<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 333-23769
---------------------
DOBSON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OKLAHOMA 73-1110531
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13439 NORTH BROADWAY EXTENSION
SUITE 200
OKLAHOMA CITY, OKLAHOMA 73114
(Address of principal executive (Zip Code)
offices)
</TABLE>
(405) 391-8500
(Registrant's telephone number, including area code)
------------------------
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 ____
At October 31, 1997, there were 473,152 shares of the registrant's $1.00 par
value Class A Common Stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DOBSON COMMUNICATIONS CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at September 30, 1997 and December
31, 1996................................................................. 3
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 1997 and 1996............................ 4
Condensed Consolidated Statement of Stockholders' Equity for the Nine
Months Ended September 30, 1997.......................................... 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996.............................................. 6
Notes to Condensed Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk.................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 22
Item 2. Changes in Securities...................................................... 22
Item 3. Defaults Upon Senior Securities............................................ 22
Item 4. Submission of Matters to a Vote of Security Holders........................ 22
Item 5. Other Information.......................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................... 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 1,665,753 $ 1,609,221
Accounts receivable, net....................................... 10,835,295 6,584,103
Restricted cash and investments................................ 21,220,822 --
Receivables--affiliates........................................ 4,543,933 1,704,033
Other current assets........................................... 3,565,553 10,059,098
------------- ------------
Total current assets......................................... 41,831,356 19,956,455
------------- ------------
PROPERTY, PLANT AND EQUIPMENT, net............................... 75,786,300 61,929,904
------------- ------------
OTHER ASSETS:
Receivables--affiliates........................................ 1,702,190 3,494,806
Restricted investments......................................... 46,591,571 --
Cellular license acquisition costs, net........................ 158,489,036 23,465,128
Other intangibles, net......................................... 26,099,042 6,723,598
Investments in unconsolidated subsidiaries and other........... 22,502,310 1,378,134
------------- ------------
Total other assets........................................... 255,384,149 35,061,666
------------- ------------
Total assets............................................... $373,001,805 $116,948,025
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 8,073,821 $ 4,718,124
Accrued liabilities.............................................. 16,613,364 3,014,737
Current portion of long-term debt................................ 1,223,558 1,190,924
------------- ------------
Total current liabilities.................................... 25,910,743 8,923,785
LONG-TERM DEBT, net of current portion........................... 362,779,664 104,303,802
DEFERRED CREDITS................................................. 1,146,504 1,077,864
MINORITY INTERESTS............................................... 3,515,518 2,444,176
CLASS B CONVERTIBLE PREFERRED STOCK.............................. 10,000,000 10,000,000
CLASS C PREFERRED STOCK.......................................... 1,623,329 --
STOCKHOLDERS' EQUITY:
Class A Preferred Stock.......................................... 100,000 --
Class A Common Stock, $1 par value 1,000,000 shares authorized
and 473,152 shares issued and outstanding...................... 473,152 473,152
Paid-in capital.................................................. 5,508,285 5,508,285
Retained deficit................................................. (26,042,390) (3,870,039)
------------- ------------
(19,960,953) 2,111,398
Less--
Class A Preferred Stock owned by Dobson Telephone................ (100,000) --
Class A Common Stock held in treasury, at cost................... (11,913,000) (11,913,000)
------------- ------------
Total stockholders' equity................................... (31,973,953) (9,801,602)
------------- ------------
Total liabilities and stockholders' equity................... $373,001,805 $116,948,025
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Cellular service............................................... $ 10,215,196 $ 4,449,904 $ 26,487,441 $ 12,897,510
Cellular roaming............................................... 7,927,129 2,465,370 17,781,657 5,624,841
Cellular equipment sales....................................... 383,105 130,444 740,538 526,612
Wireline telephone service..................................... 3,861,383 3,520,135 11,275,597 10,084,628
Fiber service revenues......................................... 823,807 627,950 2,528,169 1,643,279
Other.......................................................... 195,627 222,166 703,331 876,312
-------------- -------------- -------------- --------------
Total operating revenues..................................... 23,406,247 11,415,969 59,516,733 31,653,182
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Cellular service............................................... 4,269,089 1,251,284 9,652,862 3,120,841
Cellular equipment............................................. 1,044,318 676,027 2,834,416 1,714,060
Wireline telephone service..................................... 467,208 540,427 1,447,533 1,378,197
Fiber service.................................................. 70,724 45,986 215,941 145,470
Marketing and selling.......................................... 3,366,503 1,317,618 7,479,728 3,285,176
General and administrative..................................... 4,800,601 3,025,845 13,860,252 8,269,742
Depreciation and amortization.................................. 5,880,672 3,117,140 15,473,672 7,286,545
-------------- -------------- -------------- --------------
Total operating expenses..................................... 19,899,115 9,974,327 50,964,404 25,200,031
-------------- -------------- -------------- --------------
OPERATING INCOME................................................. 3,507,132 1,441,642 8,552,329 6,453,151
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest income................................................ 858,227 230 1,931,548 507
Interest expense............................................... (7,847,308) (1,921,133) (19,495,493) (4,705,320)
Other.......................................................... 87,135 (220,463) 123,128 (1,922,216)
-------------- -------------- -------------- --------------
Total other expense, net..................................... (6,901,946) (2,141,366) (17,440,817) (6,627,029)
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE MINORITY INTERESTS IN INCOME OF
SUBSIDIARIES, INCOME TAXES AND EXTRAORDINARY ITEMS............. (3,394,814) (699,724) (8,888,488) (173,878)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES..................... (512,995) (213,679) (1,314,312) (438,221)
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS........ (3,907,809) (913,403) (10,202,800) (612,099)
INCOME TAX (PROVISION) BENEFIT................................... 167,088 337,169 418,755 244,153
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS......................... (3,740,721) (576,234) (9,784,045) (367,946)
EXTRAORDINARY EXPENSE, net of income tax benefit of $93,887 in
1997, and $287,361 in 1996..................................... -- -- (2,403,711) (542,055)
-------------- -------------- -------------- --------------
NET LOSS......................................................... (3,740,721) (576,234) (12,187,756) (910,001)
DIVIDENDS ON PREFERRED STOCK..................................... (252,387) (315,985) (727,646) (759,442)
