D&E Communications Reports Second Quarter Results

[August 06, 2004]

D&E Communications Reports Second Quarter Results

EPHRATA, Pa. --(Business Wire)-- Aug. 6, 2004 -- D&E Communications, Inc. ("D&E") (Nasdaq:DECC), a leading provider of integrated communications services in central and eastern Pennsylvania, today announced the following unaudited operating results: -0- *T (Unaudited) (in thousands, except per share amounts) Quarter Ended June30, Six Months Ended June30, 2004 2003 Change 2004 2003 Change -------- -------- -------- -------- -------- -------- Operating Revenues $44,135 $43,287 $ 848 $87,900 $85,372 $ 2,528 Operating Income 5,191 6,467 (1,276) 10,205 11,670 (1,465) Income (Loss) from Continuing Operations 1,312 810 502 (2,802) 1,265 (4,067) Net Income (Loss) 1,312 764 548 (2,802) 1,472 (4,274) Basic and Diluted Earnings (Loss) Per Common Share $ 0.08 $ 0.05 $ 0.03 ($0.18) $ 0.10 ($0.28) *T

D&E reported quarterly revenues of $44.1 million, up 2.0% from $43.3 million in the second quarter of 2003. The increase is due to growth in sales of dedicated data circuits and leased facilities in our RLEC and CLEC segments of approximately $0.6 million and increased directory revenue of $0.4 million. Operating income in the quarter ended June 30, 2004, was $5.2 million, compared to $6.5 million in the second quarter of 2003. The operating income decrease was primarily attributable to cost increases, including wage and benefit costs of $0.9 million and directory expenses of $0.3 million, which more than offset the increased revenues described above. Employee costs were lower in the RLEC, but increased in all other segments. The video service trial we have conducted, which is not part of a segment, but is reported as part of the corporate and other amounts, also contributed to the decrease in operating profit. The income from continuing operations was $1.3 million in 2004, compared with an income of $0.8 million in the prior year. Income from continuing operations was favorably impacted by a decrease in interest expense of $1.3 million due to lower interest rates as a result of our debt refinancing in March 2004 and the voluntary principal payment on long-term debt of $10 million in the second quarter of 2004. The equity losses from our European affiliates decreased by $0.4 million. The net income was $1.3 million, or $0.08 per share, for the second quarter of 2004 compared to a net income of $0.8 million, or $0.05 per share, in the comparable period of 2003.

For the six months ended June 30, 2004, revenues were $87.9 million, up 3% from $85.4 million in 2003. The sale of Conestoga Wireless in January of 2003 resulted in a decrease of $0.5 million from the prior year. Operating income in the six months ended June 30, 2004, was $10.2 million, compared to $11.7 million in the prior year. The loss from continuing operations was $2.8 million in 2004, compared with an income of $1.3 million in the prior year. The loss from continuing operations for the six months ended June 30, 2004 included an $8.0 million ($4.8 million, or $0.31 per common share, after-tax) one-time loss on early extinguishment of debt.

Results of Operations

The following table is a summary of our operating results by segment for the three months ended June 30, 2004 and 2003: -0- *T Internet Dollars in Thousands RLEC CLEC Services ------------ ------------- ------------ June 30, 2004 ------------------------------ Revenues - External $ 25,476 $ 9,014 $ 2,572 Revenues - Intercompany 2,358 313 6 ----------- ------------ ------------ Total Revenues 27,834 9,327 2,578 ----------- ------------ ----------- Depreciation and Amortization 7,874 1,067 255 Other Operating Expenses 12,687 9,001 2,328 ----------- ------------ ----------- Total Operating Expenses 20,561 10,068 2,583 ----------- ------------ ----------- Operating Income (Loss) $ 7,273 $ (741) $ (5) =========== ============ =========== June 30, 2003 ------------------------------ Revenues - External $ 26,229 $ 8,697 $ 1,518 Revenues - Intercompany 1,973 175 169 ----------- ------------ ----------- Total Revenues 28,202 8,872 1,687 ----------- ------------ ----------- Depreciation and Amortization 7,868 994 207 Other Operating Expenses 11,597 8,784 1,493 ----------- ------------ ----------- Total Operating Expenses 19,465 9,778 1,700 ----------- ------------ ----------- Operating Income (Loss) $ 8,737 $ (906) $ (13) =========== ============ =========== Corporate, Systems Other and Total Dollars in Thousands Integration Eliminations Company ------------ ------------- ------------ June 30, 2004 ------------------------------ Revenues - External $ 6,230 $ 843 $ 44,135 Revenues - Intercompany 13 (2,690) -- ----------- ------------ ----------- Total Revenues 6,243 (1,847) 44,135 ----------- ------------ ----------- Depreciation and Amortization 487 235 9,918 Other Operating Expenses 6,945 (1,935) 29,026 ----------- ------------ ----------- Total Operating Expenses 7,432 (1,700) 38,944 ----------- ------------ ----------- Operating Income (Loss) $ (1,189) $ (147) $ 5,191 =========== ============ =========== June 30, 2003 ------------------------------ Revenues - External $ 6,227 $ 616 $ 43,287 Revenues - Intercompany 5 (2,322) -- ------------ ------------ ----------- Total Revenues 6,232 (1,706) 43,287 ----------- ------------ ----------- Depreciation and Amortization 416 91 9,576 Other Operating Expenses 6,966 (1,596) 27,244 ----------- ------------ ----------- Total Operating Expenses 7,382 (1,505) 36,820 ----------- ------------ ----------- Operating Income (Loss) $ (1,150) $ (201) $ 6,467 =========== ============ =========== *T

