencing as of the Termination Date through the Initial Employment Term, the Executive and the Executive's dependents shall be entitled to coverage under the "employee welfare benefit plans" (as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974) provided by the Company to comparable executives. In lieu of such continued coverage, the Company may reimburse the Executive on a net after-tax basis, for the cost of individual insurance coverage for the Executive and the Executive's dependents under a policy or policies that provide benefits not less favorable than the benefits provided under such employee welfare benefit plans. The coverage provided under this subsection (d) shall be secondary to any coverage provided to the Executive and the Executive's dependents by another employer of the Executive. -5- (e) In addition, on the Termination Date the Executive's Retention Bonus and the Option to the extent not then vested or paid shall immediately vest and become payable and/or exercisable in full, notwithstanding the provisions thereof. 4.4 By the Executive. (a) Without Good Reason. The Executive may terminate his employment without Good Reason (as defined in Section 4.6), and any further obligations that the Executive may have to perform services on behalf of the Company hereunder at any time after the date hereof, by sending written notice of termination to the Company not less than thirty (30) days prior to the effective date of such termination. During such thirty (30) day period, the Executive shall continue to perform the normal duties of his employment hereunder, and shall be entitled to receive when due all compensation and benefits applicable to the Executive hereunder. Except as provided below, if the Executive shall elect to terminate his employment hereunder (other than as a result of his death or disability), then the Executive shall remain vested in all vested benefits provided for hereunder or under any benefit plan of the Company in which the Executive is a participant and shall be entitled to receive the Standard Termination Payments, but the Company shall have no further obligation to make payments or provide benefits to the Executive under Section 3 hereof. (b) With Good Reason. The Executive may terminate his employment, and any further obligations that the Executive may have to perform services on behalf of the Company at any time after the date hereof for Good Reason, by sending written notice of his termination and the Good Reason to the Company not less than sixty (60) days prior to effective date of such termination. Notwithstanding the foregoing, the Executive shall not have Good Reason for termination if, within the sixty (60) day period after the date on which the Executive gives notice of his termination to the Company, the Company corrects the action or failure to act that constitutes the grounds for termination with Good Reason as set forth in Executive's notice of termination, or the Company contests the existence of Good Reason, in which case, (i) prior to the occurrence of a Change in Control, the matter shall be presented to the Board for resolution; or (b) on or after the occurrence of a Change in Control, the matter shall be referred to binding arbitration with each party's consent or, in the absence of such consent, shall be determined in the courts or in any other forum with jurisdiction over the matter. Upon the Executive's termination for Good Reason, the Executive shall be entitled to the benefits provided upon a termination of the Executive by the Company without Cause, as set forth in Section 4.3 above. 4.5 Upon a Change in Control. Anything in this Section 4 to the contrary notwithstanding, if the Executive's employment is terminated on or after a Change in Control (as defined in Section 4.6), either (a) by the Company without Cause or (B) by the Executive with Good Reason, then the payments set forth in Section 4.3 shall not apply to the Executive, and the Executive shall be entitled to the compensation, entitlements and other benefits set forth in Section 5 of this Agreement, provided that such compensation, entitlements, and other benefits shall not be less than the Executive otherwise would have received under Section 4.3 of this Agreement. 4.6 Definition of Cause. For purposes of this Agreement, the following definitions will apply: -6- (a) Cause. The term "Cause" shall mean any of the following grounds for termination of Executive's employment: (i) the Executive's gross misconduct; (ii) the Executive's willful and repeated failure to comply with the reasonable directives of the Board or any supervisory personnel; (iii) the Executive's criminal act or act of dishonesty, malfeasance, negligence or willful misconduct that has an adverse impact on the property, operations, business or reputation of the Company or any act of fraud, dishonesty or misappropriation involving the Company or conviction or plea of guilty or nolo contendere to a felony or a crime of dishonesty; (iv) the Executive's breach of the terms of any confidentiality, non-competition, non-solicitation or employment agreement the Executive has with the Company; or (v) the Executive's continued and repeated failure to perform substantially his employment duties (other than a failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to Executive by the Company that specifically identifies the manner in which the Company believes Executive has not substantially performed his duties. (b) Change in Control. A "Change in Control" shall be deemed to have occurred if: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the owner or "beneficial owner" (as defined in Rule l3d-3 under the Exchange Act), directly or indirectly, of Company securities representing more than 30% of the combined voting power of the