-------------- -------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS....................... $ (3,993,108) $ (892,219) $ (12,915,402) $ (1,669,443)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE...... $ (6.97) $ (1.55) $ (22.53) $ (3.07)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING.................................................... 573,152 573,152 573,152 544,319
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS A
PREFERRED STOCK COMMON STOCK TREASURY
-------------------- -------------------- PAID-IN STOCK, AT RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL COST DEFICIT
--------- --------- --------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996........... -- $ -- 473,152 $ 473,152 $ 5,508,285 $ (11,913,000) $ (3,870,039)
Net Loss.................... -- -- -- -- -- -- (12,187,756)
Cash dividends declared on
preferred stock........... -- -- -- -- -- -- (727,646)
Cash dividends declared on
common stock.............. -- -- -- -- -- -- (7,633,620)
Preferred stock dividend.... -- -- -- -- -- -- (1,623,329)
Reorganization.............. 100,000 100,000 -- -- -- (100,000) --
--------- --------- --------- --------- ----------- ------------- -------------
September 30, 1997.......... 100,000 $ 100,000 473,152 $ 473,152 $ 5,508,285 $ (12,013,000) $ (26,042,390)
--------- --------- --------- --------- ----------- ------------- -------------
--------- --------- --------- --------- ----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $ (12,187,756) $ (910,001)
Adjustments to reconcile net loss to net cash provided by operating
activities--
Depreciation and amortization............................................... 15,473,672 7,286,545
Deferred income taxes....................................................... 486,519 (451,506)
Loss on disposition of assets............................................... 19,632 1,961,388
Extraordinary loss on financing cost........................................ 2,497,598 829,416
Minority interests in income of subsidiaries................................ 1,071,342 438,221
Interest on restricted investments.......................................... (1,553,949) --
Other....................................................................... -- (39,172)
Changes in current assets and liabilities--
Accounts receivable......................................................... (2,056,381) (997,187)
Other current assets........................................................ (1,148,883) (1,113,257)
Accounts payable............................................................ 4,122,827 2,923,990
Accrued liabilities......................................................... 12,429,907 330
--------------- --------------
Net cash provided by operating activities................................. 19,154,528 9,928,767
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (13,780,956) (15,112,779)
Acquisitions of selected cellular systems..................................... (154,784,566) (30,000,000)
Deferred costs................................................................ (1,592,979) --
Decrease (increase) in receivables--affiliate................................. (1,047,284) (1,130,453)
Refund of deposit............................................................. 3,190,732 2,400,000
Investments in unconsolidated subsidiaries and other.......................... (21,124,176) (475,305)
Proceeds on sale of assets.................................................... -- 378,000
--------------- --------------
Net cash used in investing activities..................................... (189,139,229) (43,940,537)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable................................................... -- 100,000
Repayments of notes payable................................................... -- (800,000)
Proceeds from long-term debt.................................................. 255,250,000 71,000,000
Repayments of long-term debt.................................................. (797,708) (35,629,498)
Cash dividends................................................................ (8,361,266) (737,556)
Issuance of preferred stock................................................... -- 10,000,000
Purchase of treasury stock.................................................... -- (5,913,000)
Restricted cash and investments............................................... (66,258,444) --
Redemption of RTFC subordinated capital certificates.......................... 1,051,057 57,632
Deferred financing costs...................................................... (10,842,406) (3,036,775)
--------------- --------------
Net cash provided by financing activities................................. 170,041,233 35,040,803
--------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 56,532 1,029,033
CASH AND CASH EQUIVALENTS, beginning of period.................................. 1,609,221 1,116,773
--------------- --------------
CASH AND CASH EQUIVALENTS, end of period........................................ $ 1,665,753 $ 2,145,806
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The condensed consolidated balance sheets of Dobson Communications
Corporation ("DCC") and subsidiaries (collectively with DCC, "the Company") as
of September 30, 1997 and December 31, 1996, the condensed consolidated
statements of operations for the three and nine months ended September 30, 1997
and 1996, the condensed consolidated statement of stockholders' equity for the
nine months ended September 30, 1997, and the condensed consolidated statements
of cash flows for the nine months ended September 30, 1997 and 1996 are
unaudited. In the opinion of management, such financial statements include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of financial position, results of operations, and cash flows
for the periods presented.
The condensed balance sheet data at December 31, 1996 was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The financial statements presented
herein should be read in connection with the Company's December 31, 1996
consolidated financial statements included in the Company's Prospectus dated May
14, 1997, as filed with the Securities and Exchange Commission under Rule 424(b)
of the Securities Act of 1933.
1. REORGANIZATION
DCC was incorporated as an Oklahoma corporation in February 1997. Under an
Agreement and Plan of Reorganization effective February 28, 1997, DCC acquired
all of the outstanding Class A Common Stock, Class C Common Stock and Class B
Convertible Preferred Stock of Dobson Operating Company ("DOC"). In exchange,
the holders of the Class A Common Stock and Class B Convertible Preferred Stock
of DOC received equivalent shares of stock of DCC. The holders of Class C Common
Stock received 100,000 shares of Class A preferred Stock of DCC. In addition,
DCC assumed all DOC outstanding stock options, substituting shares of DCC Class
B Common Stock for the DOC stock subject to options. As a result of the
reorganization, DCC is the parent company of DOC.
As part of the reorganization, the stock of certain subsidiaries of DOC was
distributed to DCC. DOC continues to be the holding company for the Company's
cellular, local exchange and wholly-owned fiber subsidiaries.
2. ACQUISITIONS OF SELECTED CELLULAR SYSTEMS
RECENT ACQUISITIONS
On March 19, 1996, the Company purchased the FCC cellular licenses for, and
certain assets relating to, one RSA located in Kansas and three RSAs and a
portion of another RSA located in Missouri for $30 million. The properties (the
"Kansas/Missouri Cluster") are located in northeastern Kansas and northwestern
Missouri near Kansas City.
On February 28, 1997, the Company purchased the FCC cellular licenses for,
and certain assets relating to, two MSAs and two RSAs located in Maryland and
Pennsylvania for $77.7 million. The properties are located immediately outside
the Washington/Baltimore metropolitan area.
On March 3, 1997, the Company purchased the FCC cellular license for, and
certain assets relating to, Maryland RSA #2 for $75.8 million. The property is
located to the east of the Washington/Baltimore metropolitan area. This
acquisition and the one completed on February 28, 1997 are referred to together
as the "Maryland/Pennsylvania Acquisition."