Second Quarter Segment Results

Total RLEC revenues decreased 1.3%, to $27.8 million in the second quarter of 2004, from $28.2 million in the same period last year. Local telephone service revenues increased and network access revenues decreased by a comparable amount as part of the rate rebalancing in July 2003. Additionally, the effect of certain decreased minutes of use was offset by a favorable change in the National Exchange Carrier Association (NECA) average schedule settlement formula for interstate access that took effect in July 2003. Both local and network access revenues were increased from growth in dedicated data circuits and leased facilities. Other revenue changes include an increase in directory advertising offset by decreases in regional long distance toll service and equipment sales.

RLEC operating income decreased 16.8%, to $7.3 million (26.1% of revenue), in the second quarter of 2004 compared to $8.7 million (31.0% of revenue) in the same period last year.

Total CLEC revenues grew 5.1% for the second quarter of 2004, to $9.3 million from $8.9 million in the same period last year, driven by new customer additions. The increase was related to the addition of access lines for new customers and growth in dedicated data circuits, which increased local telephone service and network access revenues. Long distance revenues decreased approximately $0.2 million due to rate reductions and decreased minutes of use.

The CLEC operating loss decreased 18.2%, to a $0.7 million loss (negative 7.9% of revenue), in the second quarter of 2004 compared to a $0.9 million loss (negative 10.2% of revenue) in the same period last year.

The Internet Services segment revenues grew 52.8% for the second quarter of 2004, to $2.6 million in revenues, from $1.7 million in the same period of last year. The increase resulted from an increase in the number of DSL customers and web hosting subscribers. Effective October 2003, the Internet segment began selling DSL data transmission services in addition to DSL Internet connection services, which increased revenue by $0.7 million. Operating loss for this segment decreased to $5 thousand (negative 0.2% of revenue), in the second quarter of 2004 compared to a $13 thousand loss (negative 0.8% revenue) in the same period last year.

Systems Integration revenues increased 0.2% for the second quarter of 2004 to $6.24 million from $6.23 million in the second quarter 2003. The increase included $0.53 million in communication services revenue offset by a $0.52 million decrease in telecommunications and computer equipment sales.

The Systems Integration operating loss increased 3.4%, to a $1.19 million loss (negative 19.0% of revenue), in the second quarter of 2004 compared to a $1.15 million loss (negative 18.5% of revenue) in the same period last year. -0- *T Selected Operating Statistics June 30, 2004 June 30, 2003 Change -------------- -------------- -------- RLEC Lines 141,270 144,374 -2.1% CLEC Lines 35,338 34,212 +3.3% DSL Subscribers 8,706 6,385 +36.4% Dial-up Subscribers 12,514 13,022 -3.9% Web Hosting Customers 872 759 +14.9% *T

Other Matters

During the second quarter of 2004, we continued the trial of video services in Union County, Pennsylvania that was launched at the end of last year using the same DSL technology that we use for providing broadband access to customers throughout our territory. The combination of services in which we provide voice, video and high speed internet access is known as a "triple play" bundle and is consistent with our objectives to be able to provide complete communications services to our customers. We are currently evaluating the triple play test phase and our ability to offer these services to effectively compete with cable television and wireless companies in the future. We are also working with Bucknell University on a unique video service where we use their data network to transmit video services to their students.