then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Company's Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section 4.6(b) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of a majority of the directors then still in office who either (1) were directors at the beginning of such period or (2) were so elected or nominated with such approval, cease for any reason to constitute at least a majority of the Board; (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other Company and such merger or consolidation is consummated, other than (1) a merger or consolidation which would result in the existing voting securities and the existing securities that are convertible into voting securities of the Company -7- outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities, including securities convertible into voting securities; or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets and such liquidation or sale of assets is consummated; (c) Control Change Date. "Control Change Date" means the date on which a Change in Control occurs. If a Change in Control occurs on account of a series of events, the "Control Change Date" shall be the date on which the last of such events occurs. (d) Good Reason. "Good Reason" shall mean the occurrence of any of the following events, except in connection with the termination of the Executive's employment for Disability, Cause, as a result of death or by the Executive other than for Good Reason: (i) A significant change in the Executive's position and responsibilities (including reporting responsibilities) that is inconsistent with the Executive's experience, training and skills and represents a substantial diminution of the Executive's position and responsibilities as in effect immediately prior thereto; (ii) The relocation of the offices of the Company at which the Executive is principally employed to a location more than 50 miles from the location of such offices immediately prior to the relocation, or the Company's requiring the Executive to be based anywhere other than such offices, except for required travel on the Company's business; or (iii) The failure of the Company to provide the Executive with aggregate compensation (Base Salary and Short Term Incentive Payments) or aggregate benefits that are at least equal (in terms of benefit levels and reward opportunities) to those provided by the Company to Executive immediately before the change; provided, however, that a change in compensation or benefits for all executives of the Company, in which Executive is treated similarly as all other executives of a comparable responsibility level, shall not constitute Good Reason under this Agreement. 5. Change in Control 5.1 Entitlement. Subject to the Executive's compliance with Sections 6 and 9, the Executive shall be entitled to receive the benefits described in this Section 5 if there is a Change in Control during the Employment Term and either of the following applies: (a) the Executive's employment is terminated by the Company without Cause or the Executive resigns for Good Reason at any time during the Protection Period, even if such termination occurs after the Employment Term; -8- (b) the Executive resigns within the period beginning on the one year anniversary of the effective date of a Change in Control and ending 30 days thereafter (the "Walk Away Period"). For purposes of this Agreement, the date of a termination of the Executive's employment as described in subsections (a) or (b) above is the Executive's "Control Termination Date," and the "Protection Period" shall mean the period commencing six months prior to and ending twelve months following a Change in Control. 5.2 Payment Upon a Change of Control. (a) If the Executive has met the requirements of Section 5.1(a) or (b), the Executive will receive a severance benefit equal to the greater of (i) the amount Executive would receive under such circumstances under Section 4.3 of this Agreement, if this Agreement remains in effect immediately prior to the Control Termination Date, or (ii) an amount equal to two years of the Executive's Base Salary and target Short Term Incentive Payments (the "Severance Payment"). Notwithstanding the preceding sentences, in lieu of the Severance Payment described in the preceding sentences of this Section 5, the Executive shall receive severance benefits equal to the severance benefit available to employees of the Company (or its successor and any of its affiliates) who are similarly situated to the Executive on the Control Termination Date if the value of such benefit is greater than the value of the benefit described in this Section 5. (b) The Executive's Severance Payment, less applicable withholding taxes, shall be paid in equal monthly installments in accordance with the Company's regular payroll policies and over a two year period, beginning on the first payroll date following the Executive's termination (the "Severance Period"). Notwithstanding the foregoing, at the election of the Executive, the Company shall be required to place an amount in the Executive's name in escrow with a reputable escrow agent equal to the present value of the Severance Payment determined on a net present value basis using a reasonable discount rate, as determined by the Board, which escrowed amount shall be used to pay the Severance Payments. In the event that the Executive breaches his obligations under the Employment Agreement, the Company will be entitled to recoup the amount put into escrow. 