The acquisition transactions were accounted for as purchases and,
accordingly, their results of operations have been included in the accompanying
consolidated statements of operations from the
7
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS OF SELECTED CELLULAR SYSTEMS (CONTINUED)
respective dates of acquisition. The unaudited pro forma information set forth
below includes the acquisition of the Kansas/Missouri Cluster and the
Maryland/Pennsylvania Cluster accounted for as if the purchases occurred at the
beginning of the respective periods presented. The unaudited pro forma
information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved
had the acquisitions been consummated at that time:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER NINE MONTHS ENDED SEPTEMBER
30, 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating revenue............... $ 23,406,000 $ 19,231,000 $ 64,441,000 $ 50,995,000
Loss before extraordinary
items......................... (3,741,000) (3,091,000) (12,860,000) (12,506,000)
Net loss........................ (3,741,000) (3,091,000) (15,264,000) (12,958,000)
Net loss applicable to common
stockholders.................. (3,993,000) (3,407,000) (15,991,000) (13,807,000)
Net loss applicable to common
stockholders per common
share......................... (6.97) (5.94) (27.90) (26.22)
</TABLE>
On October 1, 1997, the Company purchased a 75% interest in the Gila River
Cellular General Partnership (the "Arizona 5 Partnership"), which owns the
cellular license for Arizona RSA #5 as well as the associated tangible operating
assets, and Gila River Telecommunications Subsidiary, Inc. ("GRTSI") purchased a
25% interest in the Arizona 5 Partnership. As part of this transaction, the
Company purchased the stock of Associated Telecommunications and Technologies,
Inc. ("ATTI"), which owned 49% of one of the partners of the Arizona 5
Partnership (with a 41.95% interest). Of the $14.2 million purchase price for
ATTI, $9.5 million was paid to a director and the chief executive officer and
the chairman of the board of the Company, who together owned two-thirds of the
ATTI stock. Upon completion of these transactions, the Company paid a net
purchase price of $39.8 million for its 75% interest in the Arizona 5
Partnership. In addition, the Company loaned GRTSI a portion of the purchase
price for the 25% interest in the Arizona 5 Partnership it acquired. The Company
also guaranteed, on a short-term basis, $10.9 million of indebtedness of GRTSI.
Subsequently, the Company has been released from this guarantee.
As discussed in Note 4, the accompanying balance sheet includes
approximately $28.8 million of restricted cash used in the Arizona 5 Partnership
acquisition. As of September 30, 1997, the Company had paid approximately $15.1
million in cash relating to the Arizona 5 Partnership acquisition. The related
investment is included in the balance sheet as "Investment in unconsolidated
subsidiaries and other." In addition, the balance sheet reflects approximately
$44.0 million of additional borrowings on the revolving credit facility to
finance the October 1, 1997 acquisition.
PENDING ACQUISITIONS
On October 9, 1997, the Company entered into a definitive agreement to
purchase the FCC cellular license for, and certain assets relating to, the Texas
RSA #16 for $53.8 million, subject to adjustment. Texas RSA #16 is located in
south central Texas in an area bordered by Austin, Houston and San Antonio and
8
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS OF SELECTED CELLULAR SYSTEMS (CONTINUED)
covers a population base of approximately 326,000. Management of the Company
anticipates the transaction will close late in the first quarter of 1998.
In November 1997, the Company entered into a definitive agreement to
purchase the stock of a corporation which owns a 75% interest in a partnership
which owns the FCC cellular license and system for, and certain assets relating
to, California RSA #4 for a purchase price of approximately $65.3 million,
subject to adjustment. The Company is negotiating to purchase the remaining 25%.
California RSA #4 is located in northern California approximately 50 miles
inland from California's central coast in an area between Fresno and Modesto.
The property covers a population base of approximately 363,000.
PCS LICENSES
In the second quarter of 1997 the Company was granted PCS licenses in the
FCC "F" Block auction for nine markets adjacent to or overlapping the Company's
existing cellular footprint in Oklahoma, Kansas and Missouri. The aggregate bid
for these licenses was $5.1 million after a 15% discount. The Company financed
approximately $4.1 million of the purchase price in July 1997 by notes payable
to the United States Government at an annual interest rate of 6.25%. This
represented a non-cash financing activity, and accordingly is not reflected in
the accompanying statement of cash flows. The obligations will be amortized
quarterly over an eight year period beginning in 1999.
3. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
Revolving credit facility.................................... $ 171,000,000 $ 75,750,000
Senior notes................................................. 160,000,000 --
Mortgage notes payable....................................... 28,947,018 29,744,726
Other notes payable.......................................... 4,056,204 --
-------------- --------------
Total debt................................................... 364,003,222 105,494,726
Less--Current maturities..................................... 1,223,558 1,190,924
-------------- --------------
Total long-term debt....................................... $ 362,779,664 $ 104,303,802
-------------- --------------
-------------- --------------
</TABLE>
REVOLVING CREDIT FACILITY
On February 28, 1997, the Company's bank credit agreement was amended and
restated to provide the Company with a $200,000,000 secured revolving credit
facility maturing in 2005. Interest on borrowings under the new credit agreement
accrues at variable rates (weighted average rate of 8.83% at September 30,
1997). Initial proceeds were used to refinance existing indebtedness, finance
the Maryland/Pennsylvania Acquisition described above and for general corporate
purposes, including $7.6 million to pay a dividend to holders of its Class A
Common Stock. In connection with the closing of the revolving credit facility,
the Company extinguished its then existing credit facility, and recognized a
pretax loss of approximately $2.5 million as a result of writing off previously
capitalized financing costs associated with the old revolving
9
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. LONG-TERM DEBT (CONTINUED)
credit facility. This loss has been reflected as an extraordinary item, net of
tax, in the Company's statement of operations for the nine months ended
September 30, 1997.
On March 19, 1996 the Company amended and restated the old revolving credit
agreement. In connection with this amendment, the Company recorded a pretax loss
of approximately $.8 million as a result of writing off previously capitalized
financing costs. This loss has been reflected as an extraordinary item, net of
tax in the accompanying statement of operations for the nine months ended
September 30, 1996.
In April 1997, the Company entered into an interest rate hedge agreement to
hedge the Company's interest expense on its indebtedness under the revolving
credit facility. The agreement provides for a rate cap of 8% plus a factor,
based on the Company's leverage ratio (cap at September 30, 1997 was 10.5%),
terminating on the earlier of April 24, 2000 or the date an option to enter into
an interest rate swap transaction is exercised by the counterparty. Under the
swap agreement, the interest rate would be fixed at 6.13% plus the factor used
to determine the rate cap or a floating LIBOR rate, terminating on April 24,
2002. The Company accounts for this as a hedge.
SENIOR NOTES
On February 28, 1997, the Company issued $160,000,000 principal amount of
11.75% Senior Notes maturing in 2007. The net proceeds were used to finance the
Maryland/Pennsylvania Acquisition described above and to purchase securities
pledged to secure payment of the first four semi-annual interest payments on the
notes, which began on October 15, 1997. The pledged securities are reflected as
"restricted investments" in the Company's balance sheet. The senior notes are
redeemable at the option of the Company in whole or in part, on or after April
15, 2002, initially at 105.875%. Prior to April 15, 2000, the Company may redeem
up to 35% of the principal amount of the senior notes at 111.750% with proceeds
from sales of stock, provided that after any such redemption at least $104
million remains outstanding.
4. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of an interest pledge deposit of
approximately $39.0 million which includes an initial deposit of $38.3 million
(as discussed in Note 3) plus interest earned and cash of approximately $28.8
million to be used to finance the Arizona 5 Partnership acquisition (see Note
2).