D&E has entered into an agreement with Citizens Communications Company under which D&E will purchase 1,333,500 shares of its common stock from Citizens at a price of $10.00 per share, or approximately 8.56% of the outstanding shares of common stock of D&E.

The negotiated repurchase will terminate a 1997 Stock Acquisition Agreement pursuant to which an affiliate of Citizens originally acquired 1,300,000 shares of D&E stock. Under that agreement, Citizens is required, among other things, to provide D&E with an opportunity to purchase the shares subject to the agreement prior to selling those shares generally. We intend to draw $10 million on our existing revolving credit facility along with cash on hand to fund the repurchase.

This press release contains forward-looking statements. These forward-looking statements are found in various places throughout this press release and include, without limitation, statements regarding financial and other information. These statements are based upon the current beliefs and expectations of D&E's management concerning the development of our business, are not guarantees of future performance and involve a number of risks, uncertainties, and other important factors that could cause actual developments and results to differ materially from our expectations. Those factors include, but are not limited to, the risk that the Conestoga and D&E billing systems will not successfully be converted into a single billing system; the effect of the convergence of voice, data, and video technologies on our historical competitive advantages; the outcome of our trial of video services; the increasingly competitive nature of the communications industry; the significant indebtedness of the company; and other key factors that we have indicated could adversely affect our business and financial performance contained in our past and future filings and reports, including those filed with the United States Securities and Exchange Commission. D&E undertakes no obligation to revise or update its forward-looking statements whether as a result of new information, future events, or otherwise.