5.3 Welfare Benefits. If the Executive's employment with the Company is terminated in accordance with Section 5.1 during the Initial Employment Term, then during the Severance Period the Executive and the Executive's dependents shall be entitled coverage under the "employee welfare benefit plans" (as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974) provided by the Company to comparable executives. In lieu of such continued coverage, the Company may reimburse the Executive on a net after-tax basis, for the cost of individual insurance coverage for the Executive and the Executive's dependents under a policy or policies that provide benefits not less favorable than the benefits provided under such employee welfare benefit plans. The coverage provided under this Section 5.3 shall be secondary to any coverage provided to Executive and Executive's dependents by another employer of the Executive. -9- 5.4 Standard Termination Payments. The Company shall be obligated to pay to the Executive the Standard Termination Payments (as defined in Section 4.1). 5.5 Incentive Payments. During the Severance Period, the Company shall be obligated to pay to the Executive his Retention Bonus, if applicable. 5.6 Other Severance Benefits. In addition to the severance benefits set forth in this Section 5, on the Control Termination Date the Executive's Option to the extent not then vested shall immediately vest and become exercisable in full, notwithstanding the provisions thereof. 6. Confidential Information. 6.1 Confidentiality. The Executive understands and acknowledges that during his employment with the Company, the Executive has been and will be making use of, acquiring or adding to the Company's Confidential Information (as defined below). In order to protect the Confidential Information, the Executive will not, during his employment with the Company or thereafter, in any way utilize any of the Confidential Information except in connection with his employment by the Company. The Executive will not at any time use any Confidential Information for his own benefit or the benefit of any person except the Company. Except as expressly authorized in writing by the Company, the Executive will not at any time copy, reproduce or remove from the Company's premises the original or any copies of Confidential Information and he will not at any time disclose any Confidential Information to anyone. At the end of the Executive's employment with the Company he will surrender and return to the Company any and all Confidential Information in his possession or control, as well as any other Company property that is in his possession or control. The Executive acknowledges and agrees that any breach of this Section 6 would be a material breach of this Agreement. The term "Confidential Information" shall mean any information that is confidential and proprietary to the Company, including but not limited to the following general categories: (a) trade secrets; (b) lists and other information about current and prospective customers; (c) plans or strategies for sales, marketing, business development, or system build-out; (d) sales and account records; (e) prices or pricing strategy or information; (f) current and proposed advertising and promotional programs; (g) engineering and technical data; (h) the Company's methods, systems, techniques, procedures, designs, formulae, inventions and know-how; personnel information; (i) legal advice and strategies; and -10- (j) other information of a similar nature not known or made available to the public or the Company's Competitors (as defined in Section 7). Confidential Information includes any such information that the Executive may prepare or create during his employment with the Company, as well as such information that has been or may be created or prepared by others. 6.2 Reaffirm Obligations. Upon termination of the Executive's employment with the Company, the Executive shall, if requested by the Company, reaffirm in writing Employee's recognition of the importance of maintaining the confidentiality of the Company's proprietary information and trade secrets and reaffirm all of the obligations set forth in Section 6 of this Agreement. 7. Non-Compete; Non-Solicitation. 7.1 Non-Compete. The Executive agrees that: (a) while the Executive is employed by the Company he will not, directly or indirectly, compete with the business conducted by the Company, and he will not, directly or indirectly, provide any services to a Competitor. (b) For a period of 24 months after the Executive's employment with the Company ends (the "Non-Competition Period"), the Executive will not compete with the Company by performing or causing to be performed the same or similar types of duties or services that the Executive performed for the Company for a Competitor of the Company in any capacity whatsoever, directly or indirectly, within any city or county of the continental United States in which, at the time the Executive's employment with the Company ends, the Company provides services or products, offers to provide services or products, or has documented plans to provide or offer to provide services or products within the Non-Competition Period provided that the Executive has knowledge of those plans at the time his employment with the Company ends. Additionally, the Executive agrees that during the Non-Competition Period, he will not, directly or indirectly, sell, attempt to sell, provide or attempt to provide, any products or services in competition with those products or services provided by the Company to any person or entity who was a customer or an actively sought prospective customer of the Company, at any time during his employment with the Company. The restrictions set forth above shall immediately terminate and shall be of no further force or effect (i) in the event of a default by the Company in the payment of any compensation or benefits to which the Executive is entitled hereunder, which default is not cured within thirty (30) days after written notice thereof, or (ii) at the election of the Executive, if the Executive's employment has been terminated by the Company without Cause or by the Executive for Good Reason. Under