<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-23769
PROSPECTUS
OFFER TO EXCHANGE
ALL OUTSTANDING
11 3/4% SENIOR NOTES DUE 2007
($160,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
11 3/4% SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF
DOBSON COMMUNICATIONS CORPORATION
----------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE 16,
1997, UNLESS EXTENDED.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE NEW NOTES OFFERED HEREBY.
------------------------
Dobson Communications Corporation, an Oklahoma corporation (the "Company" or
"Dobson"), hereby offers (the "Exchange Offer"), upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal relating to the Exchange offer (the "Letter of Transmittal"), to
exchange $1,000 principal amount of its 11 3/4% Senior Notes Due 2007 (the "New
Notes"), which will be registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement of which this
Prospectus is a part, for each $1,000 principal amount of its outstanding
11 3/4% Senior Notes Due 2007 (the "Old Notes"), of which an aggregate of
$160,000,000 in principal amount is outstanding as of May 14, 1997. The New
Notes will be obligations of the Company entitled to the benefits of the
Indenture (as defined herein). The New Notes will be
(COVER CONTINUED ON NEXT PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company will accept for exchange any and all validly tendered Old Notes
on or prior to 5:00 p.m., New York City time, on June 16, 1997 (if and as
extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The
Exchange Offer." Interest on the New Notes will be paid in cash at a rate of
11 3/4% per annum on each April 15 and October 15, commencing October 15, 1997.
The New Notes may be redeemed at the option of the Company, in whole or in part,
at any time on or after April 15, 2002 at 105.875% of their principal amount,
plus accrued interest, declining ratably to 100% of their principal amount, plus
accrued interest, on or after April 15, 2004. In addition, at any time prior to
April 15, 2000, the Company may redeem up to 35% of the aggregate principal
amount of the New Notes with the net proceeds of one or more sales of capital
stock of the Company, at 111.750% of their principal amount, plus accrued
interest; provided that after any such redemption at least $104.0 million
aggregate principal amount of Notes remains outstanding. See "Description of the
Notes."
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of May 14, 1997. As of such date, there
were two registered holders of the Old Notes.
The Company will not receive any proceeds from this Exchange offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THIS EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
unsubordinated indebtedness of the Company, ranking pari passu in right of
payment with the Old Notes and all other unsubordinated indebtedness of the
Company and senior in right of payment to all subordinated indebtedness of the
Company. The Company is a holding company and the Old Notes and the New Notes
(together, the "Notes") will be effectively subordinated to all existing and
future liabilities (including trade payables) of the Company's subsidiaries.
After giving pro forma effect to the Transactions (as defined herein), as of
December 31, 1996, the Company would have had, on an unconsolidated basis, no
indebtedness other than the Notes and, on a consolidated basis, would have had
$213.9 million of liabilities in addition to the Notes (excluding intercompany
payables and including $201.7 million of secured indebtedness), all of which
effectively would rank senior to the Notes, and the Company would have had no
indebtedness ranking junior to the Notes. The form and terms of the New Notes
are identical in all material respects to the form and terms of the Old Notes
except that the New Notes have been registered under the Securities Act. Any Old
Notes not tendered and accepted in the Exchange Offer will remain outstanding
and will be entitled to all the rights and preferences and will be subject to
the limitations applicable thereto under the Indenture. Following consummation
of the Exchange Offer, the holders of the Old Notes will continue to be subject
to the existing restrictions upon transfer thereof and the Company will have no
further obligation to such holders to provide for the registration under the
Securities Act of the Old Notes held by them. Following the completion of the
Exchange Offer, none of the Notes will be entitled to the contingent increase in
interest rate provided pursuant to the Old Notes. The Exchange Offer is being
made pursuant to the terms of the registration rights agreement (the
"Registration Rights Agreement") entered into between the Company and Morgan
Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated, First Union Capital
Markets Corp. and NationsBanc Capital Markets, Inc. (the "Placement Agents")
pursuant to the terms of the Placement Agreement dated February 25, 1997 between
the Company and the Placement Agents. The New Notes and the Old Notes are
collectively referred to herein as the "Notes." See "The Exchange Offer--Purpose
and Effect of the Exchange Offer."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than broker-dealers, as set forth
below, and any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holder's
business and that such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes. Any holder who
tenders in the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the New Notes or who is an
affiliate of the Company may not rely upon such interpretations by the staff of
the Commission and, in the absence of an exemption therefrom, must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Holders of Old Notes wishing
to accept the Exchange offer must represent to the Company in the Letter of
Transmittal that such conditions have been met.
Each broker-dealer (other than an affiliate of the Company) that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the last
date Old Notes are accepted for exchange pursuant to the Exchange Offer (the
"Exchange Date"), it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution." Any
broker-dealer who is an affiliate of the Company may not rely on such no-action
letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
THE DATE OF THIS PROSPECTUS IS MAY 14, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 17
The Exchange Offer........................................................ 25
Use of Proceeds........................................................... 33
Capitalization............................................................ 34
Selected Consolidated Financial and Other Data............................ 35
Pro Forma Consolidated Financial Data..................................... 37
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 42
Business.................................................................. 51
Management................................................................ 74
Security Ownership of Certain Beneficial Owners and Management............ 81
Description of Other Indebtedness and Preferred Stock..................... 82
Description of the Notes.................................................. 89
Certain Federal Income Tax Considerations................................. 116
Plan of Distribution...................................................... 118
Legal Matters............................................................. 119
Experts................................................................... 119
Available Information..................................................... 119
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
OR THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR THE
ACCOMPANYING LETTER OF TRANSMITTAL NOR ALL OF THEM TOGETHER SHALL CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE
ACCOMPANYING LETTER OF TRANSMITTAL OR ALL OF THEM TOGETHER, NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
2
<PAGE>
CERTAIN TERMS
For cellular regulatory purposes, the Federal Communications Commission
("FCC") has designated regions of the United States as either a Metropolitan
Statistical Area ("MSA") or Rural Service Area ("RSA"). Interests in cellular
markets are commonly measured on the basis of the population of the MSA or RSA
served, with each person in the market area referred to as a "Pop." As used in
this Memorandum, unless otherwise indicated the term "Pops" means the estimate
of the population of an MSA or RSA, as derived from the CELLULAR/PCS POP BOOK:
1996 by Paul Kagan Associates, Inc. The term "Net Pops" means the estimated
population with respect to a given service area multiplied by the percentage
interest that the Company owns in the entity licensed in such service area. MSAs
and RSAs are also referred to as "markets." The term "non-wireline license"
refers to the license for any market that was initially awarded to a company,
individual or group, not affiliated with any landline carrier providing service
in the market. The term "wireline license" refers to the license for any market
that was initially awarded to a company, individual or group, affiliated with a
landline carrier providing service in the market. There is, however, no
technical distinction between a wireline and a non-wireline license. The term
"system" means an FCC-licensed cellular telephone system. The term "cell" refers
to the service area of an individual transmitter located in a cellular system.
The term "footprint" refers to the total system coverage area served under FCC
license by a given licensee. "Churn" means the number of cellular subscriber
cancellations per month as a percentage of the total cellular subscribers at the
end of such month. Churn is stated as the average monthly churn rate for the
period. The term "TDMA" means a digital technology that uses time division
multiple access and the term "CDMA" means a digital technology that uses code
division multiple access. The term "PCS" means personal communications services.
The term "CTIA" means the Cellular Telecommunications Industry Association. The
term "NACN" means the North American Cellular Network. For PCS regulatory
purposes, the FCC has designated regions of the United States as either a Major
Trading Area ("MTA") or Basic Trading Area ("BTA").
The term "Recent Acquisitions" means, collectively, the acquisitions of FCC
licenses for and assets related to (i) the Maryland 2 RSA ("Maryland 2") (the
"Maryland 2 Acquisition") completed on March 3, 1997, and (ii) the Cumberland
MSA, Hagerstown MSA, Maryland 3 RSA and Pennsylvania 10 West RSA (collectively,
the "Horizon Properties") (the "Horizon Properties Acquisition") completed on
February 28, 1997. The term "Arizona 5 Acquisition" means the acquisition of a
75% interest in a partnership which owns the FCC license and system for the
Arizona 5 RSA ("Arizona 5"). The term "Acquisitions" means, collectively, the
Recent Acquisitions and the Arizona 5 Acquisition. The term "Transactions"
means, collectively, the Acquisitions and related financing, including the sale
of the Old Notes and borrowings under the Bank Facility (as defined herein), and
the payment of $7.5 million in dividends with respect to the Company's Class A
Common Stock on February 28, 1997 and, for purposes of 1995 pro forma statement
of operations data, the term "Transactions" also includes the March 1996
acquisition of the Kansas 5 RSA, Missouri 1 RSA, Missouri 4 RSA, Missouri 5 RSA
and Missouri 2 RSA (collectively, the "Kansas/Missouri Cluster"). Unless
otherwise indicated, all references in this Prospectus to Pops, Net Pops and the
Company's systems give effect to the consummation of the Acquisitions.
The term "EBITDA" represents earnings before interest expense, income taxes,
depreciation and amortization.
As used herein the following companies and businesses will be identified as
indicated: "Airtouch" means Airtouch Communications, Inc.; "AllTel" means AllTel
Corporation; "AT&T" means AT&T Corp.; "AT&T Wireless" means AT&T Wireless
Services, Inc.; "ATTI" means Associated Telecommunications and Technologies,
Inc., an affiliate of the Company; "BANM" means Bell Atlantic/NYNEX Mobile;
"Brooks" means Brooks Fiber Properties, Inc.; "Chariton Cellular" means Missouri
RSA 5 Partnership d/ b/a Chariton Valley Cellular; "Fleet Investors" means,
collectively, Fleet Venture Resources, Inc., Fleet Equity Partners VI L.P. and
Kennedy Plaza Partners; "Kansas Cellular" means Independent Networks, Inc. d/b/a
Kansas Cellular; "MCI" means MCI Communications Corporation; "Motorola" means
Motorola, Inc.; "Enid Cellular" means Enid MSA Partnership d/b/a Enid Cellular;
"NTS" means NTS Communications, Inc.; "Sprint" means Sprint Corporation and
affiliated companies; "SWBM" means Southwestern Bell Mobile Systems, Inc.;
"SWBT" means Southwestern Bell Telephone Company; "Triad Cellular" means Triad
Cellular LP; "U.S. Cellular" means United States Cellular Corporation; "U S
WEST" means U S WEST, Inc. and its affiliated companies; "Vanguard" means
Vanguard Cellular Systems, Inc.; "Vyvx" means Vyvx, Inc.; and "WorldCom" means
WorldCom, Inc.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT
OTHERWISE REQUIRES, ALL REFERENCES IN THIS PROSPECTUS TO "DOBSON" OR THE
"COMPANY" ARE TO DOBSON COMMUNICATIONS CORPORATION AND, WHERE APPROPRIATE, ITS
SUBSIDIARIES, AND ALL REFERENCES TO "DOC" ARE TO DOBSON OPERATING COMPANY, A
WHOLLY-OWNED SUBSIDIARY OF DOBSON, WHICH OWNS THE CAPITAL STOCK OF THE COMPANY'S
CELLULAR, LOCAL EXCHANGE AND WHOLLY-OWNED FIBER SUBSIDIARIES.
THE COMPANY
Dobson Communications Corporation provides diversified telecommunications
products and services. The Company currently provides rural cellular telephone
services in a cluster of RSAs and a small MSA located in western Oklahoma and
the Texas panhandle (the "Oklahoma/Texas Cluster") and in a cluster of RSAs in
northeastern Kansas and northwestern Missouri near Kansas City (the
"Kansas/Missouri Cluster"). As a result of the consummation of the Recent
Acquisitions, the Company also owns and operates cellular systems in Maryland
and Pennsylvania and, upon consummation of the Arizona 5 Acquisition, the
Company will own and operate a cellular system in Arizona. The Company also owns
interests in, and operates, regional fiberoptic transmission networks in
Oklahoma, Texas and Colorado, and owns and operates local telephone exchanges in
Oklahoma and intends to resell local, long distance and wireless services in
Oklahoma. For the year ended December 31, 1996, the Company reported operating
income of $7.4 million and EBITDA of $17.2 million and, on a pro forma basis
giving effect to the Transactions, the Company would have had operating income
of $6.4 million and EBITDA of $31.4 million.
The Company, through its predecessors, was formed by the Dobson family in
1936 to provide wireline telephone service among oil fields in central Oklahoma,
and is currently controlled by the Dobson family. The Company initiated its
ownership and operation of rural cellular systems in 1990 in western Oklahoma
and the Texas panhandle, and expanded its rural cellular operations in Oklahoma
in 1991. In 1996, the Company acquired six RSAs in Kansas and Missouri near the
greater Kansas City area. In February and March 1997, the Company acquired
additional cellular RSA licenses in Maryland and southern Pennsylvania. In 1991,
the Company initiated its ownership and operation of fiberoptic lines in western
Oklahoma, the Texas panhandle and southwestern Colorado.
Dobson Communications Corporation was incorporated in February 1997 in
connection with a corporate reorganization (the "Reorganization") pursuant to
which Dobson Communications Corporation became the holding company parent of
Dobson Operating Company ("DOC") which owns, directly or indirectly, all of the
capital stock of, or other equity interests in, the Company's cellular, local
exchange and wholly-owned fiber subsidiaries. See "Business--Company
Organization."
RURAL CELLULAR
The Company's principal focus is the ownership, operation and development of
rural cellular systems. The Company believes rural cellular systems generally
provide strong growth opportunities due to lower penetration rates and higher
subscriber growth rates compared to large MSAs. The Company believes rural
cellular areas, which have a significant number of potential customers with
substantial needs for wireless communications, have not yet been developed as
fully as large MSAs, which were licensed earlier by the FCC. In addition, the
Company believes that, in the near term, rural cellular areas will be subject to
less competition from other wireless providers as compared to large MSAs. The
Company focuses on strategic areas that are underdeveloped and possess the
potential for increased cellular usage and superior financial performance. In
particular, the Company focuses on RSAs and small MSAs that (i) are adjacent to
major metropolitan areas, (ii) have favorable demographics, (iii) include a high
concentration of expressway corridors that facilitate a significant amount of
roaming activity, or (iv) are contiguous with existing systems or are clusters
of contiguous systems.
4
<PAGE>
The Company purchased licenses and systems in a cluster of strategically
located RSAs and small MSAs in Maryland and Pennsylvania in February and March
1997 and has entered into a purchase agreement pursuant to which it will
purchase a 75% interest in the partnership which owns the license and systems in
an RSA in Arizona. Following the completion of the Arizona 5 Acquisition, the
Company's cellular systems will include approximately 1.7 million total Pops
(1.5 million Net Pops). On a pro forma basis giving effect to the Transactions,
the Company's operating income and EBITDA from its cellular operations for the
year ended December 31, 1996 would have been $.9 million and $21.3 million,
respectively, and the Company would have had 80,437 subscribers as of December
31, 1996.
The Company began its cellular business in 1990 when it initiated operations
in an area which is now part of the Oklahoma/Texas Cluster and in 1991 acquired
the Enid, Oklahoma MSA and the Oklahoma 2 RSA. Since the inception of its
cellular business, the Company has developed organizational, marketing and
operational programs designed to increase the number and stability of
subscribers, promote superior customer service, control subscriber acquisition
costs and enhance operating cash flow. These programs include increasing the
Company's local presence, expanding coverage through the addition of cell sites,
enhancing system technology and offering simplified rate plans. Through December
31, 1996, the number of subscribers in the Oklahoma/Texas Cluster had grown to
30,996 (representing a 9.0% market penetration rate).
Since acquiring the Kansas/Missouri Cluster on March 19, 1996, the Company
has begun to implement its organizational, marketing and operational programs in
this cluster. Through December 31, 1996, the Company had added four new retail
locations. In 1997, the Company intends to open additional retail locations and
to expand its coverage by increasing its cell sites from 21 to 31. The
implementation of the Company's programs increased the number of subscribers in
the Kansas/Missouri Cluster by approximately 950 net additions to a total of
3,310 subscribers at December 31, 1996. The EBITDA attributable to the
Kansas/Missouri Cluster from its acquisition on March 19, 1996 through December
31, 1996 was $.6 million. The Company expects to incorporate similar programs in
the properties acquired pursuant to the Acquisitions.
The following table sets forth certain data with respect to the Company's
existing cellular systems and the system which will be acquired in the Arizona 5
Acquisition.
<TABLE>
<CAPTION>
TOTAL TOTAL MARKET DATE ACQUIRED/
CLUSTER POPS OWNERSHIP NET POPS SUBSCRIBERS(A) PENETRATION(B) EXPECTED
- ----------------------------- --------- ------------- --------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
OKLAHOMA/TEXAS(C)
Oklahoma 5 RSA(d).......... 32,500 64.4% 20,914 5,994 18.4% August 1989
Oklahoma 7 RSA(d).......... 115,700 64.4 74,453 7,628 6.6 August 1989
Texas 2 RSA................ 89,700 61.0 54,717 11,973 13.3 August 1989
Enid, OK MSA............... 57,600 100.0 57,600 2,817 4.9 September 1991
Oklahoma 2 RSA............. 48,800 100.0 48,800 2,584 5.3 May 1991
--------- --------- ------
Total.................... 344,300 256,484 30,996 9.0
--------- --------- ------
KANSAS/MISSOURI
Kansas 5 RSA............... 118,200 100.0 118,200 914 .8 March 1996
Missouri 1 RSA............. 42,600 100.0 42,600 1,260 3.0 March 1996
Missouri 4 RSA............. 68,800 100.0 68,800 1,069 1.6 March 1996
Missouri 5 RSA(e).......... 14,200 100.0 14,200 67 .5 March 1996
Missouri 2 RSA............. 34,200 100.0 34,200 -- -- March 1996
--------- --------- ------
Total.................... 278,000 278,000 3,310 1.2
--------- --------- ------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
TOTAL TOTAL MARKET DATE ACQUIRED/
CLUSTER POPS OWNERSHIP NET POPS SUBSCRIBERS(A) PENETRATION(B) EXPECTED
- ----------------------------- --------- ------------- --------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
MARYLAND/PENNSYLVANIA
Maryland 2 RSA............. 444,700 100.0 444,700 18,728 4.2% March 1997
Cumberland, MD MSA(f)...... 68,000 100.0 68,000 28 -- February 1997
Hagerstown, MD MSA......... 127,800 100.0 127,800 1,253 1.0 February 1997
Maryland 3 RSA............. 184,200 100.0 184,200 19,204 10.4 February 1997
Pennsylvania 10 West
RSA(f)................... 49,500 100.0 49,500 1,251 2.5 February 1997
--------- --------- ------
Total.................... 874,200 874,200 40,464 4.6
--------- --------- ------
ARIZONA 5.................... 184,400 75.0 138,300 5,667 3.1 Pending
--------- --------- ------
Total.................... 1,680,900 1,546,984 80,437 4.8%
--------- --------- ------
--------- --------- ------
</TABLE>
- ------------------------------
(a) As of December 31, 1996.
(b) Determined by dividing total subscribers by the total Pops covered by the
applicable FCC cellular license or authority.
(c) The Company also owns a 5% interest in a partnership which owns a cellular
system in Oklahoma 3 RSA, which had total Pops of 205,600. Information on
the Oklahoma 3 RSA is excluded because the Company does not manage the
system.
(d) The Company's FCC licenses for the Oklahoma 5 RSA and the Oklahoma 7 RSA do
not include Kingfisher and Blaine Counties and approximately one-half of
Dewey County (total Pops estimated by the Company to be 3,000 for the area
in Dewey County not covered by the Company's FCC license), and Harmon and
Greer Counties, respectively. Information for these two RSAs relates only to
the areas covered by the Company's FCC licenses.
(e) The Company's FCC license for the Missouri 5 RSA covers only the Linn County
portion of the RSA. Information for this RSA relates only to the area
covered by the Company's FCC license.
(f) The FCC license for the Cumberland, MD MSA covers only the towns of
Cumberland and Frostburg and surrounding areas (total Pops estimated by the
Company to be 68,000) and the FCC license for the Pennsylvania 10 West RSA
covers only Bedford County. Information for this MSA and RSA relates only to
the area covered by the Company's FCC licenses.
WIRELINE
Since 1936, the Company has provided rural local exchange services and
currently owns and operates nine contiguous local telephone exchanges in western
Oklahoma and three contiguous local telephone exchanges adjacent to and
immediately east of Oklahoma City. At December 31, 1996, the Company's local
telephone exchanges served approximately 12,000 access lines. The Company
provides local and long-distance telecommunications services with enhanced and
value-added calling and billing features. The Company's operating income and
EBITDA from its wireline operations for the year ended December 31, 1996 were
$4.7 million and $8.1 million, respectively. The Company intends to leverage its
reputation in and knowledge of local markets by reselling local, long distance
and wireless services, initially in the greater Oklahoma City and Tulsa
metropolitan areas. The Company expects to commence offering these services in
mid-1997 using its own switches and leasing local exchange lines. As a result,
the Company intends to offer these services without building out an extensive
infrastructure.
FIBER
The Company operates over 545 miles of fiberoptic lines. It owns and
operates approximately 360 miles of fiberoptic lines between Oklahoma City and
Amarillo, Texas and is a 20% partner in, and manages, a partnership which owns
and operates approximately 185 miles of fiberoptic lines between Springfield,
Colorado and Colorado Springs. The Company's fiber networks are linked to other
fiber networks through interconnection agreements that allow it to provide voice
and data telecommunications services to cities in Texas, Colorado, Oklahoma and
Kansas outside its existing network. These networks utilize advanced fiberoptic
technology and are capable of efficiently transmitting capacity-intensive
services, such as Internet, multimedia applications, frame relay and ATM. The
Company sells capacity on a wholesale basis to telecommunications carriers,
including certain subsidiaries of the Company, and also sells services to public
and private businesses and governmental agencies. While the Company has no plans
to add additional fiberoptic lines, the Company intends to initiate additional
marketing programs to increase its customer base and to increase the use of its
fiberoptic networks by its existing customers and
6
<PAGE>
will seek to expand its networks to additional cities through new
interconnection agreements. The Company's operating income and EBITDA from its
fiber operations for the year ended December 31, 1996 were $.8 million and $2.0
million, respectively.
OTHER
In April 1997, the Company was granted PCS licenses in nine markets in
Oklahoma, Kansas and Missouri that are adjacent to or overlap its existing
cellular clusters. The Company's total bids in the FCC's 10 MHz "F" Block
auction amounted to $5.1 million (net of discounts) and the licenses cover
approximately 4.2 million Pops. The Company is exploring plans to develop these
markets through the creation of alliances with other wireless companies with
similar technology, including reselling and roaming agreements and, potentially,
partitioning spectrum.
BUSINESS STRATEGY
The Company's business strategy is to focus on the development and
acquisition of rural cellular systems. The principal elements of the Company's
business strategy include:
AGGRESSIVE LOCAL MARKETING AND PROMOTION OF WIRELESS SERVICES. The
Company's marketing programs are designed to distinguish it as the local
market's highest quality wireless services provider, stressing its local sales
offices and local personnel, and its commitment to the community. The Company's
sales efforts are conducted primarily through its direct sales force operating
out of its local retail stores, and, to a lesser extent, through independent
agents in other retail outlets. Management believes that, as a local service
provider with strong local distribution of products and services, the Company
has an advantage over its competitors which do not emphasize a local presence or
focus on local knowledge and community involvement.
TARGETED MARKETING STRATEGY. The Company strives to attract subscribers who
are likely to generate high monthly revenue and low churn rates. It undertakes
extensive market research to identify and design marketing programs to attract
these subscribers and tailor distinctive rate plans and roaming rates to
emphasize the "value" and the "advantage" of the Company's cellular service. The
Company has established regional marketing alliances with neighboring cellular
carriers to create larger "home rate" areas in order to increase its roaming
revenue and to effectively expand the Company's footprint to attract new
subscribers. The Company's sales force compensation is structured to maximize
net subscriber additions in order to achieve high penetration levels and
minimize subscriber churn.
RECOGNIZED BRAND NAMES. The Company uses brand names that are predominant
in the areas surrounding its clusters or have a high degree of local
recognition. The Company markets its cellular products and services under the
CELLULAR ONE-Registered Trademark- brand name in central and northwestern
Oklahoma and in the Kansas/Missouri and Maryland/Pennsylvania Clusters. In
Arizona 5, the Company intends to use the AIRTOUCH-TM- CELLULAR brand name which
is currently in use in the adjacent Phoenix and Tucson areas. By using these
brand names, the Company benefits from the extensive marketing efforts
undertaken to promote these brands in the adjacent metropolitan areas. The
DOBSON CELLULAR-TM- brand name is used by the Company in its remaining service
areas in Oklahoma and in Texas where the Company is an established wireline
service provider and has a high degree of recognition.
SUPERIOR CUSTOMER SERVICE. The Company strives to maintain a high level of
customer satisfaction through a variety of techniques including maintaining
24-hour customer service and active ongoing contact with customers. Customer
service is supported on a local level through the Company's direct sales force
and its retail stores, and through centralized customer service centers. The
Company believes that its emphasis on superior customer service has enabled it
to achieve an average monthly churn rate of 1.83% for the year ended December
31, 1996.
FUNCTIONAL ALLOCATION OF MANAGEMENT RESPONSIBILITIES. The Company employs a
management policy that enables local management, with in-depth market knowledge,
to make day-to-day operating decisions,
7
<PAGE>
while retaining centralized control of budgets, pricing, system design and
engineering and financial and administrative functions. The local operating
control fosters a strong sense of customer service and community spirit. The
Company believes its management structure enables it to customize its marketing
strategy to the needs of each local market, while maximizing efficiencies and
support through a centralized corporate staff and customer service centers.
GEOGRAPHICALLY DIVERSE NETWORK CLUSTERS. The Company seeks to operate its
systems in multiple, contiguous market clusters in diverse geographic areas,
with each cluster of sufficient size to achieve scale economies in operation as
well as cost efficiencies in deploying its network infrastructure. The Company
believes that by owning and operating clusters in diverse geographic areas the
Company's financial performance will be less affected by local economic
conditions and seasonality.
COMMITTED SYSTEM DEVELOPMENT AND EXPANSION. The Company plans to expand and
improve coverage and increase the capacity in its existing systems, and to build
out the acquired systems. The Company believes that expanding and improving
coverage and capacity in its systems will attract additional subscribers,
enhance the use of its systems by existing subscribers, increase roamer traffic
due to the larger geographic area covered by the cellular network and further
enhance the overall efficiency of the network.
The Company intends to upgrade its systems with digital technology to enable
it to increase its roaming services and provide enhanced benefits, including
caller ID, longer battery life and zone billing, to digital cellular subscribers
and PCS subscribers with dual mode phones. The Company recently completed
upgrading its system in the Oklahoma/Texas Cluster to analog/TDMA digital
technology. The timing of the upgrading of the Company's other systems will
depend upon the technology selected by the Company's larger cellular neighbors,
and market conditions.
ACQUISITIONS AND FINANCING PLAN
The Company will focus on the integration and development of the systems
acquired or to be acquired in the Acquisitions, including the implementation of
organizational, marketing and operational strategies developed in the
Oklahoma/Texas Cluster and introduced in the Kansas/Missouri Cluster. The
Company will continue to evaluate opportunities to create new cellular clusters
or expand current clusters by acquisitions of additional RSAs and small to
mid-sized MSAs.
MARYLAND 2 ACQUISITION. On March 3, 1997, the Company purchased the FCC
cellular license for, and certain assets relating to, the Maryland 2 RSA for
$75.8 million, subject to adjustment. The property, which is located to the east
of the Washington/Baltimore metropolitan area, has 57 highway miles with heavy
tourist and commercial traffic, and 444,700 Pops. For the year ended December
31, 1996, after pro forma adjustments, the Maryland 2 RSA would have generated
$1.1 million of operating losses and $4.7 million of EBITDA. See "Pro Forma
Consolidated Financial Data."
HORIZON PROPERTIES ACQUISITION. 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, subject to
adjustment. The properties have 429,500 Pops and a major suburban population
immediately outside the Washington/Baltimore metropolitan area. These properties
generated $2.9 million of operating income and $5.2 million of EBITDA for the
year ended December 31, 1996.
ARIZONA 5 ACQUISITION. The Company intends to purchase, through a series of
transactions, a 75% interest in a partnership which owns the FCC cellular
license and system for, and certain assets relating to, Arizona 5 (the "Arizona
5 Partnership") for a net purchase price of approximately $39.8 million, subject
to adjustment. As part of the Arizona 5 Acquisition, certain affiliates of the
Company will receive approximately $9.5 million. See "Management--Certain
Transactions." In connection with the Arizona 5 Acquisition, the Company will
loan $5.2 million to one of the current partners which will acquire a 25%
interest in the Arizona 5 Partnership. Arizona 5 is located southeast of Phoenix
and northwest of Tucson. Interstate 10 between Phoenix and Tucson runs through
the property and provides a significant source of
8
<PAGE>
roaming revenue. The property has 184,400 Pops and generated $3.1 million of
operating income and $4.4 million of EBITDA for the year ended December 31,
1996.
On February 28, 1997, the Company consummated an offering of the Old Notes
(the "Offering") and replaced its existing bank facility (the "prior bank
facility") with a $200 million secured reducing revolving credit facility
maturing in September 2005 (the "Bank Facility"). DOC is the borrower under the
Bank Facility, and CoreStates Bank, N.A., First Union National Bank of North
Carolina and NationsBank of Texas, N.A. are the managing agents as well as
banks. The Company used all of the net proceeds of the Offering ($155.2 million)
to finance portions of the Horizon Properties Acquisition ($69 million) and the
Maryland 2 Acquisition ($47.8 million), and to purchase the Pledged Securities
($38.3 million) which secure payment of the first four scheduled interest
payments due on the Notes. The Company will finance the Arizona 5 Acquisition
and the related capital expenditures with borrowings by DOC under the Bank
Facility. The Bank Facility is secured by a pledge of the capital stock and
liens on the assets of DOC and its subsidiaries, and is guaranteed by the
Company and DOC's subsidiaries. See "--Recent Developments," "Business--Company
Organization" and "Description of Other Indebtedness and Preferred Stock--The
Bank Facility."
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer.............. Pursuant to the Exchange Offer, $1,000 principal amount of
New Notes will be issued in exchange for each $1,000
principal amount of Old Notes that are validly tendered
and not withdrawn. As of May 14, 1997, there were two
registered holders of Old Notes and $160,000,000 aggregate
principal amount of Old Notes is outstanding. See "The
Exchange Offer."
Holders of Old Notes whose Old Notes are not tendered and
accepted in the Exchange Offer will continue to hold such
Old Notes and will be entitled to all the rights and
preferences and will be subject to the limitations
applicable thereto under the Indenture governing the Old
Notes and the New Notes. Following consummation of the
Exchange Offer, the holders of Old Notes will continue to
be subject to the existing restrictions upon transfer
thereof and the Company will have no further obligation to
such holders to provide for the registration under the
Securities Act of the Old Notes held by them. Following
the completion of the Exchange Offer, none of the Notes
will be entitled to the contingent increase in interest
rate provided pursuant to the Old Notes.
Resale.......................... Based on interpretations by the staff of the Securities
and Exchange Commission (the "Commission") set forth in
no-action letters issued to third parties, the Company
believes the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder thereof
(other than broker-dealers, as set forth below, and any
such holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's
business and that such holder has no arrangement or
understanding with any person to participate in the
distribution of such New Notes. Any holder who tenders in
the Exchange Offer with the intention to participate, or
for the purpose
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
of participating, in a distribution of the New Notes or
who is an affiliate of the Company may not rely upon such
interpretations by the staff of the Commission and, in the
absence of an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale
transaction. Failure to comply with such requirements in
such instance may result in such holder incurring
liabilities under the Securities Act for which the holder
is not indemnified by the Company. Each broker-dealer
(other than an affiliate of the Company) that receives New
Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with
any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the
Securities Act. The Company has agreed that, for a period
of 180 days after the Exchange Date, it will make this
Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of
Distribution."
The Exchange Offer is not being made to, nor will the
Company accept surrenders for exchange from, holders of
Old Notes in any jurisdiction in which this Exchange Offer
or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
Expiration Date................. The Exchange Offer will expire at 5:00 p.m., New York City
time, on June 16, 1997, unless extended, in which case the
term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended. Any extension, if
made, will be publicly announced through a release to the
Dow Jones News Service and as otherwise required by
applicable law or regulations.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain conditions, which
may be waived by the Company. See "The Exchange
Offer--Conditions of the Exchange Offer." The Exchange
Offer is not conditioned upon any minimum principal amount
of Old Notes being tendered.
Procedures for Tendering Old
Notes......................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or a
facsimile thereof, together with such Old Notes and any
other required documentation to United States Trust
Company of New York, the Exchange Agent, at the address
set forth herein and therein. By executing the Letter of
Transmittal, each holder will represent to the Company
that, among other things, the New Notes acquired pursuant
to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes,
whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or
understanding with any person to participate in the
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
distribution of such New Notes and that neither the holder
nor any such other person is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act.
See "The Exchange Offer--Terms of the Exchange Offer
Procedures for Tendering Old Notes" and "The Exchange
Offer--Terms of the Exchange Offer-- Guaranteed Delivery
Procedures."
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender such Old Notes
in the Exchange Offer should contact such registered
holder promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on its own behalf, such
owner must, prior to completing and executing the Letter
of Transmittal and delivering its Old Notes, either make
appropriate arrangements to register ownership of the Old
Notes in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer of
registered ownership may take considerable time and may
not be able to be completed prior to the Expiration Date.
See "The Exchange Offer--Terms of the Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery
Procedures.................... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the Expiration
Date, must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The Exchange
Offer--Terms of the Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of Old Notes and
Delivery of New Notes......... Subject to certain conditions (as described more fully in
"The Exchange Offer Conditions of the Exchange offer"),
the Company will accept for exchange any and all Old Notes
which are properly tendered in the Exchange Offer and not
withdrawn, prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant to the
Exchange Offer will be delivered as promptly as
practicable following the Expiration Date.
Withdrawal Rights............... Except as otherwise provided herein, tenders of Old Notes
may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer--Withdrawal of Tenders
of Old Notes."
Certain Federal Income Tax
Considerations................ For a discussion of certain federal income tax
considerations relating to the exchange of the New Notes
for the Old Notes, see "Certain Federal Income Tax
Considerations."
Exchange Agent.................. United States Trust Company of New York is the Exchange
Agent. The address, telephone number and facsimile number
of the Exchange Agent are set forth in "The Exchange
Offer--Exchange Agent."
</TABLE>
11
<PAGE>
SUMMARY OF TERMS OF THE NEW NOTES
The Exchange Offer applies to $160,000,000 aggregate principal amount of Old
Notes. The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that (i) the New Notes
will be registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and (ii) holders of the New Notes will
not be entitled to certain rights of holders of Old Notes under the Registration
Rights Agreement, which will terminate upon consummation of the Exchange Offer.
The New Notes will evidence the same debt as the Old Notes, will be entitled to
the benefits of the Indenture and will be treated as a single class thereunder
with any Old Notes that remain outstanding. Following the Exchange Offer, none
of the Notes will be entitled to the contingent increase in interest rate
provided for (in the event of a failure to consummate the Exchange Offer in
accordance with the terms of the Registration Rights Agreement) pursuant to the
Old Notes. See "Description of the Notes."
<TABLE>
<S> <C>
Issuer............................ Dobson Communications Corporation
Securities Offered................ $160 million aggregate principal amount of 11 3/4%
Senior Notes due 2007.
Maturity.......................... April 15, 2007.
Interest.......................... Payable semiannually, in cash, on April 15 and October
15, commencing October 15, 1997.
Security.......................... A portion of the proceeds from the Old Notes was placed
in escrow and invested in U.S. government securities
("Pledged Securities") which secure payment of the first
four scheduled interest payments due on the Notes.
Proceeds from the Pledged Securities will be used by the
Company to make the first four scheduled interest
payments on the Notes and as security for the repayment
of the aggregate principal amount of the Notes. After
the first four interest payments, the Notes will be
unsecured. See "Description of the Notes--Security." The
Pledged Securities will be held by the Trustee for the
benefit of the holders of the Notes under the Escrow and
Security Agreement (as defined herein) pending
disbursement.
Optional Redemption............... The Notes are redeemable, at the option of the Company,
in whole or in part, at any time on or after April 15,
2002, initially at 105.875% of their principal amount,
plus accrued interest, declining ratably to 100% of
their principal amount, plus accrued interest, on or
after April 15, 2004. In addition, prior to April 15,
2000, the Company may redeem up to 35% of the aggregate
principal amount of the Notes with the net proceeds from
one or more sales of Capital Stock of the Company (other
than Disqualified Stock), at 111.750% of their principal
amount plus accrued interest; provided that after any
such redemption at least $104.0 million aggregate
principal amount of the Notes remains outstanding. See
"Description of the Notes--Optional Redemption."
Change of Control................. Upon a Change of Control (as defined under "Description
of the Notes--Certain Definitions"), the Company will be
required to make an offer to purchase the Notes at a
purchase price equal to 101% of their principal amount,
plus accrued interest. See
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
"Description of the Notes--Repurchase of Notes upon a
Change of Control."
Ranking........................... The Notes are unsubordinated indebtedness of the
Company, ranking PARI PASSU in right of payment with all
other unsubordinated indebtedness of the Company and
senior in right of payment to all subordinated
indebtedness of the Company. The Company is a holding
company and the Notes will be effectively subordinated
to all existing and future liabilities (including trade
payables) of the Company's subsidiaries. After giving
pro forma effect to the Transactions, as of December 31,
1996, the Company would have had, on an unconsolidated
basis, no indebtedness other than the Notes and, on a
consolidated basis, would have had $213.9 million of
liabilities in addition to the Notes (excluding
intercompany payables and including $201.7 million of
secured indebtedness), all of which effectively would
rank senior to the Notes, and the Company would have had
no indebtedness ranking junior to the Notes. See "Risk
Factors--Leverage; Significant Capital Requirements;
Ability to Meet Required Debt Service; Refinancing
Risk."
Certain Covenants................. The Indenture contains certain covenants for the benefit
of the holders of the Notes (the "Holders") which, among
other things, restrict the ability of the Company and
its Restricted Subsidiaries (as defined in "Description
of the Notes Certain Definitions") to incur additional
indebtedness, create liens, engage in sale-leaseback
transactions, pay dividends or make distributions in
respect of their capital stock, make investments or
certain other restricted payments, sell assets, issue or
sell stock of Restricted Subsidiaries, enter into
transactions with stockholders or affiliates or effect a
consolidation or merger. However, these limitations are
subject to a number of important qualifications and
exceptions. See "Description of the Notes-- Covenants."
Book Entry; Delivery and Form..... Transfers of Notes between participants in The
Depository Trust Company ("DTC") will be effected in the
ordinary way in accordance with DTC rules and will be
settled in same-day funds. See "Description of the
Notes--Book-Entry; Delivery and Form."
</TABLE>
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New Notes
pursuant to this Prospectus.
RISK FACTORS
For a discussion of certain factors to be considered in evaluating the
Company, its business and an investment in the Notes, see "Risk Factors"
beginning on page 17.
13
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain historical consolidated financial
data with respect to each of the five years ended December 31, 1996. The
consolidated financial data as of and for each of the years in the period 1992
to 1996 have been derived from the Company's audited consolidated financial
statements. The pro forma statement of operations data give effect to the
Transactions as if they occurred on January 1, 1996 and the pro forma balance
sheet data give effect to the Transactions as if they occurred on December 31,
1996. The pro forma financial information does not purport to represent what the
Company's results of operations would have been if the Transactions had in fact
occurred on such dates, nor does it purport to indicate the future financial
position or results of future operations of the Company. The historical and pro
forma data should be read in conjunction with "Selected Consolidated Financial
and Other Data," "Pro Forma Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and the related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996(A) 1996(A)(B)
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Cellular................................................................. $ 7,033 $11,089 $15,169 $18,989 $26,107 $ 62,396
Wireline................................................................. 9,607 10,716 11,557 12,807 13,472 13,472
Fiber.................................................................... 290 671 904 1,415 2,313 2,313
Rental income and other.................................................. 723 321 616 1,238 1,333 1,333
------- ------- ------- ------- ------- ---------
Total revenue.......................................................... 17,653 22,797 28,246 34,449 43,225 79,514
Costs and expenses:
Cost of services and equipment sales..................................... 4,210 4,965 5,418 7,014 9,076 20,562
General and administrative............................................... 7,098 7,971 9,621 10,138 12,087 16,213
Marketing and selling.................................................... 1,965 2,552 3,098 3,157 4,908 11,305
Depreciation and amortization............................................ 4,284 4,563 5,534 6,653 9,720 25,013
------- ------- ------- ------- ------- ---------
Total costs and expenses............................................... 17,557 20,051 23,671 26,962 35,791 73,093
Operating income........................................................... 96 2,746 4,575 7,487 7,434 6,421
Interest expense, net...................................................... (2,284) (2,276 ) (2,926) (3,824) (6,477 ) (35,264)
Other income (expense), net................................................ (338) (146 ) (191) (487) (1,587 ) (1,623)
Minority interests in income (losses) of subsidiaries(c)................... 185 (502 ) (1,105) (1,334) (675 ) (698)
Income tax (provision) benefit............................................. 856 78 (119) (738) 411 525
Extraordinary items(d)..................................................... 90 -- 228 -- (527 ) (850)
------- ------- ------- ------- ------- ---------
Net income (loss).......................................................... (1,395) 541 (e) 462 1,104 (1,421 ) (31,489)
Dividends on preferred stock............................................... -- -- (83) (591) (849 ) (849)
------- ------- ------- ------- ------- ---------
Net income (loss) applicable to common stockholders........................ $(1,395) $ 541 $ 379 $ 513 $(2,270) $(32,338)
------- ------- ------- ------- ------- ---------
------- ------- ------- ------- ------- ---------
Net income (loss) applicable to common stockholders per common share....... (2.95) 1.14 .80 1.08 (4.12 ) (58.63)
Dividends per common share................................................. -- -- .11 1.40 1.02 1.02
OTHER FINANCIAL DATA:
EBITDA(f):
Cellular(g).............................................................. $ 328 $2,680 $ 3,923 $ 5,439 $7,005 $ 21,284
Wireline................................................................. 4,115 4,637 5,413 6,968 8,137 8,137
Fiber.................................................................... (63) (8 ) 774 1,733 2,013 2,013
------- ------- ------- ------- ------- ---------
Total.................................................................. 4,380 7,309 10,110 14,140 17,155 31,434
Ratio of earnings to fixed charges(h)...................................... -- -- 1.1x 1.5x -- --
Capital expenditures, excluding cost of acquisitions....................... $ 5,191 $7,353 $ 5,267 $ 3,925 $17,438 $ 19,948
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996(A) 1996(A)(B)
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
($ IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
OTHER DATA:
Wireline access lines (at period end)...................................... 10,426 10,899 11,322 11,806 11,959 11,959
Route miles (at period end)(i)............................................. 450 485 485 516 545 545
Fiber miles (at period end)(j)............................................. 10,397 10,817 10,817 11,189 11,537 11,537
Ending cellular subscribers (at period end)................................ 8,644 15,283 21,481 26,614 34,306 80,437
Cellular penetration(k).................................................... 2.67% 4.63% 6.45% 8.02% 5.51% 4.79%
Cellular churn(l).......................................................... .45% .92% 1.52% 1.83% 1.77%
Average monthly revenue per cellular subscriber(m)......................... $ 52.77 $ 50.45 $ 50.00 $48.04 $ 44.20
Marketing and selling costs per gross additional cellular subscriber(n).... $392.04 $429.06 $451.23 $472.70 $377.80
Cellular cell sites (at period end)........................................ 18 26 36 46 67 122
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
PRO
ACTUAL FORMA(B)
---------- --------
($ IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Net fixed assets........................................................... $ 61,930 $73,930
Total assets............................................................... 116,948 379,661
Total debt................................................................. 105,495 361,712 (o)
Preferred stock............................................................ 10,000 11,656 (p)
Stockholders' equity (deficit)............................................. (9,802) (21,602 )(p)
</TABLE>
- ------------------------------
(a) Includes the operations of Kansas/Missouri Cluster from March 19, 1996, the
date of its acquisition by the Company. Information for the period January 1
to March 19, 1996 is not provided as such information is not available.
(b) Gives pro forma effect to the Transactions. See "Pro Forma Consolidated
Financial Data."
(c) Reflects minority interests in partnerships in which the Company owns the
majority interests.
(d) Extraordinary items reflect gain or (loss) related to early extinguishment
of debt. A write-off of $2.6 million of previously capitalized financing
costs associated with the Company's prior bank facility will be recognized
by the Company in 1997 as a result of the Bank Facility refinancing.
(e) Includes $641,000 of additional income to give cumulative effect to
accounting change resulting from the implementation of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes."
(f) EBITDA is provided because it is a measure commonly used in the industry to
determine a company's ability to incur or service debt. EBITDA is not
derived pursuant to generally accepted accounting principles and should not
be construed as an alternative to net income, as a measure of performance,
or to cash flows, as a measure of liquidity. The calculation of EBITDA does
not include the Company's commitments for capital expenditures or payments
of debts and should not be deemed to represent funds available to the
Company.
(g) Includes 100% of the EBITDA from partnerships in which the Company owns a
majority interest and is a general partner. During the time the partnerships
have outstanding indebtedness to the Company, all of the partnerships' cash
flow is used to service such indebtedness and is not available for
distributions to the partners. The portion of the EBITDA attributable to
minority interests was $.2 million, $.9 million, $1.5 million, $2.0 million
and $2.2 million, for the years ended December 31, 1992, 1993, 1994, 1995
and 1996, respectively, and $3.3 million for the year ended December 31,
1996 on a pro forma basis giving effect to the Transactions.
(h) For the years ended December 31, 1992, 1993 and 1996, earnings were
insufficient to cover fixed charges by $2.3 million, $.2 million and $1.3
million, respectively. On a pro forma basis, for the year ended December 31,
1996, earnings would have been insufficient to cover fixed charges by $31.3
million. "Earnings" are defined as earnings before extraordinary items and
accounting changes, interest expense, amortization of deferred financing
costs, taxes and the portion of rent expense under operating leases
representative of interest. Fixed charges consist of interest expense,
amortization of deferred financing costs and a portion of rent expense under
operating leases representative of interest.
(i) Route miles refers to the number of miles over which fiberoptic cables are
installed.
(j) Fiber miles refers to the number of route miles multiplied by the number of
fibers installed along that path.
15
<PAGE>
(k) Determined by dividing the Company's total ending cellular subscribers for
the period by the estimated total Pops covered by applicable FCC cellular
licenses or authorizations held by the Company.
(l) Churn means the number of cellular subscriber cancellations during a month
as a percentage of the total cellular subscribers at the end of such month.
Churn is stated as the average monthly churn rate for the period.
(m) Excludes roaming revenue.
(n) Determined by dividing cellular marketing and selling costs by the gross
cellular subscribers added during such period. Cellular marketing and
selling costs represent selling expenses and losses incurred on equipment
sales.
(o) Gives effect to an additional $1.5 million of indebtedness to be outstanding
upon the issuance of the PCS licenses.
(p) Gives effect to a dividend of approximately $1.7 million paid in preferred
stock to the Fleet Investors in connection with the Transactions.
RECENT DEVELOPMENTS
On May 14, 1997, the Company released its preliminary results for the first
quarter of 1997. For the quarter ended March 31, 1997, the Company expects to
report operating revenue of $14.3 million and EBITDA of $5.6 million, compared
to operating revenue of $9.6 million and EBITDA of $4.7 million for the quarter
ended March 31, 1996. Cellular operating revenue for the first quarter of 1997
increased $4.3 million over the comparable period in 1996 to $9.7 million.
Approximately $3.4 million of this growth was a result of the Company's 1996
acquisition of its Kansas/Missouri Cluster and its Maryland 2 and Horizon
Properties Acquisitions in early 1997.
At March 31, 1997, the Company's cellular subscriber base was 78,852, of
which 42,608 cellular customers were added from the Maryland 2 and Horizon
Properties Acquisitions. The Company's average monthly revenue per subscriber
customer for the quarter ended March 31, 1997 was $42.51, and the average
monthly churn rate for the quarter was 2.03%.
16
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY
AND ITS BUSINESS.
LEVERAGE; SIGNIFICANT CAPITAL REQUIREMENTS; ABILITY TO MEET REQUIRED DEBT
SERVICE; REFINANCING RISK
The Company is highly leveraged. At December 31, 1996, on a pro forma basis
giving effect to the Transactions, the Company would have had approximately
$361.7 million of indebtedness and a deficit in stockholders' equity of $21.6
million. On the same pro forma basis, for the year ended December 31, 1996, the
Company's EBITDA would have been insufficient to cover its interest expense by
$3.9 million, and its EBITDA minus interest expense, preferred stock dividends
(excluding "Make-Whole Dividends") and capital expenditures (excluding cost of
acquisitions) would have been ($24.7) million. In the event the Arizona 5
Acquisition is not consummated, the Company's EBITDA would have been
insufficient to cover its interest expense by $4.0 million for the year ended
December 31, 1996, and its EBITDA minus interest expense, preferred stock
dividends (excluding "Make-Whole Dividends") and capital expenditures (excluding
cost of acquisitions) would have been ($24.8) million. For the year ended
December 31, 1996, on a pro forma basis giving effect to the Transactions, the
Company's earnings would have been insufficient to cover fixed charges and
preferred stock dividends (excluding "Make-Whole Dividends") by $32.1 million.
See "Description of Other Indebtedness and Preferred Stock--Preferred Stock."
The Company's high degree of leverage could significantly limit its ability to
make acquisitions, withstand competitive pressures or adverse economic
conditions, finance its operations or take advantage of future business
opportunities.
The Company has required, and will likely continue to require, substantial
capital in connection with the further development and expansion of its systems.
Historically, the Company has funded its capital requirements by debt financing
and the sale of capital stock. The Company expects its capital expenditures for
1997 will be approximately $19 million, excluding expenditures related to the
Arizona 5 Acquisition and including approximately $2.7 million of costs to be
incurred in 1997 in connection with the development of Arizona 5. The Company
has not budgeted any amounts to be expended in 1997 with respect to the buildout
of the Company's PCS systems. See "--PCS Risks." The Company believes that the
net proceeds of the Offering, together with borrowings under the Bank Facility
and cash flow from operations will be sufficient to fund the Arizona 5
Acquisition and its capital expenditures and working capital and debt service
requirements. The Company may require additional financing for future
acquisitions and for buildout requirements related to its PCS licenses. See
"--PCS Risks." Sources of additional capital may include cash flow from
operations and public and private equity and debt financings by the Company or
its subsidiaries including vendor financing. The extent of additional financing
required will depend on the success of the Company's operations. There can be no
assurance that 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 Indenture, the Bank Facility, the Class B
Convertible Preferred Stock (the "Class B Preferred Stock") and the Company's
other indebtedness or that may be contained in any future financing
arrangements. See "Description of Other Indebtedness and Preferred Stock."
The Company's total indebtedness and debt service requirements have been
substantially increased as a result of the Transactions and the Company and its
subsidiaries will be subject to significant financial restrictions and
limitations. The successful implementation of the Company's strategy, including
further development of its systems, and significant and sustained growth in the
Company's cash flow are necessary for the Company to be able to meet its debt
service requirements, including its obligations under the Notes. There can be no
assurance that the Company will successfully implement its strategy or that the
Company will be able to generate sufficient cash flow from operating activities
to meet its debt service obligations and working capital requirements.
Furthermore, if the Company is unable to satisfy any of the covenants under the
Bank Facility, including financial covenants, the Company will be unable to
borrow under the Bank Facility during such time period to fund planned capital
expenditures, its ongoing
17
<PAGE>
operations or other permissible uses. Failure to obtain such financing could
result in the delay or abandonment of some or all of the Company's plans, which
could limit the ability of the Company to meet its debt service obligations
(including obligations with respect to the Notes) and could have a material
adverse effect on its business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources."