5. TAXES
The income tax benefit for the three and nine months ended September 30,
1997 differs from amounts computed at the statutory rate due primarily to net
operating losses for which no benefit has been recognized.
6. EARNINGS PER COMMON SHARE
For purposes of calculating reported weighted average number of common and
common equivalent shares outstanding, shares of convertible Class B Preferred
Stock issued on March 19, 1996 are considered common equivalent shares
outstanding.
10
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
No. 128"). SFAS No. 128 specifies the computation, presentation, and disclosure
requirements of earnings per share and supersedes Accounting Principles Board
Opinion No. 15, Earnings Per Share. SFAS No. 128 requires a dual presentation of
basic and diluted earnings per share. Basic earnings per share, which excludes
the impact of common stock equivalents, will replace primary earnings per share.
Diluted earnings per share, which utilizes the average market price per share as
opposed to the greater of the average market price per share or ending market
price per share when applying the treasury stock method in determining common
stock equivalents, will replace fully-diluted earnings per share. SFAS No. 128
will be effective for both interim and annual periods ending after December 15,
1997. The following pro forma earnings per common share information assumes SFAS
No. 128 was adopted in 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Reported:
Primary net loss applicable to common
shareholders per common share............ $ (6.97) $ (1.55) $ (22.53) $ (3.07)
Weighted average number of common and
common equivalent shares outstanding..... 573,152 573,152 573,152 544,319
Pro forma:
Basic net loss per common share.......... $ ( 8.44) $ (1.88) $ (27.30) $ (3.53)
Basic weighted average shares................ 473,152 473,152 473,152 473,152
</TABLE>
Diluted net income per common share has been omitted because the impact of
common stock equivalents is anti-dilutive.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," effective for fiscal
years beginning after December 15, 1997, and Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), "Disclosure about Segments of an Enterprise
and Related Information," effective for financial statements for periods
beginning after December 15, 1997. The Company plans to adopt both accounting
standards as of January 1, 1998.
SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income, consisting of both
net income and those items that bypass the income statement and are reported as
a separate component of stockholders' equity, be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company does not believe that comprehensive income will differ
materially from net income.
SFAS No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
11
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. RECENT PRONOUNCEMENTS (CONTINUED)
services, geographic areas, and major customers. The Company does not anticipate
the adoption of this new accounting standard will materially change the business
segments currently reported.
8. COMMITMENTS
Effective December 6, 1995 (amended December 20, 1995 and June 24, 1997),
the Company entered into an equipment supply agreement in which the Company
agreed to purchase approximately $30 million of cell site and switching
equipment between June 24, 1997 and June 23, 2001 to update the cellular systems
for the newly acquired and existing MSAs and RSAs. Of the commitment,
approximately $17 million remained at September 30, 1997.
9. SUBSEQUENT EVENTS
The Company intends to issue $150 million of preferred stock in the fourth
quarter of 1997. The Company has received a commitment from a financial
institution to purchase $30 million of redeemable preferred stock. The preferred
stock will not be registered under the Securities Act of 1993 and may not be
offered or sold in the United States without registration or absent an
applicable exemption from registration requirements.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company provides diversified telecommunication products and services.
The Company currently provides rural cellular telephone services in Oklahoma and
Texas (the "Oklahoma/Texas Cluster"), in Kansas and Missouri (the
"Kansas/Missouri Cluster"), in Maryland and Pennsylvania (the "Maryland/
Pennsylvania Cluster") and Arizona. Upon consummation of the pending
acquisitions described below, the Company will also own and operate rural
cellular systems in northern California and in south central Texas. The Company
also owns interests in, and operates, regional fiberoptic transmission networks
in Oklahoma, Texas and Colorado, owns and operates local telephone exchanges in
Oklahoma, and recently began to resell local, long distance and wireless
services in Oklahoma with plans to begin reselling such services in Tulsa and
Amarillo by the second quarter of 1998.
RECENT EVENTS
In November 1997, the Company entered into a definitive agreement to
purchase the stock of a corporation which owns a 75% interest in a partnership
which owns the FCC cellular license and system for, and certain assets relating
to, California RSA #4 for a purchase price of approximately $65.3 million,
subject to adjustment. The Company is negotiating to purchase the remaining 25%
interest. California RSA #4 is located in northern California approximately 50
miles inland from California's central coast in an area between Fresno and
Modesto. The property covers a population base of approximately 363,000.
Management of the Company anticipates the transaction will close in the first
quarter of 1998.
On October 9, 1997, the Company entered into a definitive agreement to
purchase the FCC cellular license for, and certain assets relating to, the Texas
RSA #16 for $53.8 million, subject to adjustment. Texas RSA #16 is located in
south central Texas in an area bordered by Austin, Houston and San Antonio and
covers a population base of approximately 326,000. Management of the Company
anticipates the transaction will close in the first quarter of 1998.
On October 1, 1997, the Company purchased a 75% interest in the Gila River
Cellular General Partnership (the "Arizona 5 Partnership"), which owns the
cellular license for Arizona RSA #5 as well as the associated tangible operating
assets, and Gila River Telecommunications Subsidiary, Inc. ("GRTSI") purchased a
25% interest in the Arizona 5 Partnership. As part of this transaction, the
Company purchased the stock of Associated Telecommunications and Technologies,
Inc. ("ATTI"), which owned 49% of one of the partners of the Arizona 5
Partnership (with a 41.95% interest). Of the $14.2 million purchase price for
ATTI, $9.5 million was paid to a director and the chief executive officer and
the chairman of the board of the Company, who together owned two-thirds of the
ATTI stock. Upon completion of these transactions, the Company paid a net
purchase price of $39.8 million for its 75% interest in the Arizona 5
Partnership. In addition, the Company loaned GRTSI a portion of the purchase
price for the 25% interest in the Arizona 5 Partnership it acquired. The Company
also guaranteed, on a short-term basis, $10.9 million of indebtedness of GRTSI.
Subsequently, the Company has been released from this guarantee.
On February 28, 1997, the Company purchased the FCC cellular licenses for,
and certain assets relating to, two MSAs and two RSAs located in Maryland and
Pennsylvania for $77.9 million. The properties are located immediately outside
the Washington/Baltimore metropolitan area. On March 3, 1997, the Company
purchased the FCC cellular license for, and certain assets relating to, Maryland
RSA 2 for $75.8 million. The property is located to the east of the
Washington/Baltimore metropolitan area. The acquired properties make up the
"Maryland/Pennsylvania Cluster."