these circumstances, the amount of salary and other compensation payable to the Executive by a Competitor and attributable to employment during the Non-Competition Period shall not reduce or otherwise mitigate amounts due hereunder. (c) The Executive acknowledges and agrees that the Company has a legitimate business interest in preventing him from engaging in activities competitive with it as -11- described in this Section 7 and that any breach of this Section 7 would constitute a material breach of this Section 7 and this Agreement. (d) If, during the Non-Competition Period, the Executive is offered and wants to accept employment with a business that engages in activities similar to those of the Company, the Executive will inform the Company in writing of the identity of the business, his proposed duties with that business, and the proposed starting date of that employment. The Executive also agrees that he will inform that business of the terms of this Section 7. The Company will analyze the proposed employment and make a determination as to whether it would violate this Section 7. If the Company determines that the proposed employment would not pose an unacceptable threat to the Company's interests, the Company will notify the Executive in writing that it does not object to the employment. (e) The Executive acknowledges and agrees that this Section 7 is intended to limit his right to compete only to the extent necessary to protect the Company's legitimate business interest. The Executive acknowledges and agrees that the agreement is not overly broad at the time of execution in that he has a reasonable current expectation that he will be able to earn a livelihood without violating the terms of this Section 7. If any of the provisions of this Section 7 should ever be deemed to exceed the time, geographic area, or activity limitations permitted by applicable law, the Executive agrees that such provisions may be reformed to the maximum time, geographic area and activity limitations permitted by applicable law, and the Executive authorizes a court or other trier of fact having jurisdiction to so reform such provisions. 7.2 Non-Solicitation. While the Executive is employed by the Company and during the Non-Competition Period, the Executive will not, directly or indirectly, solicit or encourage any employee of the Company to terminate employment with the Company; hire, or cause to be hired, for any employment by a Competitor, any person who within the preceding 12 month period has been employed by the Company, or assist any other person, firm, or corporation to do any of those acts described in this Section 7.2. 7.3 Definitions. For purposes of this Section 7, the following definitions will apply: (a) "Directly or indirectly" as used in this Agreement includes an interest in or participation in a business as an individual, partner, shareholder, owner, director, officer, principal, agent, employee, consultant, trustee, lender of money, or in any other capacity or relation whatsoever. The term includes actions taken on behalf of the Executive or on behalf of any other person. "Directly or indirectly" does not include the ownership of less than 5% of the outstanding shares of any corporation, if such shares are publicly traded in the over-the-counter market or listed on a national securities exchange. (b) "Competitor" as used in this Agreement means any person, firm, association, partnership, corporation or other entity that competes or attempts to compete with the Company by providing or offering to provide the same or similar services or products as the Company within any geographic area in which the Company provides or offers those services or products. "Competitor" does not include a parent, subsidiary or affiliated organization of any entity that competes or attempts to compete with the Company as defined in the preceding -12- sentence where that parent, subsidiary or affiliated organization does not itself compete or attempt to compete with the Company by providing or offering to provide the same or similar services or products as the Company within any geographic areas in which the Company provides or offers those services or products. 8. Representations. Executive represents and warrants to the Company that the execution, delivery and performance of this Agreement by Executive does not conflict with, or result in the breach by Executive or violation by Executive of, any other agreement to which Executive is a party or by which Executive is bound (other than existing agreements with Conestoga). Executive hereby agrees to indemnify the Company, its officers, directors and shareholders and hold them harmless from and against any liability which they may at any time suffer or incur arising out of or relating to any breach of an agreement, representation or warranty made by Executive herein. The Company represents and warrants that this Agreement and the transactions contemplated hereby have been duly authorized by the Company by all necessary corporate and shareholder action, and that the execution, delivery and performance of this Agreement by the Company does not conflict with, or result in the breach or violation by the Company or, its Articles of Incorporation or Amended and Restated Bylaws or any other agreement to which the Company is a party or by which it is bound. The Company hereby agrees to indemnify Executive and hold Executive harmless from and against any liability which Executive may at any time suffer or incur arising out of or relating to any breach of an agreement, representation or warranty made by the Company herein. 