The ability of the Company to borrow under the Bank Facility will be limited by
the requirement that, on a quarterly basis beginning June 30, 2000, the amount
available under the Bank Facility will reduce until the Bank Facility terminates
in September 2005. The reduction in availability may require the Company to make
significant principal payments thereunder. See "--Restrictions Imposed by
Lenders" and "Description of Other Indebtedness and Preferred Stock."
The indebtedness under the Bank Facility may need to be refinanced at its
maturity. The Company's ability to do so will depend on, among other things, its
financial condition at the time, the restrictions in the instruments governing
its indebtedness and other factors, including market conditions, beyond the
control of the Company. The holders of the Class B Preferred Stock have the
right to require the Company to purchase their Class B Preferred Stock for an
aggregate purchase price of $5 million, beginning in 2001, and $10 million,
beginning in 2002, in each case plus accrued dividends, and the Company is
required to redeem the Class C Preferred Stock in 2002 at an aggregate
redemption price of $1.7 million plus accrued dividends, or in both cases
earlier under certain circumstances. See "Description of Other Indebtedness and
Preferred Stock--Preferred Stock." In the event the implementation of the
Company's strategy to develop and expand its systems is delayed or the Company
does not generate sufficient cash flow to meet its debt service requirements or
obligations with respect to its Preferred Stock, the Company may need to seek
additional financing. There can be no assurance that any such financing or
refinancing could be obtained on terms that are acceptable to the Company. In
the absence of such financing or refinancing, the Company could be forced to
dispose of assets in order to make up for any shortfall in the payments due on
its indebtedness under circumstances that might not be favorable to realizing
the highest price for such assets. At December 31, 1996, approximately 26% of
the Company's total assets consisted of intangible assets, principally licenses
granted by the FCC, the value of which will depend upon a variety of factors
(including the success of the Company's cellular business and the wireless
telecommunications industry in general). In addition, transfers of interests in
such licenses are subject to FCC approval. As a result, there can be no
assurance that the Company's assets could be sold quickly enough, or for
sufficient amounts, to enable the Company to meet its obligations, including its
obligations with respect to the Notes.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION; PRIORITY OF SECURED
INDEBTEDNESS
The Company is a holding company with no direct operations and no
significant assets other than the stock of its subsidiaries. DOC has no
significant assets other than the stock of its subsidiaries that conduct its
cellular, local exchange and fiber operations, including Dobson Telephone
Company, Inc. ("Telco"), which conducts the Company's local exchange business.
The Company is dependent on the cash flows of its subsidiaries to meet its
obligations, including the payment of interest and principal on the Notes.
Receipt of funds from its subsidiaries will be restricted by the terms of
existing and future indebtedness including, with respect to DOC, the Bank
Facility. See "Description of Other Indebtedness and Preferred Stock-- The Bank
Facility." The Company's subsidiaries are separate legal entities that have no
obligation to pay any amounts due pursuant to the Notes or to make any funds
available therefor, whether by dividends, loans or other payments. Because the
Company's subsidiaries have not guaranteed the payment of the principal of or
interest on the Notes, any right of the Company to receive assets of any of its
subsidiaries upon its liquidation or reorganization (and the consequent right of
the holders of the Notes to participate in the distribution or realize proceeds
from those assets) will be effectively subordinated to the claims of the
creditors of such subsidiary (including trade creditors and holders of
indebtedness of such subsidiary), except if and to the extent the Company is
itself a creditor of such subsidiary, in which case the claims of the Company
would still be effectively subordinated to any security interest in the assets
of such subsidiary senior to that held by the Company. The stock of DOC and its
subsidiaries has been pledged to secure
18
<PAGE>
borrowings under the Bank Facility. In addition, DOC and its subsidiaries have
granted liens on substantially all of their assets as security for the
obligations under the Bank Facility. The Company has also guaranteed the
indebtedness under the Bank Facility. In addition, all indebtedness of Telco to
the Rural Utilities Services (formerly the Rural Electrification Administration)
("RUS") and the Rural Telephone Bank ("RTB") is secured by substantially all of
the assets of Telco. Because the Notes are not secured by any assets, in the
event of a dissolution, bankruptcy, liquidation or reorganization of the Company
and its subsidiaries, holders of the Notes may receive less ratably than the
secured creditors under the Bank Facility and the RUS/RTB indebtedness. At
December 31, 1996, after giving effect to the Transactions, DOC (on a
consolidated basis with its subsidiaries) would have had $213.9 million of total
outstanding liabilities, including $172.0 million of secured indebtedness under
the Bank Facility, and $29.7 million of secured indebtedness of Telco to the
RUS/RTB, all of which would have been effectively senior in right of payment to
the Notes. See "Capitalization," "Pro Forma Consolidated Financial Data" and
"Description of Other Indebtedness and Preferred Stock."
COVENANT RESTRICTIONS
The instruments governing the indebtedness of the Company and its
subsidiaries impose significant operating and financial restrictions on the
Company and its subsidiaries. Such restrictions will affect, and in many
respects significantly limit or prohibit, among other things, the ability of the
Company and its subsidiaries to incur additional indebtedness, pay dividends,
repay indebtedness prior to stated maturities, sell assets, make investments,
engage in transactions with stockholders and affiliates, issue capital stock,
create liens or engage in mergers or acquisitions. In addition, the Bank
Facility requires the Company and DOC to maintain certain financial ratios.
These restrictions could also limit the ability of the Company and its
subsidiaries to effect future financings, make needed capital expenditures,
withstand a future downturn in the Company's business or the economy in general,
or otherwise conduct necessary corporate activities. A failure by the Company or
its subsidiaries to comply with these restrictions could lead to a default under
the terms of such indebtedness and the Notes notwithstanding the ability of the
Company to meet its debt service obligations. In the event of a default, the
holders of such indebtedness could elect to declare all such indebtedness to be
due and payable together with accrued and unpaid interest. In such event, a
significant portion of the Company's other indebtedness (including the Notes)
may become immediately due and payable and there can be no assurance that the
Company and its subsidiaries would be able to make such payments or borrow
sufficient funds from alternative sources to make any such payment. Even if
additional financing could be obtained, there can be no assurance that it would
be on terms that are acceptable to the Company. In addition, DOC's indebtedness
under the Bank Facility is secured by a pledge of the capital stock and assets
of DOC and its subsidiaries. Telco's indebtedness to RUS/RTB is secured by liens
upon substantially all of Telco's assets. The pledge of such collateral to
existing lenders could impair the Company's ability to obtain favorable
financing. The terms of the Preferred Stock and the agreements executed in
connection therewith also contain certain covenants and restrictions with
respect to the Company, and the RUS/RTB indebtedness contains certain covenants
and restrictions with respect to Telco. See "Description of Other Indebtedness
and Preferred Stock."
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must offer to purchase the Notes upon the occurrence of a Change
of Control at a purchase price equal to 101% of the principal amount thereof,
plus accrued interest to the date of purchase. See "Description of the
Notes--Repurchase of Notes upon a Change of Control."
The Bank Facility prohibits the Company from prepaying the Notes, including
prepayments pursuant to a Change of Control offer. Prior to commencing such an
offer to purchase, the Company would be required to (i) repay in full all
indebtedness of the Company that would prohibit the repurchase of the Notes
including indebtedness under the Bank Facility, or (ii) obtain any requisite
consent to permit the repurchase. If the Company is unable to repay all of such
indebtedness or is unable to obtain the necessary
19
<PAGE>
consents, then the Company will be unable to offer to purchase the Notes and
such failure will constitute an Event of Default under the Indenture. There can
be no assurance that the Company will have sufficient funds available at the
time of any Change of Control offer to make any debt payment (including
repurchases of Notes) as described above.
The events that constitute a Change of Control under the Indenture may also
be events of default under the Bank Facility or other indebtedness of the
Company and its subsidiaries. Such events may permit the lenders under such debt
to accelerate the debt and, if the debt is not paid, to enforce security
interests in the assets of the Company and its subsidiaries, thereby limiting
the Company's ability to raise cash to repurchase the Notes and reducing the
practical benefit of the offer to purchase provisions to the holders of the
Notes. See "Description of Other Indebtedness and Preferred Stock."
RISKS ASSOCIATED WITH THE ACQUISITIONS; ABILITY TO MANAGE GROWTH
The Company is subject to risks that the systems acquired and to be acquired
in the Acquisitions will not perform as expected and that the returns from such
systems will not support the indebtedness incurred to acquire, or the capital
expenditures needed to develop, the systems. In addition, expansion of the
Company's operations may place a significant strain on the Company's management,
financial and other resources. The Company's ability to manage future growth
will depend upon its ability to monitor operations, control costs, maintain
effective quality controls and significantly expand the Company's internal
management, technical and accounting systems, all of which will result in higher
operating expenses. Any failure to expand these areas and to implement and
improve such systems, procedures and controls in an efficient manner at a pace
consistent with the growth of the Company's business could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the integration of acquired systems with existing
operations will entail considerable expenses in advance of anticipated revenues
and may cause substantial fluctuations in the Company's operating results. This
will involve, among other things, integration of switching, transmission,
technical, sales, marketing, billing, accounting, quality control, management,
personnel, payroll, regulatory compliance and other systems and operating
hardware and software, some of which may be incompatible with the Company's
existing systems. In addition, telecommunications providers generally experience
higher customer and employee turnover rates during and after an acquisition.
There can be no assurance that the Company will be able to successfully
integrate the systems acquired and to be acquired in the Acquisitions or any
other businesses it may acquire or that any such acquired business will not
experience high employee or customer turnover rates after the acquisition.
PCS RISKS
In April 1997, the Company was granted PCS licenses for nine markets in the
FCC "F" Block auction. The Company's right to own and utilize such licenses is
subject to its payment of $5.1 million (net of discounts) for the licenses and
the buildout of the PCS systems to cover at least 25% of the Pops covered by the
licenses within five years. See "Business--Cellular Operations." The Company
estimates that the capital expenditures relating to such a buildout would range
from $10.0 million to $30.0 million. The actual amount of the expenditures,
however, will depend on the PCS technology selected by the Company, the extent
of the Company's buildout, costs at the time of buildout and the extent the
Company must relocate incumbent microwave licensees. The Company will need
additional financing for the buildout of its PCS system. There can be no
assurance that 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 Indenture, the Bank Facility, the terms of and agreements with
respect to the Preferred Stock and the Company's other indebtedness. If the
Company's subsidiary which holds the PCS licenses fails to satisfy these
obligations, the PCS licenses may be canceled, the Company would forfeit its
investment in such PCS systems, and the FCC could sue the subsidiary for
collection of any unpaid sums due. There can be no assurance that the Company's
PCS system will be profitable. The extent of potential demand for PCS in
20
<PAGE>
the Company's markets cannot be estimated with any degree of certainty and the
technology related to PCS is uncertain at this time. The Company has no
experience operating PCS systems.
When the FCC first licensed cellular systems in the United States, it
specified the technical standards of systems operations to insure nationwide
compatibility between all cellular carriers. In contrast, the FCC has not
mandated the technology standard for PCS operations, leaving each licensee free
to select among several competing technologies that have sufficient
technological differences to preclude their interoperability. There can be no
assurance that the technical standards selected by the Company will be the most
widely used, or technologically sound. Also, because handsets which use one PCS
technology will not be operable on other systems, the ability to offer PCS
roamer service will be impacted. While the Company believes that dual-mode
handsets will be commercially available in the future, there can be no assurance
that new handsets will be successful or available at competitive prices. To the
extent most competitors in the PCS industry select a competing technology that
is not compatible to the system selected by the Company, the Company's PCS
business may be adversely affected. The Company has not yet finalized its plans
with respect to the buildout of its PCS licensed systems, nor has it selected
the digital technology to be utilized in such systems. The Company's choice of
TDMA technology for its cellular system in the Oklahoma/Texas Cluster will not
have any material effect on the Company's PCS buildout.
COMPETITION
The telecommunications industry is highly competitive. Many of the Company's
competitors and potential competitors have substantially greater financial,
personnel, technical, marketing and other resources than those of the Company as
well as other competitive advantages, and, in connection with the fiber
business, a far more extensive transmission network than the Company. Current
policies of the FCC authorize only two cellular licensees to operate in each
license area and in each of its markets the Company competes with one other
cellular licensee. Competition for subscribers between cellular licensees in a
given license area is based principally upon price, the services and
enhancements offered, the technical quality of the cellular system, customer
service and system coverage. The Company also competes, although to a lesser
extent, with resellers, paging companies and landline telephone service
providers. There can be no assurance that the Company will be able to continue
to compete successfully or that new technologies and products that are more
commercially effective than the Company's will not be developed. Some
competitors may market other services such as cable television access or
landline local exchange or long distance services with their wireless offerings.
There has been an industry trend of declining average revenue per minute, as
competition between service providers has led to reductions in rates for airtime
and subscriptions and other charges. See "Business--Competition" for more
detailed information on the competitive environment faced by the Company.
As a result of recent regulatory and legislative initiatives, the Company's
cellular operations may face increased competition from entities which use other
communications technologies or other radio frequency spectrum such as broadband
PCS licensees, and enhanced specialized mobile radio ("ESMR") licensees. The
Company is unable to predict whether such competing technologies will be
successful and as a result will provide significant competition for the Company.
The Company's operations may also face competition from other technologies
developed in the future including, but not limited to, satellite systems. The
Company believes the likelihood of near-term competition from such services is
reduced because the areas in which it operates are less densely populated. There
can be no assurance, however, that one or more of the technologies currently
utilized by the Company in its business will not become inferior or obsolete at
some time in the future. See "Business--Competition."
In connection with the Company's fiber business, its competitors may build
additional fiber capacity in the geographic areas served by the Company's
fiberoptic operations. The Company is aware that at least one other company is
considering building a new nationwide long-distance fiberoptic network. In
addition, many telecommunications companies are acquiring switches and users of
switches will have an increasing number of alternative providers of switched
long-distance services. The Company competes primarily on
21
<PAGE>
the basis of price, availability, transmission quality, customer service and a
variety of other services. The ability of the Company to compete effectively in
the fiber business will depend on its ability to maintain high-quality services
at prices generally equal to or below those charged by its competitors.
In connection with its resale of local, long distance and wireless services,
the Company will compete in Oklahoma City and Tulsa with the incumbent local
exchange carrier, SWBT, which has long-standing relationships with its customers
and has financial, technical and marketing resources substantially greater than
those of the Company. Other competitors may include Brooks and other competitive
local exchange carriers, microwave and satellite carriers, wireless
telecommunications providers and other resellers. In addition, AT&T, MCI and
Sprint have announced plans to offer integrated local and long distance
telecommunications services. There can be no assurance that the Company will be
able to achieve or maintain significant revenue or compete effectively in its
resale business. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology, including advancements protected by intellectual property laws.
In particular, the wireless telecommunications industry is experiencing
significant technological change, as evidenced by the increasing pace of digital
upgrades in existing analog wireless systems, evolving industry standards, the
availability of new radio frequency spectrum allocations in which to develop
wireless services, ongoing improvements in the capacity and quality of digital
technology, shorter development cycles for new products and enhancements, and
changes in end-user requirements and preferences. There is also uncertainty as
to the extent of customer demand as well as the extent to which airtime and
monthly access rates may continue to decline. The effect of technological
changes on the businesses of the Company cannot be predicted, and there can be
no assurance that technological developments will not have a material adverse
effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of management and
operating personnel, the loss of certain of whom could have a material adverse
effect on the Company. The Company believes that its ability to manage its
planned growth successfully will depend in large part on its continued ability
to attract and retain highly skilled and qualified personnel. See "--Risks
Associated with Acquisitions; Ability to Manage Growth" and "Management."
RELIANCE ON USE OF THIRD-PARTY SERVICE MARK
The Company intends to continue to use the registered service mark CELLULAR
ONE-Registered Trademark- to promote the services it offers in many of its
license areas. Upon completion of its Arizona 5 Acquisition, the Company will
use the service mark AIRTOUCH-TM- CELLULAR in that system. The Company's use of
the CELLULAR ONE-Registered Trademark- service mark is governed by five-year
contracts between the Company and Cellular One Group, the owner of the service
mark. Such contracts expire in 2002, and each is renewable at the option of the
Company for two additional five-year terms, subject to the attainment of certain
customer satisfaction ratings. The Company's contract to use the AIRTOUCH-TM-
CELLULAR service mark is for an initial term of 20 years with provisions to
extend the term for successive five-year periods. See "Business Service Marks."
Under these agreements, the Company must meet specified operating and service
quality standards for its systems. If these agreements are not renewed upon
expiration or if the Company fails to meet the applicable operating or service
quality standards, the Company's ability both to attract new subscribers and
retain existing subscribers could be impaired. Recently, AT&T Wireless, which
had been the single largest user of the CELLULAR ONE-Registered Trademark- name,
has significantly reduced its use of the brand name as a primary service mark.
If for this or some other reason beyond the Company's control, the names
CELLULAR ONE-Registered Trademark- or AIRTOUCH-TM- CELLULAR were to suffer
diminished marketing appeal, the Company's ability both to attract new
subscribers and retain existing subscribers could be materially impaired in the
applicable markets.
22
<PAGE>
FRAUDULENT CONVEYANCE STATUTES
Various laws enacted for the protection of creditors may apply to the
Company's incurrence of indebtedness and other obligations in connection with
the Acquisitions, including the issuance of the Notes. If a court were to find
in a lawsuit by an unpaid creditor or representative of creditors of the Company
that the Company did not receive fair consideration or reasonably equivalent
value for incurring such indebtedness or obligation and, at the time of such
incurrence, the Company: (i) was insolvent; (ii) was rendered insolvent by
reason of such incurrence; (iii) was engaged in a business or transaction for
which the assets remaining in the Company constituted unreasonably small
capital; or (iv) intended to incur or believed it would incur obligations beyond
its ability to pay such obligations as they mature, such court, subject to
applicable statutes of limitation, could determine to invalidate, in whole or in
part, such indebtedness and obligations as fraudulent conveyances or subordinate
such indebtedness and obligations to existing or future creditors of the
Company.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction which is being applied. Generally, however, the
Company would be considered insolvent at a particular time if the sum of its
debts was then greater than all of its property at a fair valuation or if the
present fair saleable value of its assets was then less than the amount that
would be required to pay its probable liabilities on its existing debts as they
became absolute and matured. On the basis of its historical financial
information, its recent operating history as discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other factors, the Company's management believes that, after giving effect to
indebtedness incurred in connection with the Acquisitions and other related
financings, the Company will not be rendered insolvent, will have sufficient
capital for the business in which it will be engaged and will be able to pay its
debts as they mature; however, management has not obtained any independent
opinion regarding such issues. In addition, there can be no assurance as to what
standard a court would apply in making such determinations.
POTENTIAL FOR ADVERSE REGULATORY CHANGE AND THE NEED FOR REGULATORY APPROVALS
CELLULAR. The licensing, construction, operation, acquisition and sale of
cellular systems, as well as the number of cellular and other wireless licensees
permitted in each market, are regulated by the FCC. Changes in the regulation of
cellular activities and other wireless carriers or the loss of any license or
licensed area could have a material adverse effect on the Company's operations.
In addition, all cellular and PCS licenses in the United States are subject to
renewal upon expiration of their initial ten-year term. The Company's cellular
licenses will expire beginning in 2000. The licenses acquired and to be acquired
in the Acquisitions will expire at varying dates beginning October 1997. The
Company will apply for renewal of its respective licenses, and while the Company
believes that each of these licenses will be renewed based upon FCC rules
establishing a presumption in favor of licensees that have complied with their
regulatory obligations during the initial license period, there can be no
assurance that the Company's licenses will be renewed. See
"Business--Regulation."
WIRELINE. The Company's local exchange operations are regulated by the
Oklahoma Corporation Commission (the "OCC"). The OCC sets rates, terms and
conditions of service and mandates minimum service and quality of service
requirements. Changes in the regulation of its local exchanges could have a
material adverse effect on the Company. Telco, like other companies who operate
in areas where, due to factors such as geographical conditions or subscriber
density, the cost to provide service is higher than normal, receives support
revenue from federal and state agencies. For the year ended December 31, 1996,
support revenue accounted for $5.2 million, or 37%, of the Company's revenue
from its wireline operations. With respect to federal support revenue, the FCC
has initiated proceedings to overhaul the contribution mechanism for support
revenue. A board consisting of state utility commissioners and members of the
FCC recently recommended changes that would, over time, reduce or eliminate
subsidies to telephone companies in areas where connecting and maintaining phone
lines is expensive. In the event
23
<PAGE>
such or similar changes are adopted, they could have a material adverse effect
on the Company's wireline operations.
EQUIPMENT FAILURE AND NATURAL DISASTER
The Company carries business interruption, casualty and property insurance
in amounts it believes adequate to cover the financial risks associated with any
major equipment failure or natural disaster. However, a major equipment failure
or a natural disaster affecting the Company's central switching office, its
microwave links or certain of its cell sites could have a material adverse
effect on the Company's operations.
RADIO FREQUENCY EMISSION CONCERNS
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones may be linked to cancer, and may interfere
with pacemakers and other medical devices. Concerns over RF emissions may have
the effect of discouraging the use of cellular telephones, which could have a
material adverse effect on the Company's business. On August 1, 1996, the FCC
released a report and order, which will become effective in September 1997, that
updates the guidelines and methods it uses for evaluating RF emissions from
radio equipment, including cellular and PCS telephones and transmitting
facilities. The Company does not believe these guidelines will have a material
impact on its operations. While the FCC's new rules impose more restrictive
standards on RF emissions from lower power devices such as portable cellular
telephones, the Company believes that all cellular telephones currently provided
by the Company to its customers, as well as the Company's transmitting
facilities, comply with the proposed new standards. See "Business--Regulation."
CONFLICTS OF INTEREST
All of the Company's outstanding Class A Common Stock is beneficially owned
by Everett R. Dobson, the Company's Chairman of the Board, President and Chief
Executive Officer, and his affiliates. Certain decisions concerning the
operations or financial structure of the Company may present conflicts of
interest between the holders of the Company's capital stock and the holders of
the Notes. In addition, equity investors may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment, could enhance their equity investment, even though such transactions
might involve risk to the holders of the Notes.
ABSENCE OF A PUBLIC MARKET
The Notes are a new issue of securities for which there is currently no
market and the Company does not intend to apply for listing of the Notes on any
national securities exchange or the Nasdaq National Market. Although the Company
has been advised by the Placement Agents that they currently intend to make a
market in the Notes, they are not obligated to do so and any such market-making
activities may be discontinued at any time without notice. Accordingly, there
can be no assurance as to the development or liquidity of any market for the
Notes. If a market for the Notes were to develop, the Notes could trade at
prices that may be higher or lower than their initial offering price depending
upon many factors, including prevailing interest rates, the Company's operating
results and the markets for similar securities, and such market may cease to
continue at any time.
If a trading market does not develop or is not maintained, holders of the
Notes may experience difficulty in reselling the Notes or may be unable to sell
them at all. If a market for the New Notes develops, any such market may cease
to continue at any time.
24
<PAGE>
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE OLD NOTES
In the event the Exchange Offer is consummated, the Company will not be
required to register any Old Notes not tendered and accepted in the Exchange
Offer. In such event, holders of Old Notes seeking liquidity in their investment
would have to rely on exemptions to the registration requirements under the
securities laws, including the Securities Act. Following the Exchange Offer,
none of the Notes will be entitled to the contingent increase in interest rate
provided for (in the event of a failure to consummate the Exchange Offer in
accordance with the terms of the Registration Rights Agreement) pursuant to the
Old Notes.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by Dobson on February 28, 1997 to Morgan Stanley &
Co. Incorporated, Alex. Brown & Sons Incorporated, First Union Capital Markets
Corp. and NationsBanc Capital Markets, Inc. (together, the "Placement Agents")
in reliance on Section 4(2) of the Securities Act. The Placement Agents offered
and sold the Old Notes only (i) to "qualified institutional buyers" (as defined
in Rule 144A) in compliance with Rule 144A, (ii) to a limited number of other
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act) that, prior to their purchase of Old Notes,
delivered to the Placement Agents a letter containing certain representations
and agreements, and (iii) outside the United States to persons other than U.S.
Persons, which term includes dealers or other professional fiduciaries in the
United States acting on a discretionary basis for foreign beneficial owners
(other than an estate or trust), in reliance upon Regulation S under the
Securities Act.
In connection with the sale of the Old Notes, the Company and the Placement
Agents entered into a Registration Rights Agreement dated as of February 25,
1997 (the "Registration Rights Agreement"), which requires the Company (i) to
cause the Old Notes to be registered under the Securities Act, or (ii) to file
with the Commission a registration statement under the Securities Act with
respect to an issue of new notes of the Company identical in all material
respects to the Old Notes and use its best efforts to cause such registration
statement to become effective under the Securities Act and, upon the
effectiveness of that registration statement, to offer to the holders of the Old
Notes the opportunity to exchange their Old Notes for a like principal amount of
New Notes, which will be issued without a restrictive legend and which may be
reoffered and resold by the holder without restrictions or limitations under the
Securities Act. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
Exchange Offer is being made pursuant to the Registration Rights Agreement to
satisfy the Company's obligations thereunder with regard to the Notes. The term
"Holder" with respect to the Exchange Offer means any person in whose name Old
Notes are registered on the trustee's books or any other person who has obtained
a properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company ("DTC") who desires
to deliver such Old Note by book-entry transfer at DTC.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than broker-dealers, as set forth below, and any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and that such holder has no arrangement or
understanding with any person to participate in the distribution of such New
25
<PAGE>
Notes. Any holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the New
Notes or who is an affiliate of the Company may not rely upon such
interpretations by the staff of the Commission and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liabilities under the Securities Act for which
the holder is not indemnified by the Company. Each broker-dealer (other than an
affiliate of the Company) that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. The Company has
agreed that, for a period of 180 days after the Exchange Date, it will make the
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
By tendering in the Exchange Offer, each holder of Old Notes will represent
to the Company that, among other things, (i) the New Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such person is the holder, (ii)
neither the holder of Old Notes nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Notes, (iii) if the holder is not a broker-dealer, or is a broker-dealer but
will not receive New Notes for its own account in exchange for Old Notes,
neither the holder nor any such other person is engaged in or intends to
participate in the distribution of such New Notes, and (iv) neither the holder
nor any such other person is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act or, if such holder is an "affiliate," that
such holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
Following the completion of the Exchange Offer, none of the Notes will be
entitled to the contingent increase in interest rate provided pursuant to the
Old Notes. Following the consummation of the Exchange Offer, holders of Notes
will not have any further registration rights, and the Old Notes will continue
to be subject to certain restrictions on transfer. See "--Consequences of
Failure to Exchange." Accordingly, the liquidity of the market for the Old Notes
could be adversely affected. See "Risk Factors--Consequences of the Exchange
Offer on Non-Tendering Holders of the Old Notes."
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on
whether to participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
GENERAL. Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and all
Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. Subject to the minimum denomination requirements
of the New Notes, the Company will issue $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of outstanding Old Notes accepted in
the Exchange Offer. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer. However, Old Notes may be tendered only in amounts that
are integral multiples of $1,000 principal amount.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that (i) the New Notes
will be registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and (ii) holders of the New Notes will
not be entitled
26
<PAGE>
to certain rights of holders of Old Notes under the Registration Rights
Agreement, which will terminate upon consummation of the Exchange Offer. The New
Notes will evidence the same debt as the Old Notes, will be entitled to the
benefits of the Indenture and will be treated as a single class thereunder with
any Old Notes that remain outstanding. The Exchange Offer is not conditioned
upon any minimum aggregate principal amount of Old Notes being tendered for
exchange.
As of May 14, 1997, $160,000,000 aggregate principal amount of the Old Notes
was outstanding and there were two registered holders. This Prospectus, together
with the Letter of Transmittal, is being sent to such registered holders.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Oklahoma General Corporation Act or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Old Notes which are not tendered for exchange in the
Exchange Offer will remain outstanding and interest thereon will continue to
accrue, but such Old Notes will not be entitled to any rights or benefits under
the Registration Rights Agreement.
The Company will be deemed to have accepted validly tendered Old Notes when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purposes of receiving the New Notes from the Company. If any tendered Old Notes
are not accepted for exchange because of an invalid tender, the occurrence of
certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on June 16, 1997, unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date and time to which the Exchange Offer is
extended. Although the Company has no current intention to extend the Exchange
Offer, the Company reserves the right to extend the Exchange Offer at any time
and from time to time by giving oral or written notice to the Exchange Agent and
by timely public announcement communicated, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News Service.
During any extension of the Exchange Offer, all Old Notes previously tendered
pursuant to the Exchange Offer and not withdrawn will remain subject to the
Exchange Offer. The date of the exchange of the New Notes for Old Notes will be
the first New York Stock Exchange trading day following the Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions of
the Exchange Offer" shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders. If the
Exchange Offer is amended in any manner determined by the Company to constitute
a material change, the Company will promptly disclose such amendment by means of
a prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of time, depending upon
the significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such period.
27
<PAGE>
In all cases, issuance of the New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a properly completed and duly executed Letter of
Transmittal and all other required documents; provided, however, that the
Company reserves the absolute right to waive any conditions of the Exchange
Offer or defects or irregularities in the tender of Old Notes. If any tendered
Old Notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or if Old Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged Old
Notes or substitute Old Notes evidencing the unaccepted portion, as appropriate,
will be returned without expense to the tendering holder, unless otherwise
provided in the Letter of Transmittal, as promptly as practicable after the
expiration or termination of the Exchange Offer.
INTEREST ON THE NEW NOTES. Holders of Old Notes that are accepted for
exchange will not receive accrued interest thereon at the time of exchange.
However, each New Note will bear interest from the most recent date to which
interest has been paid on the Old Notes or New Notes, or if no interest has been
paid on the Old Notes or New Notes, from February 28, 1997.
PROCEDURES FOR TENDERING OLD NOTES. The tender to the Company of Old Notes
by a holder thereof pursuant to one of the procedures set forth below will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal. A holder of the Old Notes may tender such Old Notes by (i) properly
completing and signing a Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to a Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with any
corresponding certificate or certificates representing the Old Notes being
tendered (if in certificated form) and any required signature guarantees, to the
Exchange Agent at its address set forth in the Letter of Transmittal on or prior
to the Expiration Date (or complying with the procedure for book-entry transfer
described below), or (ii) complying with the guaranteed delivery procedures
described below.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the New Notes to be issued in exchange therefor are to be
issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in DTC (also referred to as a book-entry facility) whose name
appears on a security listing as the owner of Old Notes), the signature of such
signer need not be guaranteed. In any other case, the tendered Old Notes must be
endorsed or accompanied by written instruments of transfer in form satisfactory
to the Company and duly executed by the registered holder and the signature on
the endorsement or instrument of transfer must be guaranteed by an eligible
guarantor institution which is a member of one of the following recognized
signature guarantee programs (an "Eligible Institution"): (i) The Securities
Transfer Agents Medallion Program (STAMP), (ii) The New York Stock Exchange
Medallion Signature Program (MSF), or (iii) The Stock Exchange Medallion Program
(SEMP). If the New Notes or Old Notes not exchanged are to be delivered to an
address other than that of the registered holder appearing on the note register
for the Old Notes, the signature in the Letter of Transmittal must be guaranteed
by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT
TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
28
<PAGE>
The Company understands that the Exchange Agent has confirmed with DTC that
any financial institution that is a participant in DTC's system may utilize
DTC's Automated Tender Offer Program ("ATOP") to tender Old Notes. The Company
further understands that the Exchange Agent will request, within two business
days after the date the Exchange Offer commences, that DTC establish an account
with respect to the Old Notes for the purpose of facilitating the Exchange
Offer, and any participant may make book-entry delivery of Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account in accordance
with DTC's ATOP procedures for transfer. However, the exchange of the Old Notes
so tendered will only be made after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer and timely receipt by the Exchange
Agent of an Agent's Message (as defined in the next sentence), and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by DTC and received by the Exchange Agent and
forming part of Book-Entry Confirmation, which states that DTC has received an
express acknowledgment from a participant tendering Old Notes which are the
subject of such Book-Entry Confirmation and that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal and that the
Company may enforce such agreement against such participant.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC), is received by the Exchange
Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided below) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Notes in exchange for Old
Notes tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram
or facsimile transmission to similar effect (as provided below) by an Eligible
Institution will be made only against submission of a duly signed Letter of
Transmittal (and any other required documents) and deposit of the tendered Old
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Notes. None of the Company, the Exchange Agent or any
other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. Any Old Notes received by the Exchange Agent that are not validly
tendered and as to which the defects or irregularities have not been cured or
waived, or if Old Notes are submitted in principal amount greater than the
principal amount of Old Notes being tendered by such tendering holder, such
unaccepted or non-exchanged Old Notes will be returned by the Exchange Agent to
the tendering holder, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion (a) to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, and (b) to the extent permitted by applicable law, to
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers will differ from the terms
of the Exchange Offer.
GUARANTEED DELIVERY PROCEDURES. If the holder desires to accept the
Exchange Offer and time will not permit a Letter of Transmittal or Old Notes to
reach the Exchange Agent before the Expiration Date or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if the Exchange Agent has received at its office, on or prior to the
Expiration Date, a letter, telegram or facsimile transmission from an Eligible
Institution setting forth the name and address of the tendering holder, the
name(s) in which the Old Notes are registered and the certificate number(s) of
the Old Notes to be tendered, and stating that the tender is being made thereby
and guaranteeing that, within three
29
<PAGE>
New York Stock Exchange trading days after the date of execution of such letter,
telegram or facsimile transmission by the Eligible Institution, such Old Notes,
in proper form for transfer (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC), will be delivered by such
Eligible Institution together with a properly completed and duly executed Letter
of Transmittal (and any other required documents). Unless Old Notes being
tendered by the above-described method are deposited with the Exchange Agent
within the time period set forth above (accompanied or preceded by a properly
competed Letter of Transmittal and any other required documents), the Company
may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery
which may be used by Eligible Institutions for the purposes described in this
paragraph are available from the Exchange Agent.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL. The Letter of
Transmittal contains, among other things, the following terms and conditions,
which are part of the Exchange Offer.
The party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Company and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire New Notes issuable
upon the exchange of such tendered Old Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Company to be necessary or desirable to complete the exchange, assignment
and transfer of tendered Old Notes or to transfer ownership of such Old Notes on
the account books maintained by DTC. All authority conferred by the Transferor
will survive the death, bankruptcy or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, personal
representatives, executors, administrators, successors, assigns, trustees in
bankruptcy and other legal representatives of such Transferor.
By executing a Letter of Transmittal, each holder will make to the Company
the representations set forth above under the heading "--Purpose and Effect of
the Exchange Offer."
WITHDRAWAL OF TENDERS OF OLD NOTES. Except as otherwise provided herein,
tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) contain a statement that
such holder is withdrawing its election to have such Old Notes exchanged, (iv)
be signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes in the name of the person withdrawing the tender, and
(v) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. If Old Notes have been tendered pursuant
to the procedure for book-entry transfer, any notice of withdrawal must specify
the name and number of the account at the book-entry transfer facility. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange
30
<PAGE>
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "--Procedures for Tendering Old Notes" at any
time prior to the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, or any extension of
the Exchange Offer, the Company shall not be required to accept for exchange, or
exchange New Notes for, any Old Notes, and may terminate the Exchange Offer as
provided herein before the acceptance of such Old Notes, if:
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which,
in the reasonable judgment of the Company, would prohibit, restrict or
otherwise render illegal consummation of the Exchange Offer; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(c) there shall occur a change in the current interpretations by the
staff of the Commission which, in the Company's reasonable judgment, might
materially impair the Company's ability to proceed with the Exchange Offer.
If the Company determines in its sole discretion that any of the above
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the Expiration Date,
subject, however, to the right of holders to withdraw such Old Notes (see
"--Terms of the Exchange Offer--Withdrawal of Tenders of Old Notes"), or (iii)
waive such unsatisfied conditions with respect to the Exchange Offer and accept
all validly tendered Old Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and the Company will extend the Exchange
Offer for a period of time, depending upon the significance of the waiver and
the manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such period.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the
31
<PAGE>
Letter of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
United States Trust Company United States Trust Company United States Trust Company
of New York of New York of New York
P. O. Box 844 Corporate Trust Operations 111 Broadway
Cooper Station Department Lower Level
New York, NY 10276-0844 770 Broadway - 13th Floor New York, NY 10006
Attn: Corporate Trust New York, NY 10003 Attn: Corporate Trust
Services Services
(registered or certified mail
recommended)
By Facsimile:
(212) 420-6152
(For Eligible Institutions Only)
Confirm by Telephone:
(800) 548-6565
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Old Notes and
in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and transfer agent and registrar, accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Notes pursuant to the Exchange Offer. If, however, New Notes, or Old
Notes for principal amounts not tendered or accepted for exchange, are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered or if a transfer tax is imposed for
any reason other than the exchange of the Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities within the meaning of Rule 144 of the
Securities Act. Accordingly, such Old Notes may be resold only (i) to the
Company or any subsidiary thereof, (ii) to a qualified institutional buyer in
compliance with Rule 144A, (iii) to an institutional accredited investor that,
prior to such transfer,
32
<PAGE>
furnishes to the Trustee a signed letter containing certain representations and
agreements relating to the restrictions on transfer of the Old Notes (the form
of which letter can be obtained from the Trustee) and, if such transfer is in
respect of an aggregate principal amount of Old Notes at the time of transfer of
less than $100,000, an opinion of counsel acceptable to the Company that such
transfer is in compliance with the Securities Act, (iv) outside the United
States in compliance with Rule 904 under the Securities Act, (v) pursuant to the
exemption from registration provided by Rule 144 under the Securities Act (if
available), or (vi) pursuant to an effective registration statement under the
Securities Act. The liquidity of the Old Notes could be adversely affected by
the Exchange Offer. Following the consummation of the Exchange Offer, holders of
the Old Notes will have no further registration rights under the Registration
Rights Agreement and will not be entitled to the contingent increase in the
interest rate provided for in the Old Notes.
ACCOUNTING TREATMENT
The New Notes would be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company. The costs of the Exchange Offer and the unamortized expenses related to
the issuance of the Old Notes will be amortized over the term of the New Notes.
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New Notes
offered hereby. In consideration for issuing the New Notes as contemplated in
this Prospectus, the Company will receive in exchange Old Notes in like
principal amount, the term and form of which are identical in all material
respects to the New Notes. The Old Notes surrendered in exchange for New Notes
will be retired and canceled and cannot be reissued. Accordingly, issuance of
the New Notes will not result in any increase in the indebtedness of the
Company. The Company used all of the net proceeds of the Offering ($155.2
million) to finance portions of the Horizon Properties Acquisition ($69 million)
and the Maryland 2 Acquisition ($47.8 million), and to purchase the Pledged
Securities ($38.3 million) which secure payment of the first four scheduled
interest payments due on the Notes.
33
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1996 and as adjusted to give pro forma effect to the
Transactions. This table should be read in conjunction with "Selected
Consolidated Financial and Other Data," "Pro Forma Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL PRO FORMA
---------- -----------
($ IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt......................................................... $ 1,191 $ 1,191
---------- -----------
Prior bank facility....................................................................... 75,750 --
Bank Facility............................................................................. -- 171,959
Notes..................................................................................... -- 160,000
Other long-term debt...................................................................... 28,554 28,562
---------- -----------
Total long-term debt (net of current portion)........................................... 104,304 360,521(a)
---------- -----------
Minority interests........................................................................ 2,444 15,719
---------- -----------
Class B Convertible Preferred Stock....................................................... 10,000 11,656
---------- -----------
Stockholders' equity:
Class A Common Stock, par value $1 per share; 1,000,000 shares authorized, 473,152 shares
issued and outstanding................................................................... 473 473
Paid-in capital........................................................................... 5,508 5,508
Retained earnings (deficit)............................................................... (3,870) (15,670)(b)
Treasury stock............................................................................ (11,913) (11,913)
---------- -----------
Total stockholders' equity (deficit).................................................... (9,802) (21,602)
---------- -----------
Total capitalization.................................................................... $ 108,137 $ 367,485
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(a) Gives effect to the additional $1.5 million of indebtedness to be
outstanding upon the issuance of the PCS licenses.
(b) Gives effect to a $7.5 million dividend to holders of Class A Common Stock,
the writeoff of approximately $2.6 million of debt issuance costs related to
the prior bank facility and a make-whole dividend of approximately $1.7
million paid in preferred stock to the Fleet Investors in connection with
the Transactions. See "Description of Other Indebtedness and Preferred
Stock."
34
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain historical consolidated financial
data with respect to each of the five years ended December 31, 1996. The
consolidated financial data as of and for each of the years in the period 1992
to 1996 have been derived from the Company's audited historical consolidated
financial statements. The data should be read in conjunction with "Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996(A)
--------- --------- --------- --------- ---------
($ IN THOUSANDS, EXCEPT PER SUBSCRIBER AND PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Cellular....................................................... $ 7,033 $ 11,089 $ 15,169 $ 18,989 $ 26,107
Wireline....................................................... 9,607 10,716 11,557 12,807 13,472
Fiber.......................................................... 290 671 904 1,415 2,313
Rental income and other........................................ 723 321 616 1,238 1,333
--------- --------- --------- --------- ---------
Total revenue................................................ 17,653 22,797 28,246 34,449 43,225
Costs and expenses:
Cost of services and equipment sales........................... 4,210 4,965 5,418 7,014 9,076
General and administrative..................................... 7,098 7,971 9,621 10,138 12,087
Marketing and selling.......................................... 1,965 2,552 3,098 3,157 4,908
Depreciation and amortization.................................. 4,284 4,563 5,534 6,653 9,720
--------- --------- --------- --------- ---------
Total costs and expenses..................................... 17,557 20,051 23,671 26,962 35,791
Operating income................................................. 96 2,746 4,575 7,487 7,434
Interest expense, net............................................ (2,284) (2,276) (2,926) (3,824) (6,477)
Other income (expense), net...................................... (338) (146) (191) (487) (1,587)
Minority interests in income (losses) of subsidiaries(b)......... 185 (502) (1,105) (1,334) (675)
Income tax (provision) benefit................................... 856 78 (119) (738) 411
Extraordinary items(c)........................................... 90 -- 228 -- (527)
--------- --------- --------- --------- ---------
Net income (loss)................................................ (1,395) 541(d) 462 1,104 (1,421)
Dividends on preferred stock..................................... -- -- (83) (591) (849)
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stockholders.............. $ (1,395) $ 541 $ 379 $ 513 $ (2,270)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stockholders per common
share.......................................................... $ (2.95) $ 1.14 $ .80 $ 1.08 $ (4.12)
Dividends per common share....................................... -- -- $ .11 $ 1.40 $ 1.02
OTHER FINANCIAL DATA:
EBITDA(e):
Cellular(f).................................................... $ 328 $ 2,680 $ 3,923 $ 5,439 $ 7,005
Wireline....................................................... 4,115 4,637 5,413 6,968 8,137
Fiber.......................................................... (63) (8) 774 1,733 2,013
--------- --------- --------- --------- ---------
Total........................................................ 4,380 7,309 10,110 14,140 17,155
Ratio of earnings to fixed charges(g)............................ -- -- 1.1x 1.5x --
Capital expenditures, excluding cost of acquisition.............. $ 5,191 $ 7,353 $ 5,267 $ 3,925 $ 17,438
OTHER DATA:
Wireline access lines (at period end)............................ 10,426 10,899 11,322 11,806 11,959
Route miles (at period end)(h)................................... 450 485 485 516 545
Fiber miles (at period end)(i)................................... 10,397 10,817 10,817 11,189 11,537
Ending cellular subscribers...................................... 8,644 15,283 21,481 26,614 34,306
Cellular penetration(j).......................................... 2.67% 4.63% 6.45% 8.02% 5.51%
Cellular churn(k)................................................ .45% .92% 1.52% 1.83%
Average monthly revenue per cellular subscriber(l)............... $ 52.77 $ 50.45 $ 50.00 $ 48.04
Marketing and selling costs per gross additional cellular
subscriber(m).................................................. $ 392.04 $ 429.06 $ 451.23 $ 472.70
Cellular cell sites (at period end).............................. 18 26 36 46 67
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net fixed assets.......................................... $ 44,910 $ 48,469 $ 48,834 $ 46,987 $ 61,930
Total assets.............................................. 63,273 67,250 69,647 73,490 116,948
Total debt................................................ 53,210 54,874 63,005 65,655 105,495
Preferred stock........................................... -- -- 5,913 5,913 10,000
Stockholders' equity (deficit)............................ 4,219 4,760 (6,824) (6,972) (9,802)
</TABLE>
- ------------------------
(a) Includes the operations of Kansas/Missouri Cluster from March 19, 1996, the
date of its acquisition by the Company.
(b) Reflects minority interests in partnerships in which the Company owns the
majority interests.
(c) Extraordinary items reflect gain or (loss) related to early extinguishment
of debt.
(d) Includes $641,000 of additional income to give cumulative effect to
accounting change resulting from the implementation of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes."
(e) EBITDA is provided because it is a measure commonly used in the industry to
determine a company's ability to incur or service debt. EBITDA is not
derived pursuant to generally accepted accounting principles and should not
be construed as an alternative to net income, as a measure of performance,
or to cash flows, as a measure of liquidity. The calculation of EBITDA does
not include the Company's commitments for capital expenditures or payments
of debts and should not be deemed to represent funds available to the
Company.
(f) Includes EBITDA attributable to minority interests in partnerships in which
the Company owns a majority interest and is a general partner. During the
time the partnerships have outstanding indebtedness to the Company, all of
the partnerships' cash flow is used to service such indebtedness and is not
available for distributions to the partners. These amounts were $.2 million,
$.9 million, $1.5 million, $2.0 million and $2.2 million for the years ended
December 31, 1992, 1993, 1994, 1995 and 1996, respectively.
(g) For the years ended December 31, 1992, 1993 and 1996, earnings were
insufficient to cover fixed charges by $2.3 million, $.2 million and $1.3
million, respectively. "Earnings" are defined as earnings before
extraordinary items and accounting changes, interest expense, amortization
of deferred financing costs, taxes and the portion of rent expense under
operating leases representative of interest. Fixed charges consist of
interest expense, amortization of deferred financing costs and a portion of
rent expense under operating leases representative of interest.
(h) Route miles refers to the number of miles over which fiberoptic cables are
installed.
(i) Fiber miles refers to the number of route miles multiplied by the number of
fibers installed along that path.
(j) Determined by dividing the Company's total ending cellular subscribers for
the period by the estimated total Pops covered by applicable FCC cellular
licenses or authorizations held by the Company.
(k) Churn means the number of cellular subscriber cancellations during a month
as a percentage of the total cellular subscribers at the end of such month.
Churn is stated as the average monthly churn rate for the period.
(l) Excludes roaming revenue.
(m) Determined by dividing cellular marketing and selling costs by the gross
cellular subscribers added during such period. Cellular marketing and
selling costs represent selling expenses and losses incurred on equipment
sales.
36
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial statements have
been prepared to give effect to the Transactions. The accompanying unaudited pro
forma consolidated statement of operations of the Company for the year ended
December 31, 1996 gives effect to the Maryland 2 Acquisition, the Horizon
Properties Acquisition and the Arizona 5 Acquisition, and related financings as
if they occurred on January 1, 1996. However, the information from the
Kansas/Missouri Cluster, which the Company acquired on March 19, 1996, for the
period January 1 to March 19, 1996 has not been included, as it is not available
to the Company. The accompanying unaudited pro forma consolidated balance sheet
as of December 31, 1996 has been prepared as if the Transactions occurred as of
that date. The Acquisitions have been accounted for using the purchase method of
accounting.
The unaudited pro forma consolidated financial statements have been prepared
on the basis of certain assumptions that the Company believes are reasonable,
including assumptions relating to the allocation of the consideration paid and
to be paid in the Acquisitions to the assets and liabilities acquired, based on
estimates of fair values using available information provided by the management
of the Maryland 2, the Horizon Properties and the Arizona 5 systems.
The unaudited pro forma consolidated financial statements and notes thereto
are provided for informational purposes only and do not purport to be indicative
of the results that would have actually been obtained had the Transactions been
completed on the dates indicated or that may be expected to occur in the future.
The unaudited pro forma consolidated financial statements and notes thereto
should be read in conjunction with "Selected Consolidated Financial and Other
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business--Cellular Markets and Systems" and the historical
financial statements and notes thereto included elsewhere in this Prospectus.
37
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DOBSON
COMMUNICATIONS HORIZON
CORPORATION MARYLAND 2(A) PROPERTIES ARIZONA 5 ADJUSTMENTS PRO FORMA
--------------- ------------- ----------- ----------- ----------------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue:
Cellular service....................... $ 17,593 $ 11,195 $ 10,868 $ 2,152 $ (5,359)(b) $ 36,449
Cellular equipment sales............... 662 -- 388 275 -- 1,325
Cellular roaming....................... 7,852 -- 4,264 5,583 6,923(b) 24,622
Wireline telephone service............. 13,472 -- -- -- -- 13,472
Fiber service.......................... 2,313 -- -- -- -- 2,313
Rental income and other................ 1,333 -- -- -- -- 1,333
------- ------------- ----------- ----------- -------- ----------
Total operating revenue.............. 43,225 11,195 15,520 8,010 1,564 79,514
------- ------------- ----------- ----------- -------- ----------
Operating expenses:
Service and equipment.................. 9,076 754 5,666 1,343 3,723 (c)(d 20,562
General and administrative............. 12,087 -- 2,144 1,208 774(d) 16,213
Marketing and selling.................. 4,908 2,272 2,479 1,081 565(d) 11,305
Depreciation and amortization.......... 9,720 -- 2,331 1,244 11,718(e) 25,013
------- ------------- ----------- ----------- -------- ----------
Total operating expenses............. 35,791 3,026 12,620 4,876 16,780 73,093
------- ------------- ----------- ----------- -------- ----------
Operating income......................... 7,434 8,169 2,900 3,134 (15,216) 6,421
------- ------------- ----------- ----------- -------- ----------
Other income (expense), net.............. (1,587) -- -- (36) -- (1,623)
Interest expense, net.................... (6,477) -- (1,454) -- (27,333)(f) (35,264)
------- ------------- ----------- ----------- -------- ----------
Income before minority interests, income
taxes and extraordinary item........... (630) 8,169 1,446 3,098 (42,549) (30,466)
Minority interests in income of
subsidiaries........................... (675) -- -- -- (23)(g) (698)
------- ------------- ----------- ----------- -------- ----------
Income before income taxes and
extraordinary item..................... (1,305) 8,169 1,446 3,098 (42,572) (31,164)
Income tax (provision) benefit........... 411 -- -- -- 114(h) 525
------- ------------- ----------- ----------- -------- ----------
Net income (loss) from continuing
operations............................. $ (894) $ 8,169 $ 1,446 $ 3,098 $ (42,458) $ (30,639)
------- ------------- ----------- ----------- -------- ----------
------- ------------- ----------- ----------- -------- ----------
Net income (loss) from continuing
operations per common share............ $ (1.62) $ (55.55)
Weighted average common shares
outstanding............................ 551,567 551,567
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed statement
of operations.
38
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS
(a) The statement of operations for Maryland 2 presents only cellular revenue
and direct operating expenses, as the Maryland 2 operations were included
with other cellular operations of the seller and no full statement of
operations is available.
(b) To reclassify the revenue from non-Maryland 2 subscribers of the prior
operator of Maryland 2 from cellular service to roaming and to reflect the
additional roaming revenue that would have been received by the Company
under its roaming agreement with the prior operator. The additional revenue
reflects the historical minutes incurred during the period and the rate
outlined in the roaming agreement with the prior operator. The rates charged
by the prior operator to its subscribers will not change as a result of this
agreement or the acquisition.
(c) To reflect the additional costs of cellular service that would have been
incurred by the Company under its roaming agreement with the prior operator
of Maryland 2 for Maryland 2 subscribers roaming in the prior operator's
other cellular systems. The additional costs are based on the rates
reflected in agreements with the prior operator, which will continue to
provide management and other services for Maryland 2, applied to historical
levels of operations for the period presented.