13
<PAGE>
RESULTS OF OPERATIONS
The following table presents the period-to-period change, for the periods
indicated, in dollars and percent for the various Condensed Consolidated
Statements of Operations line items:
<TABLE>
<CAPTION>
PERIOD-TO-PERIOD PERIOD-TO-PERIOD
CHANGE FOR THE CHANGE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 SEPTEMBER 30, 1997 AND 1996
INCREASE/(DECREASE) INCREASE/(DECREASE)
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Cellular service.......................................... $ 5,765,292 129.6% $ 13,589,931 105.4%
Cellular roaming.......................................... 5,461,759 221.5% 12,156,816 216.1%
Cellular equipment sales.................................. 252,661 193.7% 213,926 40.6%
Wireline telephone service................................ 341,248 9.7% 1,190,969 11.8%
Fiber service............................................. 195,857 31.2% 884,890 53.8%
Other..................................................... (26,539) (11.9)% (172,981) (19.7)%
------------- ------ ------------- -------
Total operating revenues................................ 11,990,278 105.0% 27,863,551 88.0%
------------- ------ ------------- -------
Operating Expenses:
Cellular service.......................................... 3,017,805 241.2% 6,532,021 209.3%
Cellular equipment........................................ 368,291 54.5% 1,120,356 65.4%
Wireline telephone service................................ (73,219) (13.5)% 69,336 5.0%
Fiber service............................................. 24,738 53.8% 70,471 48.4%
Marketing and selling..................................... 2,048,885 155.5% 4,194,552 127.7%
General and administrative................................ 1,774,756 58.7% 5,590,510 67.6%
Depreciation and amortization............................. 2,763,532 88.7% 8,187,127 112.4%
------------- ------ ------------- -------
Total operating expenses................................ 9,924,788 99.5% 25,764,373 102.2%
------------- ------ ------------- -------
Operating income............................................ 2,065,490 143.3% 2,099,178 32.5%
------------- ------ ------------- -------
Other expense............................................... 4,760,580 222.3% 10,813,788 163.2%
------------- ------ ------------- -------
Loss before minority interests in income of subsidiaries,
income taxes and extraordinary items...................... (2,695,090) (385.2)% (8,714,610) (5,011.9)%
Minority interests in income of subsidiaries................ (299,316) (140.1)% (876,091) (199.9)%
------------- ------ ------------- -------
Loss before income taxes and extraordinary items............ (2,994,406) (327.8)% (9,590,701) (1,566.9)%
Income tax benefit.......................................... (170,081) (50.4)% 174,602 71.5%
------------- ------ ------------- -------
Loss before extraordinary items............................. (3,164,487) (549.2)% (9,416,099) (2,559.1)%
Extraordinary expense, net of income tax benefit............ -- -- 1,861,656 343.4%
------------- ------ ------------- -------
Net loss.................................................... $ (3,164,487) (549.2)% $ (11,277,755) (1,239.3)%
------------- ------ ------------- -------
------------- ------ ------------- -------
</TABLE>
14
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
OPERATING REVENUE. For the three months ended September 30, 1997, total
operating revenue increased $12.0 million, or 105.0%, to $23.4 million from
$11.4 million for the comparable period in 1996. Total cellular revenue,
wireline revenue and fiber revenue represented 79%, 16%, and 4% of total
operating revenue, respectively, during the three months ended September 30,
1997 and 62%, 31%, and 6% of total operating revenue, respectively, during the
three months ended September 30, 1996.
CELLULAR. The Company's operating revenue from its cellular operations
(service, roaming, and equipment) increased $11.5 million, or 162.9%, to $18.5
million in the third quarter of 1997, from $7.0 million in the third quarter of
1996. Cellular service revenue increased $5.8 million, or 129.6%, to $10.2
million in the third quarter of 1997 from $4.4 million in the third quarter of
1996. Of the increase, $4.7 million was attributable to the acquisition of the
Maryland/Pennsylvania Cluster in 1997. The remaining increase was primarily
attributable to increased penetration and usage in the Oklahoma/Texas Cluster
and the Kansas/Missouri Cluster. The Company's cellular subscriber base
increased 168.6% to 85,185 at September 30, 1997, from 31,709 at September 30,
1996. 42,608 subscribers were added as a result of the acquisition of the
Maryland/Pennsylvania Cluster. The Company's average monthly cellular service
revenue per subscriber decreased 14.8% to $40.67 for the three months ended
September 30, 1997 from $47.74 for the comparable period in 1996 due to the
addition of new lower rate subscribers in the Maryland/Pennsylvania Cluster and
competitive market pressures. Cellular roaming revenue increased $5.5 million,
or 221.5%, to $7.9 million in 1997 from $2.5 million in the third quarter of
1996. Of the increase, $4.9 million was attributable to the acquisition of the
Maryland/Pennsylvania Cluster in 1997. The remaining increase was primarily
attributable to increased roaming minutes in the Oklahoma/Texas Cluster and
Kansas/Missouri Cluster due to expanded coverage area in these markets and an
increase in cellular minutes of use. Cellular equipment sales of $.4 million in
the third quarter of 1997 represented an increase of $.3 million or 194% from
$.1 million in the third quarter of 1996, as the Company sold more equipment
during the third quarter of 1997.
WIRELINE. Wireline operations revenue increased $.4 million, or 9.7%, to
$3.9 million for the three months ended September 30, 1997 compared to $3.5
million for the same period in 1996 due primarily to an increase in toll charges
and an increase in the number of access lines from 11,959 as of September 30,
1996 to 12,475 as of September 30, 1997.
FIBER. The Company's revenue from its fiber operations increased $.2
million, or 31.2%, to $.8 million in the third quarter of 1997 from $.6 million
in the third quarter of 1996 primarily as a result of an increase in the number
of fiber lines, bringing the total lines leased to an equivalent of 49 DS3s at
September 30, 1997 compared to 34 at September 30, 1996.
OTHER. For the three months ended September 30, 1997 and 1996, other income
of $.2 million included rental revenue for the use of Company owned facilities,
interest on loans to Company employees and affiliates, management fees from
affiliates and other telecommunications services such as internet and voice
mail.
COST OF SERVICE AND EQUIPMENT SALES. For the three month period ended
September 30, 1997, the total cost of service and equipment sales increased $3.4
million, or 132.8%, to $5.9 million from $2.5 million for the comparable period
in 1996.
CELLULAR. Cost of cellular service increased $3.0 million, or 241.2% to
$4.3 million during the three months ended September 30, 1997 from $1.3 million
for the three months ended September 30, 1996. Of the increase, $2.5 million was
attributable to the acquisition of the Maryland/Pennsylvania Cluster in 1997.
The remaining increase was primarily attributable to increased subscribers and
minutes of use in the Oklahoma/Texas Cluster and Kansas/Missouri Cluster and
expanded use of rerating agreements with
15
<PAGE>
cellular providers adjacent to the Company's markets. As a percentage of
cellular service and roaming revenue, cost of cellular service increased from
18.1% in the third quarter of 1996 to 23.5% in the third quarter of 1997. This
is primarily due to the expanded use of rerating agreements noted above, as well
as additional facility lease costs relating to the Maryland RSA #2 acquisition.