D&E Communications, Inc. is a leading provider of integrated communications services to residential and business customers in markets throughout central and eastern Pennsylvania. D&E offers its customers a comprehensive package of communications services including local and long distance telephone service, high speed data services and Internet access service. D&E also provides business customers with systems integration services including voice and data network solutions. -0- *T D&E Communications, Inc. Consolidated Statements of Operations (in thousands, except per-share amounts) (Unaudited) Three Months Ended Six Months Ended ------------------- -------------------- June 30, June 30, ------------------- -------------------- OPERATING REVENUES 2004 2003 2004 2003 --------- --------- ---------- --------- Communication service revenues $ 40,325 $ 38,975 $ 80,384 $ 77,833 Communication products sold 2,970 3,698 5,985 6,343 Other 840 614 1,531 1,196 --------- --------- ---------- --------- Total operating revenues 44,135 43,287 87,900 85,372 --------- --------- ---------- --------- OPERATING EXPENSES Communication service expenses (exclusive of depreciation and amortization below) 16,268 14,472 31,851 29,429 Cost of communication products sold 2,405 2,755 4,825 5,016 Depreciation and amortization 9,918 9,576 19,619 19,127 Marketing and customer services 4,166 3,891 8,147 7,930 General and administrative services 6,187 6,126 13,253 12,200 --------- --------- ---------- --------- Total operating expenses 38,944 36,820 77,695 73,702 --------- --------- ---------- --------- Operating income 5,191 6,467 10,205 11,670 --------- --------- ---------- --------- OTHER INCOME (EXPENSE) Equity in net losses of affiliates (318) (682) (850) (1,360) Interest expense (3,264) (4,602) (7,315) (9,197) Loss on early extinguishment of debt -- -- (8,013) -- Other, net 320 72 993 928 --------- --------- ---------- --------- Total other income (expense) (3,262) (5,212) (15,185) (9,629) --------- --------- ---------- --------- Income (loss) from continuing operations before income taxes and dividends on utility preferred stock 1,929 1,255 (4,980) 2,041 INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK Income taxes (benefit) 600 428 (2,211) 743 Dividends on utility preferred stock 17 17 33 33 --------- --------- ---------- --------- Total income taxes and dividends on utility preferred stock 617 445 (2,178) 776 --------- --------- ---------- --------- Income (loss) from continuing operations 1,312 810 (2,802) 1,265 Discontinued operations: Loss from operations of discontinued Paging business, net of income tax benefit of $24 and $27 -- (46) -- (53) --------- --------- ---------- --------- Income (loss) before cumulative effect of change inaccounting principle 1,312 764 (2,802) 1,212 Cumulative effect of change in accounting principle, net of income taxes of $177 -- -- -- 260 --------- --------- ---------- --------- NET INCOME (LOSS) $ 1,312 $ 764 $ (2,802) $ 1,472 ========= ========= ========== ========= Weighted average common shares outstanding (basic) 15,564 15,453 15,557 15,437 Weighted average common shares outstanding (diluted) 15,631 15,498 15,557 15,480 BASIC AND DILUTED EARNINGS (LOSS)PER COMMON SHARE Income (loss) from continuing operations $ 0.08 $ 0.05 $ (0.18) $ 0.08 Income (loss) from discontinued operations 0.00 0.00 0.00 0.00 Cumulative effect of accounting change 0.00 0.00 0.00 0.02 --------- --------- ---------- --------- Net income (loss) per common share $ 0.08 $ 0.05 $ (0.18) $ 0.10 ========= ========= ========== ========= Dividends per common share $ 0.13 $ 0.13 $ 0.25 $ 0.25 ========= ========= ========== ========= D&E Communications, Inc and Subsidiaries Consolidated Balance Sheets (in thousands) (unaudited) December June 30, 31, ASSETS 2004 2003 --------- --------- CURRENT ASSETS Cash and cash equivalents $ 8,780 $ 12,446 Accounts receivable, net of reserves of $1,206 and $1,410 16,908 20,956 Inventories, lower of cost or market, at average cost 3,492 3,552 Prepaid expenses 10,617 8,914 Other 1,216 1,141 --------- --------- TOTAL CURRENT ASSETS 41,013 47,009 -------- -------- INVESTMENTS Investments in and advances to affiliated companies 3,011 3,611 --------- --------- PROPERTY, PLANT AND EQUIPMENT In service 326,214 320,720 Under construction 8,810 5,964 --------- --------- 335,024 326,684 Less accumulated depreciation 152,450 137,533 --------- --------- 182,574 189,151 --------- --------- OTHER ASSETS Goodwill 149,094 149,127 Intangible assets, net of accumulated amortization 170,495 173,594 Other 5,557 11,756 --------- --------- 325,146 334,477 --------- --------- TOTAL ASSETS $551,744 $574,248 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Long-term debt maturing within one year $ 8,288 $ 11,001 Accounts payable and accrued liabilities 17,706 18,507 Accrued taxes 802 2,120 Accrued interest and dividends 1,482 1,949 Advance billings, customer deposits and other 9,966 10,323 --------- --------- TOTAL CURRENT LIABILITIES 38,244 43,900 --------- --------- LONG-TERM DEBT 213,500 222,765 --------- --------- OTHER LIABILITIES Deferred income taxes 86,696 88,295 Other 16,782 17,248 --------- --------- 103,478 105,543 --------- --------- 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 shares, outstanding 14 shares 1,446 1,446 --------- --------- COMMITMENTS SHAREHOLDERS' EQUITY Common stock, par value $0.16, authorized shares 100,000 at June 30, 2004 and 30,000 at December 31, 2003 2,537 2,533 Outstanding shares: 15,573 at June 30, 2004 and 15,547 at December 31, 2003 Additional paid-in capital 159,859 159,515 Accumulated other comprehensive income (loss) (4,045) (4,865) Retained earnings 42,007 48,693 Treasury stock at cost, 307 shares at June 30, 2004 and December 31, 2003 (5,282) (5,282) --------- --------- 195,076 200,594 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $551,744 $574,248 ========= ========= D&E Communications, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (unaudited) Six Months Ended June 30, 2004 2003 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS $ 23,870 $ 20,021 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures, net of proceeds from sales (9,802) (7,951) Proceeds from Conestoga Wireless and Paging sales -- 10,176 Increase in investments and advances to affiliates (384) (825) Decrease in investments and repayments from affiliates 134 120 ----------- ----------- Net Cash Provided By (Used In) Investing Activities from Continuing Operations (10,052) 1,520 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends on common stock (3,727) (3,689) Payments on long-term debt (211,978) (11,264) Proceeds from long-term debt financing 200,000 12,000 Payment of debt issuance costs (1,971) -- Proceeds from issuance of common stock 192 588 ----------- ----------- Net Cash Used In Financing Activities from Continuing Operations (17,484) (2,365) ----------- ----------- CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS (3,666) 19,176 CASH USED IN DISCONTINUED OPERATIONS Cash Used in Operating Activities of Discontinued Operations -- (20,553) ----------- ----------- Net Cash Used In Discontinued Operations -- (20,553) ----------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS (3,666) (1,377) CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 12,446 15,514 ----------- ----------- END OF PERIOD $ 8,780 $ 14,137 =========== =========== *T

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