(d) To reflect the additional costs that the Company anticipates it would have
incurred to operate the Maryland 2 system and other costs that were not
reflected in Maryland 2's statement of cellular revenues and direct
operating expenses.
(e) To reflect the additional depreciation and amortization resulting from the
increase in the fair value of property and equipment, cellular license
acquisition costs and intangible assets. Property and equipment is being
depreciated over five to eight years, cellular license acquisition costs
over fifteen years and intangible assets over five years. The fifteen-year
period used for cellular license acquisition costs is based primarily on the
Company's internal analysis of the recovery period for its cellular
investments, which indicates that such costs will be recovered through
operations over a period of not more than fifteen years. Other factors
considered include the competitive nature of the cellular industry, the rate
of technological change and risk of obsolescence, and the specific terms and
characteristics of the licenses. See "Risk Factors--Competition" and
"--Rapid Technological Changes" and "Business-- Competition" and
"--Regulation."
(f) To reflect (i) the elimination of $1.5 million of interest expense
associated with indebtedness of the Acquisitions which was not assumed by
the Company, (ii) $18.8 million of interest expense relating to the $160
million principal amount of Notes, (iii) $14.2 million of interest expense
relating to the $172.0 million of indebtedness incurred under the Bank
Facility (assuming an interest rate of 9.0% per annum), (iv) $1.1 million of
amortization of deferred financing costs relating to the estimated $10.8
million of debt issuance costs incurred in connection with the offering of
the Old Notes and the Bank Facility, and (v) the elimination of $5.2 million
of interest expense relating to the indebtedness under the Company's prior
bank facility which was repaid in the Transactions.
For each .5% change in the assumed interest rate on the Bank Facility,
interest expense would change by approximately $.9 million.
(g) To reflect the 25% equity interest in the income of the Arizona 5
Partnership to be owned by the Gila River Indian Community following the
Arizona 5 Acquisition. See "Business--Cellular Markets and Systems."
(h) To reflect an adjustment to income tax expense for the effects of the
Acquisitions. Net operating loss carryforwards generated have not been
recognized as an income tax benefit due to the uncertainty of realizing the
benefit of these carryforwards.
39
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ACQUISITIONS(A)
DOBSON -------------------------------------
COMMUNICATIONS HORIZON
CORPORATION PROPERTIES ARIZONA 5 ADJUSTMENTS PRO FORMA
--------------- ----------- ----------- ----------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash restricted........................... $ -- $ -- $ -- $ 38,300(b) $ 38,300
Current assets(b)......................... 19,956 2,924 2,446 582 )(f 25,908
Property, plant and equipment............. 61,930 7,607 8,230 (3,837)(c) 73,930
Receivables affiliate..................... 3,267 -- -- 5,224(d) 8,491
Cellular license acquisition costs........ 23,465 31,842 -- 155,946(c) 211,253
Deferred costs............................ 3,952 -- -- 8,206(e) 12,158
Intangible assets......................... 2,771 -- -- 5,243(c) 8,014
Other assets.............................. 1,607 100 -- (100)(c) 1,607
--------------- ----------- ----------- ----------- ----------
Total assets............................ $ 116,948 $ 42,473 $ 10,676 $ 209,564 $ 379,661
--------------- ----------- ----------- ----------- ----------
--------------- ----------- ----------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities....................... $ 8,924 $ 15,638 $ 1,127 $ (13,400)(g) $ 12,289
Long-term debt, net of current portion.... 104,304 -- 8 256,209(h) 360,521
Deferred credits.......................... 1,078 -- -- -- 1,078
Minority interests........................ 2,444 -- -- 13,275 )(d 15,719
Preferred stock........................... 10,000 -- -- 1,656 11,656(i)
Stockholders' equity (deficit)............ (9,802) 26,835 9,541 (48,176)(j) (21,602)(i)
--------------- ----------- ----------- ----------- ----------
Total liabilities and stockholders'
equity................................ $ 116,948 $ 42,473 $ 10,676 $ 209,564 $ 379,661
--------------- ----------- ----------- ----------- ----------
--------------- ----------- ----------- ----------- ----------
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed balance
sheet.
40
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED BALANCE SHEET
(a) No balance sheet as of December 31, 1996 for the Maryland 2 Property is
available, as Maryland 2's operations were included with other cellular
operations of the prior operator. The fair value of the license and customer
list to be acquired in the Maryland 2 Acquisition is reflected in the pro
forma adjustments. See footnote (c) below.
(b) To reflect the approximately $38.3 million in restricted cash to be held in
a pledged account to secure the Notes until payment of the first four
scheduled interest payments. See "Description of the Notes--Security."
Included in the pro forma current assets balance is $3.2 million of
unrestricted cash and cash equivalents.
(c) To allocate the purchase price to the assets acquired and liabilities
assumed as follows:
<TABLE>
<CAPTION>
HORIZON
MARYLAND 2 PROPERTIES ARIZONA 5 TOTAL
----------- ----------- ----------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated acquisition price...................................... $ 75,801 $ 77,700 $ 39,817 $ 193,318
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Historical net book value at December 31, 1996................... 26,835 9,541 36,376
Estimated liabilities not assumed................................ -- 13,400 -- 13,400
----------- ----------- ----------- ----------
Adjusted historical net book value at December 31, 1996.......... -- 40,235 9,541 49,776
Current assets................................................... -- (435) -- (435)
Property, plant and equipment.................................... -- (1,907) (1,930) (3,837)
Cellular license acquisition costs............................... 70,558 39,907 45,481 155,946
Intangible assets................................................ 5,243 -- -- 5,243
Other............................................................ -- (100) -- (100)
----------- ----------- ----------- ----------
75,801 77,700 53,092 206,593
Minority interest................................................ -- -- 13,275 13,275
----------- ----------- ----------- ----------
$ 75,801 $ 77,700 $ 39,817 $ 193,318
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
(d) To reflect the 25% equity interest in the Arizona 5 Partnership to be owned
by the Gila River Indian Community following completion of the Arizona 5
Acquisition and the $5.2 million loan to be made by the Company to the Gila
River Indian Community in connection with the Arizona 5 Acquisition.
(e) Reflects an estimated $10.8 million of debt issuance costs incurred in
connection with the Offering of the Old Notes, the Bank Facility and the
write-off of approximately $2.6 million of debt issuance costs relating to
the Company's prior bank facility which was repaid with proceeds from the
Bank Facility.
(f) To reflect the reduction in current assets resulting from the repayment by
the Dobson Trusts of approximately $.5 million of liabilities owed to the
Company upon receipt of a dividend of approximately $.5 million.
(g) To eliminate advances from affiliates at December 31, 1996 for Horizon
Properties which were not assumed by the Company in the Horizon Properties
Acquisition.
(h) To reflect the $160.0 million principal amount of Notes and $172.0 million
of indebtedness under the Bank Facility and the repayment of approximately
$75.8 million of indebtedness under the Company's prior bank facility. Gives
effect to an additional $1.5 million of indebtedness to be outstanding upon
the issuance of the PCS licenses.
(i) To reflect a dividend of approximately $1.7 million paid in Class C
Preferred Stock to the Fleet Investors in connection with the Transactions.
(j) To eliminate stockholders' equity accounts of the Acquisitions, to reflect
the write-off of approximately $2.6 million of debt issuance costs related
to the Company's prior bank facility, and to reflect a $7.5 million dividend
paid with respect to the Company's Class A Common Stock in the Transactions.
41
<PAGE>
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 its
Oklahoma/Texas Cluster and in its Kansas/Missouri Cluster. As a result of the
Recent Acquisitions, the Company also operates cellular systems in Maryland and
Pennsylvania and, upon consummation of the Arizona 5 Acquisition, will also own
and operate a cellular system in Arizona. The Company also owns interests in,
and operates, regional fiberoptic transmission networks in Oklahoma, Texas and
Colorado, and owns and operates local telephone exchanges in Oklahoma, and
intends to resell local, long distance and wireless services in Oklahoma.
CELLULAR
The Company commenced providing rural cellular services in its
Oklahoma/Texas Cluster in 1990. The Company expanded the cluster in 1991 and
developed organizational, marketing and operational programs designed to
increase the number of its cellular subscribers and operating revenue. At
December 31, 1996, the number of subscribers in the Oklahoma/Texas Cluster had
increased to 30,996. In March 1996, the Company further expanded its cellular
operations through the purchase, for approximately $30 million, of the
Kansas/Missouri Cluster with 2,354 subscribers at the time of acquisition. Since
acquiring the Cluster the Company has increased the number of subscribers by
approximately 950, or 41%, and at December 31, 1996, the Kansas/Missouri Cluster
had 3,310 subscribers. While the acquisition of the Kansas/Missouri Cluster
added $.6 million of EBITDA for the period from March 19, 1996 to December 31,
1996, as a result of increased interest expense and amortization resulting from
the acquisition, the Company's cellular business incurred a net loss for the
year ended December 31, 1996.
The Company purchased Maryland 2 and the Horizon Properties for an aggregate
purchase price of $153.5 million, subject to adjustments, in February and March
1997, and expects to purchase a 75% interest in Arizona 5 for a net purchase
price of approximately $39.8 million in June 1997. The size and scope of the
Company's cellular operations increased substantially upon consummation of the
Recent Acquisitions and will increase further upon consummation of the Arizona 5
Acquisition. See "Pro Forma Consolidated Financial Data." On a pro forma basis,
giving effect to the Acquisitions, the Company would have had 80,437 subscribers
at December 31, 1996. The Company financed the Recent Acquisitions with proceeds
from the Offering and borrowings under the Bank Facility and will finance the
Arizona 5 Acquisition with additional borrowings under the Bank Facility.
Although the Company expects its EBITDA will increase as a result of the
Acquisitions, the increased interest and amortization expense associated with
the Acquisitions is expected to result in increased losses in 1997 and
thereafter until the Company expands the acquired systems and increases the
subscriber base.
There has been an industry trend of declining average revenue per minute, as
competition between service providers has led to reductions in rates for airtime
and subscriptions and other charges. The Company believes that the impact of
this trend will be mitigated by increases in the number of wireless
telecommunications subscribers and the number of minutes of usage per
subscriber. There has also been a broad trend in the cellular industry of
declining average revenue per subscriber. The Company believes that the downward
trend is primarily the result of the addition of new lower usage customers who
utilize cellular services for personal convenience, security or as a backup for
their traditional landline telephone. Although the Company has experienced a
decline in average revenue per subscriber, the Company has introduced new
services, such as voice mail and call forwarding, to increase revenue and
encourage additional usage.
The Company's cellular churn rate increased from 1994 through 1996 due to
increased competition among cellular providers in the Company's markets that
offer service contracts with terms the Company's subscribers may have considered
more advantageous. Further, as the Company's cellular penetration has
42
<PAGE>
increased, its cellular churn rates have also increased. The Company's overall
cellular penetration rates decreased in 1996 compared to 1995 as a result of the
Company's acquisition of the cellular systems in its Kansas/Missouri Cluster,
but cellular penetration rates in the Company's other markets increased in 1995
and 1996. The Company believes that as its cellular penetration rates increase,
the increase in new subscriber revenue will exceed the loss of revenue
attributable to increases in the cellular churn rate.
In recent years, the Company, and other cellular companies, have increased
the use of discounts on phone equipment and free phone promotions, as
competition between service providers has intensified. The Company believes that
its average discount rate is not significantly different from that of other
cellular providers. As a result, although the number of the Company's additional
subscribers has been increasing, revenue from equipment sales has decreased
substantially and the Company has incurred, and expects to continue to incur,
losses on cellular equipment sales, which have resulted in increased marketing
and selling costs per gross additional cellular subscriber. While the Company
expects to continue these discounts and promotions, the Company believes that
related increases in selling and marketing costs will be mitigated by increased
revenue from increases in the number of cellular subscribers.
Roaming revenue is a substantial source of revenue for the Company,
accounting for 30.1% of the Company's cellular revenue for the year ended
December 31, 1996 and 39.5% on a pro forma basis after giving effect to the
Acquisitions. While the industry trend is to reduce roaming rates, the Company
believes that, historically, its roaming rates have been generally lower than
rates offered by others in or near the Company's systems and that its roaming
rates have not been materially impacted by this trend. Roaming yield (roamer
service revenue, which includes airtime, toll charges and surcharges, divided by
roaming minutes of use) was $.70 per minute for the years ended December 31,
1995 and 1996.
WIRELINE
The Company has provided local exchange services since 1936, and currently
owns and operates nine contiguous exchanges in western Oklahoma and three
contiguous exchanges adjacent to and east of the Oklahoma City metropolitan
area. The Company's wireline revenues consist of (i) end user revenue, which
includes charges for local service and enhanced services such as call waiting
and call forwarding, (ii) access revenue, which is paid by interexchange
carriers ("IXCs") for providing access from the IXC's point of presence to the
end user who makes or receives a long distance call and (iii) support revenue,
which is paid by federal and state agencies to companies, such as the Company,
which operate in areas where, due to factors such as geographic conditions or
subscriber density, the cost to provide service is higher than normal. Support
revenue, which consists of high cost funds ("HCF") from state agencies and
universal service funds ("USF") from federal agencies, accounted for
approximately 38.5% of the Company's revenue from its wireline operations, or
$5.2 million, for the year ended December 31, 1996.
The Telecommunications Act of 1996 potentially impacts the Company's sources
of support revenue. Under previous regulations access charges contained implicit
support for high cost areas. Regulations proposed pursuant to the 1996 Act would
remove implicit support from access revenues and place more emphasis for such
support on HCF/USF. However, a board consisting of state utility commissioners
and members of the FCC recently recommended changes that would, over time,
reduce or eliminate subsidies to telephone companies in areas where connecting
and maintaining phone lines is expensive. Although the Company cannot predict
whether any such recommended changes will be adopted, management will continue
to pursue its strategy to lessen the impact of any future regulatory changes by
limiting investments in new plant which may not be recoverable in the future,
and by reducing its operating costs through consolidation of operational
functions at the Company level in order to achieve economies of scale. See "Risk
Factors--Potential for Adverse Regulatory Change and Regulatory Approval."
The Company intends to resell local, long distance and wireless services,
initially in the greater Oklahoma City and Tulsa metropolitan areas. The Company
expects to commence offering these services in mid-1997, using its own switches
and leasing local exchange lines. The Company has entered into an
43
<PAGE>
agreement with SWBT, pursuant to which the Company may resell local exchange and
other services in all markets served by SWBT in Oklahoma. The Company expects to
incur losses and negative cash flows in its resale business in 1997 and until it
develops and expands its subscriber base, primarily as a result of marketing and
advertising costs.
FIBER
The Company's revenues from its fiber business are generated from three
different sources: (1) wholesale long-haul transport services as a "carrier's
carrier," (2) transport services to private businesses and government agencies
requiring network services, and (3) long-haul transport services for the
Company's subsidiaries. For 1996, approximately 49% of its gross fiber revenue
was attributable to NTS and approximately 33% of its gross fiber revenue was
attributable to the Company's subsidiaries. During this period, the Company's
operating income and EBITDA have declined as a percentage of gross fiber revenue
primarily as a result of increases in sales and administrative staff and
additional allocations of corporate overhead.
Although the Company currently has excess capacity and does not currently
plan to add additional fiberoptic lines, the Company will seek to expand its
network through interconnect agreements to access other major population centers
(including routes which may be attractive to major carriers).
OTHER
In February 1997, the Company was declared the winning bidder for PCS
licenses for nine markets in the FCC's "F" block auction. The Company's total
bids amounted to $5.1 million (net of discounts). The licenses, which were
granted in April 1997, cover approximately 4.2 million Pops in markets that are
adjacent to or overlap the Company's existing cellular clusters. The Company is
exploring plans to develop these markets through the creation of alliances with
other wireless companies with similar technology, including reselling and
roaming agreements and, potentially, partitioning spectrum.
44
<PAGE>
The following table is a summary of certain data related to the Company's
principal business activities for the periods indicated and includes
intercompany transactions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
($ IN THOUSANDS EXCEPT PER SUBSCRIBER DATA)
<S> <C> <C> <C>
CELLULAR:
Operating revenue............................. $ 15,169 $ 18,989 $ 26,107
Operating income.............................. 2,159 3,045 1,947
EBITDA........................................ 3,923 5,439 7,005
Identifiable assets........................... 21,108 19,749 60,859
Total subscribers, at period end.............. 21,481 26,614 34,306
Average monthly revenue per subscriber,
excluding roaming........................... 50.45 50.00 48.04
WIRELINE:
Gross operating revenue....................... $ 14,147 $ 18,842 $ 23,113
Operating income.............................. 2,340 3,625 4,684
EBITDA........................................ 5,413 6,968 8,137
Identifiable assets........................... 35,593 40,604 40,058
Total access lines, at period end............. 11,322 11,806 11,959
FIBER:
Gross operating revenue....................... $ 1,489 $ 2,525 $ 3,453
Operating income.............................. 77 816 804
EBITDA........................................ 774 1,733 2,013
Identifiable assets........................... 13,092 13,137 16,032
Equivalent DS3 lines, at period end........... 8 20 46
</TABLE>
HISTORICAL RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUE. For the year ended December 31, 1996, total operating
revenue increased $8.8 million, or 25.5%, to $43.2 million from $34.4 million
for the comparable period in 1995.
CELLULAR. The Company's operating revenue from its cellular operations
increased $7.1 million in 1996 compared to 1995. Cellular service revenue
increased $3.6 million, or 26.1%, to $17.6 million in 1996 from $14.0 million in
1995. Of the $3.6 million increase, $2.5 million was attributable to increased
penetration and usage in the Oklahoma/Texas Cluster and $1.1 million was
attributable to the acquisition of the Kansas/Missouri Cluster in March 1996.
The Company's cellular subscriber base increased 28.9% to 34,306 at December 31,
1996, from 26,614 at December 31, 1995, of which 42.5% (3,270 subscribers) was
attributable to increased penetration in the Oklahoma/Texas Cluster. However,
the Company's average monthly cellular service revenue per subscriber decreased
3.9% to $48.04 for the year ended December 31, 1996 from $50.00 for the year
ended December 31, 1995 due to competitive market pressures and the addition of
new lower usage subscribers. Cellular equipment sales of $.7 million in 1996
represented a slight decrease over 1995. Although the Company sold more
equipment during the year ended December 31, 1996, the Company increased its use
of discounted equipment and free phone promotions with the signing of one-year
service contracts. Cellular roaming revenue increased $3.5 million, or 79.7%, to
$7.9 million in the year ended December 31, 1996 from $4.4 million for the same
period of 1995. Of the $3.5 million increase, $1.9 million, or 54.3%, was as a
result of the inclusion of the Kansas/Missouri Cluster from March 1996 with
roaming minutes of use totaling 1.7 million from the acquisition date to
December 31, 1996. The remaining $1.6 million, or 45.7%, resulted from a 37.4%
increase in roaming minutes of use in 1996 for the Oklahoma/Texas Cluster.
45
<PAGE>
WIRELINE. The Company's revenue from its wireline operations increased $.8
million to $14.8 million for the year ended December 31, 1996 compared to $14.0
million for the same period in 1995. Wireline telephone service revenue
increased $.7 million, or 5.1%, to $13.5 million for the year ended December 31,
1996 from $12.8 million for the same period in 1995 due to a 1.3% increase in
the number of access lines. Other revenue increased $.1 million, or 7.7%, to
$1.3 million in 1996 primarily as a result of an increase in management services
provided to third parties.
FIBER. The Company's revenue from its fiber operations increased $.9
million to $2.3 million in 1996 from $1.4 million in 1995 primarily as a result
of an increase in the number of fiber lines leased by an equivalent of 26 DS3
lines, bringing the total lines leased to an equivalent of 46 DS3s at December
31, 1996, partially offset by a decline in leased line charges.
RENTAL AND OTHER. For 1996, rental and other income of $1.3 million
included rental revenue for the use of Company owned facilities, interest on
loans to Company employees and affiliates, management fees from affiliates and
revenue from telemarketing and other telecommunications services such as
internet and voice mail.
COST OF SERVICES AND EQUIPMENT SALES. For the year ended December 31, 1996,
the total cost of services and equipment sales increased $2.1 million, or 30.0%,
to $9.1 million from $7.0 million for the comparable period in 1995.
CELLULAR. Cost of cellular services increased $1.3 million, or 42.7%, to
$4.5 million during 1996 from $3.2 million in 1995. Cost of services includes
costs incurred for access for local exchange company facilities, rerating,
roaming validation (provided by a third party clearinghouse) and long distance
toll services. Of the increase, 58.7% was attributable to the inclusion of the
Kansas/Missouri Cluster from March 1996. The remaining increase primarily is the
result of roaming agreements entered into by the Company in 1995 with eleven
other carriers in Texas and Oklahoma to expand its home rate coverage. Cost of
cellular service increased as a percentage of cellular service and roaming
revenue to 17.7% for the year ended December 31, 1996 from 17.2% for the same
period in 1995. Cost of cellular equipment increased $.6 million, or 27.7%, to
$2.6 million in 1996 from $2.0 million in 1995. The increase resulted primarily
from increases in the volume of equipment sales due to the growth in subscribers
during 1996, partially offset by a decrease in equipment costs.
WIRELINE. Cost of wireline telephone service increased $.2 million, or
8.5%, to $1.9 million in 1996 from $1.7 million in 1995. Cost of wireline
telephone service in 1996 increased as a percentage of wireline telephone
service revenues to 13.9% from 13.5% in 1995 as a result of increased
maintenance costs of wireline plant and costs associated with continued
subscriber growth.
FIBER. Cost of fiber service remained constant at $.1 million for the years
ended December 31, 1996 and 1995.
GENERAL AND ADMINISTRATIVE COSTS. For the year ended December 31, 1996,
general and administrative costs increased $2.0 million, or 19.2%, to $12.1
million from $10.1 million for 1995. The increase was primarily due to increased
billing costs as a result of the growth in cellular subscribers, the inclusion
of the Kansas/Missouri Cluster from March 1996 and increased salary costs
resulting from additional personnel in its cellular and fiber operations.
General and administrative costs decreased as a percentage of the Company's
total revenues to 28.0% in 1996 from 29.4% in 1995.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $1.7
million, or 55.5%, to $4.9 million in 1996 from $3.2 million in 1995. The
increase was primarily due to the higher level of cellular subscribers added
period to period. Gross cellular subscribers added for the year ended December
31, 1996 was 11,709 with the Kansas/Missouri Cluster making up 1,511 of the
gross cellular subscribers added since its acquisition. The gross number of
cellular subscribers added in 1995 was 9,653.
46
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE. For 1996, depreciation and
amortization expense increased $3.1 million to $9.7 million from $6.6 million in
1995. Approximately $1.2 million of the increase was the result of the
amortization of the licenses acquired in the Kansas/Missouri Cluster, with the
remainder due primarily to the increase in equipment in the Company's cellular,
wireline and fiber businesses.
INTEREST EXPENSE, NET. For 1996, interest expense, net increased $2.7
million to $6.5 million from $3.8 million in 1995. The increase was primarily a
result of increased borrowings to finance the Kansas/ Missouri Cluster
acquisition and the acquisition of fiber equipment.
OTHER INCOME (EXPENSE), NET. For 1996, other expense increased $1.1 million
to $1.6 million from $.5 million in 1995 primarily as a result of a $1.7 million
pretax loss on the disposal of two mobile telecommunications switching offices
and related equipment sold during 1996 in connection with the technology upgrade
of the Company's systems in the Oklahoma/Texas Cluster.
EXTRAORDINARY EXPENSE. For the year ended December 31, 1996, the Company
incurred a pretax loss of approximately $.9 million as a result of writing off
previously capitalized financing costs associated with a revolving credit
facility that was refinanced in March 1996. The Company expects to incur a
pretax loss of approximately $2.6 million in 1997 as a result of writing off
capitalized financing costs associated with its prior bank facility which was
refinanced in connection with the Transactions.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
OPERATING REVENUE. For the year ended December 31, 1995, total operating
revenue increased $6.2 million, or 22.0%, to $34.4 million from $28.2 million
for 1994.
CELLULAR. The Company's operating revenue from its cellular operations
increased $3.8 million in 1995 compared to 1994. Cellular service revenue
increased $3.1 million, or 28.0%, to $13.9 million in 1995 from $10.9 million in
1994 as a result of continued subscriber growth in the Company's Oklahoma/Texas
Cluster. The Company's total subscriber base was 26,614 as of December 31, 1995,
a 23.9% increase from 21,481 subscribers as of December 31, 1994. The Company's
average monthly churn rate increased to 1.52% for 1995 from an average monthly
churn rate of .92% for 1994. Cellular equipment sales decreased $.3 million to
$.7 million for 1995 from $1.0 million in 1994 due to increased use of
discounted equipment and free phone promotions. Cellular roaming revenue
increased $1.1 million, or 34.4%, to $4.4 million in 1995 from $3.3 million in
1994 as a result of a 34.0% increase in roaming traffic. Roaming yield was $.71
in 1994, decreasing by $.01 to $.70 in 1995.
WIRELINE. The Company's revenue from its wireline operations increased $1.9
million to $14.0 million in 1995 compared to $12.2 million in 1994. Wireline
telephone service revenue increased $1.2 million, or 10.8%, to $12.8 million
during 1995 from $11.6 million in 1994. USF support revenue increased 29.4% in
1995 as a direct result of the increase in wireline equipment put into service.
The increase in support revenue accounted for $.6 million of the increase in
total wireline telephone service revenue. In addition, wireline access lines
increased 4.3% in 1995. Revenue from other operations increased $.6 million to
$1.2 million for 1995 from $.6 million for 1994 due to an increase in management
services provided to third parties and an increase in interest from Company held
loans.
FIBER. The Company's revenue from its fiber operations increased $.5
million to $1.4 million during 1995 from $0.9 million in 1994 as a direct result
of increasing fiber line leasing. The number of fiber lines leased increased by
an equivalent of 12 DS3 lines for 1995 bringing the total lines leased to an
equivalent of 20 DS3s at December 31, 1995.
RENTAL AND OTHER. For 1995, rental and other income of $1.2 million
included rental revenue for the use of Company owned facilities, interest on
loans to Company employees and affiliates, management fees from affiliates and
revenue from telemarketing and other telecommunications services such as
internet and voice mail.
47
<PAGE>
COST OF SERVICES AND EQUIPMENT SALES. For the year ended December 31, 1995
the total cost of services and equipment sales increased $1.6 million, or 29.5%,
to $7.0 million from $5.4 million for 1994.
CELLULAR. Cost of cellular services increased $1.2 million, or 58.4%, to
$3.2 million in 1995 from $2.0 million in 1994. Of this increase, approximately
56.7% was due to networking and engineering costs increased to add 10 cell sites
to bring the total sites to 46 at December 31, 1995. The Company entered into
roaming agreements in 1995 with eleven other carriers in Texas and Oklahoma to
expand its home rate coverage which accounted for approximately 24.1% of the
increase in cost of cellular services in 1995. The remaining 19.2% was due to
increases in technician salary expenses, cell site repairs, utilities and toll
charges. Cellular equipment costs increased $.5 million or 34.0%, to $2.0
million for 1995 from $1.5 million in 1994. The increase in cellular equipment
costs was due to a 17.8% increase in gross subscribers added during 1995
compared to 1994.
WIRELINE. Cost of wireline telephone service decreased slightly to $1.7
million in 1995 from $1.8 million in 1994, primarily as a result of the
consolidation of network monitoring operations. Cost of wireline telephone
service as a percentage of wireline telephone service revenue decreased to 13.5%
in 1995 from 15.5% in 1994.
FIBER. Cost of fiber service remained at $.1 million.
MARKETING AND SELLING COSTS. Marketing and selling costs increased slightly
to $3.2 million during 1995 from $3.1 million in 1994 as a result of the
increase in the number of subscribers.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $1.2 million to $6.7 million in 1995 from $5.5 million in
1994. The increase was primarily due to the addition of 10 new cellular cell
sites in 1995 and, to a lesser extent, due to an increased investment in
equipment for the wireline operations.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $.5 million to $10.1 million in 1995 from $9.6 million in 1994,
primarily as a result of incremental costs incurred to maintain and retain
cellular subscribers offset by a slight decrease in customer and corporate
operations in the Company's wireline operations.
INTEREST EXPENSE, NET. Interest expense, net increased $.9 million to $3.8
million in 1995 from $2.9 million in 1994, primarily as a result of borrowings
to fund a $5.0 million deposit required to participate in the FCC's "C" Block
PCS license auctions and borrowings to finance the repurchase of outstanding
common stock of the Company. The Company was not successful in the "C" Block
auctions.
EXTRAORDINARY INCOME. In 1994 the Company realized extraordinary income of
approximately $354,000 from the early extinguishment of debt.
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 vendor financing, bank debt and proceeds from the sale of
equity. The Company's wireline and fiber businesses have historically been
financed through government loans.
The Company's net cash provided by operating activities for 1994, 1995 and
1996 was $5.1 million, $8.6 million and $11.6 million, respectively. The
increase in cash flows from operating activities corresponds to the increase in
EBITDA during the same periods. The increase in net cash used in investing
activities and net cash provided by financing activities from 1995 to 1996 is
primarily the result of the Company's 1996 acquisition of cellular systems in
the Kansas/Missouri Cluster which was financed primarily through the issuance of
additional long-term debt.
48
<PAGE>
The Company's capital expenditures (excluding cost of acquisitions) were
$17.4 million for the year ended December 31, 1996 and the Company expects its
capital expenditures (excluding cost of acquisitions) to be approximately $19
million for 1997. Capital expenditures for its cellular operations include
buildout of new cell sites and new store locations in the Kansas/Missouri
Cluster, in the Maryland/ Pennsylvania Cluster and in Arizona 5. The fiber
operations capital expenditures will be for electronics to increase capacity and
the Company expects to invest only maintenance capital for its wireline
operations. The Company expects to invest approximately $4.0 million in high
capacity switches in 1997 for use in its resale business in Oklahoma City and
Tulsa, and in its wireline operations.
In April 1997, the Company was granted PCS licenses in nine markets adjacent
to and overlapping the Company's existing cellular footprint. The aggregate bid
for these licenses was $5.1 million after a discount of 15%. The Company has
paid 20% of the winning bid amount and the balance has been financed by the
government at the U.S. Treasury rate for ten-year obligations and will amortize
quarterly over eight years after the second year. The Company is required to
build out systems covering 25% of the population within the first five years
after obtaining the licenses. 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.
The amount and timing of capital expenditures may vary depending on the rate
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 and whether the Company expands its fiberoptic network or local
exchange operations.
The minority partners in the Company's partnerships that own certain of its
cellular operations receive distributions equal to their share of the profit
multiplied by estimated income tax rates. In 1995 and 1996, the minority
partners received distributions of $.9 million and $.1 million, respectively.
Under the Bank Facility, the Company's minority partners are not entitled to
receive any cash distributions in excess of amounts required to meet income tax
obligations until all indebtedness of their respective partnerships is paid or
extinguished.
The Company has paid dividends each year in amounts sufficient to fund the
interest and principal payments owed by certain of its shareholders with respect
to debt incurred in November 1994 to purchase common stock. In 1995 and 1996,
the Company paid aggregate dividends on its common stock of $.7 million and $.6
million, respectively. In connection with the Transactions, the Company paid a
$7.5 million dividend, of which $6.0 million was used to repay such debt and $.5
million was used to pay indebtedness to the Company. The Company does not expect
to pay dividends on its common stock in the foreseeable future. See
"Management--Certain Transactions."
At December 31, 1996, the Company's current portion of long-term debt was
$1.2 million, all of which related to the RUS/RTB loans. The Company intends to
service this debt out of current cash flows, primarily from the Telco
operations.
As of December 31, 1996, on a pro forma basis giving effect to the
Transactions, the Company would have had $361.7 million of indebtedness
outstanding, including $172.0 million of secured indebtedness under the Bank
Facility, and $29.7 million of secured indebtedness to the RUS/RTB. See
"Description of Other Indebtedness and Preferred Stock." The Bank Facility will
amortize quarterly beginning June 30, 2000 until the Bank Facility terminates on
September 30, 2005. The RUS/RTB loans have scheduled maturities between 1997 and
2028. The indebtedness under the Bank Facility and the RUS/RTB loans may need to
be refinanced at their maturity. The Company's ability to do so will depend
upon, among other things, its financial condition at the time, the restrictions
on its indebtedness and other factors, including market conditions, beyond the
control of the Company. See "Risk Factors--Leverage; Significant Capital
Requirements; Ability to Meet Required Debt Service; Refinancing Risk."
49
<PAGE>
In April 1997, the Company entered into an interest rate hedge agreement to
hedge the Company's interest expense on $160 million of its indebtedness under
the Bank Facility. The agreement provides for a rate cap of 8% terminating on
the earlier of April 24, 2000 or the date an option to enter into an interest
rate swap transaction is exercised. Under the swap agreement, the interest rate
would be fixed at 6.13% or a floating LIBOR rate, terminating on April 24, 2002.
The Company used all of the net proceeds of the Offering ($155.2 million) to
finance portions of the Horizon Properties Acquisition ($69 million) and the
Maryland 2 Acquisition ($47.8 million), and to purchase the Pledged Securities
($38.3 million) which secure payment of the first four scheduled interest
payments due on the Notes.
Although there can be no assurance, management believes the proceeds from
the Offering, together with cash on hand, borrowings under the Bank Facility and
cash flow from operations will be sufficient to fund the Acquisitions, the
Company's capital expenditures and its working capital and debt service
requirements. The Company may require additional financing for future
acquisitions and to meet the required PCS buildout. Also, the holders of the
Class B Preferred Stock have the right to require the Company to purchase their
Class B Preferred Stock beginning in 2001, and the Company is required to redeem
the Class C Preferred Stock in 2002, or in both cases earlier under certain
circumstances. However, in connection with the Offering the Fleet Investors
acknowledged that the Indenture could restrict the Company from repurchasing
their stock for cash and agreed that any claim for such payment would be
subordinate in right of payment to the Notes. See "Description of Other
Indebtedness and Preferred Stock--Preferred Stock." Sources of additional
capital may include cash flow from operations and public or private debt or
equity financings, including vendor financing. 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 flow, is
necessary for the Company to meet its debt service requirements, including its
obligations under the Notes. See "Risk Factors-- Leverage; Significant Capital
Requirements; Ability to Meet Required Debt Service; Refinancing Risk."
In connection with the repayment of the indebtedness outstanding under its
prior bank facility, the Company expects to recognize a pretax loss of
approximately $2.6 million as a result of writing off deferred financing costs
associated with its prior bank facility.
As the Company's cellular activities have increased, its cellular churn rate
has increased which, in turn, has caused the Company to increase its allowance
for doubtful accounts.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company
adopted SFAS No. 121 in 1996 with no impact on its consolidated financial
position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which the Company adopted in 1996. SFAS 123 allows companies to
either account for stock-based compensation under the new provisions of SFAS No.
123 or under the provisions of Accounting Principles Board Opinion No. 25 ("APB
25"), but requires pro forma disclosure in the footnotes to the financial
statements, if material, as if the measurement provisions of SFAS 123 had been
adopted. The Company has determined that the effect of SFAS 123 on a pro forma
basis would not be material. The Company intends to continue accounting for its
stock-based compensation in accordance with the provisions of APB 25. As such,
the adoption of SFAS No. 123 did not have an impact on the financial position or
the results of operations of the Company.
50
<PAGE>
BUSINESS
GENERAL
The Company provides diversified telecommunications products and services.
The Company currently provides rural cellular telephone services in its
Oklahoma/Texas Cluster, a cluster of RSAs and a small MSA located in western
Oklahoma and the Texas panhandle, in its Kansas/Missouri Cluster, a cluster of
RSAs in northeastern Kansas and northwestern Missouri near Kansas City, and in
its Maryland/Pennsylvania Cluster, a cluster of RSAs and small MSAs in Maryland
and Pennsylvania. Upon consummation of the Arizona 5 Acquisition, the Company
will also own and operate a cellular system in Arizona. The Company also owns
interests in, and operates, regional fiberoptic transmission networks in
Oklahoma, Texas and Colorado, and owns and operates local telephone exchanges in
Oklahoma and intends to resell local, long distance and wireless services in
Oklahoma. For the year ended December 31, 1996, the Company reported operating
income of $7.4 million and EBITDA of $17.2 million and, on a pro forma basis
giving effect to the Transactions, the Company would have had operating income
of $6.4 million and EBITDA of $31.4 million.
The Company, through its predecessors, was formed by the Dobson family in
1936 to provide wireline telephone service among oil fields in central Oklahoma,
and is currently controlled by the Dobson family. The Company initiated its
ownership and operation of rural cellular systems in 1990 in western Oklahoma
and the Texas panhandle, and expanded its rural cellular operations in Oklahoma
in 1991. In 1996, the Company acquired six RSAs in Kansas and Missouri near the
greater Kansas City area. In February and March 1997, the Company acquired
additional cellular RSA licenses in Maryland and southern Pennsylvania. In 1991,
the Company initiated its ownership and operation of fiberoptic lines in western
Oklahoma, the Texas panhandle and southwestern Colorado.
Dobson Communications Corporation was incorporated in February 1997 in
connection with the Reorganization pursuant to which it became the holding
company parent of DOC which owns, directly or indirectly, all of the capital
stock of, or other equity interests in, the Company's cellular, local exchange
and wholly-owned fiber subsidiaries. See "--Company Organization."
RURAL CELLULAR
The Company's principal focus is the ownership, operation and development of
rural cellular systems. The Company believes rural cellular systems generally
provide strong growth opportunities due to lower penetration rates and higher
subscriber growth rates compared to large MSAs. The Company believes rural
cellular areas, which have a significant number of potential customers with
substantial needs for wireless communications, have not yet been developed as
fully as large MSAs, which were licensed earlier by the FCC. In addition, the
Company believes that, in the near term, rural cellular areas will be subject to
less competition from other wireless providers as compared to large MSAs. The
Company focuses on strategic areas that are underdeveloped and possess the
potential for increased cellular usage and superior financial performance. In
particular, the Company focuses on RSAs and small MSAs that (i) are adjacent to
major metropolitan areas, (ii) have favorable demographics, (iii) include a high
concentration of expressway corridors that facilitate a significant amount of
roaming activity, or (iv) are contiguous with existing systems or are clusters
of contiguous systems.
The Company purchased licenses and systems in a cluster of strategically
located RSAs and small MSAs in Maryland and Pennsylvania in February and March
1997 and has entered into a purchase agreement pursuant to which it will
purchase a 75% interest in the partnership which owns the license and system in
Arizona 5. Following the completion of the Arizona 5 Acquisition, the Company's
cellular systems will include approximately 1.7 million total Pops (1.5 million
Net Pops). On a pro forma basis giving effect to the Transactions, the Company's
operating income and EBITDA from its cellular operations for the year ended
December 31, 1996 would have been $.9 million and $21.3 million, respectively,
and the Company would have had 80,437 subscribers as of December 31, 1996.
51
<PAGE>
The Company began its cellular business in 1990 when it initiated operations
in an area which is now a part of the Oklahoma/Texas Cluster and in 1991
acquired the Enid, Oklahoma MSA and Oklahoma 2 RSA. Since the inception of the
its cellular business, the Company has developed organizational, marketing and
operational programs designed to increase the number and stability of
subscribers, promote superior customer service, control subscriber acquisition
costs and enhance operating cash flow. These programs include increasing the
Company's local presence, expanding coverage through the addition of cell sites,
enhancing system technology and offering simplified rate plans. Through December
31, 1996 the number of subscribers in the Oklahoma/Texas Cluster had grown to
30,996 (representing a 9.0% market penetration rate).
Since acquiring the Kansas/Missouri Cluster in March 1996, the Company has
begun to implement its organizational, marketing and operational programs in
this cluster. Through December 31, 1996, the Company had added four new retail
locations. In 1997, the Company intends to open additional retail locations and
to expand its coverage by increasing its cell sites from 21 to 31. The
implementation of the Company's programs has increased the number of subscribers
in the Kansas/Missouri Cluster by approximately 950 net additions to a total of
3,310 subscribers at December 31, 1996. The EBITDA attributable to the
Kansas/Missouri Cluster from its acquisition on March 19, 1996 through December
31, 1996 was $.6 million. The Company expects to incorporate similar programs in
the properties acquired pursuant to the Acquisitions.
The following table sets forth certain data with respect to the Company's
existing cellular systems and the system which will be acquired in the Arizona 5
Acquisition.
<TABLE>
<CAPTION>
TOTAL TOTAL MARKET DATE
CLUSTER POPS OWNERSHIP NET POPS SUBSCRIBERS (A) PENETRATION (B) ACQUIRED/EXPECTED
- ---------------------------- --------- ----------- --------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
OKLAHOMA/TEXAS(C)
Oklahoma 5 RSA(d)......... 32,500 64.4% 20,914 5,994 18.4% August 1989
Oklahoma 7 RSA(d)......... 115,700 64.4 74,453 7,628 6.6 August 1989
Texas 2 RSA............... 89,700 61.0 54,717 11,973 13.3 August 1989
Enid, OK MSA.............. 57,600 100.0 57,600 2,817 4.9 September 1991
Oklahoma 2 RSA............ 48,800 100.0 48,800 2,584 5.3 May 1991
--------- --------- ------
Total................... 344,300 256,484 30,996 9.0
--------- --------- ------
KANSAS/MISSOURI
Kansas 5 RSA.............. 118,200 100.0 118,200 914 .8 March 1996
Missouri 1 RSA............ 42,600 100.0 42,600 1,260 3.0 March 1996
Missouri 4 RSA............ 68,800 100.0 68,800 1,069 1.6 March 1996
Missouri 5 RSA(e)......... 14,200 100.0 14,200 67 .5 March 1996
Missouri 2 RSA............ 34,200 100.0 34,200 -- -- March 1996
--------- --------- ------
Total................... 278,000 278,000 3,310 1.2
--------- --------- ------
MARYLAND/PENNSYLVANIA
Maryland 2 RSA............ 444,700 100.0 444,700 18,728 4.2 March 1997
Cumberland, MD MSA(f)..... 68,000 100.0 68,000 28 -- February 1997
Hagerstown, MD MSA........ 127,800 100.0 127,800 1,253 1.0 February 1997
Maryland 3 RSA............ 184,200 100.0 184,200 19,204 10.4 February 1997
Pennsylvania 10 West
RSA(f).................. 49,500 100.0 49,500 1,251 2.5 February 1997
--------- --------- ------
Total................... 874,200 874,200 40,464 4.6
--------- --------- ------
ARIZONA 5................... 184,400 75.0 138,300 5,667 3.1 Pending
--------- --------- ------
Total................... 1,680,900 1,546,984 80,437 4.8%
--------- --------- ------
--------- --------- ------
</TABLE>
- ------------------------
(a) As of December 31, 1996.
(b) Determined by dividing total subscribers by the total Pops covered by the
applicable FCC cellular license or authority.
52
<PAGE>
(c) The Company also owns a 5% interest in a partnership which owns a cellular
system in Oklahoma 3 RSA, which had total Pops of 205,600. Information on
the Oklahoma 3 RSA is excluded because the Company does not manage the
system.
(d) The Company's FCC licenses for the Oklahoma 5 RSA and the Oklahoma 7 RSA do
not include Kingfisher and Blaine Counties and approximately one-half of
Dewey County (total Pops estimated by the Company to be 3,000 for the area
in Dewey County not covered by the Company's FCC license), and Harmon and
Greer Counties, respectively. Information for these two RSAs relates only to
the areas covered by the Company's FCC licenses.
(e) The Company's FCC license for the Missouri 5 RSA covers only the Linn County
portion of the RSA. Information for this RSA relates only to the area
covered by the Company's FCC license. See "Business--Cellular Markets and
Systems."
(f) The FCC license for the Cumberland, MD MSA covers only the towns of
Cumberland and Frostburg and surrounding areas (total Pops estimated by the
Company to be 68,000) and the FCC license for the Pennsylvania 10 West RSA
covers only Bedford County. Information for this MSA and RSA relates only to
the area covered by the FCC licenses.
WIRELINE
Since 1936, the Company has provided rural local exchange services and
currently owns and operates nine contiguous local telephone exchanges in western
Oklahoma and three contiguous local telephone exchanges adjacent to and
immediately east of Oklahoma City. At December 31, 1996, the Company's local
telephone exchanges served approximately 12,000 access lines. The Company
provides local and long-distance telecommunications services with enhanced and
value-added calling and billing features. The Company intends to leverage its
reputation in and knowledge of local markets by reselling local, long distance
and wireless services, initially in the greater Oklahoma City and Tulsa
metropolitan areas. The Company expects to commence offering these services in
mid-1997 using its own switches and leasing local exchange lines. As a result,
the Company intends to offer these services without building out an extensive
infrastructure. The Company's operating income and EBITDA from its wireline
operations for the year ended December 31, 1996 were $4.7 million and $8.1
million, respectively.
FIBER
The Company operates over 545 miles of fiberoptic lines. It owns and
operates approximately 360 miles of fiberoptic lines between Oklahoma City and
Amarillo, Texas and is a 20% partner in, and manages, a partnership which owns
and operates approximately 185 miles of fiberoptic lines between Springfield,
Colorado and Colorado Springs. The Company's fiber networks are linked to other
fiber networks through interconnection agreements that allow it to provide voice
and data telecommunications services to cities in Texas, Colorado, Oklahoma and
Kansas outside its existing network. These networks utilize advanced fiberoptic
technology and are capable of efficiently transmitting capacity-intensive
services, such as Internet, multimedia applications, frame relay and ATM. The
Company sells capacity on a wholesale basis to telecommunications carriers,
including certain subsidiaries of the Company, and also sells services to public
and private businesses and governmental agencies. While the Company has no plans
to add additional fiberoptic lines, the Company expects that it will upgrade the
electronics associated with its fiberoptic lines, and would expect to fund the
costs of any such upgrade out of operating cash. In addition, the Company
intends to initiate additional marketing programs to increase its customer base
and to increase the use of its fiberoptic networks by its existing customers and
will seek to expand its networks to additional cities through new
interconnection agreements. The Company's operating income and EBITDA from its
fiber operations for the year ended December 31, 1996 were $.8 million and $2.0
million, respectively.
OTHER
In February 1997, the Company was declared the winning bidder for PCS
licenses in nine markets in Oklahoma, Kansas and Missouri that are adjacent to
or overlap its existing cellular clusters. The
53
<PAGE>
Company's total bids in the FCC's 10 MHz "F" Block auction amounted to $5.1
million (net of discounts). The licenses, which were granted in April 1997,
cover approximately 4.2 million Pops. The Company is exploring plans to develop
these markets through the creation of alliances with other wireless companies
with similar technology, including reselling and roaming agreements and,
potentially, partitioning spectrum. The Company has applied to the FCC to issue
the PCS licenses. While no assurance can be given that the licenses will be
issued, the Company has no reason to believe the licenses will not be issued.
BUSINESS STRATEGY
The Company's business strategy is to focus on the development and
acquisition of rural cellular systems. The principal elements of the Company's
business strategy include:
AGGRESSIVE LOCAL MARKETING AND PROMOTION OF WIRELESS SERVICES. The
Company's marketing programs are designed to distinguish it as the local
market's highest quality wireless services provider, stressing its local sales
offices and local personnel, and its commitment to the community. The Company's
sales efforts are conducted primarily through its direct sales force operating
out of its local retail stores, and, to a lesser extent, through independent
agents in other retail outlets. Management believes that, as a local service
provider with strong local distribution of products and services, the Company
has an advantage over its competitors which do not emphasize a local presence or
focus on local knowledge and community involvement.
TARGETED MARKETING STRATEGY. The Company strives to attract subscribers who
are likely to generate high monthly revenue and low churn rates. It undertakes
extensive market research to identify and design marketing programs to attract
these subscribers and tailor distinctive rate plans and roaming rates to
emphasize the "value" and the "advantage" of the Company's cellular service. The
Company has established regional marketing alliances with neighboring cellular
carriers to create larger "home rate" areas in order to increase its roaming
revenue and to effectively expand the Company's footprint to attract new
subscribers. The Company's sales force compensation is structured to maximize
net subscriber additions in order to achieve high penetration levels and
minimize subscriber churn.
RECOGNIZED BRAND NAMES. The Company uses brand names that are predominant
in the areas surrounding its clusters or have a high degree of local
recognition. The Company markets its cellular products and services under the
CELLULAR ONE-Registered Trademark- brand name in central and northwestern
Oklahoma and in the Kansas/Missouri and Maryland/Pennsylvania Clusters. In
Arizona 5, the Company intends to use the AIRTOUCH-TM- CELLULAR brand name which
is currently in use in the adjacent Phoenix and Tucson areas. By using these
brand names, the Company benefits from the extensive marketing efforts
undertaken to promote these brands in the adjacent metropolitan areas. The
DOBSON CELLULAR-TM- brand name is used by the Company in its remaining service
areas in Oklahoma and in Texas where the Company is an established wireline
service provider and has a high degree of recognition.
SUPERIOR CUSTOMER SERVICE. The Company strives to maintain a high level of
customer satisfaction through a variety of techniques including maintaining
24-hour customer service and active ongoing contact with customers. Customer
service is supported on a local level through the Company's direct sales force
and its retail stores, and through centralized customer service centers. The
Company believes that its emphasis on superior customer service has enabled it
to achieve an average monthly churn rate of 1.83% for the year ended December
31, 1996.
FUNCTIONAL ALLOCATION OF MANAGEMENT RESPONSIBILITIES. The Company employs a
management policy that enables local management, with in-depth market knowledge,
to make day-to-day operating decisions, while retaining centralized control of
budgets, pricing, system design and engineering and financial and administrative
functions. The local operating control fosters a strong sense of customer
service and community spirit. The Company believes its management structure
enables it to customize its marketing strategy to the needs of each local
market, while maximizing efficiencies and support through a centralized
corporate staff and customer service centers.
54
<PAGE>
GEOGRAPHICALLY DIVERSE NETWORK CLUSTERS. The Company seeks to operate its
systems in multiple, contiguous market clusters in diverse geographic areas,
with each cluster of sufficient size to achieve scale economies in operation as
well as cost efficiencies in deploying its network infrastructure. The Company
believes that by owning and operating clusters in diverse geographic areas the
Company's financial performance will be less affected by local economic
conditions and seasonality.
COMMITTED SYSTEM DEVELOPMENT AND EXPANSION. The Company plans to expand and
improve coverage and increase the capacity in its existing systems, and to build
out the acquired systems. The Company believes that expanding and improving
coverage and capacity in its systems will attract additional subscribers,
enhance the use of its systems by existing subscribers, increase roamer traffic
due to the larger geographic area covered by the cellular network and further
enhance the overall efficiency of the network.
The Company intends to upgrade its systems with digital technology to enable
it to increase its roaming services and provide enhanced benefits, including
caller ID, longer battery life and zone billing, to digital cellular subscribers
and PCS subscribers with dual mode phones. The Company recently completed
upgrading its system in the Oklahoma/Texas Cluster to analog/TDMA digital
technology. The timing of the upgrading of the Company's other systems will
depend upon the technology selected by the Company's larger cellular neighbors,
and market conditions.
CELLULAR MARKETS AND SYSTEMS
The following is a description of the Company's existing cellular markets
and the system to be acquired upon consummation of the Arizona 5 Acquisition.