Cost of cellular equipment increased $.4 million, or 54.5%, to $1.0 million
during the third quarter of 1997 from $.6 million in the third quarter of 1996,
primarily from increases in the volume of equipment sold due to the growth in
subscribers.
WIRELINE. Cost of wireline telephone service decreased $73,000, or 13.5%,
to $467,000 during the third quarter of 1997 from $540,000 in the third quarter
of 1996. As a percentage of wireline telephone service revenue, cost of wireline
telephone service decreased to 12.1% in the third quarter of 1997 from 15.4% in
the third quarter of 1996. This is primarily due to increased revenue received
in the third quarter of 1997 compared to the third quarter of 1996 from the
National Exchange Carrier Association pool that has no associated cost of
service.
FIBER. Cost of fiber service increased $25,000, or 53.8%, to $71,000 in the
third quarter of 1997 from $46,000 in the third quarter of 1996 as a result of
adding additional fiber lines.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $2.1
million, or 155.5%, to $3.4 million in the third quarter of 1997 from $1.3
million in the comparable period of 1996. As a percentage of total operating
revenue, marketing and selling costs increased to 14.4% in the third quarter of
1997 from 11.5% in the third quarter of 1996. The increase was primarily due to
the higher level of cellular subscribers added period to period. Gross cellular
subscribers added in the third quarter of 1997 was 9,031 with subscribers added
in the Maryland/Pennsylvania Cluster since the acquisition making up 4,711 of
the gross cellular subscribers added in the third quarter of 1997. The number of
gross cellular subscribers added in the third quarter of 1996 was 2,802.
Additionally, the Company incurred $.3 million of marketing costs in the third
quarter of 1997 associated with the October launch of its resale operations.
GENERAL AND ADMINISTRATIVE COSTS. For the three month period ended
September 30, 1997, general and administrative costs increased $1.8 million, or
58.7%, to $4.8 million from $3.0 million for the third quarter of 1996. The
increase was primarily due to increased billing costs as a result of the growth
in cellular subscribers, the acquisition of the Maryland/Pennsylvania Cluster
and increased salary costs resulting from additional personnel in the Company's
cellular, fiber, and resale operations. As a percentage of total operating
revenue, general and administrative costs decreased from 26.5% in the third
quarter of 1996 to 20.5% in the third quarter of 1997. The decrease as a
percentage of total operating revenue is a result of economies of scale realized
as the Company integrated its new cellular operations into its existing
management structure.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three month period ended
September 30, 1997, depreciation and amortization expense increased $2.8
million, or 88.7%, to $5.9 million in the third quarter of 1997 from $3.1
million in the third quarter of 1996. Amortization of assets acquired in the
Maryland/Pennsylvania Cluster accounted for $3.2 million of the increase, which
was offset by a decrease from certain other assets becoming fully depreciated in
1996.
OTHER EXPENSE. For the three months ended September 30, 1997, total other
expense (consisting of interest income, interest expense and other) increased
$4.8 million, or 222.3% to $6.9 million from $2.1 million for the comparable
period in 1996. Interest income of $.9 million, was a result of interest earned
on securities purchased which were pledged to secure payment of the first four
semi-annual interest payments on the Senior Notes. For the third quarter of
1997, interest expense increased $5.9 million to $7.8 million from $1.9 million
in the comparable period of 1996. The increase was primarily a result of
increased borrowings in the first quarter 1997 to finance the
Maryland/Pennsylvania Cluster acquisition. For the third quarter of 1997, other
expense decreased $.3 million from the comparable period in 1996.
16
<PAGE>
This is primarily the result of a $.2 million loss recognized in the third
quarter of 1996 relating to a sale of assets.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996
OPERATING REVENUE. For the nine months ended September 30, 1997, total
operating revenue increased $27.8 million, or 88.0% to $59.5 million from $31.7
million for the comparable period in 1996. Total cellular revenue, wireline
revenue and fiber revenue represented 76%, 19%, and 4% of total operating
revenue, respectively, during the nine months ended September 30, 1997 and 60%,
32%, and 5% of total operating revenue, respectively, during the nine months
ended September 30, 1996.
CELLULAR. The Company's operating revenue from its cellular operations
(service, roaming, and equipment) increased $26.0 million, or 136.3%, to $45.0
million for the first nine months of 1997, from $19.0 million in the comparable
period of 1996. Cellular service revenue increased $13.6 million, or 105.4%, to
$26.5 million in the nine months ended September 30, 1997 from $12.9 million in
the comparable period of 1996. Of the increase, $11.3 million was attributable
to the acquisition of the Maryland/Pennsylvania Cluster in 1997 and the
inclusion of the operations of the Kansas/Missouri Cluster, which was acquired
March 19, 1996, for all of 1997. The remaining increase was primarily
attributable to increased penetration and usage in the Oklahoma/Texas Cluster
and Kansas/Missouri Cluster. The Company's cellular subscriber base increased
168.6% to 85,185 at September 30, 1997, from 31,709 at September 30, 1996.
42,608 subscribers were added as a result of the acquisition of the Maryland/
Pennsylvania Cluster. The Company's average monthly cellular service revenue per
subscriber decreased 14.2% to $41.08 for the nine months ended September 30,
1997 from $47.87 for the comparable period in 1996 due to the addition of new
lower rate subscribers in the Maryland/Pennsylvania Cluster and competitive
market pressures.
Cellular roaming revenue increased $12.2 million, or 216.1%, to $17.8
million in the nine-month period ended September 30, 1997 from $5.6 million in
the comparable period of 1996. Of the increase, $10.0 million was attributable
to the acquisition of the Maryland/Pennsylvania Cluster in 1997 and the
inclusion of the operations of the Kansas/Missouri Cluster, which was acquired
on March 19, 1996, for all of 1997. The remaining increase was primarily
attributable to increased roaming minutes in the Oklahoma/ Texas Cluster and
Kansas/Missouri Cluster due to expanded coverage areas in these markets and an
increase in cellular minutes of use. Cellular equipment sales of $.7 million in
the first nine months of 1997 represented an increase of $.2 million or 40.6%
from $.5 million in the comparable period of 1996, as the Company sold more
equipment in 1997.
WIRELINE. Wireline operations revenue increased $1.2 million, or 11.8%, to
$11.3 million for the nine months ended September 30, 1997 compared to $10.1
million for the same period in 1996 due primarily to an increase in toll charges
and an increase in the number of access lines from 11,959 as of September 30,
1996 to 12,475 as of September 30, 1997.
FIBER. The Company's revenue from its fiber operations increased $.9
million, or 53.8%, to $2.5 million in the first nine months of 1997 from $1.6
million in the same period of 1996 due primarily as a result of an increase in
the number of fiber lines, bringing the total lines leased to an equivalent of
49 DS3s at September 30, 1997 compared to 34 at September 30, 1996.
OTHER. For the nine months ended September 30, 1997 and 1996, other income
of $.7 million and $.9 million, respectively, included rental revenue for the
use of Company-owned facilities, interest on loans to Company employees and
affiliates, management fees from affiliates and other telecommunications
services such as internet and voice mail.