9. Remedies. The parties hereto agree that the Company would suffer irreparable harm from a breach by the Executive of any of the covenants or agreements contained herein. Therefore, in the event of the actual or threatened breach by the Executive of any of the provisions of this Agreement, the Company may, in addition and supplementary to other rights and remedies existing in its favor, apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violation of the provisions hereof. The Executive agrees that these restrictions are reasonable. 10. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company and its affiliates and their successors and assigns, and shall be binding upon- and inure to the benefit of the Executive and his legal representatives and assigns, provided that in no event shall the Executive's obligations to perform services for the Company and its affiliates be delegated or transferred by the Executive. The Company may assign or transfer its rights hereunder to a successor corporation in the event of a merger, consolidation or transfer or sale of all or substantially all of the assets of the Company or of the Company's business (provided, however, that no such assignment or transfer shall have the effect of relieving the Company of any liability to the Executive hereunder or under any other agreement or document contemplated herein), but only if such assignment or transfer does not result in employment terms, conditions, duties or responsibilities which are or may be materially different than the terms, conditions, duties or responsibilities of the Executive hereunder. 11. Modification or Waiver. No amendment, modification, waiver, termination or cancellation of this Agreement shall be binding or effective for any purpose unless it is made in a writing signed by the party against whom enforcement of such amendment, modification, waiver, termination or cancellation is sought. No course of dealing between or among the parties -13- to this Agreement shall be deemed to affect or to modify, amend or discharge any provision or term of this Agreement. No delay on the part of the Company or the Executive in the exercise of any of their respective rights or remedies shall operate as a waiver thereof, and no single or partial exercise by the Company or the Executive of any such right or remedy shall preclude other or further exercises thereof. A waiver of a right or remedy on any one occasion shall not be construed as a bar to or waiver of any such right or remedy on any other occasion. 12. Severability. Whenever possible each provision and term of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision or term of this Agreement shall be held to be prohibited by or invalid under such applicable law, then such provision or term shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting in any manner whatsoever the remainder of such provisions or term or the remaining provisions or terms of this Agreement. 13. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same Agreement. 14. Headings. The headings of the Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part hereof and shall not affect the construction or interpretation of this Agreement. 15. Entire Agreement. This Agreement (together with all documents and instruments referred to herein) constitutes the entire agreement, and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof. 16. Release. In consideration for the execution of this Agreement, the Executive hereby agrees to enter into the Agreement and General Release attached hereto as Exhibit A, pursuant to which the Executive agrees to release the Company from any claims he has under the Conestoga Agreement or due to his employment with the Conestoga in exchange for the rights granted hereunder. 17. Withholding. All payments under this Agreement shall be made subject to applicable tax withholding, and the Company shall withhold from any payments under this Agreement all federal, state and local taxes as the Company is required to withhold pursuant to any law or governmental rule or regulation. Except as specifically provided otherwise in this Agreement, the Executive shall bear all expense of, and be solely responsible for, all federal, state and local taxes due with respect to any payment received under this Agreement. 18. Governing Law. This Agreement shall be governed by and interpreted under the laws of Pennsylvania without giving effect to any conflict of laws provisions. -14- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. D&E COMMUNICATIONS, INC. By: /s/ Garth Sprecher -------------------------------- Name: Title: Executive /s/ Albert H. Kramer ----------------------------------- Albert H. Kramer -15- EX-99.1 5 w65743exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER D&E Communications, Inc. and Subsidiaries EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q for the period ended September 30, 2002 of D&E Communications, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, G. William Ruhl, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. [ss] 1350, as adopted pursuant to [ss] 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. [ss] 78m(a) or [ss] 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ G. William Ruhl - ----------------------------- Name: G. William Ruhl Title: Chief Executive Officer Date: November 14, 2002 EX-99.2 6 w65743exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER D&E Communications, Inc. and Subsidiaries EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q for the period ended September 30, 2002 of D&E Communications, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas E. Morell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. [ss] 1350, as adopted pursuant to [ss] 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. [ss] 78m(a) or [ss] 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas E. Morell - ----------------------------- Name: Thomas E. Morell Title: Chief Financial Officer Date: November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----