OKLAHOMA/TEXAS CLUSTER
GENERAL. The Oklahoma/Texas Cluster, which consists of the Oklahoma 5 and 7
RSAs, Texas 2 RSA, the Enid, Oklahoma MSA and the Oklahoma 2 (Woodward) RSA,
extends west from Oklahoma City to Amarillo. The Company initiated cellular
operations in the Oklahoma 5 and 7 and Texas 2 RSAs in 1990 when the wireline
FCC licenses were issued. The Oklahoma 5 and 7 and Texas 2 RSAs were start-up
operations in which the Company activated its first cell site in March 1991. The
Oklahoma 2 MSA and the Oklahoma 2 RSA were acquired by the Company in 1991 from
owners who had not developed the market area. The following table provides
certain data regarding the Oklahoma/Texas Cluster:
<TABLE>
<CAPTION>
PRINCIPAL
TOTAL TOTAL MARKET CELLULAR
POPS(A) OWNERSHIP NET POPS SUBSCRIBERS(B) PENETRATION(C) COMPETITORS
----------- ------------- ----------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Oklahoma 5 RSA(d).............. 32,500 64.4% 20,914 5,994 18.4% AT&T Wireless
Oklahoma 7 RSA(d).............. 115,700 64.4 74,453 7,628 6.6 Triad Cellular
Texas 2 RSA.................... 89,700 61.0 54,717 11,973 13.3 Triad Cellular
Enid, OK MSA................... 57,600 100.0 57,600 2,817 4.9 Enid Cellular
Oklahoma 2 RSA................. 48,800 100.0 48,800 2,584 5.3 Enid Cellular
----------- ----------- ------
Total........................ 344,300 256,484 30,996 9.0%
----------- ----------- ------
----------- ----------- ------
</TABLE>
- ------------------------------
(a) The data excludes Oklahoma 3 RSA (total Pops of 205,600) in which the
Company has a 5% interest.
(b) As of December 31, 1996.
(c) Determined by dividing total subscribers by the total Pops covered by the
applicable FCC cellular license.
(d) The Company's FCC licenses for the Oklahoma 5 RSA and the Oklahoma 7 RSA do
not include Kingfisher and Blaine Counties and approximately one-half of
Dewey County (total Pops estimated by the Company to be 3,000 for the area
in Dewey County not covered by the Company's FCC license), and Harmon and
Greer Counties, respectively. Information for these two RSAs relates only to
the areas covered by the Company's FCC licenses.
DEMOGRAPHICS. The Oklahoma/Texas Cluster covers a contiguous area of
approximately 27,000 square miles. The cluster includes the cities of Chickasha,
Clinton, Enid and Woodward in Oklahoma, and Pampa and Borger in Texas. The
Oklahoma 5 and 7 RSAs, extend west from Oklahoma City along Interstate 40 to the
Texas state line. The Texas 2 RSA is located in the eastern half of the Texas
panhandle. The Enid, Oklahoma MSA and Oklahoma 2 RSA are located north and
northwest of Oklahoma City.
55
<PAGE>
Enid, with a population of approximately 45,000, is the largest town in the
Oklahoma/Texas Cluster. The Oklahoma/Texas Cluster is primarily agricultural and
oil and gas industry oriented.
MARKETING AND ROAMING. The Company operates under the brand name CELLULAR
ONE-Registered Trademark- in the Enid, Oklahoma MSA and Oklahoma 2 RSA, and
DOBSON CELLULAR-TM- in the rest of the cluster. The Company currently has 18
retail locations and approximately 80 agents in the cluster. The Company has
roaming agreements with SWBM, AT&T Wireless and several other companies which
include their respective market areas in Oklahoma City, Amarillo and adjacent
RSAs.
SYSTEMS. There are 46 cell sites covering approximately 99% of the total
population in the cluster. The Company has completed upgrading its system in
this cluster to be able to offer analog or TDMA digital service. However, the
Company's current subscribers would have to exchange their analog handsets for
new digital handsets in order to receive digital service.
KANSAS/MISSOURI CLUSTER
GENERAL. In March 1996, the Company purchased the cellular licenses and
assets of the Kansas 5 RSA, Missouri 1 RSA, Missouri 4 RSA and Missouri 2 RSA
and a portion of the Missouri 5 RSA and, through December 31, 1996 the Company
had added approximately 950 net subscribers to this system. The Company's
authority to operate in the Missouri 2 RSA is an interim operating authority,
which will be terminated if a permanent license for the Missouri 2 RSA is
granted by the FCC and such licensee commences commercial service in the RSA.
The FCC has not scheduled any proceedings to issue a permanent license for the
Missouri 2 RSA. The Kansas/Missouri Cluster is located in northeastern Kansas
and northwestern Missouri near Kansas City. Cellular services have been provided
in the Kansas/Missouri Cluster since 1992. The following table provides certain
data regarding the Kansas/Missouri Cluster as of December 31, 1996:
<TABLE>
<CAPTION>
TOTAL TOTAL MARKET PRINCIPAL CELLULAR
POPS OWNERSHIP NET POPS SUBSCRIBERS(A) PENETRATION(B) COMPETITORS
--------- ------------- ----------- ----------------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Kansas 5 RSA.............. 118,200 100.0% 118,200 914 .8% SWBM; Kansas Cellular
Missouri 1 RSA............ 42,600 100.0 42,600 1,260 3.0 SWBM
Missouri 4 RSA............ 68,800 100.0 68,800 1,069 1.6 AllTel
Missouri 5 RSA(c)......... 14,200 100.0 14,200 67 .5 Chariton Cellular
Missouri 2 RSA............ 34,200 100.0 34,200 -- -- SWBM; AllTel
--------- ----------- -----
Total................... 278,000 278,000 3,310 1.2%
--------- ----------- -----
--------- ----------- -----
</TABLE>
- ------------------------
(a) As of December 31, 1996.
(b) Determined by dividing total subscribers by the total Pops covered by the
applicable FCC cellular license or authority.
(c) The Company's FCC license for Missouri 5 RSA covers only the Linn County
portion of the RSA. All information for this RSA relates only to the area
covered by the Company's FCC license.
DEMOGRAPHICS. The Kansas/Missouri Cluster covers a contiguous area of
approximately 10,500 square miles. The Kansas 5 RSA is northwest of Kansas City.
Leavenworth, Kansas, is the largest city in the Kansas/Missouri Cluster and
serves primarily as a bedroom community to Kansas City. The Missouri 1 RSA is in
northwest Missouri directly north of St. Joseph and the Missouri 4 RSA is
northeast of Kansas City. The Company's portion of the Missouri 2 RSA serves as
a roaming corridor for I-35, which connects Kansas City and Des Moines. The
Kansas/Missouri Cluster also includes Linn County, Missouri in the northwest
corner of the Missouri 5 RSA, which is contiguous to the Missouri 2 and Missouri
4 RSAs.
MARKETING AND ROAMING. The Company operates under the CELLULAR
ONE-Registered Trademark- service mark in the Kansas/Missouri Cluster. Since
March 1996, the Company has increased the number of retail locations from one to
five, and currently has 18 sales agents in this cluster. The Company has a
roaming agreement with CMT Partners, a partnership between AirTouch and AT&T
Wireless, which includes Kansas City and
56
<PAGE>
St. Joseph MSAs and adjacent RSAs. The Company also has roaming agreements with
Western Wireless and U.S. Cellular, each of which have systems adjacent to the
Kansas/Missouri Cluster.
SYSTEMS. The Kansas/Missouri Cluster has 21 cell sites which cover
approximately 60% of the population. The Company expects to convert its system
to analog/digital, although the digital technology will not be selected until
the digital technologies for the Kansas City and St. Joseph MSAs have been
chosen by CMT Partners.
MARYLAND/PENNSYLVANIA CLUSTER
GENERAL. On March 3, 1997, the Company purchased from Maryland Wireless
Communications, L.P. and Wendy C. Coleman the FCC cellular license for, and
certain assets relating to, the Maryland 2 RSA for $75.8 million (subject to
certain adjustments). In January 1997, the Company also purchased from
Washington Baltimore Cellular Limited Partnership ("WBCLP"), an affiliate of
SWBM, for $5.2 million approximately 18,700 customers in the Maryland 2 RSA. The
owner of the Maryland 2 RSA license has had no employees, distribution
facilities or cell sites, and the RSA was serviced by WBCLP on an interim basis.
The agreement with WBCLP also provides for the Company to lease the existing
cell sites and related equipment used by WBCLP in the Maryland 2 RSA. On
February 28, 1997, the Company also purchased from Horizon Cellular Telephone
Company of Hagerstown, L.P. and Cumberland Cellular Partnership the FCC cellular
licenses for, and certain assets relating to, the Horizon Properties for $77.7
million, subject to certain adjustments. Cellular service has been provided in
the Horizon Properties since 1991. The following table provides certain data
regarding the Maryland/Pennsylvania Cluster:
<TABLE>
<CAPTION>
TOTAL TOTAL MARKET PRINCIPAL CELLULAR
POPS OWNERSHIP NET POPS SUBSCRIBERS(A) PENETRATION(B) COMPETITORS
--------- ------------- --------- --------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Maryland 2 RSA............. 444,700 100.0% 444,700 18,728 4.2% BANM; Sprint
Cumberland, MD MSA(c)...... 68,000 100.0 68,000 28 -- U.S. Cellular
Hagerstown, MD MSA......... 127,800 100.0 127,800 1,253 1.0 Sprint; U.S. Cellular
Maryland 3 RSA............. 184,200 100.0 184,200 19,204 10.4 BANM
Pennsylvania 10 West
RSA(c).................... 49,500 100.0 49,500 1,251 2.5 U.S. Cellular
--------- --------- ------
Total.................... 874,200 874,200 40,464 4.6%
--------- --------- ------
--------- --------- ------
</TABLE>
- ------------------------
(a) As of December 31, 1996.
(b) Determined by dividing the total subscribers by the total Pops covered by
the applicable FCC cellular license.
(c) The FCC license for the Cumberland, MD MSA covers only the towns of
Cumberland and Frostburg and surrounding areas (total Pops estimated by the
Company to be 68,000) and the FCC license for the Pennsylvania 10 West RSA
covers only Bedford County. Information for this MSA and RSA relates only to
the area covered by the FCC licenses.
DEMOGRAPHICS. The Maryland/Pennsylvania Cluster covers approximately 6,200
square miles. The Maryland 2 RSA encompasses suburban areas south and east of
Washington, D.C. as well as the eastern shore of Maryland. Many residents in the
Maryland 2 RSA commute to Annapolis, Baltimore and Washington, D.C. and there is
a heavy traffic pattern in Maryland 2 RSA during the summer months as tourists
travel to and from several popular vacation spots along the eastern shore,
especially Ocean City.
The Horizon Properties are within 100 miles of Washington, D.C. and
Baltimore. The area has numerous high-technology businesses and is considered a
high-commuter market due to its proximity to nearby metropolitan areas.
MARKETING AND ROAMING. In the Maryland/Pennsylvania Cluster, the Company
operates under the brand name CELLULAR ONE-Registered Trademark-, which is the
dominant brand name within the Washington/Baltimore area. The
Maryland/Pennsylvania Cluster presently has seven retail locations and five
agents, and the Company intends to open additional retail locations.
The Company has entered into roaming agreements with SWBM, which operates
under the CELLULAR ONE-Registered Trademark- trade name in the Washington, D.C.
area, that allows each party to include in its home
57
<PAGE>
coverage footprint the other party's system. The Company also has a roaming
agreement with Vanguard, which operates a system adjacent to the Horizon
Properties on the north and east.
SYSTEMS. The Company leases 22 cell sites from WBCLP which cover
approximately 95% of the population in the Maryland 2 RSA. During the next three
years, the Company will either acquire these cell sites from WBCLP or construct
its own cell sites. The Horizon Properties currently have fourteen cell sites
covering approximately 99% of the population of the market area.
ARIZONA 5
GENERAL. The Company intends to purchase, through a series of transactions,
a 75% interest in the Arizona 5 Partnership for a net purchase price of
approximately $39.8 million, subject to adjustment. Arizona 5 is located
southeast of Phoenix and northwest of Tucson. Russell L. Dobson, a director of
the Company, and Everett R. Dobson, a director, executive officer and principal
stockholder of the Company, beneficially own a 67% equity interest in ATTI,
which indirectly owns an interest in the Arizona 5 Partnership. As part of the
Arizona 5 Acquisition, the Company will purchase the outstanding stock of ATTI
for $14.2 million, of which Messrs. Dobson and Dobson together will receive
approximately $9.5 million. See "Management--Certain Transactions." In addition,
in connection with the Arizona 5 Acquisition, the Company will loan $5.2 million
to an entity owned by the Gila River Indian Community, one of the current
partners in the Arizona 5 Partnership, which will use the loan proceeds together
with other funds to acquire a 25% interest in the Arizona 5 Partnership.
Cellular services have been provided in the Arizona 5 RSA since 1991. The
Arizona 5 RSA has 184,400 total Pops, resulting in Net Pops of 138,300 to the
Company, and, as of December 31, 1996, there were 5,667 subscribers
(representing a 3.1% market penetration).
DEMOGRAPHICS. The Arizona 5 RSA covers an area of approximately 10,100
square miles in southern Arizona. The principal industries in the Arizona 5 RSA
are mining and smelting. In addition, the area experiences significant tourist
traffic to the local Indian dwellings and commuter traffic from persons
commuting to Phoenix and Tucson. The service area includes approximately 100
miles of I-10.
MARKETING AND ROAMING. As part of the Arizona 5 Acquisition, the Company
has entered into a roaming agreement and other agreements with WMC Partners,
L.P. ("WMC"), an affiliate of Airtouch and U S WEST. Pursuant to these
agreements the Company is licensed to use the AIRTOUCH-TM- CELLULAR service mark
to identify and promote its cellular telephone service in the Arizona 5 RSA. The
agreements also provide for WMC and the Company to include each other's service
area in its home coverage footprint, allowing both parties to offer a wider
service area. WMC's service area includes Phoenix and Tucson. The Company's
principal competitor will be BANM.
At present, Arizona 5 does not have any retail locations and only seven
agents serve the coverage area. The Company intends to open retail stores,
increase the number of agents, and significantly increase the use and marketing
of the AIRTOUCH-TM- CELLULAR name in the coverage area.
SYSTEMS. Arizona 5 has sixteen cell sites. The system is currently switched
out of the Phoenix office of U S WEST. The Company intends to continue this
arrangement with U S WEST until it purchases its own switch. The Company expects
to convert the system to analog/digital, although the digital technology will
not be selected until WMC chooses a technology for its Phoenix and Tucson
systems.
CELLULAR OPERATIONS
PRODUCTS AND SERVICES
The Company provides a variety of cellular services and products designed to
address a range of consumer, business and personal security needs. In addition
to mobile voice and data transmission, the Company offers ancillary services
such as call forwarding, call-waiting, three-party conference calling, voice
message storage and retrieval and no-answer transfer. The nature of the services
offered by the Company varies depending upon the market area. The Company also
sells cellular equipment at discount prices as a way to encourage use of its
mobile services.
58
<PAGE>
The Company offers cellular service for a fixed monthly access fee
(accompanied by varying allotments of unbilled or "free" minutes), plus
additional variable charges per minute of use and for custom calling features.
Various pricing programs (which may be based on multi-year service contracts)
are utilized. Unlike some of its competitors, the Company designs rate plans on
a market-by-market basis. The Company's local general managers generally have
the authority to initiate and modify rate plans, depending upon market and
competitive conditions. Generally, these rate plans include a high-volume user
plan, a medium-volume user plan, a basic plan and an economy plan. In general,
rate plans which include a higher monthly access fee typically include a lower
usage rate per minute. An ongoing review of equipment and servicing pricing is
maintained to ensure the Company's competitiveness, and as appropriate,
revisions to pricing of service plans and equipment are made to meet the demands
of the local marketplace.
The Company intends to upgrade its cellular systems to digital technology to
enable it to increase its roaming services and provide enhanced benefits,
including caller ID, longer battery life and zone billing to digital cellular
subscribers and PCS subscribers with dual mode phones. Currently, the Company
does not intend to actively market digital cellular services to its customers
until market conditions in each area will support such services. The Company has
completed the upgrade to digital technology in the Oklahoma/ Texas Cluster.
Because its digital switches will be capable of handling both analog and digital
transmission, the Company will be able to continue to offer analog cellular
service to those customers who do not transfer to digital handsets.
CUSTOMER SERVICE
Customer service is an essential element of the Company's marketing and
operating philosophy. The Company is committed to attracting new subscribers and
retaining existing subscribers by providing consistently high-quality customer
service. In each of its cellular service areas, the Company maintains
installation and repair facilities and a local staff, including a market
manager, customer service representatives, technical and sales representatives.
Each cellular service area handles its own customer-related functions such as
customer activations, account adjustments and rate plan changes. Local offices
and installation and repair facilities enable the Company to service customers
better, schedule installations and make repairs. Through the use of
sophisticated, centralized monitoring equipment, the Company will be able to
centrally monitor the technical performance of its cellular service areas.
In addition, the Company's customers generally are able to report cellular
telephone service or account problems 24-hours a day to the Company's two
central customer service centers on a toll-free access number (with no airtime
charge). Management believes its emphasis on customer service affords it a
competitive advantage over its large competitors. The Company contacts its
subscribers at frequent intervals in order to evaluate and measure, on an
ongoing basis, the quality and competitiveness of its services.
SALES, MARKETING AND DISTRIBUTION
The Company's marketing programs are designed to generate continued net
subscriber growth by focusing on subscribers who are likely to generate high
monthly revenue and low churn rates, while simultaneously maintaining a low cost
of adding net subscribers. The Company undertakes extensive market research to
identify and design marketing programs to attract these subscribers and tailor
distinctive rate plans and roaming rates to emphasize the "value" and the
"advantage" of the Company's cellular service. The Company has established
marketing alliances with neighboring cellular systems to create larger "home
rate" areas and to effectively expand the Company's footprint in order to
increase its roaming revenue and to attract new subscribers. The Company markets
its service offerings primarily through its direct sales force and Company-owned
retail stores. The Company also uses a network of dealers and other agents, such
as electronics stores, car dealerships and department stores. In addition to
these traditional channels, the Company's marketing team continuously evaluates
other, less traditional, methods of distributing the Company's services and
products, such as targeted telemarketing and direct mail programs.
59
<PAGE>
The Company markets its cellular products and services under the name DOBSON
CELLULAR-TM- in portions of western Oklahoma and the Texas panhandle. Elsewhere
in the Oklahoma/Texas Cluster and in the Kansas/Missouri and
Maryland/Pennsylvania Clusters, the Company markets its cellular service under
the name CELLULAR ONE-Registered Trademark-, one of the most recognized brand
names in the cellular industry. The national advertising campaign conducted by
the Cellular One Group enhances the Company's advertising exposure at a fraction
of the cost of what could be achieved by the Company alone. Upon completion of
the Arizona 5 Acquisition, the Company intends to use the service mark
AIRTOUCH-TM- CELLULAR in that service area. See "--Service Marks." The service
mark selected for use by the Company in each of its clusters will, to a large
extent, depend upon the service mark used in neighboring MSAs.
Management trains and compensates its sales force in a manner designed to
stress the importance of customer service, high penetration levels and minimum
acquisition costs per subscriber. The Company believes that its direct sales
force is better able to select and screen new subscribers and select pricing
plans that realistically match subscriber means and needs than are independent
agents. In addition, the Company motivates its direct sales force to sell
appropriate rate plans to subscribers, thereby reducing churn, by linking
payment of commissions to subscriber retention. As a result, the Company's use
of a direct sales force keeps marketing costs low both directly, because
commissions are lower, and indirectly, because subscriber retention is higher
than when independent agents are used. The cellular industry, generally, and the
Company, in particular, experienced increases in cellular churn rates between
1994 and 1996. In 1996, the Company's cellular churn rate was 1.83%, compared to
the industry churn rate which has been estimated to range from 2.0% to 2.5%.
The Company believes that the after-sale telemarketing program conducted by
its sales force and customer service personnel helps to reduce its churn rate.
This program enhances customer loyalty and allows the sales staff to check
customer satisfaction as well as to offer additional calling features, such as
voicemail, call waiting and call forwarding.
At December 31, 1996, the Company had 14 retail stores and nine other retail
outlets (19 retail stores and 11 other retail outlets on a pro forma basis
giving effect to the Acquisitions). The retail stores range in size from 750
square feet to 5,000 square feet, and each retail store is fully equipped to
handle customer service and telephone maintenance and installation. Some of
these stores are also authorized warranty repair centers. The Company's stores
provide subscriber-friendly retail environments (extended hours, large
selection, an expert sales staff and convenient locations) which make the sales
process quick and easy for the subscriber.
ROAMING
The Company believes that regional roaming is an important service component
for many subscribers. Accordingly, where possible, the Company attempts to
arrange reciprocal roaming rates that allow customers to roam at competitive
prices. The Company believes this increases usage on all cellular systems,
including the Company's. Roaming revenue is a substantial source of revenue for
the Company due, in part, to the fact that a number of the Company's cellular
systems are located in rural areas and because certain of the Company's systems
as well as the systems included in the Acquisitions are in the early stages of
their growth cycle. While there is an industry trend to reduce roaming rates,
the Company believes that, historically, its roaming rates have been generally
lower than the rates offered by others in or near the Company's systems and that
its roaming rates have not been materially impacted by this trend.
The Company has agreements with NACN, which is the largest wireless
telephone network system in the world linking cellular operators throughout the
United States and Canada. NACN connects key areas across North America so that
customers can use their cellular phones to place and receive calls in these
areas as easily as they do in their home areas. Through NACN, customers receive
calls automatically without the use of complicated roaming codes as they roam in
more than 5,000 cities and towns in the United States and Canada. In addition,
special services such as call forwarding and call waiting automatically follow
subscribers as they travel.
60
<PAGE>
TECHNOLOGY AND SYSTEM DEVELOPMENT
OVERVIEW. Historically, most cellular services have transmitted voice and
data signals over analog-based systems, which use one continuous electronic
signal that varies in amplitude or frequency over a single radio channel.
Digital systems, on the other hand, convert voice or data signals into a stream
of digits that is compressed before transmission, enabling a single radio
channel to carry multiple simultaneous signal transmissions. This enhanced
capacity, along with enhancements in digital protocols, allows digital-based
wireless technologies to offer new and enhanced services, such as greater call
privacy and single number (or "find me") service, and more robust data
transmission features, such as "mobile office" applications (including
facsimile, electronic mail and connecting notebook computers with computer/data
networks).
While digital technology serves generally to reduce transmission
interference relative to analog technology, capacity limitations in the 8
kilobit cellular digital handsets now deployed by most digital cellular
operators also cause a perceptible decline in transmission quality. This gap in
transmission quality has proven to be a significant barrier to cellular
operators seeking to switch their customers from analog to digital service.
Enhanced 13 kilobit digital handsets are now being developed by vendors for
digital cellular systems, and are expected to be available in 1997. These new
handsets are expected to offer digital transmission quality comparable to, if
not better than, current analog cellular handsets.
SYSTEM DEVELOPMENT. The Company develops or builds out its cellular service
areas by adding channels to existing cell sites and by building new cell sites
with an emphasis on improving coverage for hand-held phones in
heavily-trafficked areas. Such development is designed to increase capacity and
to improve coverage in response to projected subscriber demand and in response
to competitive factors. Projected subscriber demand is calculated for each
cellular service area on a cell-by-cell basis. The Company has historically met
such demand through a combination of augmenting channel capacity in existing
cell sites and building new cell sites.
Cell site expansion is expected to enable the Company to continue to add and
retain subscribers, enhance subscriber use of the systems, increase roamer
traffic due to the larger geographic area covered by the cellular network and
further enhance the overall efficiency of the network. The Company believes that
the increased cellular coverage will have a positive impact on market
penetration and subscriber usage.
The Company also continues to evaluate expansion through acquisitions of
other cellular properties that will further enhance its network. In evaluating
acquisition targets, the Company considers, among other things, demographic
factors, including population size and density, traffic patterns, cell site
coverage and required capital expenditures.
DIGITAL TECHNOLOGY. Digital signal transmission is accomplished through the
use of frequency management technologies, or "protocols." These protocols
"manage" the radio channel either by dividing it into distinct time slots (TDMA)
or by assigning specific coding instructions to each packet of digitized data
that comprises a signal (CDMA). While the FCC has mandated that licensed
cellular systems in the U.S. must utilize compatible analog signaling protocols,
at present there is no required universal digital signaling protocol. Because
the CDMA and TDMA protocols are incompatible, a subscriber of a system that
relies on TDMA technology, for example, will be unable to use his handset when
traveling in an area served only by CDMA, unless he carries a dual-mode handset
(which is not yet available) that permits the subscriber to use the cellular
system in that area. However, the FCC or industry organizations may decide to
move toward a universal digital switching protocol in the future.
Over the next decade, it is expected that many cellular systems will convert
from analog to digital technology. This conversion is due in part to capacity
constraints in many of the largest cellular markets, such as New York, Los
Angeles and Chicago. As carriers reach limited capacity levels, certain calls
may be unable to be completed, especially during peak hours. Digital technology
increases system capacity and offers other advantages, often including improved
overall average signal quality, improved call security,
61
<PAGE>
potentially lower incremental costs for additional subscribers and the ability
to provide data transmission services. The conversion from analog to digital
technology is expected to be an industry-wide process that will take a number of
years to complete. While management does not believe that its network will
experience capacity constraints in the foreseeable future that would require
converting its network from analog to digital technology, management intends to
effect such conversion based upon market demand so that its subscribers will
enjoy the added benefits of digital technology, and the Company will benefit
from increased roamer revenue.
The technology utilized by the Company will be governed, to a large extent,
by the technology used by the large, dominant carriers in MSAs near the
Company's systems. The timing of the conversions will be governed by the
conversion rate of larger, neighboring MSAs and market conditions. The Company's
systems in its Oklahoma/Texas Cluster have been upgraded to enable the Company
to offer analog or TDMA digital services.
The Company has not yet finalized its plans with respect to the buildout of
its PCS licensed systems, nor has it selected the digital technology to be
utilized in such systems. The Company choice of TDMA technology for its cellular
system in the Oklahoma/Texas Cluster will not have any material effect on the
Company's PCS buildout.
INFORMATION SYSTEMS. All billing functions for the Company's cellular
operations are provided by International Telecommunications Data Service
("ITDS"). Proprietary software furnished by ITDS serves all functions of billing
for the corporate and retail locations. All administrative and customer
maintenance functions are handled in-house with invoice processing and printing
handled by ITDS. The Company uses complementing software to the billing system
allowing the use of credit, collection, and switch interfaces. Bill processing
is performed off-site by a billing vendor.
The Company operates a Nortel Meridian phone system with voice mail
features. In addition, the Company's customer service and collections groups
extensively utilize the automatic call distribution queues and traffic and
productivity reporting capacities of the system.
WIRELINE
The Company provides wireline telephone services to nine contiguous local
exchanges in western Oklahoma and three contiguous local exchanges adjacent to
and east of the Oklahoma City metropolitan area. These services are provided
through Telco.
Telco, like other wireline companies who operate in areas where, due to
factors such as geographic conditions or subscriber density, the cost to provide
service is higher than normal, receives high cost support funds (HCF) (from
state jurisdictions) and the federal universal service fund (USF). Approximately
38% of the Company's revenue from its wireline operations for the nine months
ended September 30, 1996 was from these two sources. Telco's other primary
sources of revenue consist of end user revenue and access revenue. End user
revenue include charges for local service and enhanced services such as call
waiting and call forwarding. Access revenue are amounts charged by Telco to IXCs
for providing access from the IXCs' point of presence to the end user who makes
or receives a long-distance call.
The Telecommunications Act of 1996 (the "1996 Act") potentially impacts
these revenue sources. Under previous regulation, access charges contained
implicit support for high cost areas. The proposed rules would remove implicit
support from access revenues and place more emphasis for such support on
HCF/USF. Thus, in the near term, the Company expects that the 1996 Act will be
revenue neutral for Telco. However, a board consisting of state utility
commissioners and members of the FCC has recently recommended changes that
would, over time, reduce or eliminate subsidies to telephone companies. Although
the Company cannot predict whether any such recommended changes will be adopted,
management will continue to pursue its strategy to lessen the impact of any
future regulatory changes by limiting substantial investments in new facilities
which may not be recoverable in the future and by reducing its
62
<PAGE>
operating costs through consolidation of operations at the Company level in
order to achieve economies of scale. Additionally, efforts are continuing to
maximize revenues from sources such as enhanced services, rather than from
support funds. Although there can be no assurance, management believes these
pro-active steps will assist in maintaining the stability of Telco's long-term
revenue.
The Company expects to commence reselling local exchange, long-distance,
wireless, data transmission and internet access services in the Oklahoma City
and Tulsa metropolitan areas in mid 1997. The Company has an agreement which
allows the Company to provide these services in all markets served by SWBT in
Oklahoma. Initially, however, the Company will focus on Oklahoma City, where the
Company can leverage off of its existing wireline operations in McLoud, and in
Tulsa. By using its own switches and leasing local exchange lines, the Company
expects to offer these services without building out an extensive
infrastructure. The Company intends to utilize its existing reputation and
goodwill by offering a full range of telecommunication services under the
LOGIX-TM- brand name. The Company intends to focus primarily on small and
mid-size businesses and residential customers.
FIBER
The Company operates over 545 miles of fiberoptic lines. The Company entered
the fiber business in 1990 when it joined with AT&T to place fiber between
Oklahoma City and Amarillo, Texas. The Company and AT&T each has its own cable,
sharing in all legal rights to the private right-of-way where the cables are
located. The Company's cable covers approximately 360 route miles and consists
of 36 strands of fiber. In 1991, the Company acquired a 20% interest in Forte of
Colorado Partnership which has 24 strands of fiber from Springfield, Colorado,
to Colorado Springs, approximately 185 miles in length. To enhance the revenue
potential for the above segments, the Company, Forte of Colorado, and other
segment providers have interconnected their networks and currently offer
fiber-based transport services among Denver, Colorado Springs, Amarillo, Kansas
City, Wichita, Lubbock, Midland, Albuquerque, Oklahoma City, Wichita Falls and
Dallas. Other segment providers have expressed interest in interconnecting to
this network and expansion may occur north to Chicago, south to Houston and San
Antonio, and east toward Atlanta. There can be no assurance that such expansion
will occur to all or any of these cities, or if such expansion does occur, when
it may occur or on what terms and conditions.
Revenue from the fiber business is generated from three principal sources:
(1) wholesale long-haul transport services as a "carrier's carrier"; (2)
services to private business and government end users; and (3) long-haul
transport services for the Company's subsidiaries. Substantially all of the
Company's revenues from its fiber business is generated from its long-haul
services including those of the Company's subsidiaries.
The Company has long-haul service contracts with various long-distance
carriers, including AT&T, SWBT, Sprint and NTS, which, in turn, resells to MCI
and WorldCom. NTS is the largest customer of the Company's fiber business,
accounting for approximately 49% of its gross fiber revenue for the year ended
December 31, 1996. The Company also provides services to the State of Oklahoma
and has recently contracted to provide fiber service to Vyvx.
The Company currently markets its fiber services through one full-time sales
employee and an independent marketing agent. While the Company has no plans to
add additional fiberoptic lines, the Company intends to initiate additional
marketing programs to increase its customer base and the use of its fiber
network by its existing customers and will seek to expand its network to
additional cities through new interconnection agreements.
The Company believes that it has a competitive advantage in the market area
that it serves because it has the only fiber network between Oklahoma City and
Amarillo, other than AT&T. AT&T's network, however, does not branch off to small
communities between Oklahoma City and Amarillo. By expanding its network through
interconnect agreements to access other major population centers (including
routes which may be attractive to major carriers) and providing high-quality,
reliable transmission services on a
63
<PAGE>
fixed-cost basis at competitive rates, the Company can expand its customer
values and increase its fiber revenue.
OTHER
In April 1997, a subsidiary of the Company was granted PCS licenses in nine
markets in Oklahoma, Kansas and Missouri that are adjacent to or overlap its
existing cellular markets. Because the Company qualifies as a "small business,"
the Company received a 15% discount on its bid amount. As a result, the
Company's aggregate obligations are approximately $5.1 million. The Company has
paid 20% of its bid amount. The balance has been financed by the government, at
the U.S. treasury rate for ten year obligations, and will amortize quarterly
over eight years after the second year. The FCC debt is secured by a lien on the
licenses, and limits the Company's ability to place other liens on the PCS
licenses. If the Company fails to meet its obligations to pay for its PCS
licenses, the Company will forfeit the licenses and the FCC may pursue the
Company's subsidiary for the balance due.
The PCS licenses obligate the Company to construct network facilities that
cover at least 25% of the population in each market within five years from the
grant of the license. The licenses cover an aggregate of approximately 4.2
million Pops.
SERVICE MARKS
The Company owns the service mark DOBSON CELLULAR-TM- which it uses in its
cellular telephone systems in western Oklahoma. While the Company has not
attempted to federally register the brand name "Dobson Cellular," the Company
believes that its prior use of this brand name in the limited areas where it is
used will enable the Company to effectively police against any infringing uses
of such brand name. The Company also owns the service mark LOGIX-TM- which it
uses in its competitive local exchange operations in the Oklahoma City and Tulsa
areas. The Company has submitted applications for the federal and state
registration of the service mark "LOGIX" and such applications are currently
being processed. In its cellular telephone business, the Company is currently
licensed to use the CELLULAR ONE-Registered Trademark- service mark in market
areas in part of the Oklahoma/Texas Cluster and in the Kansas/Missouri and the
Maryland/ Pennsylvania Clusters. The Company will use the AIRTOUCH-TM- CELLULAR
service mark in Arizona 5.
CELLULAR ONE-Registered Trademark- is a registered service mark with the
U.S. Patent and Trademark Office. The service mark is owned by Cellular One
Group, a Delaware general partnership of Cellular One Marketing, Inc., a
subsidiary of SWBM, together with Cellular One Development, Inc., a subsidiary
of AT&T Wireless and Vanguard. The Company uses the CELLULAR
ONE-Registered Trademark- service mark to identify and promote its cellular
telephone service pursuant to licensing agreements with Cellular One Group (the
"Licensor"). Licensing and advertising fees are determined based upon the
population of the licensed areas. The licensing agreements require the Company
to provide high-quality cellular telephone service to its customers and to
maintain a certain minimum overall customer satisfaction rating in surveys
commissioned by the Licensor. The licensing agreements which the Company has
entered into are for original five-year terms expiring in 2002. These agreements
may be renewed at the Company's option, subject to the satisfaction of certain
operating standards, for two additional five-year terms.
AIRTOUCH-TM- CELLULAR is a registered service mark licensed by WMC, an
affiliate of Airtouch and U S WEST. In connection with the Arizona 5
Acquisition, the Company has entered into a licensing agreement which will
permit the Company to use the AIRTOUCH-TM- CELLULAR service mark to identify and
promote its cellular telephone service in Arizona 5. The Company's right to use
the service mark in the territory is non-exclusive and non-transferrable. The
licensing agreement for the AIRTOUCH-TM- CELLULAR mark requires the Company to
provide high-quality cellular telephone services to its customers and to
otherwise maintain reasonable standards set by WMC. The licensing agreement is
for an initial term of 20 years with automatic extensions for additional
five-year periods.
64
<PAGE>
COMPETITION
CELLULAR
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of improvements in the
capacity and quality of digital technology, shorter cycles for new products and
enhancements, and changes in consumer preferences and expectations. Accordingly,
the Company expects competition in the wireless telecommunications business to
be dynamic and intense as a result of the entrance of new competitors and the
development of new technologies, products and services.
Each of the markets in which the Company competes will be served by other
two-way wireless service providers, including licensed cellular and PCS
operators and resellers. Many of these competitors have been operating for a
number of years, currently serve a substantial subscriber base and have
significantly greater financial and technical resources than those available to
the Company. Some competitors are expected to market other services, such as
cable television access, with their wireless telecommunication service
offerings. Several of the Company's competitors are operating, or planning to
operate, through joint ventures and affiliation arrangements, wireless
telecommunications systems that encompass most of the United States. In
addition, some of the Company's competitors have chosen CDMA as their digital
technology standard. In its cellular operating areas other than the
Oklahoma/Texas Cluster, the Company has not yet adopted the type of digital
technology which it will employ. The Company expects to adopt a digital
technology which is compatible with the digital technology adopted by the major
providers of cellular and digital services in the market area and in adjoining
market areas. To the extent that the Company's digital technology is different
from that of its competitors, the Company's roaming revenues may be reduced.
The Company competes primarily against one other facilities-based cellular
carrier in each of its RSA and MSA markets. See "--Cellular Markets and
Systems." Competition for customers between cellular licensees is based
principally upon the services and enhancements offered, the quality of the
cellular system, customer service, system coverage, capacity and price. Such
competition may increase to the extent that licenses are transferred from
smaller, stand-alone operators to larger, better capitalized and more
experienced cellular operators that may be able to offer consumers certain
network advantages.
Cellular carriers, including the Company, also face to a lesser extent
competition from PCS, ESMR and mobile satellite service ("MSS") systems,
including low earth-orbit satellite based ("LEO") systems, as well as from
resellers of these services and cellular service. In the future, cellular
operators may also compete more directly with traditional landline telephone
service providers. Continuing technological advances in telecommunications make
it impossible to predict the extent of future competition. However, due to the
depth and breadth of these competitive services offered by operators using these
other technologies, such competition could be significant and is expected to
become more intense.
The FCC requires that all cellular system operators provide service to
resellers on a nondiscriminatory basis. A reseller provides cellular service to
customers but does not hold an FCC license or own cellular facilities. Instead,
the reseller buys blocks of cellular telephone numbers from a licensed carrier
and resells service through its own distribution network to the public.
Therefore, a reseller may be both a customer of a cellular licensee's services
and a competitor of that licensee. Several well-known telecommunications
companies resell cellular service as a complement to their long distance, local
telephone, paging, cable television or internet offerings.
The most likely future source of direct competition to cellular providers in
the near term from a new technology is broadband PCS. Broadband PCS services
consist of wireless two-way telecommunications services for voice, data and
other transmissions employing digital micro-cellular technology. PCS operates in
the 1850 to 1990 MHz band. Like cellular, PCS technology utilizes a network of
small, low-powered transceivers placed throughout a neighborhood, business
complex, community or metropolitan area to
65
<PAGE>
provide customers with mobile and portable voice and data communications. Many
PCS licensees that will compete with the Company have access to substantial
capital resources. In addition, many of these companies or their predecessors
and affiliates, already operate large cellular telephone systems and thus bring
significant wireless experience to this new marketplace. In the Oklahoma/Texas
Cluster the Company competes with Western Wireless, Sprint Telecommunications
Venture, Nextwave Communications, PCS PrimeCo and Omni Point, who are the PCS
providers in or overlapping the Company's cellular coverage area. In the
Kansas/Missouri Cluster, the Company competes, or will compete, with Sprint
Telecommunications Venture, American Portable Telecommunications, RLV-PCS I
Partnership and Nextwave/RLV PCS, Inc., who are the PCS providers in or
overlapping the Company's cellular coverage area. In the Maryland/Pennsylvania
Cluster, the Company competes with AT&T Wireless, Sprint Spectrum, Nextwave
Communications and Aer Force Communications LP as the PCS providers in or
overlapping the Company's cellular coverage area. In the Arizona 5 area, the
Company will compete with AT&T Wireless and Sprint Spectrum as the PCS providers
in or overlapping the Company's cellular coverage area.
ESMR is a wireless communications service supplied by converting analog SMR
services into an integrated, digital transmission system. The ESMR system
incorporates characteristics of cellular technology, including multiple low
power transmitters and interconnection with the landline telephone network. ESMR
service may compete with analog cellular service by providing high quality
digital communication technology, lower rates, enhanced privacy and additional
features such as electronic mail and built-in paging. ESMR handsets are likely
to be more expensive than cellular telephones.
A consortium of telecommunications providers known as American Mobile
Satellite Corporation has been licensed by the FCC to provide mobile satellite
service. In addition, Motorola has filed for a license from the FCC for a
low-orbit satellite system, called "Iridium," that would provide mobile
communications to subscribers throughout the world. Other proposals for MSS are
pending before the FCC. The FCC is developing rules for these services and
international and foreign regulatory authorities must also approve aspects of
some mobile satellite systems and services. Mobile satellite systems could
augment or replace communications within land-based cellular systems. The
Company is aware of one LEO system which has commenced commercial operations.
While the Company may experience increased competition from LEO systems in the
future, to date, such systems have not affected the Company's operations.
The commercial development and deployment of most of these new technologies
remain in an early phase. The Company expects this activity to be focused
initially in relatively large markets in view of the substantial costs involved
in building and launching systems using these technologies. The Company believes
that it can effectively face this competition from its position as an incumbent
in the cellular field with a high quality network, an extensive footprint that
is not capacity constrained, strong distribution channels, superior customer
service capabilities and an experienced management team. Since the Company
operates in medium to small markets, the new entrants may be unable to offer
wireless service at competitive rates in many of the Company's markets in the
near term. The extensive capital expenditures required to deploy infrastructure
are more readily justifiable from an economic standpoint in larger, more densely
populated urban areas, than in the rural areas in which the Company operates.
The Company believes that its cellular subscription rates and roaming rates are
generally competitive with such rates of its competitors in cellular markets
served by the Company.
WIRELINE
There are currently no competitors in the areas served by the Company's
local exchanges. In connection with its resale of local, long distance and
wireless services, the Company will compete in Oklahoma City and Tulsa with the
incumbent local exchange carrier, SWBT, which has long-standing relationships
with its customers, has financial, technical and marketing resources
substantially greater than those of the Company and benefits from certain
existing regulations that favor the local exchange carrier over the Company in
certain respects. Other competitors may include Brooks and other competitive
local exchange carriers, microwave and satellite carriers, wireless
telecommunications providers and other
66
<PAGE>
resellers. In addition, AT&T and Sprint have announced plans to offer integrated
local and long distance telecommunications services. There can be no assurance
that the Company will be able to achieve or maintain significant revenue or
compete effectively in its resale business.
FIBER
In providing bulk long-haul circuit capacity, the Company's primary
competitors are IXC Communications, Inc., QWest and AT&T. AT&T is the largest
supplier of long distance voice and data transmission services in the United
States and has a transmission line adjacent to the Company's between Oklahoma
City and Amarillo. The Company also competes with other facilities-based IXCs,
such as MCI, WorldCom and Sprint, all of which have substantially greater
financial resources than the Company and a far more extensive transmission
network than the Company's network. In Oklahoma, the Company's principal
competitor is a subsidiary of SWBT. The Company may also face competition from
the regional Bell operating companies ("RBOCs"), GTE and others such as electric
utilities and cable television companies.
REGULATION
CELLULAR AND PCS
OVERVIEW. The cellular telephone industry is subject to extensive
governmental regulation on the federal level and to varying degrees on the state
level. Many aspects of such regulation have recently been impacted by the
enactment of the 1996 Act and are currently the subject of administrative
rulemakings that are significant to the Company. Neither the outcome of these
rulemakings nor their impact upon the cellular telephone industry or the Company
can be predicted at this time. The following is a summary of the federal laws
and regulations that materially affect the cellular communications industry and
a description of certain state laws. This section does not purport to be a
summary of all present and proposed federal, state and local regulations and
legislation relating to the cellular communications industry.
FEDERAL REGULATION. The licensing, construction, modification, operation,
ownership and acquisition of cellular telephone systems are subject to
regulations and policies of the FCC under the Communications Act of 1934, as
amended (the "Communications Act"). The FCC has promulgated rules and
regulations governing, among other things, applications to construct and operate
cellular communications systems, applications to transfer control of or assign
cellular licenses and technical and operational standards for the operation of
cellular systems (such as maximum power and antenna height).
The FCC licenses cellular systems in accordance with 734 geographically
defined market areas comprised of 306 MSAs and 428 RSAs. In each market, the
frequencies allocated for cellular telephone use are divided into two equal 25
MHz blocks and designated as wireline and non-wireline. Block B licenses
initially were reserved for wireline entities, such as the Company, while
non-wireline licenses initially were reserved for entities that were not
affiliated with a wireline telephone company. Apart from the different frequency
blocks, there is no technical difference between wireline and non-wireline
cellular systems and the operational requirements imposed on each by the FCC are
the same. Under current FCC rules, with FCC approval, wireline and non-wireline
licenses are transferable without restriction as to wireline affiliation.
However, no entity may own, directly or indirectly, more than a 5% interest in
both systems in any one MSA or RSA, unless such ownership will not pose a
substantial threat to competition, and no entity may, directly or indirectly,
own a controlling interest in, or otherwise have the ability to control, both
such systems. The FCC may prohibit or impose conditions on transfers of
licenses. In addition, under FCC rules, no person may have an attributable
interest in a total of more than 45 Mhz of licensed, broadband PCS, cellular and
ESMR spectrum regulated as Commercial Mobile Radio Services ("CMRS") with
significant overlap in any geographic area (significant overlap will occur when
at least 10% of the population of the PCS licensed service areas is within the
CGSA (as defined below) and/or the ESMR service area).
67
<PAGE>
Under FCC rules, the authorized service area of a cellular provider in each
of its markets is referred to as the "Cellular Geographic Service Area" or
"CGSA." The CGSA may conform exactly with the boundaries of the FCC designated
MSA or RSA, or it may be smaller, subject to certain minimum service
requirements. A cellular licensee has the exclusive right to expand its CGSA
boundaries within the licensee's MSA or RSA for a period of five years after
grant of the licensee's initial construction permit. At the end of this
five-year build-out period, however, any entity may apply to serve portions of
the MSA or RSA outside the licensee's then designated CGSA. The five year
build-out period has expired for substantially all licensees and the FCC has
granted several "unserved area" applications filed by parties.
Cellular service providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent cellular users,
permittees and licensees in order to avoid interference between adjacent
systems. In addition, the height and power of base station transmitting
facilities and the type of signals they emit must fall within specified
parameters. The Company is obligated to pay certain annual regulatory fees to
the FCC in connection with its cellular operations.
The Communications Act requires prior FCC approval for transfers to or from
the Company of a controlling interest in any license or construction permit, or
any rights thereunder. Although there can be no assurance that any future
requests for approval of applications filed will be approved or acted upon in a
timely manner by the FCC, the Company has no reason to believe such requests or
applications would not be approved or granted in due course.
The FCC also regulates a number of other aspects of the cellular business.
For example, the FCC regulates cellular resale practices and recently extended
the resale requirement to broadband PCS and ESMR licensees. Cellular, PCS and
ESMR providers may not restrict any customers' resale of their services or
unreasonably discriminate against resellers of their services. Under the new FCC
policy, all resale obligations for cellular, broadband PCS and ESMR operators
will terminate five years after the date that the last group of initial PCS
licenses are granted. The FCC has also adopted requirements for cellular and
other providers of two-way voice services to implement enhanced 911 services,
providing emergency service providers the ability to better locate carriers who
have used wireless 911 features, such implementation to occur by October 2001.
In addition, the FCC regulates the ancillary service offerings that cellular
and PCS licensees can provide and recently revised its rules to permit cellular,
PCS, paging and ESMR licensees to offer fixed services on a primary basis along
with mobile services. This rule change may facilitate the provision of wireless
local loop service, which involves the use of wireless links to provide
telephone service by cellular licensees, as well as broadband PCS and ESMR
licensees. In this regard, the FCC also recently adopted telephone number
portability rules for local exchange carriers ("LECs"), as well as cellular,
broadband PCS and ESMR licensees, that could facilitate the development of local
exchange competition, including wireless local loop service. The new number
portability rules generally require cellular, broadband PCS and ESMR licensees
to have the capability to deliver calls from their systems to ported numbers by
December 31, 1998 and to offer number portability and roaming to ported numbers
by June 30, 1999. These requirements may result in added capital expenditures
for the Company to make necessary system changes, although the Company currently
has no plans for any such expenditures.
Initial cellular and PCS licenses are generally granted for terms of ten
years, beginning on the date of the grant of the initial operating authority,
and are renewable upon application to the FCC. The Company's existing cellular
licenses expire at various dates beginning in October 2000. The licenses which
are being acquired in the Horizon Properties Acquisition will expire at varying
dates beginning in October 1997. Licenses may be revoked and license renewal
applications denied for cause after appropriate notice and hearing. Near the
conclusion of the license term, licensees must file applications for renewal of
licenses to obtain authority to operate for up to an additional 10-year term.
The FCC will award a renewal expectancy to a cellular licensee that meets
certain standards of past performance. If the existing
68
<PAGE>
licensee receives a renewal expectancy, it is very likely that the existing
licensee's cellular license will be renewed without becoming subject to
competing applications. To receive a renewal expectancy, a licensee must show
that it has provided "substantial" service during its past license term, and has
substantially complied with applicable FCC rules and policies and the
Communications Act. "Substantial" service is defined as service which is sound,
favorable and substantially above a level of mediocre service that might only
minimally warrant renewal. If the existing licensee does not receive a renewal
expectancy, competing applications for the license will be accepted by the FCC
and the license may be awarded to another entity.
In order to increase competition in wireless communications, promote
improved quality and service and make available the widest possible range of
wireless services, federal legislation was enacted directing the FCC to allocate
radio frequency spectrum for PCS by competitive bidding. A PCS system operates
under a protected geographic service area license granted by the FCC for either
an MTA or BTA on one of six frequency blocks allocated for broadband PCS
service. The FCC has divided the United States and its possessions and
territories into PCS markets made up of 493 BTAs and 51 MTAs. As many as six
licensees will compete in each PCS service area. The FCC has allocated 120 MHz
of radio spectrum in the 2 GHz band for licensed broadband PCS services. The FCC
divided the 120 MHz of spectrum into six individual blocks, each of which is
allocated to serve either MTAs or BTAs. The spectrum allocation includes two 30
MHz blocks (A and B Blocks) licensed for each of the 51 MTAs, one 30 MHz block
(C Block) licensed for each of the 493 BTAs, and three 10 MHz blocks (D, E and F
Blocks) licensed for each of the 493 BTAs, a total of more than 2,000 licenses.
The FCC has adopted specific standards to apply to PCS renewals, under which
the FCC will award a renewal expectancy to a PCS licensee that (i) has provided
substantial service during its past license term and (ii) has substantially
complied with applicable FCC rules and policies and the Communicates Act. All 30
MHz broadband PCS licensees must construct facilities that offer coverage to
one-third of the population of their service area within five years, and
two-thirds of the population within ten years, of their initial license grants.
Licensees that fail to meet the coverage requirements may be subject to
forfeiture of the license. FCC rules restrict the voluntary assignments or
transfers of control of C Block and F Block licenses. During the first five
years of the license term, assignments or transfers affecting control are
permitted only to assignees or transferees that meet the eligibility criteria
for participation in the entrepreneur block auction at the time the application
for assignment or transfer of control is filed, or if the proposed assignee or
transferee holds other licenses for C Block and F Block and, at the time of
receipt of such licenses, met the same eligibility criteria. Any transfers or
assignments during the entire 10-year initial license terms are subject to
unjust enrichment penalties, I.E., forfeiture of any bidding credits and
acceleration of any installment payment plans should the assignee or transferee
not qualify for the same benefits. In the case of the C Block and F Block, the
FCC will conduct random audits to ensure that licensees are in compliance with
the FCC's eligibility rules. Violations of the Communications Act or the FCC's
rules could result in license revocations, forfeitures or fines.
For a period of up to five years after the grant of a PCS license (subject
to extension), a PCS licensee will be required to share spectrum with existing
licensees that operate certain fixed microwave systems within its license area.
To secure a sufficient amount of unencumbered spectrum to operate its PCS
systems efficiently and with adequate population coverage, the Company may need
to relocate many of these incumbent licensees, at the Company's expense. In an
effort to balance the competing interests of existing microwave users and newly
authorized PCS licensees, the FCC has adopted (i) a transition plan to relocate
such microwave operators to other spectrum blocks and (ii) a cost sharing plan
so that if the relocation of an incumbent benefits more than one PCS licensee,
the benefitting PCS licensees will share the cost of the relocation. This
transition plan allows most microwave users to operate in the PCS spectrum for a
two-year voluntary negotiation period and an additional one-year mandatory
negotiation period. For public safety entities dedicating a majority of their
system communications for police, fire or emergency medical services operations,
the voluntary negotiation period is three years, with an additional two year
mandatory negotiation period. The FCC is considering shortening the voluntary
negotiation period by one year and
69
<PAGE>
lengthening the mandatory negotiation period by one year for PCS licensees in
the C, D, E and F Blocks. There can be no assurance that the FCC will accept
this proposal. Parties unable to reach agreement within these time periods may
refer the matter to the FCC for resolution, but the incumbent microwave user is
permitted to continue its operations until final FCC resolution of the matter.