COST OF SERVICE AND EQUIPMENT SALES. For the nine-month period ended
September 30, 1997, the total cost of service and equipment sales increased $7.8
million, or 122.6%, to $14.2 million from $6.4 million for the comparable period
in 1996.
17
<PAGE>
CELLULAR. Cost of cellular service increased $6.5 million, or 209.3%, to
$9.7 million during the nine months ended September 30, 1997 from $3.2 million
in the same period of 1996. Of the increase $5.3 million was attributable to the
acquisition of the Maryland/Pennsylvania Cluster in 1997 and the inclusion of
the operations of the Kansas/Missouri Cluster for all of the 1997 period. The
remaining $1.2 million was primarily attributable to increased subscribers and
minutes of use in the Oklahoma/Texas Cluster and Kansas/Missouri Cluster and
expanded use of rerating agreements with cellular providers adjacent to the
Company's markets. As a percentage of cellular service and roaming revenue, cost
of cellular service increased from 16.8% in the first nine months of 1996 to
21.8% in the first nine months of 1997. This is primarily due to the expanded
use of rerating agreements noted above, as well as additional facility lease
costs relating to the Maryland RSA #2 acquisition. Cost of cellular equipment
increased $1.1 million or 65.4% to $2.8 million for the nine months ended
September 30, 1997 from $1.7 million in the same period of 1996, primarily from
increases in the volume of equipment sold due to the growth in subscribers.
WIRELINE. Cost of wireline telephone service increased $.1 million, or
5.0%, to $1.5 million for the first nine months of 1997 from $1.4 million from
the same period in 1996. As a percentage of wireline telephone service revenue,
cost of wireline telephone service decreased slightly from 13.7% for the first
nine months of 1996 to 12.8% for the same period of 1997.
FIBER. Cost of fiber service increased $.1 million, or 48.4%, to $.2
million in the first nine months of 1997 from $.1 million in the same period of
1996. The increase was the result of increased DS3 equivalents.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $4.2
million, or 127.7%, to $7.5 million in the first nine months of 1997 from $3.3
million in the same period of 1996. The increase was primarily due to the higher
level of cellular subscribers added period to period. Gross cellular subscribers
added in the first nine months of 1997 was 22,273 with subscribers added in the
Maryland/Pennsylvania Cluster since its acquisition making up 10,907 of the
gross cellular subscribers added. The number of gross cellular subscribers added
in the first nine months of 1996 was 7,607. Additionally, the Company incurred
$.3 million of marketing costs in the first nine months of 1997 associated with
the October 1997 launch of its resale operations. As a percentage of total
operating revenue, marketing and selling costs increased to 12.6% for the first
nine months of 1997 from 10.4% in the same period of 1996.
GENERAL AND ADMINISTRATIVE COSTS. For the nine-month period ended September
30, 1997, general and administrative costs increased $5.6 million, or 67.6%, to
$13.9 million from $8.3 million for 1996. The increase was primarily due to
increased billing costs as a result of the growth in cellular subscribers, the
acquisition of the Maryland/Pennsylvania Cluster, the inclusion of the
Kansas/Missouri Cluster for all of 1997, and increased salary costs resulting
from additional personnel in the Company's cellular, fiber, and resale
operations. As a percentage of total operating revenue, general and
administrative costs decreased from 26.1% in the first nine months of 1996 to
23.3% in the same period of 1997. The decrease is a result of economies of scale
realized as the Company integrated its new cellular operations into its existing
management structure.
DEPRECIATION AND AMORTIZATION EXPENSE. For the nine-month period ended
September 30, 1997, depreciation and amortization expense increased $8.2
million, or 112.4%, to $15.5 million from $7.3 million in the same period of
1996. Approximately $8.1 million of the increase was the result of the
amortization of assets acquired in the Maryland/Pennsylvania and Kansas/Missouri
Clusters.
OTHER EXPENSE. For the nine months ended September 30, 1997, total other
expense (consisting of interest income, interest expense, and other
income/expense) increased $10.8 million, or 163.2%, to $17.4 million from $6.6
million for the comparable period in 1996. Interest income of $1.9 million for
the first nine months of 1997 was a result of interest earned on securities
purchased which were pledged to secure payment of the first four semi-annual
interest payments on the Senior Notes. For the first nine
18
<PAGE>
months of 1997, interest expense increased $14.8 million to $19.5 million from
$4.7 million in the comparable period of 1996. The increase was primarily the
result of increased borrowings during the first nine months of 1997 to finance
the Maryland/Pennsylvania Cluster acquisitions. For the first nine months of
1997, other income/expense decreased $2.0 million for the comparable period in
1996. This is primarily the result of a $2.0 million loss recognized during the
first nine months of 1996 relating to the sale of assets.
EXTRAORDINARY EXPENSE. In the first nine months of 1997 and 1996, the
Company incurred a pretax loss of approximately $2.5 million and $.8 million,
respectively, as a result of writing off previously capitalized financing costs
associated with a revolving credit facility that was refinanced in February 1997
and March 1996.
LIQUIDITY AND CAPITAL RESOURCES
The cellular telephone business requires substantial capital to acquire,
construct, and expand cellular telephone systems and to fund operating
requirements. The Company historically has financed its acquisitions and other
capital needs through bank debt and proceeds from the sale of debt and equity.
The Company's wireline businesses have historically been financed through
government loans.
At September 30, 1997, the Company had working capital of $15.9 million (a
ratio of current assets to current liabilities of 1.6:1) and a cash balance of
$22.9 million ($21.2 million of which was restricted), compared to working
capital of $11.0 million (a ratio of current assets to current liabilities of
2.2:1) and a cash balance of $1.6 million at December 31, 1996 (none of which
was restricted).
The Company's net cash provided by operating activities totaled $19.2
million for the nine months ended September 30, 1997 compared to $9.9 million
for the nine months ended September 30, 1996. The increase of $9.3 million was
primarily due to net changes in current assets and liabilities and depreciation
and amortization, offset by the Company's net loss for the period.
Cash flow used in investing activities, which totaled $43.9 million and
$189.1 million in the nine months ended September 30, 1996 and 1997,
respectively, principally related to the acquisition of cellular systems in the
Kansas/Missouri Cluster in 1996 and the Maryland/Pennsylvania Cluster in 1997,
as well as capital expenditures in both periods. Acquisitions accounted for $30
million and $154.8 million and capital expenditures were $15.1 million and $13.8
million in the nine months ended September 30, 1996 and 1997, respectively.