The transition and cost sharing plans expire on April 4, 2005, at which time
remaining incumbents in the PCS spectrum will be responsible for their costs to
relocate to alternate spectrum locations. The Company has not yet determined the
extent, if any, of expenses it may need to incur to relocate microwave
incumbents in order to provide PCS services using the PCS licenses it expects to
be awarded.
Applications for FCC authority may be denied and in extreme cases licenses
may be revoked if the FCC finds that an entity lacks the requisite "character"
qualifications to be a licensee. In making the determination, the FCC considers
whether an applicant or licensee has been the subject of adverse findings in a
judicial or administrative proceeding involving felonies, the possession or sale
of unlawful drugs, fraud, antitrust violations or unfair competition, employment
discrimination, misrepresentations to the FCC or other government agencies, or
serious violations of the Communications Act or FCC regulations. The FCC also
requires licensees to comply with statutory restrictions regarding the direct or
indirect ownership or control of FCC licenses by non-U.S. persons or entities.
Interconnection charges paid to local exchange carriers are a major
component of the Company's cost structure. Changes in the interconnection charge
rate structure imposed by the FCC or mandated by the 1996 Act may have a
material impact on the Company.
The 1996 Act, which makes significant changes to the Communications Act and
terminated the antitrust consent decree applicable to the RBOCs, affects the
telecommunications industry. This legislation, among other things, affects
competition for local telecommunications services, interconnection arrangements
for carriers, universal service funding and the provision of interexchange
services.
The 1996 Act requires state public utilities commissions and/or the FCC to
implement policies that mandate reciprocal compensation between local exchange
carriers, a category that will, for these purposes, include cellular carriers,
for interconnection services at rates more closely related to cost. On August 1,
1996, the FCC adopted rules implementing the interconnection policies imposed by
the 1996 Act. Various aspects of the order are being appealed in federal court
and the FCC's orders are currently subject to a court stay. While it is too soon
to predict the actual effect of the FCC's order, the Company believes that the
new rules are likely to reduce the interconnection expenses incurred by the
Company.
The 1996 Act requires the FCC to adopt rules that require interstate
communications carriers, including cellular carriers, to "make an equitable and
non-discriminatory contribution" to a universal service fund that reimburses
communications carriers that provide basic communications services to users who
receive services at subsidized rates. If adopted, these rules could result in
increased costs for the Company's cellular operations. These provisions may also
impact the Company's wireline operations. See "--Wireline." The 1996 Act also
eases the restrictions on the provision of interexchange telephone services by
wireless carriers affiliated with RBOCs. RBOC-related wireless carriers have
interpreted the legislation to permit immediate provision of long distance call
delivery for their cellular customers.
The 1996 Act specifically exempts all cellular carriers from the obligation
to provide equal access to interstate long distance carriers. However, the 1996
Act gives the FCC the authority to impose rules to require unblocked access
through carrier identification codes or 800/888 numbers, so that cellular
subscribers are not denied access to the long distance carrier of their
choosing, if the FCC determines that the public interest so requires. The
Company currently provides "dial around" equal access to all of its customers.
The overall impact of the 1996 Act on the business of the Company is unclear
and will likely remain so for the foreseeable future. The new limitations on
local zoning requirements may facilitate the construction of new cell sites and
related facilities. See "--State, Local and Other Regulation." However, other
70
<PAGE>
provisions of the new statute relating to interconnection, telephone number
portability, equal access and resale could subject the Company to additional
costs and increased competition.
STATE, LOCAL AND OTHER REGULATION. The Communications Act preempts state or
local regulation of the entry of, or the rates charged by, any commercial mobile
service or any private mobile service provider, which includes cellular
telephone service providers. The FCC has denied the petition of eight states to
continue their rate regulation authority, including authority over cellular
operators. As a practical matter, the Company is free to establish rates and
offer new products and service with a minimum of regulatory requirements. The
states of the Company's existing operations and Arizona, in which it will
operate upon completion of the Arizona 5 Acquisition, maintain nominal oversight
jurisdiction, primarily focusing upon prior approval of acquisitions and
transfers and resolution of customer complaints.
The location and construction of cellular transmitter towers and antennas
are subject to FCC and Federal Aviation Administration ("FAA") regulations and
are subject to federal, state and local environmental regulation, as well as
state or local zoning, land use and other regulation. Before a system can be put
into commercial operation, the grantee of a construction permit must obtain all
necessary zoning and building permit approvals for the cell sites microwave
tower locations and must secure state certification, if required. The time
needed to obtain zoning approvals and requisite state permits varies from market
to market and state to state. Likewise, variations exist in local zoning
processes.
Zoning and planning regulation may become more restrictive in the future as
many broadband PCS carriers are now seeking sites for network construction. The
1996 Act may provide some relief from state and local laws that arbitrarily
restrict the expansion of personal wireless services, which include cellular,
PCS and ESMR systems. For example, under the 1996 Act, localities are now
precluded from denying zoning approval for cell sites based upon electromagnetic
emission concerns, if the cellular operator's system complies with FCC emissions
standards. In addition, localities are prohibited from adopting zoning
requirements that simply prohibit or have the effect of prohibiting personal
wireless services, or that discriminate between "functionally equivalent"
services. Notwithstanding these new requirements, the effectiveness of the new
law has not yet been tested and it is still unclear whether the costs of
expanding cellular systems by adding cell sites will increase and whether
significant delays will be experienced due to local zoning regulation.
There can be no assurance that any state or local regulatory requirements
currently applicable to the Company's systems will not be changed in the future
or that regulatory requirements will not be adopted in those states and
localities which currently have none.
FUTURE REGULATION. From time to time, legislation that potentially could
affect the Company, either beneficially or adversely, is proposed by federal or
state legislators. There can be no assurance that federal or state legislation
will not be enacted, or that regulations will not be adopted or actions taken by
the FCC or state regulatory authorities that might adversely affect the business
of the Company. Changes such as the allocation by the FCC of radio spectrum or
services that compete with the Company's business could adversely affect the
Company's operating results. In this regard, the FCC is considering allocating
an additional 30 MHz for new wireless communications services.
WIRELINE
Telco is subject to the regulatory authority of the OCC, which sets rates,
terms and conditions of service, and mandates minimum service and quality of
service requirements for telephone companies in Oklahoma. Telephone companies in
Oklahoma have elected to be access providers, providing long distance service
only between their own exchanges. Interexchange carriers, including SWBT,
provide all other long distance services for other customers. Telco has received
authority to provide competitive local exchange telecommunications services
within Oklahoma and has made application to the OCC for authority for the resale
of intrastate long distance services.
71
<PAGE>
The 1996 Act potentially impacts the Company's wireline operations. Under
previous regulations access charges contained implicit support for high-cost
areas. The FCC has initiated proceedings to overhaul the contribution mechanism
for federal support revenue. The proposed rules would remove implicit support
from access revenues and place more emphasis for such support on HCF/USF. In
addition, a board consisting of state utility commissioners and members of the
FCC has recently recommended changes that would, over time, reduce or eliminate
subsidies to businesses in high-cost areas. While it is too early to predict
what the final FCC orders may be, or the effect of FCC orders, the rules
ultimately adopted by the FCC may have a material impact on the Company's
wireline operations. See "Risk Factors--Potential for Adverse Regulatory Change
and the Need for Regulatory Approvals."
EMPLOYEES AND AGENTS
As of April 15, 1997, the Company had approximately 334 employees. In
addition, as of such date, the Company had agreements with 146 independent sales
agents, including car dealerships, electronics stores, paging service companies
and independent contractors. None of the Company's employees are represented by
a labor organization, and the Company considers its employee relations to be
good.
PROPERTIES
The Company maintains its corporate headquarters in Oklahoma City, Oklahoma.
The Company leases this space, which is approximately 24,111 square feet, from
an affiliate of the Company at a monthly rental of approximately $22,000. See
"Management--Certain Transactions." As of April 15, 1997, the Company's cellular
operations leased 20 and owned three sales and administrative offices, at
aggregate annual rentals of approximately $.2 million, and leased 62 and owned
44 cell sites, with aggregate annual rentals of approximately $2.1 million. The
Company anticipates that it will review these leases from time to time and may,
in the future, lease or acquire new facilities as needed. The Company expects to
lease or purchase additional sales and administrative office spaces and tower
sites in connection with the Arizona 5 Acquisition. The Company does not
anticipate that it will encounter any material difficulties in meeting its
future needs for any leased space.
LEGAL PROCEEDINGS
The Company is not currently involved in any pending legal proceedings that
individually or in the aggregate are material to the Company. The Company is a
party to routine filings and customary regulatory proceedings with the FCC
relating to its operations.
72
<PAGE>
COMPANY ORGANIZATION
The organization of the Company is as follows:
[LOGO]
73
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The holders of the Company's voting securities have agreed that the Board
will consist of six directors, four designated by the principal holder of the
Company's Class A Common Stock, par value $1.00 per share (the "Class A Common
Stock"), and two designated by holders of the Class B Preferred Stock. See
"Description of Other Indebtedness and Preferred Stock" for a description of the
provisions of the Certificate of Designation for the Class B Preferred Stock and
the Shareholders' Agreement with respect to election of directors.
The Company's Board of Directors presently consists of five directors, with
one vacancy to be filled by an independent director designee of the principal
holder of the Class A Common Stock. Directors and executive officers of the
Company are elected to serve until they resign or are removed, or are otherwise
disqualified to serve, or until their successors are elected and qualified.
Directors of the Company are elected for one-year terms at the annual meeting of
stockholders which is held in April of each year. Officers of the Company are
appointed at the Board's first meeting after each annual meeting of
stockholders.
The directors and executive officers of the Company are set forth below.
Certain of the officers and directors hold or have held positions in several of
the Company's subsidiaries. The ages of the persons set forth below are as of
December 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION(A)
- -------------------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Everett R. Dobson(b)............ 37 Chairman of the Board, President and Chief Executive Officer and
Director
G. Edward Evans................. 35 Chief Operating Officer of cellular subsidiaries
Robert J. Mirabito.............. 42 President of fiber subsidiaries
Bruce R. Knooihuizen............ 40 Vice President and Chief Financial Officer
Stephen T. Dobson(b)............ 34 Treasurer, Secretary and Director
Russell L. Dobson(b)............ 61 Director
Justin L. Jaschke(c)............ 38 Director
Thadeus J. Mocarski(c).......... 34 Director
</TABLE>
- ------------------------
(a) Unless otherwise indicated, position is held with the Company.
(b) Everett R. Dobson and Stephen T. Dobson are sons of Russell L. Dobson.
(c) Director designee of holders of Class B Preferred Stock. See "Description of
Other Indebtedness and Preferred Stock."
Dobson was incorporated in February 1997 in connection with a corporate
reorganization (the "Reorganization") pursuant to which Dobson became the
holding company parent of DOC, which owns the capital stock of the Company's
cellular, local exchange and wholly-owned fiber subsidiaries. Information below
with respect to positions held by the Company's executive officers and directors
refers to their positions with DOC and, since February 1997, also with Dobson.
Everett R. Dobson has been a director and President of the Company, and
President and Chief Executive Officer of the Company's cellular subsidiaries,
since 1990. In April 1996, he succeeded his father, Russell L. Dobson, as
Chairman of the Board and Chief Executive Officer. Mr. Dobson is President of
Gila River Telecommunications, Inc., which presently owns a 41.95% interest in
Gila River Cellular General Partnership, the owner of Arizona 5. See "--Certain
Transactions." Mr. Dobson served on the board of the Cellular Telecommunications
Industry Association ("CTIA") in 1993 and 1994 and is a member of the Rural
Cellular Association, Oklahoma Telephone Association ("OTA") and the
Organization for the Protection and Advancement of Small Telephone Companies
("OPASTC"). He is a member of
74
<PAGE>
the Young Presidents Organization. Mr. Dobson holds a B.A. in economics from
Southwestern Oklahoma State University.
G. Edward Evans joined the Company as Chief Operating Officer of the
cellular subsidiaries in January 1997. Mr. Evans was employed by BellSouth
Mobility, Inc. from 1993 to 1996, serving as General Manager-Kentucky, Director
of Field Operations at the company's corporate office in Atlanta and Director of
Marketing-Alabama. He was an Area Manager and a Market Manager of United States
Cellular, Inc. from 1990 to 1993 and was a Sales Manager of GTE Mobilnet from
1989 to 1990. Mr. Evans has an M.B.A. from Georgia State University.
Robert J. Mirabito became President of each of the fiber subsidiaries in
April 1996. He served as Vice President of Dobson Fiber Company and Dobson
Network Management, Inc. from 1994 to 1996 and was Director of Strategic
Planning for the Company from 1991 to 1994. Prior to joining the Company, Mr.
Mirabito was employed by AT&T for eight years in various capacities, including
Manager-State Government Affairs and Senior Internal Auditor. Mr. Mirabito is
active in the CTIA and OTA and has published numerous articles in
telecommunications and fiber optic trade journals. Mr. Mirabito holds a B.S. in
civil engineering from the University of Notre Dame and an M.B.A. from the
University of Kansas.
Bruce R. Knooihuizen joined the Company as Vice President and Chief
Financial Officer in July 1996. From 1994 to 1996, Mr. Knooihuizen was Chief
Financial Officer and Secretary for Westlink Holdings, Inc. in San Diego, a
wireless provider which was formerly an operating unit of U S WEST. Previously,
he was Treasurer and Controller of Ameritech Cellular from 1990 to 1994,
Director, Accounting Operations of Ameritech Applied Technologies from 1988 to
1990, and Controller of Ameritech Properties in 1988, all located in Chicago.
From 1980 to 1988 he held various financial and accounting positions with The
Ohio Bell Telephone Company. Mr. Knooihuizen received a B.S. in finance from
Miami University in Oxford, Ohio and an M.B.A. in finance from the University of
Cincinnati.
Stephen T. Dobson has been a director of the Company since 1990. He has
served as Treasurer and Secretary of the Company since 1990 and General Manager
and Secretary of Telco since 1994 and 1990, respectively. He became President of
Dobson Wireless, Inc. in January 1997. Mr. Dobson is a member of the Western
Rural Cellular Association ("WRTA"), National Telephone Cooperative Association
and National Cable Television Association. He holds a B.S. in business
administration from the University of Central Oklahoma.
Russell L. Dobson has been a director of the Company since 1990 and was
Chairman of the Board and Chief Executive Officer from 1990 to 1996. Mr. Dobson
joined his father at Telco in 1956 and became the controlling owner and Chief
Executive Officer in 1975 when he purchased his father's interest. He has been
active in many industry-related groups, including the OTA, WRTA and OPASTC.
Justin L. Jaschke has been a director of the Company since October 1996. Mr.
Jaschke has been the Chief Executive Officer and a director of World-Net Access,
Inc., a privately held Internet access provider based in Englewood, Colorado,
since its inception in March 1996. Prior to March 1996, he was Chief Operating
Officer of Nextel Communications, Inc. following its merger with OneComm
Corporation in 1995. He served as OneComm's President and was a member of its
Board of Directors from 1993. From 1990 to 1993, he was President and Chief
Executive Officer of Bay Area Cellular Telephone Company in South San Francisco,
California. Mr. Jaschke is a director of Metricom, Inc., a wireless modem and
Internet service provider in Los Gatos, California. Mr. Jaschke has a B.S. in
mathematics from the University of Puget Sound and an M.S. in management from
the Massachusetts Institute of Technology Sloan School of Management.
Thadeus J. Mocarski has been a director of the Company since April 1996. Mr.
Mocarski has been a partner of Fleet Equity Partners, a private equity fund
located in Providence, Rhode Island, since 1994. Affiliates of Fleet Equity
Partners (the "Fleet Investors") own all of the outstanding Class B and Class C
Preferred Stock of the Company. See "Description of Other Indebtedness and
Preferred Stock." From
75
<PAGE>
1989 to 1994, Mr. Mocarski was employed by the law firm Edwards & Angell in
Providence, Rhode Island, where he represented various private equity capital
firms in their investment and acquisition activities, including Fleet Equity
Partners. Mr. Mocarski received a B.A. from Colby College and a J.D. from the
Washington College of Law. Mr. Mocarski is a director of MJD Communications,
Inc., a rural local exchange company headquartered in Charlotte, North Carolina.
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation during
1996 earned by the Company's chief executive officer and its other most highly
compensated executive officers whose combined salary and bonus exceeded $100,000
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(A) COMPENSATION($)(B) COMPENSATION($)(C)
- ----------------------------------------------- --------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C>
Everett R. Dobson, Chairman of the Board,
President and Chief Executive Officer........ 300,000 -- 77,100(d) 9,500
Russell L. Dobson, Director(e)................. 250,000 -- 37,500(f) 9,500
Robert J. Mirabito, President of fiber
subsidiaries................................. 80,000 25,000 -- 3,200
Thomas F. Riley, Executive Vice President(g)... 129,000 -- -- 14,500
Stephen T. Dobson, Treasurer and Secretary..... 97,000 -- 20,600(h) 3,900
</TABLE>
- ------------------------
(a) For Mr. Mirabito, represents the amount of bonus paid in 1997 with respect
to services performed in 1996. It is expected that bonuses relating to 1996
will be paid in 1997 to Everett R. Dobson and Stephen T. Dobson; however,
the amount of such bonuses has not yet been determined. Does not include
$205,000 and $69,000 paid to Everett R. Dobson and Stephen T. Dobson,
respectively, in 1996 with respect to services performed in 1995.
(b) Represents the value of perquisites and other personal benefits in excess of
10% of annual salary and bonus.
(c) Includes the matching contributions made by the Company to the account of
the executive officer under the Company's 401(k)/Profit Sharing Plan. With
respect to Mr. Riley, also includes a severance payment of $10,000.
(d) Includes $62,900 for personal use of Company aircraft and $12,500 for a
Company-provided vehicle.
(e) Russell L. Dobson was Chairman of the Board and Chief Executive Officer of
the Company until April 1996, when he was succeeded by Everett R. Dobson.
(f) Includes $20,600 for personal use of Company aircraft, $9,600 for premiums
paid by the Company on an individual life insurance policy for Mr. Dobson
and $5,300 for a Company-provided vehicle.
(g) Mr. Riley ceased to be an employee of the Company on December 31, 1996.
(h) Includes $7,400 for personal use of Company aircraft and $6,500 for a
Company-provided vehicle.
76
<PAGE>
EMPLOYMENT AGREEMENTS
In connection with the employment of G. Edward Evans and Bruce R.
Knooihuizen in 1996, the Company agreed to provide them compensation in the form
of salary, bonus, stock options and other benefits. The arrangement with Mr.
Evans included the following: a $20,000 payment upon acceptance of employment,
an initial annual salary of $120,000, an annual bonus ranging from 30% to 50% of
his annual salary, a five-year home mortgage loan of $300,000 at an annual
interest rate of 4%, and a 10-year option to purchase 6,033 shares of Class B
Common Stock at $100 per share, with 60% of the option vesting ratably over five
years and 40% vesting over five years based on the achievement of annual
performance objectives. Mr. Knooihuizen's employment arrangement includes an
initial annual salary of $150,000, an annual bonus ranging from 30% to 50% of
his annual salary, and a 10-year option to purchase 7,541 shares of Class B
Common Stock at $100 per share vesting at the rate of 20% per year. The Company
also agreed to a severance payment equal to one year's salary in the event of
termination of employment of either Mr. Evans or Mr. Knooihuizen without cause.
The options to purchase shares of Class B Common Stock held by Messrs. Evans and
Knooihuizen become fully vested upon a change of control of the Company. The
Company employs Russell L. Dobson on an as-needed basis to assist the Company in
connection with the wireline and fiber operations for annual compensation of
$250,000, which is payable irrespective of the time required for Mr. Dobson's
services. There are no other employment agreements with the Company's executive
officers.
The Purchase Agreement executed in connection with the Fleet Investors'
purchase of Class B Preferred Stock imposes limitations on the amount of salary
that the Company may pay to each of Everett R., Stephen T. and Russell L. Dobson
and provides for performance criteria for bonus payments to Everett R. Dobson.
Other compensation paid to executive officers is subject to prior approval of
the Fleet Investors. See "Description of Other Indebtedness and Preferred
Stock."
DIRECTOR COMPENSATION
The Company reimburses directors for out-of-pocket expenses incurred in
attending board meetings. Justin L. Jaschke, in connection with his election as
a director by the Fleet Investors in October 1996, was granted an option to
acquire 833 shares of Class B Common Stock at an exercise price of $100 per
share. Mr. Jaschke's option vests ratably over a five-year period and fully
vests upon a change of control of the Company. Directors who are officers or
consultants to the Company receive no additional compensation for services
rendered as directors.
STOCK OPTION PLAN
As part of the Reorganization in February 1997, Dobson adopted DOC's 1996
Stock Option Plan (the "Plan"), substituting Dobson Class B Common Stock for the
stock subject to the Plan. The purpose of the Plan is to encourage key employees
of the Company (including Dobson and any present or future parent or subsidiary
of Dobson) by providing opportunities to participate in the ownership of Dobson
and its future growth through the grant of incentive stock options and
nonqualified stock options. The Plan also permits the grant of options to
directors. The Plan is presently administered by the Board of Directors, but in
the future may be administered by a committee of the Board (whether the Board or
a committee, the "Committee").
The maximum number of shares of Class B Common Stock for which options may
be granted under the Plan is 30,166, subject to adjustment in the event of any
stock dividend, stock split, recapitalization, reorganization or certain defined
change in control events. Shares subject to previously expired or terminated
options become available again for grants of options. The shares to be issued
under the Plan will be authorized but unissued shares.
The number of shares and other terms of each grant are determined by the
Committee. The price payable upon the exercise of an incentive stock option may
not be less than 100% of the fair market value of the Class B Common Stock at
the time of grant, or in the case of an incentive stock option granted to an
77
<PAGE>
employee owning stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company (a "10% Shareholder"), 110% of the
fair market value on the date of grant. Incentive stock options may be granted
to an employee only to the extent that the aggregate exercise price of all such
options under all Company plans becoming exercisable for the first time by the
employee during any calendar year does not exceed $100,000. The price payable
upon the exercise of a nonqualified stock option must be at least the minimum
legal consideration required under the laws of Oklahoma.
Each option granted under the Plan will expire on the date specified by the
Committee, but not more than ten years from the date of grant or, in the case of
a 10% Shareholder, not more than five years from the date of grant. Unless
otherwise agreed, an incentive stock option will terminate not more than 90 days
(or twelve months in the event of death or disability) after the optionee's
termination of employment.
An optionee may exercise an option by giving notice to the Company,
accompanied by an instrument of accession providing that the optionee agrees to
be bound by the terms applicable to shareholders under the Shareholders'
Agreement and full payment of the purchase price in cash or, at the discretion
of the Committee, (i) Common Stock having a fair market value equal to the
exercise price, (ii) the optionee's personal recourse note bearing interest
payable not less than annually at no less than 100% of the lowest applicable
federal rate (as defined in Section 1274(d) of the Internal Revenue Code), (iii)
an assignment of proceeds from the sale of a portion of the stock subject to the
option being exercised, or (iv) a combination of the foregoing.
Outstanding options become nonforfeitable and exercisable in full
immediately prior to certain defined change of control events. Unless otherwise
determined by the Committee, outstanding options will terminate immediately
prior to the consummation of the dissolution or liquidation of Dobson.
The Plan may be terminated or amended by the Board of Directors at any time
subject, in the case of certain amendments, to shareholder approval. If not
earlier terminated, the Plan expires on June 1, 2006.
CERTAIN TRANSACTIONS
The Company has adopted a policy requiring that any material transaction
between the Company and persons or entities affiliated with officers, directors
or principal stockholders of the Company be on terms no less favorable to the
Company than reasonably could have been obtained in an arms' length transaction
with independent third parties. Any other matters involving potential conflicts
of interests are to be resolved on a case-by-case basis.
In connection with the Reorganization effected in February 1997, the
shareholders of DOC exchanged their DOC stock for the following stock of Dobson,
all of which has a par value of $1.00: Dobson CC Limited Partnership, 469,998
shares of Class A Common Stock ("Class A Common Stock"); Russell L. Dobson,
3,154 shares of Class A Common Stock; Telco, 100,000 shares of Class A 5%
Non-Cumulative, Non-Voting, Non-Convertible Preferred Stock ("Class A Preferred
Stock"); Fleet Venture Resources, Inc., 69,446 shares of Class B Convertible
Preferred Stock ("Class B Preferred Stock"); Fleet Equity Partners VI, L.P.,
29,762 shares of Class B Preferred Stock; and Kennedy Plaza Partners, 792 shares
of Class B Preferred Stock. In addition, Dobson assumed outstanding DOC stock
options, substituting shares of Dobson's Class B Non-Voting Common Stock for the
DOC stock subject to options held by the following optionees: Justin L. Jaschke,
833 shares; G. Edward Evans, 6,033 shares; Bruce R. Knooihuizen, 7,541 shares.
Further, in connection with the Transactions in February 1997, Dobson issued
100,000 shares of its Class C 8% Cumulative, Non-Voting, Non-Convertible
Preferred Stock ("Class C Preferred Stock") to the Fleet Investors (each holding
the same number of shares as it holds of Class B Preferred Stock). See
"Description of Other Indebtedness and Preferred Stock--Preferred Stock."
Transactions with the Company described below refer to DOC if they occurred
prior to the Reorganization.
In March 1996, the Fleet Investors purchased 100,000 shares of Class B
Preferred Stock from the Company for $10.0 million. In connection with this
transaction, the Company and its shareholders entered
78
<PAGE>
into a Shareholders' Agreement providing for, among other matters, registration
rights, restrictions on the transfer of Company stock, put and call rights with
respect to the Class B Preferred Stock, and the issuance of additional stock
upon the happening of certain events. The Fleet Investors also granted the
Company a stock option. In connection with the Reorganization, Dobson and its
shareholders entered into a new Shareholders' Agreement having substantially the
same terms and conditions. For a summary of the terms of the Fleet Investors
Purchase Agreement, the Shareholders' Agreement and option agreement, see
"Description of Other Indebtedness and Preferred Stock."
The Everett R. Dobson Irrevocable Family Trust, Steven T. Dobson Irrevocable
Family Trust and Robbin L. Dobson Irrevocable Family Trust (collectively, the
"Dobson Trusts") were co-borrowers with the Company and certain of its
subsidiaries under the prior bank facility, which was first entered into in
1994. The Dobson Trusts are the limited partners of Dobson CC Limited
Partnership, which holds more than 99% of Dobson's Class A Common Stock and,
prior to the Reorganization, held more than 99% of DOC's Class A Common Stock.
See "Security Ownership of Certain Beneficial Owners and Management." The
Company and its borrower subsidiaries guaranteed, and the Company pledged the
equity securities of certain of its subsidiaries as security for, the
obligations of the Dobson Trusts under a $6.0 million promissory note maturing
in 2004 (the "Trust Loan"), and Dobson CC Limited Partnership guaranteed the
loan obligations of the Company and its subsidiaries under the credit agreement.
All borrowings were secured by the Class A Common Stock. In accordance with the
terms of the Fleet Investors Purchase Agreement and the prior bank facility, the
Company paid dividends on the Class A Common Stock in amounts sufficient to
permit the Dobson Trusts to service the Trust Loan. See "Description of Other
Indebtedness and Preferred Stock." The Dobson Trusts incurred legal fees
totaling approximately $.5 million in connection with the negotiation and
closing of the bank credit agreement in 1994 and an amendment effected in 1996.
Such fees were paid by the Company. In connection with the Transactions, the
Company used $7.5 million of borrowings under the Bank Facility to pay a
dividend to holders of its Class A Common Stock, of which $6.0 million was used
to fully pay the Trust Loan and $.5 million was used to pay indebtedness owed to
the Company by the Dobson Trusts with respect to the legal fees described above.
Everett R. Dobson and Russell L. Dobson beneficially own 67% of the capital
stock of ATTI. Currently, the Company owns no capital stock of ATTI. In December
1996, the Company consolidated $263,000 of ATTI's outstanding indebtedness to
the Company in an unsecured promissory note which provides for interest at an
annual rate of 10%. The consolidation refinanced earlier loans made prior to
1994. At December 31, 1996, National Telecommunications Technologies, Inc.
("Natelco"), a wholly-owned subsidiary of ATTI, was indebted to the Company in
the aggregate principal amount of $307,000, representing funds advanced by the
Company during 1992, 1993 and 1995. The indebtedness is evidenced by an
unsecured promissory note which matures in December 1997 and which provides for
interest at an annual rate of 10%. In December 1993, the Company made a $25,000
unsecured loan to Natelco, which loan, together with accrued interest, was fully
repaid in May 1994. The Company loaned another subsidiary of ATTI $21,000 in
1994 and $32,000 in 1995, at annual interest rates of 12% and 14%, respectively.
These loans were paid in full in October 1995 and January 1996.
The Company performs certain management services for ATTI and its
subsidiaries, including accounting, plant and central office management and
engineering. Billings for the services are based on the time spent by, and
hourly rates of, Company personnel and expenses incurred. During 1994, 1995 and
1996, the aggregate amounts billed for management fees and expenses to ATTI and
its subsidiaries were approximately $547,000, $210,000 and $333,000,
respectively. The amounts owed by these entities to the Company for management
fees at December 31, 1994, 1995 and 1996 were $832,000, $1.0 million, and $1.2
million, respectively.
ATTI beneficially owns, among other assets, a 20.55% partnership interest in
the Arizona 5 Partnership, which owns the FCC license and systems for Arizona 5.
In connection with the Arizona 5 Acquisition, the Company will purchase all of
the outstanding capital stock of ATTI for $14.2 million, of which Everett R.
Dobson and Russell L. Dobson, together, will receive $9.5 million. The purchase
price for the
79
<PAGE>
ATTI stock is based on ATTI's beneficial ownership in the Arizona 5 Partnership
and negotiations between the Company and the Gila River Indian Community
("GRIC"). All notes and accounts receivable due from ATTI and its subsidiaries
will be paid contemporaneously with the Company's acquisition of ATTI. As part
of the Arizona 5 Acquisition, the Company will make an $8.1 million contribution
to ATTI which will be transferred to GRIC, along with ATTI's other assets, in
exchange for GRIC's 21.39% interest in the Arizona 5 Partnership. The Company
will also make a $5.2 million unsecured loan to an entity owned by GRIC, the
proceeds of which, together with other assets, will be used by GRIC to purchase
a 25% interest in the Arizona 5 Partnership.
In March 1996, the Company made a $1.4 million unsecured loan to Everett R.
Dobson which bears interest, payable quarterly, at the same annual rate as that
payable under the Company's prior bank facility. The loan consolidated amounts
borrowed prior to 1994, together with accrued interest. The entire principal
amount, plus unpaid interest, is due on the earlier of March 2003 or the sale of
certain assets of ATTI. The promissory note evidencing this loan has been
collaterally assigned to the lenders under the existing bank facility. The note
will be repaid in connection with the Arizona 5 Acquisition.
In December 1996, Everett R. Dobson executed a promissory note in favor of
the Company in the amount of approximately $340,000, which represented loans
made to him by the Company during 1996. The note bears interest at 8% per annum
and matures in June 1997. In December 1996, the Company made a one-year loan in
the amount of $12,900 to Russell L. Dobson which bears interest at 9% per annum.
In November and December 1996, the Company made two additional loans to Russell
L. Dobson aggregating $403,200, of which $290,000 consolidated amounts owed to
the Company since prior to 1994. These loans, which bear interest at annual
rates of 9.25% and 9%, respectively, matured in March 1997. Principal and
interest on the loans aggregating $413,300 was refinanced, and the maturity date
was extended to June 1997. The interest rate charged on the loan to Everett R.
Dobson represented the Company's costs of borrowed funds. The interest rates on
the loans to Russell L. Dobson approximate the prevailing market rates at the
time the loans were made. In 1993, Steven T. Dobson was indebted to the Company
in the principal amount of $7,500, which loan was paid in full in March 1995. In
February 1994, the Company made a $45,000 unsecured loan to Dobson CC Limited
Partnership, which was paid in full in December 1994.
The Company leases its headquarters from WillRuss Limited Liability Company
("WillRuss") pursuant to a 10-year lease expiring in 2005. WillRuss is owned by
Russell L. Dobson and his wife. Monthly rent under the lease is approximately
$22,000, or $.91 per square foot. The Company believes that the terms of this
lease are no less favorable to the Company than could be obtained in a lease
from an unrelated party. In August 1995, the Company loaned WillRuss $60,000,
which was paid in full in September 1995, together with interest at an annual
rate of 10%.
The Company made a $300,000 home mortgage loan to G. Edward Evans in
February 1997 in connection with his employment. See "--Employment Agreements."
The loan is payable in 60 monthly installments of $1,400, including interest at
the annual rate of 4%, with the balance due at maturity in February 2002.
In 1995, the Company bought 75,000 shares of common shares of Zenex
Communications, Inc. ("Zenex") for $75,000 and 400,000 shares of Zenex preferred
stock for $400,000, and received an option to purchase additional shares of
Zenex common stock. In early 1996, the Company purchased an additional 275,000
shares of Zenex preferred stock for $275,000. In October 1996, Zenex redeemed
all shares of Zenex preferred stock held by the Company and purchased the
Company's option for an aggregate of $825,000. At the same time, the Company
sold 30,000 shares of Zenex common stock to an unrelated party for $142,000.
Everett R. Dobson, an executive officer, director and principal shareholder of
the Company, has been a director of Zenex since the Company's purchase of Zenex
stock in 1995.
80
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information, as of May 14, 1997, concerning
beneficial ownership of the Company's Class A Common Stock and Class B Preferred
Stock by (a) each person known by the Company to own beneficially more than 5%
of such stock, (b) each director and Named Executive Officer who beneficially
owns any Class A Common Stock or Class B Preferred Stock, and (c) all directors
and executive officers as a group:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B PREFERRED STOCK
------------------------------ ------------------------------
PERCENT OF PERCENT OF PERCENT OF TOTAL
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES CLASS NUMBER OF SHARES CLASS VOTING POWER(A)
- --------------------------------------- ----------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Everett R. Dobson 469,998(b) 99.3% 40,000(c) 40.0% 89.0%
13439 N. Broadway Ext.
Oklahoma City, OK 73114
Russell L. Dobson 3,154 * -- -- *
13439 N. Broadway Ext.
Oklahoma City, OK 73114
Thadeus J. Mocarski -- -- 100,000(d) 100.0 17.4
50 Kennedy Plaza
Providence, RI 02903
Fleet Venture Resources, Inc. -- -- 69,446 69.4 12.1
50 Kennedy Plaza
Providence, RI 02903
Fleet Equity Partners VI, L.P. -- -- 29,762 29.8 5.2
50 Kennedy Plaza
Providence, RI 02903
All directors and executive officers as
a group (8 persons) 473,152 100.0 100,000 100.0 100.0
</TABLE>
- ------------------------
* Less than 1%.
(a) In calculating the percent of total voting power, the voting power of shares
of Class A Common Stock (one vote per share) and Class B Preferred Stock
(presently equivalent to one vote per share) is aggregated. See "Description
of Other Indebtedness and Preferred Stock" for a description of the voting
rights of the Class B Preferred Stock.
(b) All such shares are held by Dobson CC Limited Partnership. As the president
and sole director and shareholder of RLD, Inc., the general partner of the
partnership, Everett R. Dobson has voting and investment power with respect
to such shares.
(c) Includes an option, presently exercisable, to purchase 27,778 shares from
Fleet Venture Resources, Inc. ("FVR"), an indirect subsidiary of Fleet
Financial Group, 11,905 shares from Fleet Equity Partners VI, L.P. ("FEP6")
and 317 shares from Kennedy Plaza Partners ("KPP").
(d) Includes 69,446 shares held by FVR, 29,762 shares held by FEP6 and 792
shares held by KPP. Mr. Mocarski has shared voting and investment power with
respect to such shares in his capacity as Senior Vice President of FVR, as
Senior Vice President of Fleet Growth Resources II, Inc., an indirect
subsidiary of Fleet Financial Group and a general partner of FEP6, and as a
general partner of KPP. Mr. Mocarski disclaims beneficial ownership of all
such shares, except to the extent of his pecuniary interest therein.
In addition to the voting stock set forth above, there are also outstanding
100,000 shares of nonvoting Class A Preferred Stock, all of which are owned by
Telco, and 100,000 shares of nonvoting Class C Preferred Stock, all of which are
held by the Fleet Investors (69,446 shares by FVR, 29,762 shares by FEP6, and
792 shares by KPP). See "Management--Certain Transactions" and "Description of
Other Indebtedness and Preferred Stock--Preferred Stock."
81
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS AND PREFERRED STOCK
THE BANK FACILITY
The Bank Facility was established pursuant to the Second Amended and
Restated Credit Agreement dated as of February 28, 1997 among DOC and CoreStates
Bank, N.A., First Union National Bank of North Carolina and NationsBank of
Texas, N.A., as co-agents and banks. The initial proceeds of the Bank Facility
were used to refinance indebtedness outstanding under the prior bank facility,
to pay a $7.5 million dividend on Class A Common Stock, to pay a portion of the
purchase price for the Recent Acquisitions and to pay certain expenses of the
Offering, the Bank Facility and the Acquisitions. Thereafter, proceeds may be
used for the Arizona 5 Acquisition and other permitted acquisitions, to fund
dividends to Dobson for the purpose of paying scheduled interest on the Notes
(after the first four interest payments), to finance capital expenditures and
for general corporate purposes. The following summary of the material provisions
of the Bank Facility does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the credit agreement, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Capitalized terms that are used but not defined in this
section have the meanings that are given such terms in the credit agreement.
The Bank Facility is a $200 million reducing revolving credit facility which
matures on September 30, 2005. Borrowings under the Bank Facility bear interest,
payable at least quarterly, at DOC's option, at an annual rate equal to either
(i) the greater of (x) the federal funds rate plus 1/2% and (y) the prime rate
of CoreStates Bank, N.A., plus in each case a percentage per annum ranging from
0% to 1 3/4%, or (ii) a Libor-based rate plus a percentage per annum ranging
from 1 1/4% to 3.0%. The amount of additional interest applicable to either
option is based on the Company's quarterly Leverage Ratio.
Commencing June 30, 2000, the borrowing commitment under the Bank Facility
will reduce quarterly in percentage increments ranging from 3.75% in each of the
four quarters ending March 31, 2001 to 5.0% in each of the two quarters ending
September 30, 2005. A mandatory prepayment and reduction of the borrowing
commitment will be required at the time of, and in an amount equal to, certain
distributions made by DOC to the Company or any of its subsidiaries not directly
owned by DOC, excluding distributions to the Company for the purpose of paying
scheduled interest on the Notes after the first four interest payments. In
addition, the borrowing commitment under the Bank Facility will be reduced by an
amount equal to 100% of the net proceeds from sales of assets other than in the
ordinary course of business and in connection with the incurrence of certain
indebtedness by DOC, its subsidiaries or the Company. If the Company incurs
indebtedness for borrowed money (other than the Notes), the proceeds must be
used to repay borrowings under the Bank Facility and reduce the borrowing
commitment thereunder.
The Bank Facility contains a number of covenants including, among others,
covenants limiting the ability of the Company, DOC and their respective
subsidiaries to incur debt, make loans or guarantees, create liens, pay
dividends, make distributions or stock repurchases, make investments, make sale
and lease-back transactions, change their business, engage in transactions with
affiliates and non-subsidiaries, sell assets and engage in mergers and
acquisitions. Approval of the Banks is required for any acquisition in excess of
$15 million or outside the domestic cellular industry and Everett R. Dobson or
the Everett R. Dobson Irrevocable Family Trust must maintain voting control of
the Company and Everett Dobson must maintain a senior management position with
the Company or DOC. The Bank Facility contains other affirmative covenants,
including, among others, compliance with laws, maintenance of corporate
existence, licenses and insurance, payment of taxes and performance of other
material obligations and the delivery of financial and other information.
The Bank Facility restricts DOC from declaring and paying dividends or
distributions, including dividends to pay scheduled interest on the Notes.
However, DOC will be permitted to pay dividends to the Company to pay scheduled
interest on the Notes commencing after the first four interest payments on the
Notes, unless at the time of such dividend or distribution an event of default
(other than an event of
82
<PAGE>
default resulting solely from the breach of a representation or warranty) exists
or would be caused by such dividend or distribution; provided that, with respect
to any event of default (other than a payment default, a bankruptcy event with
respect to the Company or DOC or the loss of a material license or cellular
system), DOC will not be prohibited from paying dividends to the Company to pay
scheduled interest on the Notes for more than 180 days.
The Company is required to comply with certain financial tests and maintain
certain financial ratios, including, among others, a requirement that (i) the
ratio of DOC's Total Debt to its Operating Cash Flow not exceed 6.75 to 1 until
June 30, 1997, 6.5 to 1 from July 1 to September 30, 1997, 6.25 to 1 from
October 1 to December 31, 1997, 6.0 to 1 from January 1 to March 31, 1998, 5.75
to 1 from April 1 to June 30, 1998, 5.5 from July 1 to December 31, 1998, 5.0 to
1 from January 1 to June 30, 1999, 4.5 to 1 from July 1 to December 31, 1999,
4.0 to 1 from January 1 to June 30, 2000 and 3.5 to 1 at July 1, 2000 and
thereafter; (ii) the ratio of DOC's Operating Cash Flow to its Pro Forma Debt
Service be not less than 1.15 to 1; (iii) the ratio of DOC's Operating Cash Flow
to its Interest Expense for the most recently ended four quarters be not less
than 1.75 to 1 through March 31, 1998, 2.0 to 1 from April 1 to December 31,
1998, and 2.25 to 1 thereafter; (iv) the Fixed Charge Coverage Ratio be not less
than 1.0 to 1; (v) the Company's Leverage Ratio be not more than 10.5 to 1
through March 31, 1998, 10.25 to 1 from April 1 to September 30, 1998, 10.0 to 1
from October 1 to December 31, 1998, 9.5 to 1 from January 1 to March 31, 1999,
9.0 to 1 from April 1 to September 30, 1999, 8.0 to 1 from October 1, 1999 to
March 31, 2000, 6.5 to 1 from April 1 to December 31, 2000, 5.5 to 1 from
January 1 to December 31, 2001 and 4.5 to 1 at January 1, 2002 and thereafter;
and (vi) the Company's Consolidated Operating Cash Flow to its Consolidated
Interest Expense for the most recently ended four quarters from April 1 to
December 31, 1999 be not less than 1.10 to 1 and 1.25 to 1 thereafter.
For purposes of the financial covenants, "Operating Cash Flow" is defined as
Operating Cash Flow of DOC or the Company, as applicable, and their consolidated
subsidiaries, including certain cash flow of the "Cellular Partnerships"
(defined as Oklahoma RSA 5 Limited Partnership, Oklahoma RSA 7 Limited
Partnership, Texas RSA No. 2 Limited Partnership and any other entity in which
DOC or Dobson Cellular Systems, Inc., as applicable, owns a partnership interest
and serves as the managing general partner) for the four most recently completed
fiscal quarters; provided that, until March 31, 1998, the Company's Operating
Cash Flow may be increased by up to $5 million of losses incurred in new
businesses. "Operating Cash Flow" for any period is defined as the (i) sum of
net income, income taxes, interest, depreciation and amortization expenses,
extraordinary losses, and non-cash charges, minus (ii) interest and dividend
income, capitalized marketing costs, reductions in deferred taxes, gains on the
sale of assets, extraordinary gains and other non-cash components of income.
"Total Debt" of DOC is defined as the sum of all obligations for borrowed money,
all payments required under non-compete agreements, capital lease obligations,
amounts required under installment sale purchases, all financial obligations of
others guaranteed by DOC, and any amounts for which DOC is contingently liable
to provide as equity or debt advances to other parties, but does not include
intercompany subordinated debt owed by DOC to the Company or any subsidiary of
the Company not owned by DOC. "Total Debt" of the Company is defined as the sum
of all obligations for borrowed money, all payments required under non-compete
agreements, capital lease obligations, amounts required under installment sale
purchases, all financial obligations of others guaranteed, and any amounts for
which the Company and any of its direct or indirect subsidiaries are
contingently liable to provide as equity or debt advances to other parties (less
the amount held in the Pledge Account). "Pro Forma Debt Service" is defined as
the sum of Pro Forma Interest Expense and payments scheduled to be made on Total
Debt for the succeeding twelve months. "Pro Forma Interest Expense" is the
result obtained by multiplying the average debt outstanding during the period
(the sum of (a) Total Debt at the beginning of the period plus (b) such Total
Debt at the end of the period, taking into account payments thereof scheduled to
be made during the period, divided by two) by the interest rate in effect at the
time of calculation. "Fixed Charge Coverage Ratio" is defined as the ratio of
(i) the Operating Cash Flow of DOC for the most recently ended four fiscal
quarters to (ii) the sum of all payments on DOC's Total Debt required to be
paid, cash interest expense and capital expenditures of DOC, cash taxes, and
distributions
83
<PAGE>
and dividends paid by DOC (other than up to $7.5 million distributed for "new
businesses," as defined in the Bank Facility), in each case for the most
recently ended four fiscal quarters; provided that in 1997, the measurement
period with respect to clauses (i) and (ii) will commence January 1, 1997. The
Company's "Leverage Ratio" is defined as the ratio, on a consolidated basis, of
its Total Debt to its Operating Cash Flow.
Failure to satisfy any of the financial covenants will constitute an Event
of Default under the Bank Facility, permitting the Banks, after notice, to
terminate the commitment and/or accelerate payment of outstanding indebtedness
notwithstanding the ability of the Company to meet its debt service obligations.
The Bank Facility also includes other customary events of default, including,
without limitation, a cross-default to other indebtedness, material undischarged
judgments, bankruptcy and a change of control.
DOC's obligations under the Bank Facility are guaranteed by the Company and
DOC's subsidiaries. Borrowings under the Bank Facility are secured by all assets
of DOC and its present and future subsidiaries, and by a pledge of the stock of
DOC and the stock of and partnership interests in its subsidiaries.
RUS/RTB FACILITY
Telco is a party to loan agreements with the United States of America, Rural
Utilities Services ("RUS") and the Rural Telephone Bank ("RTB") pursuant to
which the RUS and RTB have agreed to loan Telco an aggregate maximum of $75
million at any time outstanding (the "RUS/RTB Facility"). At December 31, 1996,
the aggregate unpaid principal balance of these loans was $29.7 million. The
loans bear interest at annual rates varying from 2% to 10 3/4% and with
scheduled maturities between 1997 and 2028.
No loans under the RUS/RTB Facility may mature after May 2043. All advances
under the RUS/RTB Facility are secured by substantially all of Telco's assets,
including its licenses and other intangible assets.
The RUS/RTB Facility contains covenants which, among other things, require
prior approval of the applicable lending agencies before Telco can declare or
pay dividends, make distributions to or investments in affiliates or
stockholders or redeem its capital stock, unless after such payments, Telco's
current assets equal or exceed current liabilities and its adjusted net worth
meets specified requirements. In addition, the RUS/RTB Facility limits Telco's
ability to merge or consolidate or sell its assets or enter into any contracts
for the operation or maintenance of its property for use by others or for toll
traffic, operator assistance, extended scope or switching services to be
furnished by or for connecting or other companies other than contracts generally
used in the telephone industry. Telco is restricted from advancing payments or
loans to any stockholders or affiliates, other than for certain wireline related
investments unless if after such investment, the aggregate of investments does
not exceed one-third of Telco's net worth and its net worth is at least 20% of
its total assets.
The RUS/RTB Facility also provides that while Telco's adjusted net worth is
less than 10% of its total assets, Telco is restricted from increasing salaries
of officers or directors without the prior consent of the holders of a majority
of the outstanding indebtedness. In addition, if retained earnings decrease as a
result of operations, Telco must increase its charges for telephone service or
execute a plan for reducing expenses, each with the approval of the holders of
outstanding indebtedness. Telco is also required to maintain a ratio of net
income or net margins plus interest expense to interest expense of 1.50 to 1.
Failure to satisfy any of the covenants constitutes an event of default
under the RUS/RTB Facility permitting the applicable lending agencies to
accelerate payment of the outstanding indebtedness or sell or take possession of
the mortgaged property notwithstanding Telco's ability to meet its debt
obligations. In the event of a default in the payment of principal or interest
on the outstanding indebtedness, if in the opinion of holders of a majority of
the outstanding indebtedness Telco's operations are not being efficiently
operated, Telco may be required to terminate operating contracts or the
employment of certain
84
<PAGE>
managers. The RUS/RTB Facility also contains certain other events of default,
including forfeiture of permits or licenses required to carry on a material
portion of its business, and customary events of default, including, without
limitation, material undischarged judgments and bankruptcy.
PREFERRED STOCK
CLASS A PREFERRED STOCK
As part of the Reorganization, Telco was issued 100,000 shares of Class A
Preferred Stock. A certificate of designation for the Class A Preferred Stock
provides for the following rights, preferences and powers:
VOTING RIGHTS. Except as otherwise required by law, the holders of shares
of Class A Preferred Stock have no voting rights.
DIVIDENDS. The holders of Class A Preferred Stock are entitled to receive
non-cumulative dividends at the annual rate of 5% of the $70 per share
liquidation value, if and when declared by the Board of Directors. The Indenture
will limit, and for the foreseeable future effectively prohibit, the payment of
cash dividends on the Class A Preferred Stock.
CONVERSION. The Class A Preferred Stock is not convertible.
REDEMPTION. At any time and from time to time, the Class A Preferred Stock
may be redeemed, in whole or in part, at the option of the Company at the
liquidation value thereof.
FLEET INVESTORS PREFERRED STOCK
In March 1996, Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P.
and Kennedy Plaza Partners purchased 100,000 shares of Class B Preferred Stock
from DOC for $10 million net of acquisition cost pursuant to a securities
purchase agreement (the "Fleet Investors Purchase Agreement") and entered into a
shareholders' agreement (the "Shareholders' Agreement") with DOC, Dobson CC
Limited Partnership and Russell L. Dobson (the "Dobson Shareholders" and,
together with the Fleet Investors, the "Shareholders"). As part of the
Reorganization and in connection with the Transactions, the DOC Class B
Preferred Stock was exchanged for 100,000 shares of Dobson Class B Preferred
Stock and the Fleet Investors were also issued 100,000 shares of Dobson Class C
Preferred Stock (together with the Dobson Class B Preferred Stock, sometimes
hereafter referred to as the "Fleet Investors Preferred Stock"). The following
summary of the Fleet Investors Preferred Stock, the Fleet Investors Purchase
Agreement and the Shareholders' Agreement does not purport to be complete and is
qualified in its entirety by reference to the applicable certificates of
designation and such agreements, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
PURCHASE AGREEMENT. The Fleet Investors Purchase Agreement contains various
covenants which, among other things, restrict the ability of the Company and its
subsidiaries to pay dividends, purchase their outstanding equity securities,
issue equity securities (including rights, options or warrants with respect to
such securities and other securities convertible into equity securities), make
investments or acquire or dispose of material amounts of assets outside the
ordinary course of business, or engage in transactions with affiliates.
CLASS B PREFERRED STOCK CERTIFICATE OF DESIGNATION. The certificate of
designation for the Class B Preferred Stock (the "Class B Preferred Stock
Certificate of Designation") provides for the following rights, including voting
rights, preferences and powers:
Voting Rights. Except as otherwise provided by law, the shares of Class A
Common Stock and Class B Preferred Stock vote together on all matters submitted
to a vote of the shareholders. Each share of Class B Preferred Stock, which is
presently convertible into one share of Class A Common Stock, is entitled to the
number of votes that it would have upon conversion on the record date fixed for
any meeting, or the effective date of action taken by written consent, of
shareholders. The holders of Class B Preferred Stock
85
<PAGE>
are entitled to elect, voting as a single class, two directors of the Company.
In addition, as long as at least 50,000 shares of Class B Preferred Stock remain
outstanding, approval of the holders of a majority of the outstanding Class B
Preferred Stock, voting as a single class, is necessary to (i) authorize or
increase the authorized number of shares of, or issue, any class or a series of
capital stock ranking prior to, or on a parity with, the Class B Preferred
Stock, (ii) make any change in the Company's Certificate of Incorporation which
would adversely affect the powers, preferences or rights of the Class B
Preferred Stock, (iii) authorize or effect the sale of all or substantially all
of the assets of the Company, any merger or consolidation of the Company
resulting in the change of control, or the liquidation, dissolution or winding
up of the Company, (iv) amend the Bylaws to change the authorized number of
directors, or (v) amend the provisions of the Company's Certificate of
Incorporation setting forth the voting rights of the Class B Preferred Stock.
Dividends. Cumulative dividends on each share of Class B Preferred Stock
accrue daily at the annual rate of 8% (15% upon the happening of any
Noncompliance Event) on the sum of the $100 per share liquidation value and all
accumulated and unpaid dividends ("Accrued Dividends") from the date of
issuance, compounded annually on December 31 of each year, and are payable when
declared by the Board of Directors (subject to any prohibition on the payment of
dividends in the Bank Facility). Further, upon the earliest to occur of
conversion of Class B Preferred Stock into Class A Common Stock, liquidation,
dissolution or winding up of the Company, sale of assets or merger or
consolidation resulting in the change of control of the Company and the
consummation of a public offering of the Company's common stock (each, a
"Trigger Event"), holders of Class B Preferred Stock will be entitled to receive
Accrued Dividends. A "Noncompliance Event" includes, among other things, a
breach of certain covenants under the Fleet Investors Purchase Agreement,
Shareholders' Agreement, Class B Preferred Stock Certificate of Designation or
the Bank Facility or related documents, any representation or warranty made in
such agreements which proves to be materially false, an uncured default on
indebtedness of the Company or its subsidiaries, undischarged final judgments in
excess of $5 million, the bankruptcy of the Company or its subsidiaries, the
death of Everett R. Dobson or his ceasing to be President of the Company unless
replaced by a person with comparable expertise and experience or a change of
control in which Everett R. Dobson ceases to have voting control of the
securities owned by, or ceases to own at least 90% of the economic interest of,
Dobson CC Limited Partnership.
The Indenture will limit, and for the foreseeable future effectively
prohibit, the payment of cash dividends on the Class B Preferred Stock.
The Class B Preferred Stock Certificate of Designation prohibits the
declaration or payment of dividends or redemption or purchase (by the Company,
any subsidiary or other affiliate) of any junior securities. The certificate of
designation for the Class B Preferred Stock held by the Fleet Investors prior to
the Reorganization contained a similar prohibition, except that it permitted the
payment of a dividend on the Class A Common Stock solely for the purpose of
permitting distributions to the Dobson Trusts to service the Trust Loan.
Simultaneously with the payment of such dividend, the holders of the Class B
Preferred Stock were entitled to receive a dividend (a "Make-Whole Dividend") in
an amount equal to the amount they would have received had their Class B
Preferred Stock been converted into Class A Common Stock. At December 31, 1996,
the Company had accrued approximately $94,300 of Make-Whole Dividends. It
further provided that, in the event the Trust Loan became a liability of the
Company, the holders of the Class B Preferred Stock would be entitled to receive
a Make-Whole Dividend in an amount equal to the product of (a) an amount
computed by dividing (i) the aggregate amount of the Trust Loan assumed by (ii)
the proportionate equity ownership interest of Dobson CC Limited Partnership in
the Company and (b) the Fleet Investors' proportionate equity ownership interest
in the Company.
In February 1997, a $7.5 million dividend was paid on the Class A Common
Stock, of which $6.0 million was used to fully discharge the Trust Loan and $.5
million was used to repay certain indebtedness owed to the Company. See
"Management--Certain Transactions." As a result of the $7.5 million dividend,
the Fleet Investors were entitled to a Make-Whole Dividend of approximately $1.7
million. In lieu of such Make-Whole Dividend, the Fleet Investors received
100,000 shares of Class C
86
<PAGE>
Preferred Stock having a liquidation preference of $1,656,000, and all
provisions for Make-Whole Dividends were eliminated from the terms of the Class
B Preferred Stock.
Conversion. At any time and from time to time, any holder of Class B
Preferred Stock may convert all or a portion of the shares of Class B Preferred
Stock held by such holder into a number of shares of Class A Common Stock equal
to the product of (x) the number of shares of Class B Preferred Stock to be
converted and (y) a fraction the numerator of which is $100 and the denominator
is the conversion price then in effect. The conversion rate is initially one to
one. Upon the occurrence of a "Texas 2 Event" (as defined below), the conversion
price will be adjusted to an amount equal to 100.45% of the conversion price.
Redemption. There are no provisions for redemption of the Class B Preferred
Stock. See, however, "--Shareholders' Agreement" below for a description of
certain put and call rights.
CLASS C PREFERRED STOCK CERTIFICATE OF DESIGNATION. The certificate of
designation for the Class C Preferred Stock provides for the following rights,
preferences and powers:
Voting Rights. Except as otherwise required by law, the holders of shares of
Class C Preferred Stock have no voting rights.
Dividends. Cumulative dividends on each share of Class C Preferred Stock
accrue daily at the annual rate of 8% on the sum of the $16.56 per share
liquidation value ("Liquidation Value") and all accumulated and unpaid dividends
thereon ("Accrued Dividends") from the date of issuance, compounded annually on
December 31 of each year, and are payable when declared by the Board of
Directors (subject to any prohibition on the payment of dividends in the Bank
Facility). Further, upon the occurrence of a Trigger Event, holders of Class C
Preferred Stock will be entitled to receive Accrued Dividends. The Indenture
will limit, and for the foreseeable future effectively prohibit, the payment of
cash dividends on the Class C Preferred Stock.
Conversion. The Class C Preferred Stock is not convertible.
Redemption. At any time and from time to time, the Class C Preferred Stock
may be redeemed, in whole or in part, at the option of the Company at the
Liquidation Value thereof plus Accrued Dividends. Upon the earlier to occur of a
Trigger Event or February 28, 2002, the Company shall redeem all the outstanding
shares of Class C Preferred Stock at the Liquidation Value thereof plus Accrued
Dividends. The Fleet Investors have acknowledged that the Indenture could
restrict the Company from redeeming their Class C Preferred Stock for cash in
accordance with its terms and agreed that any claim for such payment would be
subordinate in right of payment to the Notes. See "Description of the Notes."
SHAREHOLDERS' AGREEMENT. Under the Shareholders' Agreement, after a public
offering of the Company's equity securities, the Fleet Investors have demand and
"piggy-back" registration rights for their shares of Class A Common Stock
issuable upon conversion of the Class B Preferred Stock. The Shareholders have
also agreed that six directors will constitute the Company's Board, four
designated by Dobson CC Limited Partnership (one of whom must be Everett R.
Dobson and one of whom must be reasonably acceptable to the Fleet Investors and
not an affiliate or employee of the Company or a family member thereof), one
designated by FVR and one designated by FEP6, provided that upon written request
of Everett R. Dobson, the FEP6 designee must be reasonably acceptable to Mr.
Dobson and not an officer, director or employee of FEP6 or FVR. FVR has the
right to designate one representative of each committee established by the Board
and have an observer, selected by FVR, attend each meeting of the Board and each
meeting of any committee of the Board.
The Fleet Investors have preemptive rights with respect to new equity
securities issued by the Company (excluding securities issued in a public
offering or upon the exercise of employee stock options) and rights to
participate with the Dobson Shareholders in a sale of their shares. The Fleet
Investors may not sell their shares without first giving the Company an
opportunity to purchase the shares. The transfer restrictions in the
Shareholders' Agreement applicable to Shareholders other than the Fleet
Investors terminate upon the earlier of an initial public offering by the
Company or the sale of the Company.
87
<PAGE>
The Shareholders' Agreement also provides for put and call rights. The Fleet
Investors have the right to require the Company to purchase their Class B
Preferred Stock or the Class A Common Stock into which it may be converted (the
"Put") after the earliest to occur of (i) March 19, 2001, (ii) a Change of
Control Event, (iii) a Noncompliance Event, and (iv) the six month anniversary
of the death of Everett R. Dobson, provided that a Fleet Investor may not
exercise its Put rights as to more than 50% of its shares prior to March 19,
2002 unless one or more of the events referred to clauses (ii) to (iv) have
occurred. The purchase price for each share of Class A Common Stock is its Fair
Market Value (determined by the Company's outside directors or, if their
determination is not acceptable to the Company or the Fleet Investors, by an
investment banking firm) and, for each share of Class B Preferred Stock is the
greater of (x) liquidation value ($100) plus Accrued Dividends and (y) the Fair
Market Value of the Class A Common Stock issuable upon the conversion of one
share of Class B Preferred Stock. A "Change of Control Event" means (i) any
merger or consolidation of the Company as a result of which the Shareholders own
less than a majority of the Company's voting equity securities, (ii) the sale of
all or substantially all of the assets of the Company and its subsidiaries,
(iii) the issuance of equity securities as a result of which the Shareholders
own less than a majority of the voting equity securities of the Company, (iv)
the failure by Everett R. Dobson to control at least 50.1% of the Company's
voting equity securities, and (v) the failure of the persons comprising the
Board of Directors on March 19, 1996 or persons approved by a majority of the
Company's incumbent Board of Directors to comprise the majority of the directors
of the Company. In the event that the Company fails to redeem any shares
pursuant to a Put request by the later of six months after the date of the
request or three months after the determination of Fair Market Value (the
"Mandatory Date"), but in no event later than the nine months after the date of
the request, the Company is required to issue to the Fleet Investors exercising
the Put the number of shares of common stock of the Company as is then equal to
1% of the outstanding common stock of the Company and on each third month
anniversary until the repurchase date, the Company is required to issue an
additional 1% of the outstanding shares of common stock of the Company to such
Fleet Investors. In the event that the Company fails to redeem all of the shares
pursuant to the Put within two years after the earlier of the determination of
the Fair Market Value of the shares and the Mandatory Date, Fleet Investors
exercising the Put have the right to immediately designate a majority of the
Board until such time as all shares subject to the Put are purchased. The
Company has the right to purchase (the "Call") all the shares held by any Fleet
Investor after March 19, 2003 at the same purchase price applicable to the Put.
The Call rights terminate upon the consummation of an initial public offering or
upon transfer of the shares if they are transferred in transactions to which the
rights of refusal or co-sale apply.
The Indenture limits the ability of the Company to repurchase shares of
Class B Preferred Stock or common stock. In connection with the Offering, the
Fleet Investors acknowledged that the Indenture could restrict the Company from
repurchasing their stock for cash and agreed that any claim for such payment
would be subordinate in right of payment to the Notes. See "Description of the
Notes."
COMPANY OPTION. The Fleet Investors have granted the Company an option to
purchase up to 452 shares (subject to antidilution adjustments) of Class A
Common Stock issuable upon conversion of Class B Preferred Stock at an exercise
price of $.01 per share. The option is exercisable during the 30-day period
following the consummation of a "Texas 2 Event" if the Fleet Investors have
converted the Class B Preferred Stock to Class A Common Stock. The "Texas 2
Event" means the purchase by the Company, prior to March 19, 1999, of the entire
interest in Texas RSA 2 Limited Partnership not owned by the Company on March
19, 1996 (other than the interest owned by SWBM) for a purchase price of not
more than $7.5 million and on such other terms as are reasonably satisfactory to
the Fleet Investors.
88
<PAGE>
DESCRIPTION OF THE NOTES
The Old Notes were issued under an Indenture, dated as of February 28, 1997
(the "Indenture"), between the Company and United States Trust Company of New
York, as trustee (the "Trustee"). The New Notes will be issued under the
Indenture, which will be qualified under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act), upon the effectiveness of the Registration
Statement of which this Prospectus is a part. The form and terms of the New
Notes are identical in all material respects to the form and terms of the Old
Notes except that the New Notes will be registered under the Securities Act and,
therefore, will not bear legends restricting transfer thereof. Upon the
consummation of the Exchange Offer, holders of Notes will not be entitled to
registration rights under, or the contingent increase in interest rate provided
pursuant to, the Old Notes. The New Notes will evidence the same debt as the Old
Notes and will be treated as a single class under the Indenture with any Old
Notes that remain outstanding. The Old Notes and New Notes are herein
collectively referred to as the "Notes."
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act as in effect on
the date of the Indenture. The Notes are subject to all such terms and reference
is made to the Indenture and the Trust Indenture Act for a statement thereof. A
copy of the Indenture has been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summary, which describes certain provisions of the Indenture and the Notes, does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to all the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part thereof by the Trust
Indenture Act.
GENERAL
The Notes will be unsubordinated obligations of the Company, initially
limited to $160 million aggregate principal amount, and will mature on April 15,
2007. Each Note will initially bear interest at 11 3/4% per annum from February
28, 1997 or from the most recent Interest Payment Date to which interest has
been paid or provided for, payable semiannually (to Holders of record at the
close of business on the April 1 or October 1 immediately preceding the Interest
Payment Date) on April 15 and October 15 of each year, commencing October 15,
1997.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 114 W. 47th Street, New York,
New York 10036); PROVIDED that, at the option of the Company, payment of
interest may be made by check mailed to the Holders at their addresses as they
appear in the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "--Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
The Company may, subject to the covenants described below under "Covenants"
and applicable law, issue additional Notes under the Indenture. The New Notes
offered hereby and any additional Notes subsequently issued would be treated as
a single class for all purposes of the Indenture.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after April 15, 2002 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid
89
<PAGE>
interest, if any, to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date that is prior to the Redemption Date
to receive interest due on an Interest Payment Date), if redeemed during the
12-month period commencing April 15, of the years set forth below:
YEAR REDEMPTION PRICE
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------ -----------------
<S> <C>
2002.............................................................. 105.8750%
2003.............................................................. 102.9375
2004 and thereafter............................................... 100.0000
</TABLE>
In addition, at any time prior to April 15, 2000, the Company may redeem up
to 35% of the aggregate principal amount of the Notes with the Net Cash Proceeds
of one or more sales of Capital Stock of the Company (other than Disqualified
Stock), at any time as a whole or from time to time in part, at a Redemption
Price (expressed as a percentage of principal amount) of 111.750%, plus accrued
and unpaid interest to the Redemption Date (subject to the rights of Holders of
record on the relevant Regular Record Date that is prior to the Redemption Date
to receive interest due on an Interest Payment Date); PROVIDED that at least
$104.0 million aggregate principal amount of Notes remains outstanding after
each such redemption.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not listed on a national securities exchange, on a pro rata basis, by
lot or by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate; PROVIDED that no Note of $1,000 in principal amount or
less shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
SECURITY
Immediately prior to the closing of the Offering, the Company entered into
an escrow and security agreement (the "Escrow and Security Agreement") with the
Placement Agents and United States Trust Company of New York, escrow agent (in
such capacity, the "Escrow Agent"), pursuant to which the Company, on the
Closing Date, deposited with the Escrow Agent the net proceeds from the Offering
which were pledged to the Trustee for the benefit of the Holders of the Notes to
secure the payment of principal, premium if any, and interest on Notes.
The escrowed proceeds which remain subject to the Escrow and Security
Agreement have been invested in Pledged Securities held in the Pledge Account.
The Pledged Securities consist of U.S. Government Obligations having scheduled
interest and principal payments which exceed the amount sufficient, in the
opinion of a nationally recognized firm of independent public accountants
selected by the Company, to provide for payment in full of the first four
scheduled interest payments due on all Notes then outstanding.
Immediately prior to an Interest Payment Date, the Company may either
deposit with the Trustee from funds otherwise available to the Company cash
sufficient to pay the interest scheduled to be paid on such date or the Company
may direct the Trustee to release from the Pledge Account proceeds sufficient to
pay interest then due on the Notes. In the event the Company exercises the
former option, the Company may direct the Trustee to release a like amount of
proceeds from the Pledge Account. A failure to pay
90
<PAGE>
interest on the Notes in a timely manner through the first four scheduled
interest payment dates will constitute an immediate Event of Default under the
Indenture, with no grace or cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, in the opinion of a nationally recognized
firm of independent public accountants selected by the Company, to provide for
payment in full of the first four scheduled interest payments due on the Notes,
the Trustee will be permitted to release to the Company, at its request, any
such excess amount. The Pledged Securities and Pledge Account will also secure
the repayment of the principal amount and premium on the Notes.
Under the Escrow and Security Agreement, once the Company makes the first
four scheduled interest payments on the Notes, all of the remaining Pledged
Securities, if any, will be released from the Pledge Account and thereafter the
Notes will be unsecured.
RANKING
The Notes are unsubordinated indebtedness of the Company, and rank PARI
PASSU in right of payment with all other unsubordinated indebtedness of the
Company and senior in right of payment to all subordinated indebtedness of the
Company. The Company is a holding company and the Notes will be effectively
subordinated to all existing and future liabilities (including trade payables)
of the Company's subsidiaries. After giving pro forma effect to the
Transactions, as of December 31, 1996, the Company would have had, on an
unconsolidated basis, no indebtedness other than the Notes and, on a
consolidated basis, would have had $213.9 million of liabilities in addition to
the Notes (excluding intercompany payables and including $201.7 million of
secured indebtedness), all of which effectively would rank senior to the Notes,
and the Company would have had no indebtedness ranking junior to the Notes. See
"Risk Factors--Leverage; Significant Capital Requirements; Ability to Meet
Required Debt Service; Refinancing Risk."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of all terms as well as any other capitalized term
used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person (other than net income attributable to a
Restricted Subsidiary) in which any Person (other than the Company or any of its
Restricted Subsidiaries) has a joint interest and the net income of any
Unrestricted Subsidiary, except to the extent of the amount of dividends or
other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such other Person or such Unrestricted Subsidiary during such
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below (and in such case,
except to the extent includable pursuant to clause (i) above), the net income
(or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by
91
<PAGE>
the Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary
gains and extraordinary losses, net of tax.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles (other than FCC
license acquisition costs), all as set forth on the most recent quarterly or
annual consolidated balance sheet of the Company and its Restricted
Subsidiaries, prepared in conformity with GAAP and filed with the Commission
pursuant to the "Commission Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Arizona 5 Acquisition" means the acquisition by DOC, or a Subsidiary
thereof, of a 75% interest in the Arizona 5 Partnership.
"Arizona 5 Partnership" means the Gila River Cellular General Partnership,
which holds the FCC cellular license and system relating to the Arizona 5 RSA.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; PROVIDED that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any
92
<PAGE>
other property and assets of the Company or any of its Restricted Subsidiaries
outside the ordinary course of business of the Company or such Restricted
Subsidiary and, in each case, that is not governed by the provisions of the
Indenture applicable to mergers, consolidations and sales of all or
substantially all of the assets of the Company; PROVIDED that "Asset Sale" shall
not include (a) sales or other dispositions of inventory, receivables and other
current assets, (b) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, provided
that the consideration received consists of property or assets (other than
current assets) of a nature or type or that are used in a business (or a company
having property or assets of a nature or type, or engaged in a business) similar
or related to the nature or type of the property and assets of, or business of,
the Company and its Restricted Subsidiaries existing on the date of such sale or
other disposition or (c) the sale of the Prior ATTI Assets.
"ATTI" means Associated Telecommunications and Technologies, Inc.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Bank Credit Agreement" means the Existing Credit Agreement until it is
refinanced by the Bank Facility Agreement and thereafter means the Bank Facility
Agreement.
"Bank Facility" means the $200 million reducing revolving credit facility
established pursuant to the Bank Facility Commitment Letter.
"Bank Facility Agreement" means the credit agreement establishing the Bank
Facility, together with all other agreements, instruments and documents executed
or delivered pursuant thereto or in connection therewith, in each case as such
agreements, instruments or documents may be amended, supplemented, extended,
renewed, replaced or otherwise modified from time to time.
"Bank Facility Commitment Letter" means the commitment letter (including the
Summary of Terms attached thereto) dated February 5, 1997 among Dobson
Communications Corporation, Dobson Operating Company and the banks party
thereto.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the Closing Date, including, without limitation, all Common Stock
and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Section 13(d) or
14(d)(2) under the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date and (b) after the occurrence of a Public Market, a
"person" or "group" (within the meaning of Section 13(d) or 14(d)(2) under the
Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 35% of the total voting power of the Voting
Stock of the Company on a fully diluted basis and such ownership represents a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date; or (ii) individuals who on the Closing Date constitute
the Board of Directors
93
<PAGE>
(together with any new directors whose election by the Board of Directors or
whose nomination for election by the Company's stockholders was approved by a
vote of at least a majority of the members of the Board of Directors then in
office who either were members of the Board of Directors on the Closing Date or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the members of the Board of Directors
then in office.
"Class A Common Stock" means the Class A Common Stock, par value $1.00 per
share, of the Company.
"Class B Preferred Stock" means the Class B Convertible Preferred Stock, par
value $1.00 per share, of the Company.
"Class C Preferred Stock" means the Class C Preferred Stock, par value $1.00
per share, of the Company.
"Closing Date" means February 28, 1997, the date on which the Notes were
originally issued under the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non voting) of such Person's equity, other than Preferred Stock of
such Person, whether now outstanding or issued after the Closing Date, including
without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income (i) Consolidated Interest Expense,
(ii) income taxes, (other than income taxes (either positive or negative)
attributable to extraordinary and non-recurring gains or losses or sales of
assets), (iii) depreciation expense, (iv) amortization expense, and (v) all
other non-cash items reducing Adjusted Consolidated Net Income (other than items
that will require cash payments and for which an accrual or reserve is, or is
required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; PROVIDED that,
if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied by
(B) the quotient of (1) the number of shares of outstanding Common Stock of such
Restricted Subsidiary not owned on the last day of such period by the Company or
any of its Restricted Subsidiaries divided by (2) the total number of shares of
outstanding Common Stock of such Restricted Subsidiary on the last day of such
period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; EXCLUDING, HOWEVER, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Notes, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with GAAP.
94
<PAGE>
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the four fiscal quarters
for which financial statements of the Company have been filed with the
Commission pursuant to the "Commission Reports and Reports to Holders" covenant
described below (such four fiscal quarter period being the "Four Quarter
Period"); PROVIDED that (A) PRO FORMA effect shall be given to any Indebtedness
that is to be Incurred or repaid on the Transaction Date as if such Incurrence
or repayment had occurred on the first day of such Four Quarter Period; (B) PRO
FORMA effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving PRO FORMA effect to the application of proceeds of any Asset
Disposition) that occur during the period beginning on the first day of the Four
Quarter Period and ending on the Transaction Date (the "Reference Period") as if
they had occurred and such proceeds had been applied on the first day of such
Reference Period; and (C) PRO FORMA effect shall be given to asset dispositions
and asset acquisitions (including giving PRO FORMA effect to the application of
proceeds of any asset disposition) that have been made by any Person that has
become a Restricted Subsidiary or has been merged with or into the Company or
any Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions
that occurred on the first day of such Reference Period; PROVIDED that to the
extent that clause (B) or (C) of this sentence requires that PRO FORMA effect be
given to an Asset Acquisition or Asset Disposition, such PRO FORMA calculation
shall be based upon the four full fiscal quarters immediately preceding the
Transaction Date of the Person, or division or line of business of the Person,
that is acquired or disposed for which financial information is available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased
95
<PAGE>
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below.
"Existing Credit Agreement" means the Amended and Restated Credit Agreement,
dated March 19, 1996, among CoreStates Bank, N.A., as a bank and as
administrative agent, NationsBank of Texas, N.A., First Union National Bank of
North Carolina, PNC Bank, National Association, each as a bank and as co-agents,
and DOC and certain of its subsidiaries and certain other related parties,
together with all other agreements, instruments and documents executed or
delivered pursuant thereto or in connection therewith, in each case as such
agreements, instruments or documents may be amended, supplemented, extended,
renewed, replaced or otherwise modified from time to time.
"Existing Stockholders" means Everett R. Dobson and Fleet Investors.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
"Fleet Investors" means Fleet Venture Resources, Inc., Fleet Equity Partners
VI, L.P. and Kennedy Plaza Partners and their Affiliates.
"Fleet Investors Preferred Stock" means the Class B Preferred Stock and the
Class C Preferred Stock.
"FCC" means the Federal Communications Commission.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes and (ii) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Horizon Properties Acquisition" means the acquisition by DOC, or a
Subsidiary thereof, of the FCC licenses for, and certain assets relating to, the
Cumberland MSA, Hagerstown MSA, Maryland 3 RSA and Pennsylvania 10 West RSA
pursuant to the asset purchase agreement among Horizon Cellular Telephone
Company of Hagerstown, L.P., Cumberland Cellular Partnership, Dobson Cellular of
Maryland, Inc. and DOC dated as of November 19, 1996.
96
<PAGE>
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Indebtedness by reason of a Person becoming a
Restricted Subsidiary; PROVIDED that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; PROVIDED that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date (or in the case of a revolving credit or
other similar facility, the total amount of funds outstanding and/or available
on the date of determination) of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, PROVIDED (A)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the unamortized
portion of the original issue discount of such Indebtedness at the time of its
issuance as determined in conformity with GAAP, (B) money borrowed at the time
of the Incurrence of any Indebtedness in order to pre-fund the payment of
interest on such Indebtedness shall be deemed not to be "Indebtedness" and (C)
that Indebtedness shall not include any liability for federal, state, local or
other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant. For purposes of the
definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
97
<PAGE>
Payments" covenant described below, (i) "Investment" shall include the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Subsidiaries)) of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii)
the fair market value of the assets (net of liabilities (other than liabilities
to the Company or any of its Subsidiaries)) of any Unrestricted Subsidiary at
the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary
shall be considered a reduction in outstanding Investments and (iii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Maryland 2 Acquisition" means the acquisition by DOC, or a Subsidiary
thereof, of (a) the FCC license for, and assets relating to, the Maryland 2 RSA
pursuant to the asset purchase agreement among Maryland Wireless Communications,
L.P., Wendy C. Coleman, Dobson Cellular of Maryland, Inc. and DOC dated as of
September 25, 1996 and (b) approximately 18,700 customers in Maryland 2 RSA from
Washington Baltimore Cellular Limited Partnership.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary of the Company as a reserve against any
liabilities associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with GAAP and
(b) with respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary of the Company)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of attorney's fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof.
"Offer to Purchase" means an offer by the Company to purchase Notes from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased
98
<PAGE>
pursuant to the Offer to Purchase will be required to surrender the Note,
together with the form entitled "Option of the Holder to Elect Purchase" on the
reverse side of the Note completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the Business Day immediately
preceding the Payment Date; (vi) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the third Business Day immediately preceding the Payment Date, a telegram,
facsimile transmission or letter setting forth the name of such Holder, the
principal amount of Notes delivered for purchase and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (vii) that
Holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount to the unpurchased portion of the Notes surrendered;
PROVIDED that each Note purchased and each new Note issued shall be in a
principal amount of $1,000 or integral multiples thereof. On the Payment Date,
the Company shall (i) accept for payment on a pro rata basis Notes or portions
thereof validly tendered pursuant to an Offer to Purchase; (ii) deposit with the
Paying Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee
all Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; PROVIDED that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. The Company will publicly announce the results of an
Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; PROVIDED that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; and (iv) stock, obligations or securities received in
satisfaction of judgments.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made (including deposits made to the FCC) to secure the performance of tenders,
bids, leases, statutory or regulatory obligations, bankers' acceptances, surety
and appeal bonds, government contracts, performance and return-of-money bonds
and other obligations of a similar nature incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money); (v)
easements, rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof)
upon real or personal property acquired after the Closing Date; PROVIDED that
(a) such Lien is created solely for the purpose of
99
<PAGE>
securing Indebtedness Incurred, in accordance with the "Limitation on
Indebtedness" covenant described below, (1) to finance the cost (including the
cost of design, development, improvement, construction, installation or
integration) of the item of property or assets subject thereto and such Lien is
created prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property or (2) to refinance any Indebtedness previously so
secured, (b) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost and (c) any such Lien shall not extend to or cover
any property or assets other than such item of property or assets and any
improvements on such item; (vii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property
or assets under construction arising from progress or partial payments by a
customer of the Company or its Restricted Subsidiaries relating to such property
or assets; (ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of Capital Stock or Indebtedness of, any Person existing at the
time such Person becomes, or becomes a part of, any Restricted Subsidiary;
PROVIDED that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary of the Company that does not give rise to an Event of
Default; (xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof; (xv) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (xvi) Liens encumbering
customary initial deposits and margin deposits, and other Liens that are either
within the general parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing Indebtedness under Interest
Rate Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed solely
to protect the Company or any of its Restricted Subsidiaries from fluctuations
in interest rates, currencies or the price of commodities; (xvii) Liens arising
out of conditional sale, title retention, consignment or similar arrangements
for the sale of goods entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business in accordance with the past
practices of the Company and its Restricted Subsidiaries prior to the Closing
Date; (xviii) Liens on or sales of receivables; and (xix) Liens on PCS licenses
issued by the FCC to secure obligations in favor of the FCC.
"Pledge Account" means an account established with the Trustee pursuant to
the terms of the Escrow and Security Agreement for the deposit of the Pledged
Securities to be purchased by the Company with the net proceeds from the Notes.
"Pledged Securities" means the U.S. Government Obligations to be purchased
by the Company and held in the Pledge Account in accordance with the Escrow and
Security Agreement.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
now outstanding or issued after the Closing Date, including, without limitation,
all series and classes of such preferred stock or preference stock.
"Prior ATTI Assets" means the interests in Fort Mojave Telecommunications
Inc., FMTV Cable Television Company and Saginaw Chippewa Telecommunications
Joint Venture, to be sold by ATTI prior to or in connection with the acquisition
of ATTI by DOC or a Subsidiary thereof.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company has been distributed
100
<PAGE>
by means of an effective registration statement under the Securities Act or
sales pursuant to Rule 144 under the Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of the Company, accounted for more than 10% of the consolidated revenues of
the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Service and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P, and (v) securities
with maturities of six months or less from the date of acquisition issued or
fully and unconditionally guaranteed by any state, commonwealth or territory of
the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or Moody's.
"Term Loan" means the $6 million of indebtedness of the Trusts under the
Existing Credit Agreement as in effect on the Closing Date.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
101
<PAGE>
"Trusts" means, collectively, the Everett R. Dobson Irrevocable Family
Trust, Stephen T. Dobson Irrevocable Family Trust and Robbin L. Dobson
Irrevocable Family Trust.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED
that immediately after giving effect to such designation (x) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be incurred
for all purposes of the Indenture and (y) no Default or Event of Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced to the Trustee by promptly providing the Trustee a copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Indenture contains, among others, the following covenants.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); PROVIDED that the Company may Incur Indebtedness,
and any Restricted Subsidiary may Incur Acquired Indebtedness, if, after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the proceeds therefrom, the Consolidated Leverage Ratio would be less than 8 to
1, for Indebtedness Incurred on or prior to December 31, 1998, or 7 to 1, for
Indebtedness Incurred thereafter.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $250 million, less any amount of such Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness (A) to the Company evidenced by an unsubordinated promissory note
or (B) to any of its Restricted Subsidiaries; PROVIDED that any event which
results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary
or any subsequent transfer of such Indebtedness (other than to the Company or
another
102
<PAGE>
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
refinance or refund, then outstanding Indebtedness, other than Indebtedness
Incurred under clause (i), (ii), (iv), (vi) or (ix) of this paragraph, and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); PROVIDED that
Indebtedness the proceeds of which are used to refinance or refund the Notes or
Indebtedness that is PARI PASSU with, or subordinated in right of payment to,
the Notes shall only be permitted under this clause (iii) if (A) in case the
Notes are refinanced in part or the Indebtedness to be refinanced is PARI PASSU
with the Notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is outstanding,
is expressly made PARI PASSU with, or subordinate in right of payment to, the
remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated
in right of payment to the Notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new Indebtedness is
issued or remains outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes and (C) such new Indebtedness, determined as of the
date of Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; and PROVIDED FURTHER that in no event
may Indebtedness of the Company be refinanced by means of any Indebtedness of
any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A)
in respect of performance, surety or appeal bonds provided in the ordinary
course of business, (B) under Currency Agreements and Interest Rate Agreements;
PROVIDED that such agreements (a) are designed solely to protect the Company or
its Subsidiaries against fluctuations in foreign currency exchange rates or
interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; or (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary of the Company (other than Guarantees
of Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition), in an amount not to exceed the gross proceeds
actually received by the Company or any Restricted Subsidiary in connection with
such disposition; (v) Indebtedness of the Company, to the extent the net
proceeds thereof are promptly (A) used to purchase Notes tendered in an Offer to
Purchase made as a result of a Change in Control or (B) deposited to defease the
Notes as described below under "Defeasance"; (vi) Guarantees of the Notes and
Guarantees of Indebtedness of the Company by any Restricted Subsidiary provided
the Guarantee of such Indebtedness is permitted by and made in accordance with
the "Limitation on Issuance of Guarantees by Restricted Subsidiaries" covenant
described below; (vii) Indebtedness Incurred to finance the cost (including the
cost of design, development, construction, installation or integration) of
telecommunications network assets, equipment or inventory acquired by the
Company or a Restricted Subsidiary after the Closing Date; (viii) Indebtedness
of the Company not to exceed, at any one time outstanding, two times the Net
Cash Proceeds received by the Company after the Closing Date from the issuance
and sale of its Capital Stock (other than Disqualified Stock) to a Person that
is not a Subsidiary of the Company to the extent such Net Cash Proceeds have not
been used pursuant to clause (C) (2) of the first paragraph of the "Limitation
on Restricted Payments" covenant described below to make a Restricted Payment;
PROVIDED that such Indebtedness does not mature prior to the Stated Maturity of
the Notes and has an Average Life longer than the Notes; and (ix) Indebtedness
outstanding at any time in an aggregate principal amount not to exceed $7.5
million, less any amount of such Indebtedness permanently repaid as provided
under the "Limitation on Asset Sales" covenant described below; PROVIDED, that
the proceeds of such Indebtedness are used in the Company's PCS or competitive
local exchange carrier businesses or to refinance any such Indebtedness.
103
<PAGE>
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding Indebtedness
due solely to the result of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under the
Bank Credit Agreement on or prior to the Closing Date shall be treated as
Incurred pursuant to clause (i) of the second paragraph of this "Limitation on
Indebtedness" covenant, (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (3) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses (other than Indebtedness referred to in clause (1) above), the Company,
in its sole discretion, shall classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of such
clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders, PROVIDED that such
dividends do not in the aggregate exceed the minority stockholders' pro rata
share of such Restricted Subsidiaries' net income from the first day of the
fiscal quarter beginning immediately following the Closing Date) held by Persons
other than the Company or any of its Restricted Subsidiaries, (ii) purchase,
redeem, retire or otherwise acquire for value any shares of Capital Stock of (A)
the Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
Notes or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through (iv)
being collectively "Restricted Payments") if, at the time of, and after giving
effect to, the proposed Restricted Payment: (A) a Default or Event of Default
shall have occurred and be continuing, (B) except with respect to an Investment,
the Company could not Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant or (C) the aggregate
amount of all Restricted Payments (the amount, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) made after the Closing Date
shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of the amount of such loss) (determined by excluding income resulting
from transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken
as one accounting period) beginning on the first day of the fiscal quarter
immediately following the Closing Date and ending on the last day of the last
fiscal quarter preceding the Transaction Date for which reports have been filed
pursuant to the "Commission Reports and Reports to Holders" covenant PLUS (2)
the aggregate Net Cash Proceeds received by the Company after the Closing Date
from the issuance and sale permitted by the Indenture of its Capital Stock
(other than Disqualified Stock) to a Person who is not a Subsidiary of the
Company
104
<PAGE>
(except to the extent such Net Cash Proceeds are used to Incur Indebtedness
pursuant to clause (viii) under the "Limitation on Indebtedness" covenant) or
from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes) PLUS (3) an amount equal to
the net reduction in Investments (other than reductions in Permitted
Investments) in any Person resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of assets, in
each case to the Company or any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment (except, in each case, to the
extent any such payment or proceeds are included in the calculation of Adjusted
Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company (or
options, warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a substantially concurrent offering of, shares of
Capital Stock (other than Disqualified Stock) of the Company; (iv) the making of
any principal payment or the repurchase, redemption, retirement, defeasance or
other acquisition for value of Indebtedness of the Company which is subordinated
in right of payment to the Notes in exchange for, or out of the proceeds of, a
substantially concurrent offering of, shares of the Capital Stock of the Company
(other than Disqualified Stock); (v) the declaration or payment of dividends on
the Common Stock of the Company following a Public Equity Offering of such
Common Stock, of up to 6% per annum of the Net Cash Proceeds received by the
Company in such Public Equity Offering; (vi) payments or distributions, to
dissenting stockholders pursuant to applicable law, pursuant to or in connection
with a consolidation, merger or transfer of assets that complies with the
provisions of the Indenture applicable to mergers, consolidations and transfers
of all or substantially all of the property and assets of the Company; (vii) the
purchase, redemption, acquisition, cancellation or other retirement for value of
shares of Capital Stock of the Company to the extent necessary in the good faith
judgment of the Board of Directors of the Company, to prevent the loss or secure
the renewal or reinstatement of any license or franchise held by the Company or
any Restricted Subsidiary from any governmental agency; (viii) the declaration
or payment of up to $7.5 million of dividends on Class A Common Stock of the
Company of which $6.0 million will be used by the Trusts to repay the Term Loan
and $.5 million of which will be used to repay liabilities owed to the Company;
(ix) the purchase of shares of Fleet Investors Preferred Stock of the Company
(or the Class A Common Stock into which the Class B Preferred Stock may be
converted) pursuant to the exercise of the put rights granted to the Fleet
Investors under the Shareholders' Agreement or any mandatory redemption
provisions, in each case as in effect on the Closing Date; PROVIDED (a) after
giving pro forma effect to any such purchase the Consolidated Leverage Ratio
would be less than 7.5 to 1, and (b) if the event triggering the exercisability
of the put rights constitutes an Asset Sale or Change of Control, no such
repurchase shall be made prior to the Company's repurchase of such Notes as are
required to be repurchased pursuant to the "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below; (x) an
Investment of up to $5.3 million in the Gila River Indian Community in
connection with the Arizona 5 Acquisition; (xi) the declaration or payment of
dividends on the Fleet Investors Preferred Stock (I) if after giving pro forma
effect to any such dividend, the Consolidated Leverage Ratio would be less than
6 to 1 or (II) following a Public Equity Offering of Capital Stock; PROVIDED (A)
the Net Cash Proceeds received by the Company in
105
<PAGE>
such Public Equity Offering is at least equal to $90 million and (B) the
aggregate amount of dividends permitted to be made in any fiscal year of the
Company under clause (v) and this clause (xi) shall not exceed 6% of the Net
Cash Proceeds received by the Company in the Public Equity Offering; or (xii)
the purchase, redemption, retirement or other acquisition for value of Capital
Stock of the Company, or options to purchase such shares, held by directors,
employees or former directors or employees of the Company or any Restricted
Subsidiary (or their estates or beneficiaries under their estates) upon death,
disability, retirement, termination of employment or pursuant to the terms of
any agreement under which such shares of Capital Stock or options were issued;
PROVIDED that the aggregate consideration paid for such purchase, redemption,
acquisition, cancellation or other retirement of such shares of Capital Stock or
options after the Closing Date does not exceed $500,000 in any calendar year, or
$1.5 million in the aggregate; PROVIDED that, except in the case of clauses (i)
and (iii), no Default or Event of Default shall have occurred and be continuing
or occur as a consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof and an exchange
of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii)
or (iv) thereof), and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clauses (iii) and (iv), shall be included in calculating whether
the conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is PARI PASSU with the Notes, then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this "Limitation on Restricted Payments" covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Existing Credit Agreement,
the Indenture or any other agreements in effect on the Closing Date, and any
amendments, extensions, refinancings, renewals or replacements of such
agreements; PROVIDED that the encumbrances and restrictions in any such
amendments, extensions, refinancings, renewals or replacements are no less
favorable in any material respect to the Holders than those encumbrances or
restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any
106
<PAGE>
manner material to the Company or any Restricted Subsidiary; (v) with respect to
a Restricted Subsidiary and imposed pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary; (vi)
contained in the Bank Facility Agreement, provided any encumbrance or
restriction that would prevent payments to the Company to pay interest on the
Notes applies only in the event of an event of default (other than an event of
default resulting solely from a breach of a representation or warranty) under
the Bank Facility Agreement; PROVIDED (x) with respect to any event of default
(other than a payment default, bankruptcy default or a loss of a material
license or cellular system), such restriction will terminate 180 days after the
occurrence of such event of default and (y) the financial covenants in the Bank
Facility Agreement are no less favorable to the Company or its Subsidiaries than
the financial covenants set forth in the Bank Facility Commitment Letter on the
Closing Date; or (vii) contained in the terms of any Indebtedness of a
Restricted Subsidiary, or any agreement pursuant to which such Indebtedness was
issued, if the encumbrance or restriction applies only in the event of a payment
default or a default with respect to a financial covenant contained in such
Indebtedness or agreement, if the encumbrance or restriction is not materially
more disadvantageous to the Holders of the Notes than is customary in comparable
financings (as determined by the Company) and if the Company determines that any
such encumbrance or restriction will not materially affect the Company's ability
to make principal or interest payments on the Notes. Nothing contained in this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary
from (1) creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the "Limitation on Liens" covenant or (2) restricting the sale or
other disposition of property or assets of the Company or any of its Restricted
Subsidiaries that secure Indebtedness of the Company or any of its Restricted
Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary, PROVIDED any Investment in such
Person remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant, if
made on the date of such issuance or sale; (iv) sales of up to 25% of the Common
Stock of the Arizona 5 Partnership in connection with the Arizona 5 Acquisition,
PROVIDED after such issuance the Company or its Restricted Subsidiaries would
own at least 75% of the outstanding Common Stock of the Arizona 5 Partnership,
and (v) sales of Common Stock of a Restricted Subsidiary; PROVIDED that the
assets of such Restricted Subsidiary consist solely of assets relating to the
Company's PCS or resale business and the Net Cash Proceeds, if any, of such sale
are applied in accordance with clause (A) or (B) of the "Limitation on Asset
Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; PROVIDED that this
107
<PAGE>
paragraph shall not be applicable to (a) any Guarantee of any Restricted
Subsidiary that existed at the time such Person became a Restricted Subsidiary
and was not Incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or (b) any Guarantee of any Restricted
Subsidiary required under the Bank Facility Agreement as contemplated by the
Bank Facility Commitment Letter as in effect on the Closing Date. If the
Guaranteed Indebtedness is (A) PARI PASSU with the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant; or (vi) the
acquisition of the capital stock of ATTI in the Arizona 5 Acquisition for an
aggregate purchase price of up to $14.2 million and the sale of the Prior ATTI
Assets. Notwithstanding the foregoing, any transaction covered by the first
paragraph of this "Limitation on Transactions with Stockholders and Affiliates"
covenant and not covered by clauses (ii) through (vi) of this paragraph, the
aggregate amount of which exceeds $2 million in value, must be approved or
determined to be fair in the manner provided for in clause (i)(A) or (B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation
108
<PAGE>
or liability to be secured by such Lien is subordinated in right of payment to
the Notes, prior to) the obligation or liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the Closing
Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock
of the Company or its Restricted Subsidiaries created in favor of the Holders;
(iii) Liens with respect to the assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to the Company or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iii) of the
second paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that
such Liens do not extend to or cover any property or assets of the Company or
any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens on the Capital Stock and assets of
Dobson Operating Company and its subsidiaries securing the Company's or any of
its Restricted Subsidiaries' obligations under the Bank Facility Agreement; or
(vi) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within twelve
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 85% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net
Tangible Assets (determined as of the date closest to the commencement of such
12-month period for which a consolidated balance sheet of the Company and its
subsidiaries has been filed pursuant to the "Commission Reports and Reports to
Holders" covenant), then the Company shall or shall cause the relevant
Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds
so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and
109
<PAGE>
assets of a nature or type, or engaged in a business) similar or related to the
nature or type of the property and assets of, or the business of, the Company
and its Restricted Subsidiaries existing on the date of such investment and (ii)
apply (no later than the end of the 12-month period referred to in clause (i))
such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i))
as provided in the following paragraph of this "Limitation on Asset Sales"
covenant. The amount of such excess Net Cash Proceeds required to be applied (or
to be committed to be applied) during such twelve-month period as set forth in
clause (i) of the preceding sentence and not applied as so required by the end
of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 101% of the principal amount thereof, plus, in each
case, accrued interest (if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the Commission,
for so long as any Notes are outstanding, the Company will file with the
Commission all such reports and other information as it would be required to
file with the Commission by Sections 13(a) or 15(d) under the Securities
Exchange Act of 1934 if it were subject thereto. The Company shall supply the
Trustee and each Holder or shall supply to the Trustee for forwarding to each
such Holder, without cost to such Holder, copies of such reports and other
information.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days;
PROVIDED that a failure to make any of the first four scheduled interest
payments on the Notes on the applicable Interest Payment Date will constitute an
Event of Default with no grace or cure period; (c) default in the performance or
breach of the provisions of the Indenture applicable to mergers, consolidations
and transfers of all or substantially all of the assets of the Company or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of Control"
covenant; (d) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture or under the Notes (other
than a default specified in clause (a), (b) or (c) above) and such default or
breach continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (e) there occurs
110
<PAGE>
with respect to any issue or issues of Indebtedness of the Company or any
Significant Subsidiary having an outstanding principal amount of $5 million or
more in the aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of default
that has caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 30 days of such
payment default; (f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $5 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Company or any Significant Subsidiary and shall not be paid or discharged, and
there shall be any period of 30 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $5 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a
court having jurisdiction in the premises enters a decree or order for (A)
relief in respect of the Company or any Significant Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 30 consecutive days; (h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or (i) the Escrow and Security
Agreement shall cease to be in full force and effect or enforceable in
accordance with its terms, other than in accordance with its terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Notes then outstanding shall IPSO FACTO become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. At any time after declaration of acceleration, but
before a judgment or decree for the payment of the money due has been obtained
by the Trustee, the Holders of at least a majority in principal amount of the
outstanding Notes by written notice to the Company and to the Trustee, may waive
all past defaults and rescind and annul a declaration of acceleration and its
consequences if (i) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the Notes that have become
due solely by such declaration of acceleration, have been
111
<PAGE>
cured or waived and (ii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; PROVIDED that this clause (iv) shall not apply to a consolidation or
merger with or into a Wholly Owned Restricted Subsidiary with a positive net
worth; PROVIDED that, in connection with any such merger or consolidation, no
consideration (other than Common Stock in the surviving Person or the Company)
shall be issued or distributed to the stockholders of the Company; and (v) the
Company delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clauses (iii) and (iv))
and Opinion of Counsel, in each case stating that such consolidation, merger or
112
<PAGE>
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; PROVIDED, HOWEVER, that clauses (iii) and (iv) above do not
apply if, in the good faith determination of the Board of Directors of the
Company, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change the state of incorporation of
the Company; and PROVIDED FURTHER that any such transaction shall not have as
one of its purposes the evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit (except with respect to any trust funds for the account of any Holder
who may be deemed an "insider" for purposes of the United States Bankruptcy
Code, after one year following the deposit); the trust funds will not be subject
to the effect of Section 547 of the United States Bankruptcy Code or Section 15
of the New York Debtor and Creditor Law, (C) immediately after giving effect to
such deposit on a pro forma basis, no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or during the period
ending on the 123rd day after the date of such deposit, and such deposit shall
not result in a breach or violation of, or constitute a default under, any other
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound, and (D) if at
such time the Notes are listed on a national securities exchange, the Company
has delivered to the Trustee an Opinion of Counsel to the effect that the Notes
will not be delisted as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clauses (c) and (d) under "Events of Default" with respect to such clauses (iii)
and (iv) under "Consolidation, Merger and Sale of Assets" and such covenants and
clauses (e) and (f) under "Events of Default" shall be deemed not to be Events
of Default, upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain
113
<PAGE>
or loss for federal income tax purposes as a result of such deposit and
defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraphs and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; PROVIDED, HOWEVER, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal of, or premium, if any, or
interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the Escrow and Security Agreement, the
Indenture, or in any of the Notes or because of the creation of any Indebtedness
represented thereby, shall be had against any incorporator, stockholder,
officer, director, employee or controlling person of the Company or of any
successor Person thereof. Each Holder, by accepting the Notes, waives and
releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; PROVIDED, HOWEVER, that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
114
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will initially be represented by
one or more permanent global Notes in definitive, fully registered form without
interest coupons (each a "Global Note") and will be deposited with the Trustee
as custodian for, and registered in the name of, a nominee of DTC. Except in the
limited circumstances described below under "Certificated Notes," owners of
beneficial interests in a Global Note will not be entitled to receive physical
delivery of Certificated Notes (as defined below).
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with the applicable procedures of DTC, in addition to those provided for under
the Indenture.
Payments of the principal of, and interest on, a Global Note will be made to
DTC or its nominee, as the case may be, as the registered owner thereof. Neither
the Company, the Trustee nor any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in a Global Note are credited and only in respect of such portion
of the aggregate principal amount of Notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the Notes, DTC will exchange the applicable Global Note for
Certificated Notes, which it will distribute to its participants.
The Company understands that DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A under the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates and certain other organizations. Indirect access to the DTC
system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
115
<PAGE>
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Notes in registered form without coupons
("Certificated Notes") in exchange for the Global Notes. Holders of an interest
in a Global Note may receive Certificated Notes in accordance with DTC's rules
and procedures in addition to those provided for under the Indenture.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary sets forth the material federal income tax
consequences of the acquisition, ownership and disposition of the New Notes. It
is based on the relevant provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), accompanying Treasury Regulations, published positions of
the Internal Revenue Service (the "Service"), legislative history, and judicial
decisions as in effect on the date hereof. The existing authorities, however,
are subject to change, and any changes could be applied retroactively and could
cause the tax consequences to vary substantially from those described below.
Furthermore, this summary does not discuss all aspects of federal income
taxation that may be relevant to a particular Holder because of the Holder's
personal investment circumstances or because of the Holder's classification
(such as an insurance company, a dealer in securities, a tax-exempt
organization, a financial institution or a foreign taxpayer) and resulting
special treatment under the federal income tax laws. The summary also does not
discuss aspects of state, local or foreign tax laws and is limited to Holders
who have held, and on the effective date of the Exchange Offer will hold, their
Notes as "capital assets," which would generally be property held for investment
purposes, within the meaning of Section 1221 of the Code, and will not be part
of a straddle, hedge or a conversion transaction within the meaning of Section
1258 of the Code.
THE NEW NOTES
EXCHANGE FOR REGISTERED SECURITIES. The exchange by a Holder of an Old Note
for a New Note will not constitute a taxable exchange. Each New Note will be
treated as having been originally issued at the time the Old Note exchanged
therefor was originally issued.
STATED INTEREST. Each Holder of Notes must include as ordinary interest
income the interest attributable to such Notes at the time it accrues or is
received, in accordance with the Holder's accounting method for United States
federal income tax purposes.
ORIGINAL ISSUE DISCOUNT. The Notes were not issued with original issue
discount for federal income tax purposes.
SALE, EXCHANGE OR RETIREMENT. Upon the sale, exchange or retirement of a
Note, a Holder will recognize taxable gain or loss equal to the difference
between the amount realized on the sale, exchange or retirement (excluding, in
the case of a cash basis taxpayer, any amount attributable to accrued interest,
which is taxable as such) and such Holder's adjusted tax basis in such Note. A
Holder's adjusted tax basis in a Note will generally equal the cost of such Note
to such Holder, increased by, in the case of an accrual basis taxpayer, any
accrued interest, and by any market discount previously included in taxable
income by the Holder, and reduced by any amortized bond premium and any
non-interest payments received by the
116
<PAGE>
Holder, and, in the case of an accrual basis taxpayer, by any interest payments
received by the Holder, all with respect to such Note.