The Company's capital expenditures (excluding cost of acquisitions) were
$13.8 million for the nine month period ended September 30, 1997, and the
Company expects its capital expenditures (excluding capital expenditures
associated with the pending acquisitions of Texas RSA #16 and California RSA #4)
to total approximately $19 million for 1997 and $31 million for 1998. Of the
capital expenditures expected to be made in 1998, $16 million is expected to be
made in its cellular operations (to build out new cell sites and new store
locations and to replace equipment in the Maryland/Pennsylvania Cluster
currently being leased), $7 million is expected to be made in its wireline
operations, $4 million is expected to be made in its resale operations and $2
million is expected to be made in its fiber operations (primarily for
electronics to increase capacity). The amount and timing of capital expenditures
may vary depending on the rate at which the Company expands and develops its
cellular systems, whether the Company consummates additional acquisitions, the
rate at which the Company builds out a PCS system, whether the Company expands
its fiberoptic network or local exchange operations and the adoption of new
regulations relating to support revenue.
In April 1997, the Company was granted PCS licenses in the FCC "F" Block
auction for nine markets adjacent to or overlapping the Company's existing
cellular footprint in Oklahoma, Kansas and Missouri. The aggregate bid for these
licenses was $5.1 million after a discount of 15%. The Company financed
approximately $4.1 million of the purchase price in July 1997 by notes payable
to the United States
19
<PAGE>
Government at an annual interest rate of 6.25%, amortized quarterly over eight
years beginning in 1999. The Company is required to build out systems covering
25% of the licensed population by 2002. The Company currently anticipates that
the cost to build out the minimum PCS system will be $10 million to $30 million.
The actual amount of the expenditures will depend on the PCS technology selected
by the Company, the extent of the Company's buildout, the costs at the time of
buildout and the extent the Company must relocate incumbent microwave licensees.
Net cash provided by financing activities was $170 million for the nine
months ended September 30, 1997 compared to $35 million for the nine months
ended September 30, 1996. Financing activities in the nine months ended
September 30, 1997 consisted primarily of $255.3 million of proceeds from
long-term debt, including the issuance of $160 million of Senior Notes and
borrowings under the Bank Facility.
During the first quarter of 1997, the Company established a $200 million
secured revolving bank credit facility maturing in 2005 (the "Bank Facility"),
and issued $160 million principal amount of 11.75% Senior Notes due 2007. See
Note 3 of the notes to the accompanying financial statements.
In April 1997, the Company entered into an interest rate hedge agreement to
hedge the Company's interest expense on its indebtedness under the Bank
Facility. The agreement provides for a rate cap of 8% plus a factor, based on
the Company's leverage ratio (cap at September 30, 1997 was 10.5%), terminating
on the earlier of April 24, 2000 or the date an option to enter into an interest
rate swap transaction is exercised by the counterparty. Under the swap
agreement, the interest rate would be fixed at 6.13% plus the factor used to
determine the rate cap or a floating LIBOR rate, terminating on April 24, 2002.
The Company accounts for this as a hedge.
The Company intends to issue $150 million of redeemable preferred stock in
the fourth quarter of 1997 to finance a portion of the purchase price for the
California RSA #4 and Texas RSA #16 acquisitions and to pay down existing debt.
The Company has received a commitment from a financial institution to purchase
of $30 million of redeemable preferred stock. The preferred stock will not be
registered under the Securities Act of 1933 and may not be offered or sold in
the United States without registration or absent an applicable exemption from
registration requirements. The Company is presently engaged in preliminary
discussions with lenders to establish an additional bank credit facility for
financing future acquisitions.
Although there can be no assurance, management believes the proceeds
available from the revolving credit facility, the proposed $150 million
preferred stock offering, together with cash on hand and cash flow from
operations, will be sufficient to fund the Company's capital expenditures,
including the Texas RSA #16 and California RSA #4 acquisitions, and its working
capital and debt service requirements. At September 30, 1997, the Company had
approximately $29.0 million of funds available under the Bank Facility. The
Company will require additional financing to pursue other acquisitions and to
meet the required PCS buildout. Sources of additional capital may include public
or private debt or equity financings. There can be no assurance that any
additional financing will be available to the Company or, if available, that it
can be obtained on terms acceptable to the Company and within the limitations
contained in the Company's financing arrangements. The successful implementation
of the Company's strategy, including the further development of its cellular
systems and significant and sustained growth in the Company's cash flows, is
necessary for the Company to meet its debt service requirements.
FORWARD-LOOKING STATEMENTS
The description of the Company's plans set forth above, including planned
capital expenditures and acquisitions, are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These plans involve a number of risks and uncertainties. The
important factors that could cause actual capital expenditures, acquisitions
activity, or the Company's performance to differ materially from the
forward-looking statements include, without limitation, the Company's ability to
satisfy the financial covenants of its existing debt instruments and to raise
additional
20
<PAGE>
capital; the Company's ability to manage its rapid growth successfully and to
compete effectively in its cellular, fiber and resale businesses against
competitors with greater financial, technical, marketing and other resources;
changes in end-user requirements and preferences; the development of other
technologies and products that may gain more commercial acceptance than those of
the Company; and adverse regulatory changes. Readers are cautioned not to place
reliance on these forward looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update or revise the result of
these forward looking statements to reflect events or circumstances after the
date hereof including, without limitation, changes in the Company's business
strategy or planned capital expenditures, or to reflect the occurrence of
unanticipated events. For further information regarding these and other risk
factors, see "Risk Factors" and "Business" in the Company's Prospectus dated May
14, 1997 filed with the Securities and Exchange Commission under Rule 424(b) of
the Securities Act of 1933.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DOBSON COMMUNICATIONS
CORPORATION
(registrant)
Date: November 19, 1997 /s/ EVERETT R. DOBSON
------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: November 19, 1997 /s/ BRUCE R. KNOOIHUIZEN
------------------------------
Bruce R. Knooihuizen
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,665,753
<SECURITIES> 0
<RECEIVABLES> 10,835,295
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,831,356
<PP&E> 118,253,283
<DEPRECIATION> 42,466,983
<TOTAL-ASSETS> 373,001,805
<CURRENT-LIABILITIES> 25,910,743
<BONDS> 362,779,664
11,623,000
100,000
<COMMON> 473,152
<OTHER-SE> 5,508,285
<TOTAL-LIABILITY-AND-EQUITY> 373,001,805
<SALES> 59,516,733
<TOTAL-REVENUES> 59,516,733
<CGS> 14,150,752
<TOTAL-COSTS> 50,964,404
<OTHER-EXPENSES> 17,440,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,202,800)
<INCOME-TAX> (418,755)
<INCOME-CONTINUING> (9,784,045)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,403,711)
<CHANGES> 0
<NET-INCOME> (12,187,756)
<EPS-PRIMARY> (22.53)
<EPS-DILUTED> (22.53)
</TABLE>