Subject to the exception discussed below for market discount, gain or loss
recognized on the sale, exchange or retirement of a Note generally will be
capital gain or loss and will be a long-term capital gain or loss if at the time
of sale, exchange or retirement such Note has been held for more than one year.
AMORTIZABLE BOND PREMIUM AND MARKET DISCOUNT. If a Holder purchased a Note
for an amount that is greater than the amount payable at maturity, such Holder
will be considered to have purchased such Note with "bond premium." The amount
of bond premium is the excess of (i) the Holder's tax basis in such Note, over
(ii) the amount payable at maturity (or on an earlier call date if it results in
a smaller amortizable bond premium). Such Holder may elect (in accordance with
applicable Code provisions) to amortize such premium using a constant yield
method over the remaining term of such Note (or until an earlier call date if it
resulted in a smaller amortizable bond premium) and to offset interest otherwise
required to be included in income in respect of such Note during any taxable
year by the amortized amount of such excess for such taxable year. Such
election, once made, is irrevocable (unless permission is received from the
Service and applies to all taxable bonds held during the taxable year for which
the election is made or subsequently acquired.
If a Holder purchased a Note for an amount that is less than the stated
redemption price at maturity, such Holder will generally be considered to have
purchased such Note with "market discount." For this purpose, the stated
redemption price at maturity of a Note will equal its principal amount. Market
discount with respect to a Note is the excess of the stated redemption price at
maturity over the amount paid by the Holder for such Note. However, the amount
of market discount will be considered zero if it would otherwise be less than
1/4 of 1 percent of the stated redemption price of such Note at maturity
multiplied by the number of complete years to maturity (after the Holder
acquired such Note). If a Note is subject to the market discount rules, a Holder
will generally be required to (i) treat any gain realized with respect to such
Note as ordinary income to the extent market discount accrued during the period
such Holder held the Note, (ii) possibly treat any payment on such Note (other
than stated interest) as ordinary income to the extent market discount accrued
during the period such Holder held such Note, and (iii) defer the deduction of
all or a portion of the interest expense on any indebtedness incurred or
maintained by such Holder to purchase or carry such Note. If such Note is
disposed of in a nontaxable transaction (other than a nonrecognition transaction
described in Section 1276(c) of the Code), accrued market discount will be
includable as ordinary income to the Holder as if such Holder had sold such Note
at its then fair market value. Market discount will be considered to accrue
ratably during the period from the date of acquisition to the maturity date of
such Note, unless the Holder irrevocably elects (on an instrument-by-instrument
basis) to accrue market discount on the basis of a constant interest rate. A
Holder may elect to include market discount in income currently as it accrues
(on either a ratable or constant yield basis), in which case the rules described
above regarding the treatment of gain realized and the deferral of interest
deductions will not apply. An election to include market discount currently,
once made, will apply to all market discount obligations acquired by the Holder
on or after the first day of the first taxable year to which the election
applies, and may not be revoked without the consent of the Service.
Because of the complexity of the rules relating to bond premium and market
discount, Holders should consult their tax advisors as to the application of
these rules to their particular circumstances and as to the merit of making any
elections in connection therewith.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The 31% "backup" withholding and information reporting requirements apply to
certain payments of principal, premium, if any, and interest on a debt
instrument and to proceeds of the sale or redemption of a debt instrument.
Certain Holders may be subject to backup withholding at a rate of 31% on any
payments made with respect to, and proceeds of disposition of, the Notes. Backup
withholding will apply
117
<PAGE>
only if the Holder fails to furnish its taxpayer identification number (social
security number or employer identification number) to certify that such Holder
is not subject to backup withholding, or otherwise fails to comply with the
applicable requirements of the backup withholding rules. Any amount withheld
under these backup withholding rules will be creditable against the Holder's
federal income tax liability. Certain Holders (including, among others,
corporations) are not subject to the backup withholding and information
reporting requirements.
PLAN OF DISTRIBUTION
Except as described below, (i) a broker-dealer may not participate in the
Exchange Offer in connection with a distribution of the New Notes, (ii) such
broker-dealer would be deemed an underwriter in connection with such
distribution, and (iii) such broker-dealer would be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transactions. A broker-dealer may, however,
receive New Notes for its own account pursuant to the Exchange Offer in exchange
for Old Notes when such Old Notes were acquired as a result of market-making
activities or other trading activities. Each such broker-dealer must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer (other
than an "affiliate" of the Company) in connection with resales of such New
Notes. The Company has agreed that for a period of 180 days after the Exchange
Date, it will make this Prospectus, as amended or supplemented, available to any
such broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of the New Notes and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Exchange Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in a Letter of
Transmittal. The Company has agreed to pay all expenses incident to the Exchange
Offer other than commissions or concessions of any brokers or dealers and
transfer taxes and will indemnify the holders of the Old Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
The New Notes will constitute a new issue of securities with no established
trading market. The Company does not intend to list the New Notes on any
national securities exchange or to seek approval for quotation through any
automated quotation system. The Company has been advised by the Placement Agents
that following completion of the Exchange Offer, the Placement Agents intend to
make a market in the New Notes. However, the Placement Agents are not obligated
to do so and any market-making activities with respect to the New Notes may be
discontinued at any time without notice. Accordingly, no assurance can be given
that an active public or other market will develop for the New Notes or as to
the liquidity of or the trading market for the New Notes. If a trading market
does not develop or is not
118
<PAGE>
maintained, holders of the New Notes may experience difficulty in reselling the
New Notes or may be unable to sell them at all. If a market for the New Notes
develops, any such market may cease to continue at any time. If a public trading
market develops for the New Notes, future trading prices of the New Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar securities
and other factors, including the financial conditions of the Company.
LEGAL MATTERS
The legality of the Notes offered hereby will be passed upon for the Company
by McAfee & Taft A Professional Corporation, Oklahoma City, Oklahoma.
EXPERTS
The following financial statements appearing in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto as of the dates indicated, and are included
herein in reliance upon said firm as experts in giving said reports:
-- The consolidated balance sheets of Dobson Communications Corporation and
subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996.
-- The combined balance sheets of Kansas RSA #5, Inc., USCOC of Missouri RSA
#1, Inc., USCOC of Missouri RSA #4, Inc. and Missouri RSA No. 2 (a
division of USCOC of Missouri RSA #5, Inc.) as of December 31, 1994 and
1995, and the related combined statements of operations, cash flows and
retained earnings for the years then ended.
-- The balance sheets of Gila River Cellular General Partnership as of
December 31, 1995 and 1996, and the related statements of operations,
changes in partners' capital and cash flows for each of the three years in
the period ended December 31, 1996.
The following financial statements appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon as of the indicated dates,
appearing elswhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing:
-- The statements of cellular revenue and direct operating expenses of
Maryland RSA 2 for the years ended December 31, 1994, 1995 and 1996.
-- The combined statements of assets and liabilities of The Cellular
Telephone Business of Selected Systems of Horizon Cellular Telephone
Company, L.P. as of December 31, 1995 and 1996, and the related combined
statements of operations and net assets and of cash flows for each of the
three years in the period ended December 31, 1996.
AVAILABLE INFORMATION
The Company is not currently subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon effectiveness of the Registration Statement of which this Prospectus
is a part, the Company will become subject to the informational requirements of
the Exchange Act. In addition, the Indenture provides that, regardless of
whether the Company is required to file reports with the Commission, the Company
will file with the Commission all such reports and other information as it would
be required to file with the Commission if the Company were subject to the
reporting requirements of the Exchange Act. The Company will supply the Trustee
and each holder of Notes, or cause the Trustee to supply each such holder,
without cost, copies of such reports or other information.
119
<PAGE>
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-4 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the New Notes offered pursuant to the Exchange Offer. For the
purposes hereof, the term "Registration Statement" means the original
Registration Statement and any and all amendments thereto. In accordance with
the rules and regulations of the Commission, this Prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto. For further information concerning the Company and the New Notes
offered in the Exchange Offer, reference is made to the Registration Statement
and the exhibits filed therewith, which may be examined without charge at, or
copies obtained upon payment of prescribed fees from, the Commission and its
regional offices at Seven World Trade Center, New York, New York 10048 and at
500 West Madison Street, Chicago, Illinois 60661-2511. The Registration
Statement may also be examined electronically through the Commission's Web site
at http://www.sec.gov. Any statements contained herein concerning the provisions
of any document are not necessarily complete, and, in each instance, reference
is made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
120
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Report of independent public accountants................................................................. F-3
Consolidated balance sheets as of December 31, 1995 and 1996............................................. F-4
Consolidated statements of operations for the years ended December 31, 1994, 1995
and 1996............................................................................................... F-6
Consolidated statements of stockholders' equity for the years ended December 31, 1994, 1995 and 1996..... F-7
Consolidated statements of cash flows for the years ended December 31, 1994, 1995
and 1996............................................................................................... F-8
Notes to consolidated financial statements............................................................... F-10
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
Report of independent public accountants................................................................. F-25
Combined balance sheets as of December 31, 1994 and 1995................................................. F-26
Combined statements of operations for the years ended December 31, 1994 and 1995......................... F-27
Combined statements of cash flows for the years ended December 31, 1994 and 1995......................... F-28
Combined statements of retained earnings for the years ended December 31, 1994 and 1995.................. F-29
Notes to combined financial statements................................................................... F-30
MARYLAND RSA 2
Report of independent auditors........................................................................... F-36
Statements of cellular revenue and direct operating expenses for the years ended December 31, 1994, 1995
and 1996............................................................................................... F-37
Notes to statements of cellular revenue and direct operating expenses.................................... F-38
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF HORIZON CELLULAR TELEPHONE
COMPANY, L.P.
Report of independent auditors........................................................................... F-40
Combined statements of assets and liabilities as of December 31, 1995 and 1996........................... F-41
Combined statements of operations and net assets for the years ended December 31, 1994, 1995 and 1996.... F-42
Combined statements of cash flows for the years ended December 31, 1994, 1995 and 1996................... F-43
Notes to combined financial statements................................................................... F-44
GILA RIVER CELLULAR GENERAL PARTNERSHIP
Report of independent public accountants................................................................. F-49
Balance sheets as of December 31, 1995 and 1996.......................................................... F-50
Statements of operations for the years ended December 31, 1994, 1995 and 1996............................ F-51
Statements of changes in partners' capital for the years ended December 31, 1994, 1995 and 1996.......... F-52
Statements of cash flows for the years ended December 31, 1994, 1995 and 1996............................ F-53
Notes to financial statements............................................................................ F-54
</TABLE>
F-1
<PAGE>
[This page intentionally left blank]
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Dobson Communications Corporation:
We have audited the accompanying consolidated balance sheets of Dobson
Communications Corporation (an Oklahoma corporation) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dobson
Communications Corporation and subsidiaries as of December 31, 1995 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
March 3, 1997
F-3
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 1,116,773 $ 1,609,221
Accounts receivable--
Due from customers, net of allowance for doubtful accounts of $41,425 and
$339,144 in 1995 and 1996, respectively.................................... 6,223,623 6,584,103
Affiliates................................................................... -- 1,704,033
Inventory...................................................................... 472,294 1,012,589
Deposits....................................................................... 5,000,000 6,350,000
RTFC subordinated capital certificates......................................... -- 1,051,057
Income taxes receivable........................................................ -- 1,133,063
Prepaid expenses and other..................................................... 212,520 121,836
Deferred income taxes.......................................................... 540,308 390,553
-------------- --------------
Total current assets....................................................... 13,565,518 19,956,455
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net............................................... 46,986,949 61,929,904
-------------- --------------
OTHER ASSETS:
Receivables -- Affiliates...................................................... 1,464,020 228,041
Notes receivable -- Affiliates................................................. 2,256,939 3,266,765
Notes receivable............................................................... 47,064 41,673
Cellular license acquisition costs, net of accumulated amortization of
$1,689,310 and $3,286,104 in 1995 and 1996, respectively..................... 2,445,545 23,465,128
Deferred costs, net of accumulated amortization of $1,542,950 and $1,948,443 in
1995 and 1996, respectively.................................................. 1,080,262 3,952,155
Excess of cost over original cost of assets acquired, net of accumulated
amortization of $940,289 and $1,035,529 in 1995 and 1996, respectively....... 2,866,683 2,771,443
Investments in unconsolidated subsidiaries and other........................... 2,777,119 1,336,461
-------------- --------------
Total other assets......................................................... 12,937,632 35,061,666
-------------- --------------
Total assets............................................................... $ 73,490,099 $ 116,948,025
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................................... $ 2,813,931 $ 4,718,124
Accrued expenses............................................................... 1,350,184 1,633,834
Deferred revenue and customer deposits......................................... 548,316 648,512
Current portion of long-term debt.............................................. 1,250,391 1,190,924
Notes payable.................................................................. 700,000 --
Accrued dividends payable...................................................... 49,275 732,391
-------------- --------------
Total current liabilities.................................................. 6,712,097 8,923,785
-------------- --------------
LONG-TERM DEBT, net of current portion........................................... 64,404,805 104,303,802
DEFERRED CREDITS:
Income taxes................................................................... 1,379,138 916,252
Investment tax credits and other............................................... 209,484 161,612
-------------- --------------
Total deferred credits..................................................... 1,588,622 1,077,864
-------------- --------------
MINORITY INTERESTS............................................................... 1,843,138 2,444,176
COMMITMENTS (Note 13)
CLASS A REDEEMABLE PREFERRED STOCK............................................. 5,913,000 --
CLASS B CONVERTIBLE PREFERRED STOCK............................................ -- 10,000,000
STOCKHOLDERS' EQUITY:
Class A common stock, no par, 300 shares authorized, issued and outstanding in
1995 and $1 par value 1,000,000 shares authorized and 473,152 shares issued
and outstanding in 1996...................................................... 1,000 473,152
Class B common stock, no par, 1,000 shares authorized, 150 shares issued and
outstanding in 1995 and $1 par value, 31,000 shares authorized, and no shares
issued or outstanding in 1996................................................ 1,000 --
Class C common stock (Note 6).................................................. -- --
Paid-in capital................................................................ 5,980,437 5,508,285
Retained deficit............................................................... (1,040,000) (3,870,039)
-------------- --------------
4,942,437 2,111,398
Less--
Class A Common Stock held in treasury, at cost................................. (11,913,000) (11,913,000)
Class B Common Stock owned by Dobson Telephone................................. (1,000) --
-------------- --------------
Total stockholders' equity................................................. (6,971,563) (9,801,602)
-------------- --------------
Total liabilities and stockholders' equity................................. $ 73,490,099 $ 116,948,025
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUE:
Cellular service.......................................................... $ 10,897,796 $ 13,948,966 $ 17,593,317
Cellular equipment sales.................................................. 1,020,648 671,349 661,632
Cellular roaming.......................................................... 3,250,332 4,369,476 7,852,532
Wireline telephone service................................................ 11,557,683 12,806,790 13,472,100
Fiber service............................................................. 904,313 1,414,521 2,312,762
Rental income and other................................................... 616,149 1,237,720 1,333,130
------------ ------------ ------------
Total operating revenue................................................. 28,246,921 34,448,822 43,225,473
------------ ------------ ------------
OPERATING EXPENSES:
Cellular service.......................................................... 1,991,389 3,154,946 4,502,676
Cellular equipment........................................................ 1,501,929 2,012,871 2,571,531
Wireline telephone service................................................ 1,787,763 1,729,730 1,877,088
Fiber service............................................................. 137,113 116,730 124,676
Marketing and selling..................................................... 3,098,350 3,156,620 4,908,050
General and administrative................................................ 9,620,625 10,138,379 12,086,509
Depreciation and amortization............................................. 5,534,481 6,652,792 9,720,379
------------ ------------ ------------
Total operating expenses................................................ 23,671,650 26,962,068 35,790,909
------------ ------------ ------------
OPERATING INCOME 4,575,271 7,486,754 7,434,564
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Equity in income (losses) of unconsolidated partnerships.................. $ (61,383) $ (98,288) $ 21,576
Interest income........................................................... 44,151 9,884 1,075
Interest expense.......................................................... (2,969,846) (3,833,189) (6,477,651)
Other..................................................................... (129,626) (388,591) (1,608,538)
------------ ------------ ------------
Total other expenses.................................................... (3,116,704) (4,310,184) (8,063,538)
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS IN INCOME OF SUBSIDIARIES, INCOME
TAXES AND EXTRAORDINARY ITEMS............................................. 1,458,567 3,176,570 (628,974)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES................................ (1,104,930) (1,334,155) (675,098)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS................... 353,637 1,842,415 (1,304,072)
INCOME TAX (PROVISION) BENEFIT.............................................. (119,436) (738,235) 410,795
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS.................................... 234,201 1,104,180 (893,277)
EXTRAORDINARY INCOME (EXPENSE), net of income tax expense (benefit) of
$125,472 in 1994 and $(323,205) in 1996 (Note 4).......................... 228,278 -- (527,334)
------------ ------------ ------------
NET INCOME (LOSS)........................................................... 462,479 1,104,180 (1,420,611)
DIVIDENDS ON PREFERRED STOCK................................................ (83,388) (591,300) (849,137)
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS......................... $ 379,091 $ 512,880 $ (2,269,748)
------------ ------------ ------------
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE........ $ .80 $ 1.08 $ (4.12)
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................................. 473,152 473,152 551,567
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 1994, 1995 AND 1996
<TABLE>
<CAPTION>
CLASS B COMMON
CLASS A CLASS B STOCK OWNED
COMMON STOCK COMMON STOCK BY SUBSIDIARY TREASURY
-------------------- ------------------------ ------------------------ PAID-IN STOCK, AT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COST
--------- --------- ----------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1993............... 300 $ 1,000 1,000 $ 1,000 1,000 $ (1,000) $5,980,437 $ --
Net income.................... -- -- -- -- -- -- -- --
Cash dividends declared on
preferred stock............. -- -- -- -- -- -- -- --
Cash dividends declared on
common stock................ -- -- -- -- -- -- -- --
Repurchase of Class A common
stock....................... -- -- -- -- -- -- -- (11,913,000)
--------- --------- ----------- ----------- ----------- ----------- --------- -----------
DECEMBER 31, 1994............... 300 1,000 1,000 1,000 1,000 (1,000) 5,980,437 (11,913,000)
Net income.................... -- -- -- -- -- -- -- --
Cash dividends declared on
preferred stock............. -- -- -- -- -- -- -- --
Cash dividends declared on
common stock................ -- -- -- -- -- -- -- --
--------- --------- ----------- ----------- ----------- ----------- --------- -----------
DECEMBER 31, 1995 300 1,000 1,000 1,000 1,000 (1,000) 5,980,437 (11,913,000)
Net loss...................... -- -- -- -- -- -- -- --
Recapitalization (Note 6)..... 472,852 472,152 (1,000) (1,000) (1,000) 1,000 (472,152) --
Cash dividends declared on
preferred stock............. -- -- -- -- -- -- -- --
Cash dividends declared on
common stock................ -- -- -- -- -- -- -- --
--------- --------- ----------- ----------- ----------- ----------- --------- -----------
DECEMBER 31, 1996............... 473,152 $ 473,152 -- $ -- -- $ -- $5,508,285 $(11,913,000)
--------- --------- ----------- ----------- ----------- ----------- --------- -----------
--------- --------- ----------- ----------- ----------- ----------- --------- -----------
<CAPTION>
RETAINED
EARNINGS
(DEFICIT)
----------
<S> <C>
DECEMBER 31, 1993............... $(1,221,113)
Net income.................... 462,479
Cash dividends declared on
preferred stock............. (83,388)
Cash dividends declared on
common stock................ (50,000)
Repurchase of Class A common
stock....................... --
----------
DECEMBER 31, 1994............... (892,022)
Net income.................... 1,104,180
Cash dividends declared on
preferred stock............. (591,300)
Cash dividends declared on
common stock................ (660,858)
----------
DECEMBER 31, 1995 (1,040,000)
Net loss...................... (1,420,611)
Recapitalization (Note 6)..... --
Cash dividends declared on
preferred stock............. (849,137)
Cash dividends declared on
common stock................ (560,291)
----------
DECEMBER 31, 1996............... $(3,870,039)
----------
----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................... $ 462,479 $ 1,104,180 $ (1,420,611)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities--
Depreciation and amortization................................. 5,534,481 6,652,792 9,720,379
Deferred income taxes and investment tax credits, net......... 279,986 277,882 (361,003)
Other deferred credits........................................ 1,450 (1,450) --
Loss on disposition of assets, net............................ 101,318 -- 1,799,570
Extraordinary loss on financing cost.......................... -- -- 850,539
Gain on early extinguishment of debt.......................... (353,749) -- --
Minority interests in income of subsidiaries.................. 1,104,930 1,334,155 675,098
Equity in losses (income) of unconsolidated partnerships...... 61,383 98,288 (21,576)
Changes in current assets and liabilities--
Accounts receivable............................................. (1,709,056) (1,814,510) (360,480)
Inventory....................................................... (177,927) 88,862 (540,295)
Income taxes receivable......................................... (291,706) 274,207 (1,133,063)
Prepaid expenses and other...................................... (99,555) 257,904 90,684
Accounts payable................................................ 416,826 (132,794) 1,904,193
Accrued expenses................................................ (201,832) 403,132 283,650
Deferred revenue and customer deposits.......................... 171,746 90,717 100,196
Other current liabilities....................................... (218,926) -- --
-------------- ------------- --------------
Net cash provided by operating activities................... 5,081,848 8,633,365 11,587,281
-------------- ------------- --------------
</TABLE>
F-8
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................ $ (5,267,434) $ (3,924,961) $ (17,437,774)
Purchase of cellular license and properties..................... -- -- (30,000,000)
Proceeds from sale of property, plant and equipment............. 117,962 23,500 377,178
Proceeds from sale of investment in unconsolidated subsidiary... -- -- 967,000
Deposits........................................................ -- (5,000,000) (1,350,000)
Increase in receivable--affiliate............................... (94,195) (340,606) (468,054)
Increase in notes receivable, net............................... (100,045) (1,164,290) (1,004,435)
Investment in unconsolidated partnerships and other, net........ (65,350) (663,122) (463,668)
-------------- ------------- --------------
Net cash used in investing activities....................... (5,409,062) (11,069,479) (49,379,753)
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................................... -- 700,000 100,000
Repayments of notes payable..................................... -- -- (800,000)
Proceeds from long-term debt.................................... 23,306,511 7,373,499 75,750,000
Repayments of long-term debt.................................... (15,241,801) (4,723,198) (35,910,470)
Dividend distributions-.........................................
Preferred stock............................................... (34,113) (591,300) (176,748)
Common stock.................................................. (50,000) (660,858) (549,564)
Distributions to partners....................................... (1,252,339) (877,122) (145,005)
Issuance of preferred stock..................................... -- -- 10,000,000
Purchase of treasury stock...................................... (6,000,000) -- (5,913,000)
Redemption of RTFC subordinated capital certificates............ 56,694 866,283 57,632
Deferred costs.................................................. (470,635) (297,087) (4,127,925)
-------------- ------------- --------------
Net cash provided by financing activities................... 314,317 1,790,217 38,284,920
-------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (12,897) (645,897) 492,448
CASH AND CASH EQUIVALENTS, beginning of year.................... 1,775,567 1,762,670 1,116,773
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of year.......................... $ 1,762,670 $ 1,116,773 $ 1,609,221
-------------- ------------- --------------
-------------- ------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest (net of amounts capitalized)......................... $ 3,088,760 $ 3,415,088 $ 6,784,154
Income taxes.................................................. $ 237,964 $ 303,031 $ 838,100
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Dobson Communications Corporation ("Dobson Communications") and its
subsidiaries (the "Company") provides service to customers in primarily three
business segments: Cellular Telephone, Wireline Telephone and Fiber Optic
Telecommunications.
CAPITAL RESOURCES AND GROWTH
The Company's total indebtedness and debt service requirements will be
substantially increased as a result of the transactions described in Note 16 and
the Company will be subject to significant financial restrictions and
limitations. If the Company is unable to satisfy any of the covenants under the
revolving credit agreement described in Note 16 including financial covenants,
the Company will be unable to borrow under the revolving credit agreement during
such time period to fund planned capital expenditures, its ongoing operations or
other permissible uses.
The Company's ability to manage future growth will depend upon its ability
to monitor operations, control costs, maintain effective quality controls and
significantly expand the Company's internal management, technical and accounting
systems, all of which will result in higher operating expenses. Any failure to
expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of the
Company's business could have a material adverse effect on the Company's
business, financial condition and results of operations.
CELLULAR TELEPHONE
The Cellular Telephone segment is comprised of the cellular entities of
Dobson Communications listed below, which operate cellular telephone systems
servicing areas in Oklahoma, Kansas, Missouri and Texas. The name of the
entity/partnership, metropolitan statistical area ("MSA")/rural statistical area
("RSA") and the Company's percentage of ownership are as follows:
<TABLE>
<CAPTION>
PERCENT
ENTITY/PARTNERSHIP MSA/RSA SERVED OWNERSHIP
- ---------------------------------------------------------- ------------------------------- -------------
<S> <C> <C>
Dobson Cellular of Enid, Inc.............................. Oklahoma MSA 2 100
Dobson Cellular of Woodward, Inc.......................... Oklahoma RSA 2 100
Texas RSA 2 Limited Partnership........................... Texas RSA 2 61
Oklahoma Independent RSA 5 Partnership.................... Oklahoma RSA 5 64.35
Oklahoma Independent RSA 7 Partnership.................... Oklahoma RSA 7 64.35
Oklahoma RSA 3 Limited Partnership........................ Oklahoma RSA 3 5
Dobson Cellular of Kansas/Missouri, Inc................... Kansas RSA 5, Missouri RSAs 1, 100
2 and 4, and the Linn County
portion of Missouri RSA 5
</TABLE>
The Company is responsible for managing and providing administrative
services to the Oklahoma Independent RSA 5 and 7 Partnerships and the Texas RSA
2 Limited Partnership. The Company is accountable to the partners for the
execution and compliance with contracts and agreements, and for filing of
instruments required by law which are made on behalf of these partnerships. The
books and records of these partnerships are also maintained by the Company.
WIRELINE TELEPHONE
The Company, through Dobson Telephone Company, Inc. ("Dobson Telephone")
provides wireline telephone service to nine contiguous exchanges in western
Oklahoma and three contiguous counties adjacent to and east of the Oklahoma City
metropolitan area. Dobson Telephone operates under the
F-10
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION: (CONTINUED)
authority of the Federal Communications Commission ("FCC"). Rates charged by
Dobson Telephone are regulated by the FCC and the Oklahoma Corporation
Commission.
FIBER OPTIC TELECOMMUNICATIONS
The Fiber Optic Telecommunications segment provides service between Oklahoma
City, Oklahoma and Amarillo, Texas through Dobson Fiber Company, Inc. ("Dobson
Fiber"). In addition, the Company has a 20% interest in the Forte of Colorado
Partnership which provides fiber optic telecommunication service between
Springfield, Colorado and Colorado Springs, Colorado.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
all majority owned subsidiaries. For financial reporting purposes, the Company
reports 100% of revenues and expenses for the markets for which it provides
cellular telephone service. However, in several of its markets, the Company
holds less than 100% of the equity ownership. The minority stockholders' and
partners' shares of income or losses in those markets are reflected in the
consolidated statements of operations as "minority interests in income of
subsidiaries." For financial reporting purposes, the Company consolidates each
subsidiary and partnership in which it has a controlling interest (greater than
50%). Significant intercompany accounts and transactions have been eliminated.
Investments in unconsolidated partnerships where the Company does not have a
controlling interest are accounted for under the equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents on the accompanying consolidated balance sheets
includes cash and short-term investments with original maturities of three
months or less.
INVENTORY
The Company values its inventory at the lower of cost or market on the
first-in, first-out method of accounting.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses potential impairments of long-lived assets, certain
identifiable intangibles, and goodwill when there is evidence that events or
changes in circumstances indicate that an asset's carrying value may not be
recoverable. An impairment loss is recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. No such
losses have been identified by the Company.
CELLULAR LICENSE ACQUISITION COSTS
Cellular license acquisition costs consist of amounts paid to acquire FCC
licenses to provide cellular services. Cellular license acquisition costs are
being amortized on a straight-line basis over ten to fifteen years. Amortization
expense of $413,486, $413,486 and $1,596,794 was recorded in 1994, 1995 and
1996, respectively.
F-11
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DEFERRED COSTS
Deferred costs consist primarily of fees incurred to secure long-term debt,
start-up costs and organizational and other costs. Deferred start-up costs are
amortized on a straight-line basis over three years. Deferred financing costs
are being amortized on a straight-line basis over the term of the debt of eight
years. Amortization expense related to these costs of $322,248, $412,384 and
$405,493 was recorded in 1994, 1995 and 1996, respectively.
EXCESS OF COST OVER ORIGINAL COST OF ASSETS ACQUIRED
The excess of cost over the original cost of assets acquired relates to
Dobson Telephone's acquisition of McLoud Telephone Company in 1985 and is being
amortized using the straight-line method over 40 years. Amortization expense of
$95,240 was recorded in 1994, 1995 and 1996.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included as marketing and
selling expenses in the accompanying consolidated statements of operations.
INCOME TAXES
The Company files a consolidated income tax return. Income taxes are
allocated among the various entities included in the consolidated tax return, as
agreed, based on the ratio of each entity's taxable income (loss) to
consolidated taxable income (loss). Deferred income taxes reflect the estimated
future tax effects of differences between financial statement and tax bases of
assets and liabilities at year end.
REVENUE RECOGNITION
The Company records service revenues over the period they are earned. The
cost of providing service is recognized as incurred.
Airtime and toll revenue is billed in arrears and monthly access charges are
billed in advance. The Company accrued estimated unbilled revenues for services
provided of approximately $803,016 and $858,074 as of December 31, 1995 and
1996, respectively, which are included in accounts receivable in the
accompanying consolidated balance sheets. Cellular equipment sales are
recognized when the cellular equipment is delivered to the customer. Subscriber
acquisition costs (primarily commissions and loss on equipment sales) are
expensed as incurred.
EARNINGS PER SHARE
Earnings per share is calculated using the weighted average shares of common
stock outstanding during the period. For the purposes of this calculation, the
exchange of common stock described in Note 6 has been treated as if it occurred
as of January 1, 1994. In addition, shares of Class B convertible preferred
stock are included in the calculation as if they were common stock from the date
of their issuance, as each share of Class B convertible preferred stock is
entitled to participate in common stock dividends on a basis equivalent to
shares of common stock, in addition to the stated preferred stock dividend.
F-12
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
SIGNIFICANT CONCENTRATIONS
In connection with providing cellular services to customers of other
cellular carriers, the Company has contractual agreements with those carriers
which provide for agreed-upon billing rates between the parties. Approximately
54%, 54% and 56% of the Company's cellular roaming revenue was earned from two
cellular carriers during the years ended December 31, 1994, 1995 and 1996,
respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company
adopted SFAS No. 121 in 1996 with no impact on its consolidated financial
position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which the Company adopted in 1996. SFAS No. 123 allows companies
to either account for stock-based compensation under the new provisions of SFAS
No. 123 or under the provisions of Accounting Principles Board Opinion No. 25
("APB 25"), but requires pro forma disclosure in the footnotes to the financial
statements, if material, as if the measurement provisions of SFAS No. 123 had
been adopted. The Company has determined that the effect of SFAS No. 123 on a
pro forma basis would not be material. The Company intends to continue
accounting for its stock-based compensation in accordance with the provisions of
APB 25. As such, the adoption of SFAS No. 123 did not have an impact on the
financial position or the results of operations of the Company.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Newly constructed
cellular systems, telephone systems and fiber optic cable systems are added to
property, plant and equipment at cost which includes contracted services, direct
labor, materials overhead, and capitalized interest. For the years ended
December 31, 1994, 1995 and 1996, interest capitalized was not material.
Repairs, minor replacements and maintenance are charged to operations as
incurred. The provisions for depreciation are provided using the straight-line
method based on the estimated useful lives of the various classes of depreciable
property.
F-13
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT: (CONTINUED)
Listed below are the major classes of property, plant and equipment and
their estimated useful lives, in years, as of December 31, 1995 and 1996:
<TABLE>
<CAPTION>
USEFUL LIFE 1995 1996
----------- ------------- -------------
<S> <C> <C> <C>
Cellular systems and equipment............................... 2 - 10 $ 10,074,277 $ 21,441,766
Telephone systems and equipment.............................. 5 - 40 43,582,981 42,659,436
Fiber systems and equipment.................................. 5 - 22 11,764,111 15,643,458
Buildings and improvements................................... 5 - 40 7,139,964 8,631,772
Vehicles, aircraft and other work equipment.................. 3 - 10 2,598,762 4,106,869
Furniture and office equipment............................... 5 - 10 2,704,634 2,848,049
Plant under construction..................................... 480,364 2,147,321
Land......................................................... 242,991 201,494
------------- -------------
Property, plant and equipment.............................. 78,588,084 97,680,165
Accumulated depreciation..................................... 31,601,135 35,750,261
------------- -------------
Property, plant and equipment, net......................... $ 46,986,949 $ 61,929,904
------------- -------------
------------- -------------
</TABLE>
During 1996, the Company disposed of two mobile telecommunications switching
offices and related equipment for which it recognized a pretax loss of
$1,725,396. The loss is included in other income (expenses) in the accompanying
consolidated statements of operations.
4. LONG-TERM DEBT:
The Company's long-term debt as of December 31, 1995 and 1996, consisted of
the following:
<TABLE>
<CAPTION>
1995 1996
------------- --------------
<S> <C> <C>
Revolving credit agreement with a bank, due in
quarterly installments, maturing in 2004,
interest at LIBOR plus 2.25% (7.92% at December
31, 1996)....................................... $ 24,000,000 $ 75,750,000
Mortgage notes payable to the United States of
America, through the RUS and the RTB, with
interest rates ranging from 2% to 10.75%, due in
quarterly or monthly installments, maturing at
various dates from 1997 to 2028................. 30,825,770 29,744,726
Revolving credit agreement with RTFC.............. 10,510,567 --
Various notes payable............................. 318,859 --
------------- --------------
Total debt.................................... 65,655,196 105,494,726
Less--Current maturities.......................... 1,250,391 1,190,924
------------- --------------
Total long-term debt.......................... $ 64,404,805 $ 104,303,802
------------- --------------
------------- --------------
</TABLE>
Effective November 9, 1994, the Company entered into a $20,000,000 revolving
credit agreement with a bank. On December 1, 1995, the revolving credit
agreement was amended to increase the credit limit to $25,000,000.
F-14
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
On March 19, 1996, the revolving credit agreement was amended and restated
to include certain of the Company's wholly owned subsidiaries, Dobson Cellular
of Enid, Inc. ("Enid Cellular"), Dobson Cellular of Woodward, Inc. ("Woodward
Cellular"), Dobson Fiber, DCC PCS, Inc. and Dobson Cellular of Kansas/Missouri,
Inc. ("Kansas/Missouri Cluster") as joint and several obligors with the original
borrowers (Dobson Communications, Dobson Cellular Systems, Inc. ("Dobson
Cellular"), Enid Cellular, Woodward Cellular and DCC PCS, Inc.) and to increase
the revolving credit facility to $84,000,000. The proceeds from the credit
facility were used to refinance existing indebtedness, provide $5,000,000 for
the C block PCS auction (this amount was subsequently refunded and a deposit of
$2,600,000 was made for the F block PCS auction in 1996), finance capital
expenditures of the Oklahoma Partnerships and Texas Partnership, finance the
acquisition of the Kansas/Missouri Cluster properties, repurchase the Company's
outstanding preferred stock and finance investments in nonborrower subsidiaries
of the Company and other general corporate purposes. This loan was secured by
100% of the capital stock and assets of Dobson Communications and its borrower
subsidiaries and by the capital stock of Dobson Telephone and partnership
interests in the principal stockholder of Dobson Communications. In connection
with closing the amended and restated revolving credit agreement, the Company
recorded a pretax loss of $850,539 as a result of writing off previously
capitalized financing costs which is included as extraordinary income (expense)
in the accompanying statement of operations. At December 31, 1996, the Company
had an outstanding balance of $75,750,000 under this revolving credit agreement.
In connection with this revolving credit agreement, the Company entered into
an interest rate collar agreement to hedge the Company's interest expense on
$36,500,000 of the revolving credit agreement in April 1996. This collar
agreement places a ceiling and floor on the Company's interest rate on this
amount of the revolving credit agreement at 7.9375% and 5.25%, respectively, and
expires in April 1998. The Company will be required to increase the amount of
the collar agreement to hedge one-half of the Company's total indebtedness under
the new revolving credit facility described in Note 16. Both the carrying value
and the fair value of this interest rate collar were not material at December
31, 1996. The Company accounts for its interest rate collar as a hedge. As such,
hedging gains and losses are recognized in the period to which they relate as
adjustments to interest expense.
On November 1, 1996, the Company entered into a terms agreement to refinance
this revolving credit agreement along with certain of its subsidiaries. The
terms of the credit facility described in Note 16 have not been reflected in the
maturities of the long-term debt provided below.
The mortgage notes payable to the United States of America, through the
Rural Utilities Service ("RUS") and the Rural Telephone Bank ("RTB"), are
secured by substantially all the assets of Dobson Telephone and contain, among
other things, restrictions on the payment of dividends and redemption of capital
stock, as defined. Under the long-term debt agreements, Dobson Telephone is
restricted, without RUS approval, from making any loans to, or in any manner
extending its credit to various affiliates. The agreements also prohibit payment
of dividends or distributions or new investments in affiliated companies unless
after such action Dobson Telephone's current assets exceed its current
liabilities and its adjusted net worth (as defined in the agreement) is at least
40% of (i) its adjusted assets (as defined in the agreement), or, (ii) if
smaller, the sum of 10% of its adjusted assets, plus 30% of the excess of its
adjusted net worth over 10% of its adjusted assets, if any, plus 30% of the
amount of any reduction of its adjusted net worth resulting from the declaration
or payment of dividends or other distributions.
In October 1990, Dobson Fiber entered into a revolving credit agreement with
the Rural Telephone Finance Cooperative ("RTFC") under which it borrowed
$12,333,333, at a variable interest rate, which was
F-15
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
scheduled to mature in 2005. Under the terms of the RTFC revolving credit
agreement, the Company guaranteed the indebtedness thereunder and was required
to purchase subordinated capital certificates ("SCCs") from the RTFC equal to
10% of each advance. On March 19, 1996, the Company repaid this debt with the
proceeds from its refinanced revolving credit agreement with certain banks as
described above and in Note 16. As a result, the SCCs are to be redeemed in
March 1997.
In 1991, Enid Cellular and Woodward Cellular acquired permits to construct
and operate a cellular system in the Enid and Woodward, Oklahoma, areas for
$255,000 in cash and promissory notes totaling $3,499,072. In exchange for early
payoff of the outstanding principal and accrued interest of these promissory
notes balances in 1994, the lender reduced the payoff amount by $353,749. The
gain on early extinguishment of debt is shown as an extraordinary item, net of
taxes of $125,472, in the accompanying consolidated statement of operations for
the year ended December 31, 1994.
Minimum future payments of long-term debt for years subsequent to December
31, 1996, are as follows:
<TABLE>
<S> <C>
1997.......................................... $ 1,190,924
1998.......................................... 4,075,061
1999.......................................... 13,763,443
2000.......................................... 14,675,760
2001.......................................... 14,887,086
2002 and thereafter........................... 56,902,452
-----------
$105,494,726
-----------
-----------
</TABLE>
5. NOTES PAYABLE:
In September 1995, Dobson Telephone entered into a revolving credit
agreement with the RTFC. Under terms of the agreement, Dobson Telephone was able
to borrow up to $1,000,000 through September 1996, at one and one-half percent
above the prevailing prime interest rate. Dobson Telephone did not renew this
revolving credit agreement, and it expired in 1996.
6. STOCKHOLDERS' EQUITY:
On November 9, 1994, the Company repurchased 49.67 percent of its
outstanding Class A common stock (149 shares) from a stockholder for an
aggregate price of $11,913,000, consisting of $6,000,000 in cash and 59,130
shares of $100 par value, 10%, Class A redeemable preferred stock ("Class A
Preferred"). On March 19, 1996, the Company redeemed all of the shares of the
Class A Preferred for $5,913,000, which is reflected in the accompanying
consolidated statement of cash flows for the year ended December 31, 1996.
Also on November 9, 1994, the Company's majority stockholder and chairman of
the board of directors sold the majority of his Class A common stock through his
interest in a partnership to three grantor trusts which he established. These
trusts borrowed $6,000,000 to finance this purchase under substantially the same
terms as those in the Company's revolving credit agreement described in Note 4.
The trusts secured their borrowings with the Class A common stock of the Company
that they purchased. The Company has guaranteed the repayment of this
indebtedness on behalf of the trusts. In addition, the
F-16
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY: (CONTINUED)
Company has a receivable of $483,850 from the trusts for legal fees paid on
behalf of the trusts in connection with the financing obtained by the trusts.
These receivables are included in accounts receivables in the accompanying
consolidated balance sheets. During 1994, 1995 and 1996, the Company made
dividend distributions totaling $50,000, $660,858 and $549,564, respectively, to
these three trusts.
In conjunction with the execution of the amended and restated revolving
credit facility on March 19, 1996, as described in Note 4, the Company canceled
its then outstanding Class A and Class B common stock and authorized the capital
structure of the Company to consist of 1,000,000 shares of Class A voting common
stock, $1 par value per share, 31,000 shares of Class B common stock, $1 par
value per share, 59,130 shares of 10% cumulative, compounded, convertible,
redeemable Class A preferred stock, $100 par value per share, and 100,000 shares
of Class B convertible preferred stock ("Class B Preferred"), $1 par value per
share, 8% dividend that accrues on a daily basis. On the same date, the Company
issued 100,000 shares of Class B Preferred. The net proceeds from the issuance
of the Class B Preferred was approximately $9,400,000. In addition, the Company
issued 473,152 shares of Class A voting common stock to the holders of the
original Class A common stock. On November 15, 1996, the Company amended its
certificate of incorporation to eliminate Class A Preferred from its authorized
capital stock.
As part of this recapitalization of the Company, Dobson Telephone was
entitled to receive shares of Class C common stock, all of which, as of December
31, 1996, had not been issued, in exchange for its shares of Class B common
stock. Subsequent to December 31, 1996, the Company amended its certificate of
incorporation to entitle Dobson Telephone to receive Class A Preferred stock in
exchange for its shares of Class C common stock as described in Note 16.
Holders of Class B Preferred are entitled to cumulative dividends as and
when declared by the board of directors of the Company and a liquidation
preference over the other classes of capital stock. The Class B Preferred
stockholders are also entitled to a dividend equal to the amount they would have
received had the Preferred Stock been converted into Class A common stock. Each
share of Class B Preferred is convertible into Class A common stock initially at
a ratio of one to one. Each share of Class B Preferred has voting rights
equivalent to Class A common stock, at a rate equal to the number of Class A
common shares into which the share of Class B Preferred is convertible at the
record date of such vote. In addition, the Class B Preferred shareholders have
the right, as a class, to elect two members of the board of directors of the
Company.
Holders of Class B Preferred have the right to sell up to 50% and 100% of
their stock to the Company after March 19, 2001 and 2002, respectively, or upon
the occurrence of certain events, at the then fair market value. After March 19,
2003, the Company has the right to call all of the outstanding shares of Class B
Preferred at the then fair market value.
7. CELLULAR PROPERTY ACQUISITION:
On March 19, 1996, the Company, through a wholly owned subsidiary, purchased
all rights, title and interest in and to the licenses and the assets of Kansas
RSA 5, Missouri RSA 1, Missouri RSA 4 and the Linn County portion of Missouri
RSA 5 for $30 million. In addition, the Company was assigned the interim
operating authority and purchased certain cellular system assets relating to the
Grundy, Harrison and Mercer counties portion of Missouri RSA 2. The transaction
was accounted for as a purchase and, accordingly, the results of operations have
been included in the accompanying consolidated statements of operations from the
date of acquisition.
F-17
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CELLULAR PROPERTY ACQUISITION: (CONTINUED)
The following unaudited financial information presents the results of
operations of the Company for the years ended December 31, 1995 and 1996,
respectively, on a pro forma basis as if the acquisition had occurred at the
beginning of the respective periods presented. The results include certain
adjustments consistent with the Company's accounting policies related to revenue
recognition and amortization of intangible assets. These results are not
necessarily indicative of the results that actually would have been attained if
the acquisition had occurred at the beginning of each period or which may be
attained in the future.
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Revenue........................................................ $ 37,252,773 $ 43,832,356
Loss before extraordinary items................................ (1,030,426) (1,853,871)
Net loss applicable to common stockholders..................... (1,621,726) (3,230,342)
Net loss applicable to common stockholders per common share.... (3.43) (5.86)
</TABLE>
8. EMPLOYEE BENEFIT PLANS:
401(K) PLAN
The Company maintains a 401(k) plan (the "Plan") in which substantially all
employees of the Company are eligible to participate. The Plan requires the
Company to match 100% of employees' contributions up to 4% of their salary.
Contributions to the Plan charged to the Company's operations were approximately
$284,000, $149,000 and $149,000 during the years ended December 31, 1994, 1995
and 1996, respectively.
STOCK OPTION PLAN
During 1996, stock options were granted to an employee and one director
allowing the purchase of 1.25% and 0.14%, respectively, of the Company's shares
of common stock at an exercise price of $100 per share. The Company did not
recognize any compensation expense for the issuance of these options, because in
management's opinion, they were issued at the fair value of the common stock on
the date of the issuance. The options vest at a rate of 20% per year.
9. TAXES:
Provision (benefit) for income taxes for the years ended December 31, 1994,
1995 and 1996, were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Federal income taxes--
Current........................................................ $ (55,573) $ 393,891 $ (44,692)
Deferred....................................................... 231,264 245,119 (280,170)
Deferred investment tax credits amortized...................... (47,714) (47,714) (47,714)
State income taxes (current and deferred)........................ (8,541) 146,939 (38,219)
---------- ---------- -------------
Total income tax provision (benefit)......................... $ 119,436 $ 738,235 $ (410,795)
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-18
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TAXES: (CONTINUED)
The provisions for income taxes for the years ended December 31, 1994, 1995
and 1996, differ from amounts computed at the statutory rate as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Income taxes at statutory rate (34%)............................. $ 120,807 $ 625,399 $ (443,688)
Deferred investment credits amortized............................ (47,714) (47,714) (47,714)
Amortization of excess of cost over original cost of assets
acquired....................................................... 32,382 32,382 32,382
State income taxes, net of Federal income tax benefit............ (11,515) 70,432 (52,199)
Loss on redemption of executive life insurance policy............ -- 47,780 --
Other, net....................................................... 25,476 9,956 100,424
---------- ---------- -------------
$ 119,436 $ 738,235 $ (410,795)
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
The tax effects of the temporary differences which gave rise to deferred tax
assets and liabilities at December 31, 1995 and 1996, were as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Current deferred income taxes:
Allowance for doubtful accounts receivable.............................. $ 15,109 $ 92,762
Deferred revenue........................................................ (33,949) --
Deferred expenses....................................................... 559,148 297,791
------------- -------------
Net current deferred income tax asset................................. 540,308 390,553
------------- -------------
Noncurrent deferred income taxes:
Depreciation and amortization........................................... (2,158,763) (1,710,000)
ITC carryforwards....................................................... 48,970 134,347
AMT credit carryforwards.................................................. 730,655 659,401
------------- -------------
Net noncurrent deferred income tax liability.......................... (1,379,138) (916,252)
------------- -------------
Total deferred income taxes........................................... $ (838,830) $ (525,699)
------------- -------------
------------- -------------
</TABLE>
The investment tax credits previously recorded by the Company for book
purposes have been deferred and are being amortized over the average lives of
the property giving rise to the credits. The investment tax credit amortization
used to offset income tax expense was $47,714 for each of the years ended
December 31, 1994, 1995 and 1996, respectively.
At December 31, 1996, the Company had investment tax credit carryforwards
for tax purposes of $134,347, which may be utilized to reduce future Federal
income taxes payable. Unless utilized, the remaining investment tax credit
carryforwards will expire in 1999.
At December 31, 1996, the Company had alternative minimum tax credit
carryforwards that may be utilized to reduce future regular Federal income taxes
payable.
10. RELATED PARTY TRANSACTIONS:
At December 31, 1995 and 1996, the Company had notes and interest receivable
of $2,304,003 and $3,308,438, respectively, of which $2,256,939 and $3,266,765
was due from related parties, including
F-19
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS: (CONTINUED)
$1,100,522 and $2,253,892 at December 31, 1995 and 1996, respectively, from the
Company's directors and officers.
The president and a director of the Company have a 67% equity interest in
Associated Telecommunications and Technologies, Inc. ("ATTI"). The Company had
$528,685 and $570,545 in notes and interest receivable from ATTI and its
subsidiaries at December 31, 1995 and 1996, respectively. Additionally, the
Company had $1,041,983 and $1,157,581 of accounts receivable from ATTI and its
subsidiaries for services provided by various employees of the Company on behalf
of ATTI and its subsidiaries and for the working capital requirements of ATTI
and its subsidiaries at December 31, 1995 and 1996, respectively, which are
included in accounts receivable--affiliates in the accompanying consolidated
balance sheets.
The Company leases its corporate office space from a related party, as
discussed in Note 13. In addition, the Company has guaranteed indebtedness of a
related party, as discussed in Note 6.
INVESTMENT IN ZENEX COMMUNICATIONS, INC.
During 1995, the Company bought 75,000 shares of common stock of Zenex
Communications, Inc. ("Zenex") a long distance carrier serving customers
primarily in Oklahoma, for $75,000 and 400,000 shares of Zenex Class B preferred
stock for $400,000. In 1996, the Company bought an additional 275,000 shares of
Zenex Class B preferred stock for $275,000.
On October 28, 1996, the Company sold its 675,000 shares of Zenex Class B
preferred stock and 30,000 of its shares of Zenex common stock for approximately
$817,000. In addition, the Company sold its option to purchase additional stock
for $150,000. The Company recognized a $262,000 gain on these transactions.
11. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Interest.................................................................... $ 486,185 $ 179,682
Property tax................................................................ 473,969 472,914
Vacation, wages and other................................................... 390,030 981,238
------------ ------------
Total accrued expenses.................................................... $ 1,350,184 $ 1,633,834
------------ ------------
------------ ------------
</TABLE>
F-20
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. REPORT OF BUSINESS SEGMENTS:
The Company operates in three reportable segments: Cellular Telephone,
Wireline Telephone and Fiber Optic Telecommunications. A summary of the
Company's operations by industry is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue--
Cellular Telephone................................. $ 15,168,776 $ 18,989,791 $ 26,107,481
Wireline Telephone................................. 14,146,504 18,841,512 23,112,944
Fiber Optic Telecommunications..................... 1,489,272 2,524,776 3,452,525
Intersegment activity.............................. (2,557,631) (5,907,257) (9,447,477)
------------- ------------- --------------
Total operating revenue.......................... 28,246,921 34,448,822 43,225,473
------------- ------------- --------------
Operating income--
Cellular Telephone................................. 2,158,857 3,045,258 1,947,026
Wireline Telephone................................. 2,339,883 3,625,328 4,683,647
Fiber Optic Telecommunications..................... 76,531 816,168 803,891
------------- ------------- --------------
Total operating income........................... 4,575,271 7,486,754 7,434,564
------------- ------------- --------------
INVESTMENT INFORMATION:
Identifiable assets--
Cellular Telephone................................. 21,018,092 19,749,045 60,858,579
Wireline Telephone................................. 35,592,655 40,603,706 40,057,711
Fiber Optic Telecommunications..................... 13,092,232 13,137,348 16,031,735
------------- ------------- --------------
69,702,979 73,490,099 116,948,025
------------- ------------- --------------
OTHER INFORMATION:
Depreciation and amortization--
Cellular Telephone................................. 1,764,225 2,393,506 5,058,348
Wireline Telephone................................. 3,073,265 3,342,532 3,453,342
Fiber Optic Telecommunications..................... 696,991 916,754 1,208,689
------------- ------------- --------------
5,534,481 6,652,792 9,720,379
------------- ------------- --------------
Capital expenditures--
Cellular Telephone................................. 2,565,883 1,412,033 12,619,701
Wireline Telephone................................. 2,590,880 1,673,706 2,137,254
Fiber Optic Telecommunications..................... 110,671 839,222 2,680,819
------------- ------------- --------------
5,267,434 3,924,961 17,437,774
------------- ------------- --------------
</TABLE>
F-21
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS:
Future minimum lease payments required under operating leases that have an
initial or remaining noncancellable lease term in excess of one year at December
31, 1996, are as follows:
<TABLE>
<S> <C>
1997............................................ $ 440,067
1998............................................ 406,682
1999............................................ 381,446
2000............................................ 377,038
2001............................................ 339,851
2002 and thereafter............................. 1,121,972
</TABLE>
Included in the annual lease commitments is approximately $264,000, payable
annually to an affiliated entity through July 2005. Lease expense under the
above leases was approximately $282,000, $300,000 and $425,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
14. LITIGATION SETTLEMENT:
On February 16, 1994, a judgment was entered against Dobson Cellular in a
lawsuit initiated by a competitor for violation of the Federal Communications
Act in connection with pricing of various services in the Texas RSA 2 market
area in the amount of $742,318, and post-judgment interest at a rate of 3.74%
from the date of the judgment until the amount was to be paid in full.
Management of the Texas RSA 2 Limited Partnership agreed to reimburse Dobson
Cellular for any and all costs related to these actions. A provision of $150,000
was charged to the Texas Partnership's operations in 1993, for anticipated costs
of appealing the judgment. During 1995, this case was settled at a total cost to
the Texas Partnership of approximately $430,000, net of insurance proceeds. A
provision for $280,000 was charged to the Texas Partnership's operations in
1995, and is included in other expenses in the accompanying consolidated
statement of operations for the year ended December 31, 1995.
15. FINANCIAL INSTRUMENTS:
The Company values its financial instruments as required by SFAS No. 107,
"Disclosures about Fair Values of Financial Instruments." Unless otherwise
noted, the carrying value of the Company's financial instruments approximates
fair market value. The Company estimates the fair value of its long-term debt
using a discounted cash flow analysis based on borrowings currently available to
the Company for debt with similar terms and maturities.
<TABLE>
<CAPTION>
1995 1996
---------------------------- ------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Long-term debt.......................... $ 65,655,196 $ 60,847,895 $ 105,494,726 $ 100,605,656
</TABLE>
16. SUBSEQUENT EVENTS:
REVOLVING CREDIT FACILITY
On February 28, 1997, the Company's revolving credit agreement was amended
and restated with certain banks to provide the Company with $200,000,000 at a
variable interest rate (9% at February 28,
F-22
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS: (CONTINUED)
1997), maturing in 2005, to refinance existing indebtedness, finance the
completed and pending acquisitions described below and for general corporate
purposes, including using $7.5 million of the borrowings to pay a dividend to
holders of its Class A Common Stock. Of the $7.5 million dividend, $6.0 million
was used to repay the trust loan which had been guaranteed by the Company,
described in Note 6, and approximately $.5 million was used to repay
indebtedness owed to the Company with respect to the legal fees described in
Note 6. As a result of the $7.5 million dividend, the holders of Class B
Preferred were entitled to a make-whole dividend of approximately $1.7 million.
In lieu of such dividend, the holders of Class B Preferred were issued 100,000
shares of Class C Preferred stock having a liquidation preference of
approximately $1.7 million. 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 $2.6 million as a result of writing
off previously capitalized financing costs associated with the revolving credit
facility. Such amount is included in deferred costs in the accompanying
consolidated balance sheets.
SENIOR NOTES
On February 25, 1997, the company issued $160,000,000 of 11.75% Senior Notes
maturing in 2007 to finance the acquisitions described below. The Company placed
approximately $38.3 million of the proceeds into an escrow account which will be
used to pay the first four semi-annual interest payments on the notes, which
begin on October 15, 1997. 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%.
REORGANIZATION
Effective February 28, 1997, the stockholders of Dobson Communications and
Dobson Holdings Corporation ("Dobson Holdings"), a new corporation, entered into
an agreement and plan of reorganization. Under the reorganization, Dobson
Holdings acquired all of the outstanding Class A common stock, Class C common
stock and Class B Preferred of Dobson Communications. In exchange, the holders
of the Class A common stock and Class B Preferred of Dobson Communications
received equivalent shares of stock of Dobson Holdings. The holders of the Class
C common stock received 100,000 shares of Class A preferred stock of Dobson
Holdings. In addition, Dobson Holdings assumed all Dobson Communications
outstanding stock options, substituting shares of Dobson Holdings Class B common
stock for the Dobson Communications stock subject to options. As a result,
Dobson Holdings is the parent company of Dobson Communications.
As part of the reorganization, the stock of certain subsidiaries was
distributed to Dobson Holdings, so that Dobson Communications is the holding
company for only Dobson Fiber, Dobson Telephone and each company that comprises
the Cellular Telephone segment. Additionally, Dobson Communications changed its
corporate name to Dobson Operating Company and Dobson Holdings changed its
corporate name to Dobson Communications Corporation.
ACQUISITION OF SELECTED CELLULAR SYSTEMS
HORIZON PROPERTIES ACQUISITION. 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, subject to
adjustment. The properties are located immediately outside the Washington/
Baltimore metropolitan area.
F-23
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS: (CONTINUED)
MARYLAND 2 ACQUISITION. On March 3, 1997, the Company purchased the FCC
cellular license for, and certain assets relating to, the Maryland RSA 2 for
$75.8 million, subject to adjustment. The property is located to the east of the
Washington/Baltimore metropolitan area.
ACQUISITION OF PCS LICENSES
In February 1997, the Company was declared the successful bidder for PCS
licenses for nine markets, adjacent to and overlapping the Company's existing
Cellular footprint, in the FCC "F" Block auction. The aggregate bid for these
licenses was $5.1 million after a 15% discount. The Company has been refunded
its $2.6 million deposit (discussed in Note 4) net of payment for 10% of the
winning bid amount with another 10% payable upon the granting of the new
licenses. The balance will be financed by the U.S. Government at the U.S.
Treasury ten-year rate. The obligations will be due in quarterly installments
over an eight year amortization beginning after two years from the grant date.
The Company is required to build out systems covering 25% of the population
within the first five years after obtaining the licenses. Management of the
Company anticipates that the cost to build out the minimum PCS system will be
approximately $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 the buildout and the extent the
Company must relocate incumbent microwave licensees.
PENDING ACQUISITION OF A CELLULAR SYSTEM
On February 28, 1997, the Company signed a definitive agreement to purchase
a 100% 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 for $53.1 million. Gila River
Telecommunications, Inc. ("GRTI") owns 41.95% of Arizona 5 Partnership and ATTI,
an affiliate of the Company, owns 49% of GRTI. In connection with this
acquisition, the Company will loan $5.2 million to one of the current partners
which will acquire a 25% interest in the Arizona 5 Partnership. Upon completion
of these transactions, the Company will own a 75% interest in the Arizona 5
Partnership. Subject to regulatory approval and satisfactory completion of the
Company's due diligence, management of the Company expects that this acquisition
will close in June 1997.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Kansas RSA #5, Inc., USCOC of Missouri RSA #1, Inc., USCOC of Missouri RSA #4,
Inc.
and Missouri RSA No. 2 (a division of USCOC of Missouri RSA #5, Inc.):
We have audited the accompanying combined balance sheets of Kansas RSA #5,
Inc., USCOC of Missouri RSA #1, Inc., USCOC of Missouri RSA #4, Inc. and
Missouri RSA No. 2 (a division of USCOC of Missouri RSA #5, Inc.) (collectively
referred to as "the Company") as of December 31, 1995 and 1994, and the related
combined statements of operations, cash flows and retained earnings for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company as of
December 31, 1995 and 1994, and the combined results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 1, 1996
(except with respect to Note 10,
as to which the date is March 19, 1996)
F-25
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Cash and cash equivalents.......................................................... $ 353,244 $ 307,354
Accounts receivable
Customers, less allowance of $12,121 and $8,019.................................. 28,898 99,729
Affiliates....................................................................... 32,027 160,235
Roaming.......................................................................... 155,148 272,877
Other............................................................................ -- 1,137
Deferred tax asset--current........................................................ 2,299 6,404
Other current assets............................................................... 11,401 4,020
Inventory.......................................................................... -- 13,351
------------- -------------
Total current assets........................................................... 583,017 865,107
Property, plant and equipment, net of accumulated depreciation of $1,736,097 and
$1,068,601....................................................................... 4,919,703 7,897,864
Deferred start-up costs, net of accumulated amortization of $72,809 and $52,579.... 48,575 28,344
Other deferred charges, net of accumulated amortization of $4,012 and $2,943....... 4,548 3,478
Investments in licenses, net of accumulated amortization of $400,823 and
$276,047......................................................................... 4,720,878 4,658,383
------------- -------------
Total assets................................................................... $ 10,276,721 $ 13,453,176
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses.............................................. $ 530,694 $ 235,345
Accounts payable and accrued interest--affiliates.................................. 313,637 626,611
Notes payable--affiliates.......................................................... 6,530,911 11,240,474
Current maturities of long term debt--affiliates................................... 134,745 190,987
Deferred revenues and customer deposits............................................ 10,005 20,984
Other current liabilities.......................................................... 23,558 86,936
------------- -------------
Total current liabilities...................................................... 7,543,550 12,401,337
Long term debt--affiliates......................................................... 910,119 719,132
Net deferred tax liability--noncurrent............................................. 2,161 272,216
------------- -------------
Total liabilities.............................................................. 8,455,830 13,392,685
Common Stock, $1 par value, 21,000 shares authorized, 1,100 issued................. 1,100 1,100
Preferred stock, $100 stated value, 30,000 shares authorized, 20,087 and 24,587
shares issued.................................................................... 2,458,700 2,008,700
Additional paid-in capital......................................................... 2,537,127 3,049,403
Retained earnings (deficit)........................................................ (3,176,036) (4,998,712)
------------- -------------
Total shareholders' equity..................................................... 1,820,891 60,491
------------- -------------
Total liabilities and shareholders' equity..................................... $ 10,276,721 $ 13,453,176
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these combined financial statements.
F-26
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Revenues:
Cellular service.................................................................. $ 709,981 $ 1,180,689
Cellular equipment sales.......................................................... 38,740 35,443
Roaming........................................................................... 1,072,160 1,587,819
------------- -------------
Total revenues.................................................................. 1,820,881 2,803,951
------------- -------------
Expenses:
Cellular equipment................................................................ 84,724 126,928
Cellular service.................................................................. 729,325 1,192,784
Marketing and selling............................................................. 346,178 372,682
General and administrative........................................................ 532,605 737,113
Depreciation and amortization..................................................... 577,632 847,476
------------- -------------
Total expenses.................................................................. 2,270,464 3,276,983
------------- -------------
Operating loss...................................................................... (449,583) (473,032)
Other income (expense).............................................................. (7,837) 9,414
Interest expense.................................................................... (578,974) (1,077,628)
------------- -------------
Loss before income taxes............................................................ (1,036,394) (1,541,246)
Income tax expense.................................................................. -- 265,812
------------- -------------
Net loss............................................................................ $ (1,036,394) $ (1,807,058)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these combined financial statements.
F-27
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from operations.......................................................... $ (1,036,394) $ (1,807,058)
Add (deduct) adjustments to reconcile net loss from operations to net cash
required by operating activities:
Depreciation and amortization................................................... 577,632 847,476
Change in accounts receivable................................................... 59,078 (317,905)
Change in inventory............................................................. 8,210 (13,351)
Change in accounts payable/accrued expenses and accrued interest................ 371,743 (821,437)
Change in deferred tax asset and liability...................................... 676 265,950
Change in deferred revenues and customer deposits............................... 856 10,979
Change in other assets and liabilities.......................................... 7,590 70,759
------------- -------------
Net cash required by operating activities......................................... (10,609) (1,764,587)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable-affiliates................................................ 1,868,723 5,548,625
Change in long-term debt.......................................................... 202,708 (190,987)
Change in current maturities--LTD................................................. -- 56,242
Dividends paid.................................................................... (26,337) (15,618)
------------- -------------
Net cash provided by financing activities......................................... 2,045,094 5,398,262
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment.................................... (1,900,763) (3,679,565)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 133,722 (45,890)
CASH AND CASH EQUIVALENTS
Beginning of period............................................................... 219,522 353,244
------------- -------------
End of period..................................................................... $ 353,244 $ 307,354
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these combined financial statements.
F-28
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
COMBINED STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Retained earnings (deficit) at beginning of period.................................. $ (2,113,305) $ (3,176,036)
Dividends........................................................................... (26,337) (15,618)
Loss................................................................................ (1,036,394) (1,807,058)
------------- -------------
Retained earnings (deficit) at end of period........................................ $ (3,176,036) $ (4,998,712)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these combined financial statements.
F-29
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND DOCUMENTATION OF BUSINESS:
The accompanying combined financial statements reflect the combined
financial position, combined results of operations and combined cash flows of
Kansas RSA #5, Inc., USCOC of Missouri RSA #1, USCOC of Missouri RSA #4, Inc.
and Missouri RSA No. 2 (a division of USCOC of Missouri RSA #5, Inc.)
(collectively referred to as "Selected Systems" or "the Company") as of and for
the years ended December 31, 1995 and 1994.
Kansas RSA #5, Inc. was formed on August 16, 1988, under the laws of the
State of Illinois for the purpose of providing cellular telephone service in the
Kansas Rural Service Area ("RSA") No. 5. Kansas RSA #5, Inc. is a wholly owned
subsidiary of United States Cellular Corporation ("USCC"). USCC is an
80.8%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
USCOC of Missouri RSA #1, Inc. was formed on July 10, 1991, under the laws
of the State of Missouri for the purpose of providing cellular telephone service
in the Missouri RSA No. 1. USCOC of Missouri RSA #1, Inc. is a wholly owned
subsidiary of USCC.
USCOC of Missouri RSA #4, Inc. was formed on July 23, 1992, under the laws
of the State of Delaware for the purpose of providing cellular telephone service
in the Missouri RSA No. 4. In July 1993, Aegis Cellular Group, L.P. ("Aegis
L.P.") assigned all of its interest in Missouri RSA No. 4 to USCOC of Missouri
RSA #4, Inc. In January 1995, Aegis L.P. was dissolved and assets of Missouri
RSA No. 4 were transferred to USCOC of Missouri RSA #4, Inc. The accompanying
combined 1994 financial statements reflect partners' capital as a component of
shareholders' equity.
USCC holds all of the common stock of USCOC of Missouri RSA #4, Inc., and
the previous owners hold all of the non-voting cumulative, exchangeable
preferred stock of USCOC of Missouri RSA #4. Prior to May 28, 2003, holders,
previous owners, of the preferred stock may exchange such stock for TDS common
shares. Each share of the preferred stock is exchangeable for 2.52058 of TDS
common shares. Prior to December 31, 1995, 9,000 shares of the preferred stock
had been exchanged for TDS common shares.
USCOC of Missouri RSA #5, Inc. holds the interim operating authority (IOA)
to provide cellular service in Missouri RSA No. 2. USCOC of Missouri RSA #5,
Inc. is a wholly owned subsidiary of USCC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in conformity with 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 amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
a. DEPRECIATION--Depreciation is computed using the straight-line method
over the useful lives of the assets, which are estimated to be 3 to 25
years.
b. OPERATING REVENUES--Operating revenues primarily consist of charges to
customers for monthly access, cellular airtime usage, roamer charges,
equipment sales, toll charges and vertical services. The Company
recognizes revenues as services are rendered. Revenues earned but
unbilled at December 31, 1995 and 1994 were $125,069 and $69,020,
respectively, and are included in accounts receivable. Unbilled revenues
result from cellular service provided from the billing cycle
F-30
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
date to the end of each month and from other cellular carriers' customers
using the Company's cellular system for the last half of December.
c. CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash and
short-term, highly liquid investments with original maturities of three
months or less. The carrying amount reported in the balance sheet for
cash and cash equivalents approximates their fair value.
d. ACCOUNTS RECEIVABLES--Accounts receivable consists of amounts owed by
customers for both service provided and equipment sales, by affiliated
entities and by other cellular carriers as a result of these carriers'
customers using the Company's cellular system.
e. INVENTORY--Inventory is stated at the lower of cost or market, using the
specific identification method to determine cost.
f. DEFERRED START-UP COSTS--Deferred start-up costs represent expenses for
the costs incurred by the Company for the acquisition of site locations,
zoning approvals, and technical and other services including related
interest and other expenses, related to constructing and obtaining
necessary approvals and licenses to operate and prepare to operate the
cellular system. These costs are capitalized and are being amortized over
five years. Amortization of these costs began in the first full month of
operations.
g. INVESTMENTS IN LICENSES--Investments in licenses consists of the costs
of acquiring Federal Communications Commission ("FCC") licenses. These
costs include amounts paid for legal, engineering and consulting services
and amounts paid for legal, engineering and consulting services and
amount incurred by the Company in acquiring these interests. License
costs are being amortized over 40 years. Amortization expenses were
$124,775 and $124,698 during 1995 and 1994, respectively.
h. DEFERRED REVENUES--Deferred revenues primarily represent monthly access
fees filled in advance. Such revenues are recognized in the following
month when service is provided.
i. PENSION PLAN--USCC's employees, who manage the daily operations of the
Company, are eligible for United States Cellular Corporation's Employees
Pension Trust I (the "Pension Trust"). The Pension Trust is a qualified
noncontributory defined contribution pension plan, which began effective
January 1, 1994. It provides pension benefits for all employees of USCC
and its subsidiaries. Under this plan, pension benefits and costs are
calculated separately for each participant and are funded currently. The
Company's pension costs were $2,569 and $2,435 and 1995 and 1994,
respectively.
j. Supplemental Cash Flow Disclosures--The Company paid interest in the
amounts of $100 and $180 during 1995 and 1994, respectively, and
converted $839,061 and $436,176 of accrued interest into notes
payable--affiliates during 1995 and 1994, respectively.
(3) LEASE COMMITMENTS:
The Company leases cell site locations under operating leases. Rent expense
totaled $24,343 and $18,505 for the years ended December 31, 1995 and 1994,
respectively. Rent expense for the cell site locations is included in cellular
service expense.
F-31
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) LEASE COMMITMENTS: (CONTINUED)
Future minimum rental payments required under these operating leases, which
have an initial noncancellable lease term of more than one year as of December
31, 1995, are as follows:
<TABLE>
<S> <C>
1996............................................... $ 10,619
1997............................................... 5,400
1998............................................... 5,400
1999............................................... 5,400
2000............................................... 5,400
Thereafter......................................... 60,900
---------
$ 93,119
---------
---------
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Land and land improvements....................................... $ 728,652 $ 676,918
Leasehold improvements........................................... 4,924 174,303
Buildings and equipment.......................................... 5,154,430 8,684,781
Furniture and office equipment................................... 61,379 57,602
Vehicles......................................................... 38,919 40,357
------------ ------------
5,988,304 9,633,961
Less accumulated depreciation.................................... 1,068,601 1,736,097
------------ ------------
$4,919,703 $7,897,864
------------ ------------
------------ ------------
</TABLE>
(5) NOTES PAYABLE--AFFILIATES:
The Company has notes payable to USCC of $11,240,474 and $6,530,911 at
December 31, 1995 and 1994, respectively. These notes bear interest at a rate of
prime plus and one-half percent and become due in 1996. The carrying value of
the Company's borrowings from USCC approximates their fair value, as the notes
payable--affiliates are variable debt with the interest rate based on the prime
rate.
(6) LONG TERM DEBT--AFFILIATES:
On October 1, 1991, USCC entered into an agreement with Northern Telecom
Finance Corporation ("NTFC") that included a commitment by NTFC to finance
equipment purchases made and construction costs incurred by certain entities
managed by USCC. Any borrowings made by USCC were loaned to the individual
entity which made the purchases and incurred the costs.
On March 31, 1992, USCC borrowed $943,214 from NTFC on behalf of the Company
and in turn loaned the same amount to the Company. There borrowings are
collateralized by a secured interest in the tangible assets (excluding customer
accounts receivable) and intangible assets of the Company (excluding any
interest in the Company's FCC license). Monthly principal and interest payments
began in April of
F-32
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(6) LONG TERM DEBT--AFFILIATES: (CONTINUED)
1993, and will continue for a period of 84 months. Interest accrues at a rate of
prime plus one and one-half percent on the outstanding debt balance.
USCC entered into a new agreement with NTFC on December 22, 1994. Under this
new agreement an additional $337,453 was borrowed from NTFC on December 29,
1994, with the same collateral requirements and interest rate as stated in the
preceding paragraph. Monthly interest payments began in January of 1995, and
will continue for a period of 84 months while monthly principal payments will
begin in January of 1996, and continue for a period of 72 months.
The carrying value of the Company's borrowings under the vendor financing
arrangements approximates their fair value. The fair value of the long-term debt
is estimated using a discounted cash flow analysis.
Following are maturities of long-term debt for the term of financing:
<TABLE>
<S> <C>
1996.............................................. $ 190,987
1997.............................................. 190,987
1988.............................................. 190,987
1999.............................................. 190,987
2000.............................................. 89,928
Thereafter........................................ 56,243
---------
$ 910,119
---------
---------
</TABLE>
(7) INCOME TAXES
The Company records all deferred tax liabilities and assets for the deferred
tax consequences of all temporary differences. Additionally, deferred tax
balances are adjusted to reflect any new tax rates when they are enacted into
law.
The Company is included in a consolidated federal income tax return and
certain state income tax returns (as applicable) with other members of the TDS
Consolidated Group.
The Company has available at December 31, 1995 and 1994, unused operating
loss carryforwards for state purposes of approximately $5,283,055 and
$2,793,656, respectively, and for federal purposes of $5,284,646, and 2,793,656,
respectively, which may be applied against future taxable income, expiring
between 2001 and 2010.
F-33
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The components of the Company's noncurrent deferred tax assets and
liabilities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSET
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Net operating loss carryforwards.................................. $ 1,165,854 $ 2,192,535
License costs..................................................... 176,219 155,799
------------ ------------
1,342,073 2,348,334
Less: Valuation Allowance......................................... 1,125,701 1,526,552
------------ ------------
$ 216,372 $ 821,782
------------ ------------
------------ ------------
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Property, plan and equipment...................................... 218,533 429,469
License costs..................................................... -- 664,529
------------ ------------
$ 218,533 $ 1,093,998
------------ ------------
------------ ------------
</TABLE>
A valuation allowance has been provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance of $1,526,552 and $1,125,701 for 1995 and
1994, respectively, primarily for operating loss carryforwards that may expire
before they can be utilized. During 1995 and 1994 the valuation allowance
increased $400,851 and $551,180, respectively, primarily due to the Company's
1995 and 1994 net operating loss. The Company had current deferred tax assets
totaling $6,404 and $2,299 at December 31, 1995 and 1994, resulting primarily
from the allowance for customer receivables.
The components of the income tax provisions charged to expenses are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Federal Income Taxes Deferred................................................... $ 216,504
State Income Taxes Deferred..................................................... 49,308
------------
Total Income Tax Expense........................................................ $ 265,812
------------
------------
</TABLE>
The statutory federal income tax rate is reconciled to the Company's
effective income rate below.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
--------------
<S> <C>
Statutory federal income tax rate............................................... 34.00%
Effects of valuation allowance on deferred tax asset............................ (51.2)
-----
Effective income tax rate....................................................... (17.2)%
-----
-----
</TABLE>
F-34
<PAGE>
SELECTED SYSTEMS OF UNITED STATES CELLULAR CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(8) CONCENTRATION OF CREDIT RISK:
The Company provides cellular service and sells cellular telephones to a
diversified group of consumers within a concentrated geographical area. The
Company performs credit evaluations of the Company's customers and generally
does not require collateral. Receivables are generally due within 30 days.
Credit losses related to customers have been within management's expectations.
(9) TRANSACTIONS WITH RELATED PARTIES:
USCC and certain affiliates of TDS provide the Company with centralized
management, accounting, consulting and computer services which resulted in
billings to the Company of $647,511 and $365,179 during 1995 and 1994,
respectively. The Company earned roaming revenues of $177,298 and $100,655 and
incurred roaming expenses of $119,305 and $70,398 from certain affiliates of
USCC during 1995 and 1994, respectively. The Company also received
administrative and other services from certain affiliates of USCC which resulted
in net billings to those affiliates of $5,982 and $91,616 during 1995 and 1994,
respectively. The Company also received switching revenue of $285,750 and
$198,000, and incurred switching fees of $34,650 and $143,400 from certain
affiliates of USCC during 1995 and 1994, respectively.
(10) SUBSEQUENT EVENT:
Kansas RSA #5, Inc., USCOC of Missouri RSA #1, Inc., and USCOC of Missouri
RSA #4, Inc. were merged with USCOC of Missouri RSA #5, Inc. on March 18, 1996.
These three markets, along with the IOA of Missouri RSA No. 2 and the Linn
County portion of USCOC of Missouri RSA #5, Inc., were sold to Dobson
Communications Corporation on March 19, 1996.
F-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Management
Maryland RSA 2
We have audited the accompanying Statements of Cellular Revenue and Direct
Operating Expenses of Maryland RSA 2 (Statements) for the years ended December
31, 1996, 1995 and 1994. These Statements are the responsibility of management.
Our responsibility is to express an opinion on the Statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Statements. An audit also includes assessing
the basis of accounting used and significant estimates made by management, as
well as evaluating the overall presentation of the Statements. We believe that
our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the accompanying Statements were prepared in
connection with the sale of the customers of Maryland RSA 2. The Statements are
not intended to be a complete presentation of Maryland RSA 2's results of
operations.
In our opinion, the Statements referred to above present fairly, in all
material respects, the cellular revenue and direct operating expenses described
in Note 1 of Maryland RSA 2 for the years ended December 31, 1996, 1995 and
1994, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Antonio, Texas
February 21, 1997
F-36
<PAGE>
MARYLAND RSA 2
STATEMENTS OF CELLULAR REVENUE AND
DIRECT OPERATING EXPENSES
(IN 000S)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cellular revenue.................................................................... $ 2,320 $ 5,093 $ 11,195
Direct operating expenses:
Marketing......................................................................... 973 1,248 2,272
Operations........................................................................ 227 292 340
Facilities........................................................................ 224 420 414
--------- --------- ---------
Total direct operating expenses..................................................... 1,424 1,960 3,026
--------- --------- ---------
$ 896 $ 3,133 $ 8,169
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-37
<PAGE>
MARYLAND RSA 2
NOTES TO STATEMENTS OF CELLULAR REVENUE AND
DIRECT OPERATING EXPENSES
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. PURPOSE OF STATEMENTS
Maryland RSA 2 (the RSA) is a cellular mobile telephone system operating
under an interim authority granted by the FCC servicing rural eastern Maryland.
The RSA is operated by Washington Baltimore Cellular Limited Partnership (the
Partnership), an indirect majority owned investee of Southwestern Bell Wireless
Holdings.
In a services agreement dated December 9, 1996, the Partnership agreed to
sell the customers of the RSA to Dobson Cellular of Maryland, Inc., Maryland
Wireless Communications Limited Partnership, a Maryland limited partnership, and
Wendy C. Coleman. These Statements of Cellular Revenue and Direct Operating
Expenses (the Statements) were prepared in connection with this transaction and
include the cellular revenue and direct operating expenses relating to the
customers sold. The Statements are not intended to be a complete presentation of
the RSA's results of operations. Accordingly, the Statements do not include
depreciation, general, administrative and other indirect expenses incurred by,
or allocated to, the Partnership. Cellular equipment sales, which are not
included in the Statements, are not significant.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
REVENUE RECOGNITION
The RSA earns revenue by providing access to its cellular system (access
revenue) and for usage of its cellular system (airtime revenue). Access revenue
is billed one month in advance and is recognized when earned. Airtime revenue,
including roaming revenue, is recognized when the service is rendered.
DIRECT OPERATING EXPENSES
MARKETING
Marketing expenses include commissions paid for obtaining customers and are
expensed as incurred.
OPERATIONS
Operations expense includes cellsite rent, lease and utilities expense and
is expensed as incurred.
FACILITIES
Facilities expense includes network access and circuit charges and is
expensed as incurred.
BASIS OF PRESENTATION
The preparation of statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the statements and accompanying notes. Actual
results could differ from those estimates.
F-38
<PAGE>
3. RELATED PARTY TRANSACTIONS
INTERSYSTEM ROAMING
The RSA is operated by the Partnership as part of a single cellular system
in combination with certain affiliated MSAs and RSAs in the Washington
D.C./Baltimore region. In 1996, regional airtime and long distance revenue were
allocated among the MSAs and RSAs based on airtime recorded by cell sites in
each MSA and RSA. Regional interconnection revenue was allocated based on the
number of calls recorded by the cellsites. During 1996, approximately $5,400,000
of revenue was recognized by the RSA under this arrangement. In 1995 and 1994,
regional airtime revenue was recorded based on actual RSA cellsite usage using
the rate plans of the calling customers. Regional interconnection revenue was
also based on actual RSA cellsite usage. During 1995 and 1994, revenue of
approximately $1,800,000 and $700,000, respectively, was recognized by the RSA
under this arrangement. Long distance service was not provided in 1995 or 1994.
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Horizon, G.P., Inc.
We have audited the accompanying combined statements of assets and
liabilities of The Cellular Telephone Business of Selected Systems of Horizon
Cellular Telephone Company, L.P. as of December 31, 1995 and 1996, and the
related combined statements of operations and net assets and of cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of Horizon Cellular Telephone Company, L.P.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities of The Cellular Telephone
Business of Selected Systems of Horizon Cellular Telephone Company, L.P. at
December 31, 1995 and 1996, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 27, 1997
F-40
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash............................................................................. $ 355,069 $ 435,407
Accounts receivable, net of allowance for doubtful accounts of $82,160 and
$100,790....................................................................... 1,709,143 2,240,468
Inventory........................................................................ 130,730 219,079
Prepaid expenses................................................................. 77,731 29,991
------------- -------------
Total current assets............................................................... 2,272,673 2,924,945
Property and equipment:
Cellular system.................................................................. 8,669,758 10,810,808
Other............................................................................ 959,727 1,287,823
------------- -------------
9,629,485 12,098,631
Accumulated depreciation......................................................... (3,080,449) (4,491,663)
------------- -------------
6,549,036 7,606,968
Licenses, net of accumulated amortization of $3,099,061 and $4,020,825............. 32,763,313 31,841,549
Other assets, net of accumulated amortization of $18,483 and $22,838............... 94,275 99,200
------------- -------------
Total assets....................................................................... $ 41,679,297 $ 42,472,662
------------- -------------
------------- -------------
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable................................................................. $ 354,798 $ 702,859
Accrued expenses................................................................. 669,390 968,815
Deferred revenue................................................................. 403,994 566,521
------------- -------------
Total current liabilities.......................................................... 1,428,182 2,238,195
Advances from affiliates........................................................... 14,862,381 13,399,571
Net assets......................................................................... 25,388,734 26,834,896
------------- -------------
Total liabilities and net assets................................................... $ 41,679,297 $ 42,472,662
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-41
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF OPERATIONS AND NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Cellular service.................................................. $ 5,863,828 $ 7,801,918 $ 10,867,791
Roaming revenues.................................................. 2,765,685 3,496,366 4,264,112
Cellular equipment sales.......................................... 524,892 402,430 388,505
------------- ------------- -------------
Total revenues...................................................... 9,154,405 11,700,714 15,520,408
Operating expenses:
Cellular service.................................................. 2,918,043 3,569,152 4,532,595
Cellular equipment................................................ 1,100,160 1,182,309 1,133,171
General and administrative........................................ 1,528,970 1,471,078 1,869,299
LPAR compensation................................................. -- -- 275,000
Marketing and selling............................................. 1,272,265 1,944,731 2,478,918
Depreciation and amortization..................................... 1,959,106 2,170,963 2,331,184
------------- ------------- -------------
8,778,544 10,338,233 12,620,167
------------- ------------- -------------
Income from operations.............................................. 375,861 1,362,481 2,900,241
Interest expense.................................................... 1,358,153 1,568,883 1,454,079
------------- ------------- -------------
Net (loss) income................................................... (982,292) (206,402) 1,446,162
Net assets at beginning of year..................................... 21,926,001 25,314,904 25,388,734
Partners' contributions............................................. 4,371,195 280,232 --
------------- ------------- -------------
Net assets at end of year........................................... $ 25,314,904 $ 25,388,734 $ 26,834,896
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-42
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................................................... $ (982,292) $ (206,402) $ 1,446,162
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization...................................... 1,959,106 2,170,963 2,331,184
Provision for bad debts............................................ 433,490 3,075 169,582
LPAR compensation.................................................. -- -- 275,000
Accrued interest expense--affiliate................................ 1,358,153 1,568,883 1,454,079
Changes in operating assets and liabilities:
Accounts receivable.............................................. (1,194,015) (280,891) (700,907)
Inventory........................................................ (72,670) 42,003 (88,349)
Prepaid expenses................................................. (4,768) (61,027) 47,740
Accounts payable and accrued expenses............................ 691,454 (239,835) 372,486
Deferred revenue................................................. 95,128 205,588 162,527
------------- ------------- -------------
Net cash provided by operating activities............................ 2,283,586 3,202,357 5,469,504
INVESTING ACTIVITIES
Purchases of property and equipment.................................. (1,942,166) (1,418,979) (2,462,997)
License and system acquisitions...................................... (4,205,125) -- --
Other................................................................ 27,925 (12,161) (9,280)
------------- ------------- -------------
Net cash used in investing activities................................ (6,119,366) (1,431,140) (2,472,277)
FINANCING ACTIVITIES.................................................
Advances to affiliates, net of $166,069 and $280,232 noncash
contributions in 1994 and 1995, respectively........................ (139,739) (2,038,131) (2,916,889)
Partners' contributions.............................................. 4,205,125 -- --
------------- ------------- -------------
Net cash provided by (used in) financing activities.................. 4,065,386 (2,038,131) (2,916,889)
------------- ------------- -------------
Net increase (decrease) in cash...................................... 229,606 (266,914) 80,338
Cash at beginning of year............................................ 392,377 621,983 355,069
------------- ------------- -------------
Cash at end of year.................................................. $ 621,983 $ 355,069 $ 435,407
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-43
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying audited combined financial statements of The Cellular
Telephone Business of Selected Systems of Horizon Cellular Telephone Company,
L.P. (HCTC) reflect the combined assets and liabilities, combined results of
operations, and combined cash flows of the cellular telephone business of
Horizon Cellular Telephone Company of Frederick ("Frederick"), Horizon Cellular
Telephone Company of Bedford ("Bedford"), Horizon Cellular Telephone Company of
Hagerstown, L.P. ("Hagerstown"), and the Cumberland Cellular Partnership
("Cumberland") (collectively referred to as "the Selected Systems," "the
Systems," or "the Company") as of December 31, 1995 and 1996, and for each of
the three years in the period ended December 31, 1996. The accompanying
financial statements are presented on HCTC's historical cost basis and are
intended to reflect only the assets, liabilities, operations, and cash flows
relating to the cellular telephone business of the named legal entities, which
are majority-owned subsidiary partnerships of HCTC, and do not represent the
financial statements of the named legal entities. The combined financial
statements include only the operating results since the Systems were acquired by
HCTC.
The Company owns, designs, develops, and operates cellular communications
systems. With the exception of Cumberland, KCCGP, L.P. (KCCGP) is the managing
and sole general partner of the subsidiary partnerships that own directly the
aforesaid cellular telephone businesses at December 31, 1996. With respect to
Cumberland, KCCGP is the managing and sole general partner of Horizon Cellular
Telephone Company of Cumberland, L.P., a 90.55% general partner in Cumberland.
KCCGP performs certain administrative functions for the Systems and,
accordingly, certain expenses of KCCGP (see Note 5) have been allocated to the
Systems on a basis which, in the opinion of management, is reasonable. However,
such expenditures are not necessarily indicative of, and it is not practicable
for management to estimate, the nature and level of expenses which might have
been incurred had the Systems been operating as separate independent companies.
2. ACQUISITIONS
In April 1994, HCTC simultaneously closed on various purchase, sale and
exchange agreements which ultimately resulted in HCTC (i) acquiring a majority
interest (90.55%) in the non-wireline FCC Operating License of the Cumberland
MSA, (ii) acquiring the non-wireline FCC Operating License of the Hagerstown MSA
together with certain operating assets, in exchange for substantially all of the
assets of the eastern portion of Bedford, and (iii) making a net payment of $4.2
million in cash. Simultaneously, HCTC contributed the Operating License to
Cumberland and contributed the Operating License to Hagerstown in exchange for a
99.0% interest in Hagerstown and KCCGP obtained a 1.0% interest in Hagerstown.
Effective January 1, 1995, the operations of Frederick and Bedford were
merged into Hagerstown. As part of the market consolidation, the general partner
interests were reorganized. KCCGP acquired an additional .9% interest in
Frederick (resulting in a 1% general partner ownership), reducing HCTC's Limited
Partnership interest to 99%. The additional partner contribution was based on
the estimated fair market value of the Frederick System.
All of the Company's acquisitions were accounted for under the purchase
method of accounting; accordingly, assets acquired and liabilities assumed have
been recorded at their estimated fair market values at the dates of acquisition
and their results of operations are included in the accompanying combined
statements of operations since the date of acquisition. The accompanying
financial statements
F-44
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. ACQUISITIONS (CONTINUED)
exclude the results of operations of the eastern portion of Bedford. The excess
of purchase price over the fair market value of identifiable net tangible assets
acquired has been allocated to customer lists and licenses. Pro forma results of
operations for 1994, assuming the acquisitions of Hagerstown and Cumberland
occurred on January 1, 1994, would not differ materially from reported results.
3. ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are carried at the lower of cost (using the first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives (three to twelve years) using the straight-line method.
Depreciation expense amounted to approximately $1,143,000 in 1994,
$1,237,000 in 1995, and $1,405,000 in 1996.
LICENSES
Licenses primarily represent the acquisition costs of the Operating
Licenses. Such costs are being amortized over a period of 40 years using the
straight-line method.
The Systems periodically review the carrying value of their licenses to
determine whether such amounts are recoverable based on undiscounted future cash
flows and whether a reduction to fair value is necessary. There have been no
such reductions through December 31, 1996.
ADVANCES FROM AFFILIATES
Advances from affiliates primarily represent cash advances from HCTC and
KCCGP which provided funds for investing and operating activities, and have no
specific repayment terms. Interest expense is charged monthly at a rate of
11-3/8% of the ending balances payable to HCTC.
REVENUE AND EXPENSE RECOGNITION
Cellular airtime revenue and access charges are recognized as service is
provided. Cellular airtime is billed in arrears and access charges are billed in
advance. Subscriber acquisition costs (mainly commissions and loss on equipment
sales) are expensed when incurred. Accounts receivable consist mainly of amounts
due from subscribers and other cellular companies whose subscribers use the
Systems' cellular service.
F-45
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. ACCOUNTING POLICIES (CONTINUED)
Approximately 40% of the 1996 roaming revenues were generated from
subscribers of a cellular company serving an adjacent market when such
subscribers place or receive calls on the Company's system.
ADVERTISING EXPENSES
Advertising expenses are charged to operations as incurred and amounted to
approximately $256,100 in 1994, $394,400 in 1995, and $512,000 in 1996.
ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Property, sales, and excise taxes..................................... $ 128,400 $ 112,800
Interconnection and other billing costs............................... 68,400 63,500
Salaries and bonuses.................................................. 118,900 139,100
LPAR compensation..................................................... -- 275,000
Other................................................................. 353,700 378,400
---------- ----------
$ 669,400 $ 968,800
---------- ----------
---------- ----------
</TABLE>
INCOME TAXES
The legal entities under which the Systems operate are partnerships
organized under the laws of Delaware. Accordingly, federal and state income
taxes are not paid at the partnership level but by the ultimate partners. The
tax basis of the Systems' assets amounted to approximately $28.8 million and $30
million at December 31, 1995 and 1996, respectively.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The impact of adopting this Statement in 1996 was not material
to the financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective for
fiscal years beginning after December 15, 1995. SFAS 123 provides companies with
a choice to follow the provisions of SFAS 123 in determining stock-based
compensation expense or to continue with the provisions of APB 25, "Accounting
for Stock Issued to Employees." Although the Selected Systems expect to continue
to follow APB 25, Statement 123 would have no effect on the combined financial
statements for the periods indicated (see Note 6).
F-46
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. COMMITMENTS AND CONTINGENCIES
The Systems lease office space, office equipment, and cellular sites and
facilities under operating leases with initial terms ranging from 1 to 20 years.
Most cellular sites contain renewal options ranging up to 25 years.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consisted of the following amounts as of December 31,
1996:
<TABLE>
<CAPTION>
CELLULAR
SITES OTHER
---------- ------------
<S> <C> <C>
1997................................................................ $ 87,000 $ 353,000
1998................................................................ 89,000 289,000
1999................................................................ 65,000 244,000
2000................................................................ 61,000 197,000
2001................................................................ 41,000 --
Thereafter.......................................................... 281,000 --
---------- ------------
Total minimum lease payments........................................ $ 624,000 $ 1,083,000
---------- ------------
---------- ------------
</TABLE>
Rental expense amounted to approximately $251,100 in 1994, $336,500 in 1995,
and $389,800 in 1996.
5. RELATED PARTY TRANSACTIONS
KCCGP provides various administrative services to the Systems, including
accounting, engineering, and marketing and advertising services, in addition to
funding working capital requirements and capital expenditures as necessary.
These expenses are charged, first on the basis of direct usage when
identifiable, with the remainder allocated equally among its operating systems.
Allocated expenses amounted to $107,000 for the year ended December 31, 1994,
and $50,000 for each of the years ended December 31, 1995 and 1996.
6. BENEFIT PLANS
HCTC has granted certain officers of the Selected Systems limited
partnership appreciation rights in HCTC pursuant to a Limited Partnership Unit
Appreciation Rights Plan ("LPAR Plan"), as amended, that was adopted September
1, 1994 to be effective January 1, 1993. Upon the occurrence of certain events
as specified therein ("Termination Events"), participants are entitled to share
in the amounts, if any, of distributions to HCTC's partners after all capital
contributions made by HCTC's partners have been repaid, together with a fixed
return on such contributions. Such rights vest over a period of five years;
however, vesting is automatically accelerated upon the occurrence of a
Termination Event. LPAR Plan compensation expense of $275,000 has been
recognized and included in accrued expenses as of December 31, 1996, which is
the LPAR Plan amount attributable to participants who are employees of the
Selected Systems.
Effective July 1, 1994, KCCGP established an employee savings plan (the
"Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code. Under the Plan, which covers employees of the
Selected Systems who have met certain eligibility requirements, participating
F-47
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. BENEFIT PLANS (CONTINUED)
employees may defer up to 15% of their pretax earnings, up to the Internal
Revenue Service annual contribution limit ($9,500 for calendar year 1996). The
Company matches up to 50% of the employee's contributions, up to a maximum of 3%
of the employee's earnings. Employees who participate in the LPAR Plan are
excluded from matching contributions. Matching Plan contributions, which vest
equally over five years, amounted to approximately $7,600 in 1994, $10,100 in
1995, and $17,600 in 1996.
7. SUBSEQUENT EVENTS
On November 19, 1996, the Company entered into a definitive agreement to
sell the FCC Operating Licenses of the Selected Systems, together with certain
operating assets and liabilities, to Dobson Cellular of Maryland, Inc. for
approximately $75 million, subject to adjustment. The combined financial
statements do not reflect either the estimated gain, or any expenses incurred or
expected to be incurred related to the sale of the systems. The sale is expected
to close in February of 1997, and is subject to certain regulatory and other
approvals.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Gila River Cellular General Partnership:
We have audited the accompanying balance sheets of Gila River Cellular
General Partnership (an Arizona general partnership) as of December 31, 1996 and
1995, and the related statements of operations, changes in partners' capital and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gila River Cellular General
Partnership as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 10, 1997
F-49
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2)............................................... $ 1,569,595 $ --
Accounts receivable, net of allowance of $159,707 and $58,696, respectively...... 849,026 503,165
Inventories (Note 2)............................................................. 27,645 32,551
Prepaid expenses................................................................. 107 555
------------- -------------
Total current assets........................................................... 2,446,373 536,271
------------- -------------
Property and Equipment (Notes 2 and 5):
Cellular systems................................................................. 10,363,236 10,218,397
Furniture and equipment.......................................................... 5,354 5,354
Construction in progress......................................................... 466,707 178,687
------------- -------------
10,835,297 10,402,438
Less accumulated depreciation and amortization................................... (2,605,661) (1,361,443)
------------- -------------
8,229,636 9,040,995
------------- -------------
Total assets................................................................... $ 10,676,009 $ 9,577,266
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable................................................................. $ 614,134 $ 170,867
Accrued liabilities.............................................................. 415,006 762,799
Advance billings and deposits (Note 2)........................................... 97,915 80,964
Due to general partner (Notes 2 and 4)........................................... -- 2,111,267
------------- -------------
Total current liabilities...................................................... 1,127,055 3,125,897
Long term liabilities.............................................................. 8,002 8,002
Commitments (Note 3) -- --
Partners' capital.................................................................. 9,540,952 6,443,367
------------- -------------
Total liabilities and partners' capital........................................ $ 10,676,009 $ 9,577,266
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (Note 2)
Cellular service...................................................... $ 2,151,888 $ 1,286,901 $ 906,882
Cellular equipment.................................................... 275,346 226,193 258,582
Roaming and other..................................................... 5,583,073 4,230,127 2,437,233
------------ ------------ ------------
Total revenues...................................................... 8,010,307 5,743,221 3,602,697
------------ ------------ ------------
Operating Expenses (Notes 2 and 4):
Cost of cellular service.............................................. 993,086 531,380 373,159
Cost of cellular equipment............................................ 350,028 264,037 269,986
Selling............................................................... 1,080,862 708,545 419,683
General and administrative............................................ 1,208,123 911,065 596,117
Depreciation and amortization......................................... 1,244,204 926,995 320,727
------------ ------------ ------------
Total operating expenses............................................ 4,876,303 3,342,022 1,979,672
------------ ------------ ------------
Operating income........................................................ 3,134,004 2,401,199 1,623,025
Other (expense) income (Note 2)......................................... (36,419) (50,024) 24,251
------------ ------------ ------------
Net income........................................................ $ 3,097,585 $ 2,351,175 $ 1,647,276
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
BEGINNING BALANCE TRANSFER OF BALANCE ADJUSTED BALANCE
OWNERSHIP DEC. 31, INTEREST DEC. 31, OWNERSHIP DEC. 31,
INTEREST 1993 NET INCOME (NOTE 1) 1994 INTEREST NET INCOME 1995
----------- --------- ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Partners:
Gila River Telecommuni-
cations, Inc......... 40.00% $ 977,966 $ 658,910 $ 79,799 $1,716,675 41.9500% $ 986,318 $2,702,993
Tohono O'odham Utility
Authority............ 23.00% 562,331 378,874 (30,590) 910,615 22.2525% 523,195 1,433,810
Aztel, Inc............. 23.00% 562,331 378,874 (30,590) 910,615 22.2525% 523,195 1,433,810
U S WEST NewVector
Group, Inc........... 14.00% 342,288 230,618 (18,619) 554,287 13.5450% 318,467 872,754
----------- --------- ----------- ----------- --------- ----------- ----------- ---------
100.00% $2,444,916 $1,647,276 $ -- $4,092,192 100.0000% $2,351,175 $6,443,367
----------- --------- ----------- ----------- --------- ----------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ----------- ---------
<CAPTION>
BALANCE
DEC. 31,
NET INCOME 1996
----------- ---------
<S> <C> <C>
General Partners:
Gila River Telecommuni-
cations, Inc......... $1,299,437 $4,002,430
Tohono O'odham Utility
Authority............ 689,290 2,123,100
Aztel, Inc............. 689,290 2,123,100
U S WEST NewVector
Group, Inc........... 419,568 1,292,322
----------- ---------
$3,097,585 $9,540,952
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................................................... $ 3,097,585 $ 2,351,175 $ 1,647,276
------------- ------------- -------------
Adjustments to net income:
Depreciation and amortization...................................... 1,244,204 926,995 320,727
Changes in current assets and current liabilities:
Accounts receivable, net......................................... (345,861) (143,655) (139,488)
Inventories...................................................... 4,906 (3,259) (9,171)
Accounts payable................................................. 35,995 10,260 62,289
Accrued liabilities.............................................. (347,793) 663,163 99,636
Advance billings and deposits.................................... 16,951 33,632 22,220
Prepaid expenses................................................. 448 (249) (306)
Other............................................................ -- -- (20,389)
------------- ------------- -------------
Total adjustments................................................ 608,850 1,486,887 335,518
------------- ------------- -------------
Cash provided by operations...................................... 3,706,435 3,838,062 1,982,794
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of property and equipment................................. (25,573) (7,090,057) (1,381,306)
Cash received on disposition of property and equipment............. -- 525,000 --
------------- ------------- -------------
Cash used for investing activities............................... (25,573) (6,565,057) (1,381,306)
------------- ------------- -------------
FINANCING ACTIVITIES:
(Payments to) advances from general partner........................ (2,111,267) 2,111,267 --
------------- ------------- -------------
Cash (used for) provided by financing activities................. (2,111,267) 2,111,267 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease).......................................... 1,569,595 (615,728) 601,488
Beginning balance................................................ -- 615,728 14,240
------------- ------------- -------------
Ending balance................................................... $ 1,569,595 $ -- $ 615,728
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION
Gila River Cellular General Partnership (an Arizona general partnership) was
formed on September 1, 1990, to fund, establish and provide cellular
telecommunication services to customers within the geographical area between the
cities of Phoenix and Tucson, Arizona known as the Gila Rural Statistical Area
("RSA") Number 5 (corridor). Gila River Telecommunications, Inc., Tohono O'odham
Utility Authority (a subsidiary organization of the Tohono O'odham Nation), and
Aztel, Inc. participate as general partners. U S WEST NewVector Group, Inc.
participates as the managing general partner.
Effective December 31, 1994, the partners of Gila River Cellular General
Partnership entered into a definitive agreement to amend the Partnership
Agreement to incorporate the geographical service area of Arizona RSA Number 5
(non-corridor) served by a separate partnership of Gila River
Telecommunications, Inc., Tohono O'odham Utility Authority and Aztel, Inc. As a
result of this transaction, the ownership interest of the general partners of
Gila River Cellular General Partnership has been revised as reflected in the
accompanying financial statements.
In late 1996, Dobson Communications Corporation ("Dobson") and the general
partners signed a letter of intent wherein Dobson agreed to purchase the
interests of the general partners. Upon completion of the transaction, which is
expected to occur in the first half of 1997, Dobson and the Gila River Indian
Community will have a 100% interest in Arizona RSA Number 5. At Dobson's option,
during the sales transition and post-transition periods, Dobson may purchase
services from the managing general partner similar to those discussed in Note 4.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts which are readily convertible into
cash and which are not subject to significant risk from fluctuations in interest
rates.
INVENTORIES
Inventories are stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventories consist of cellular mobile telephone
equipment that is purchased by the Partnership primarily for sale to customers.
PROPERTY, EQUIPMENT AND DEPRECIATION
The Partnership's investment in property and equipment is stated at cost
less accumulated depreciation. Interest incurred during construction is
capitalized and amortized over the life of the underlying asset. Interest of
$9,216, $163,427 and $2,404 was capitalized during the years ended December 31,
1996, 1995 and 1994, respectively. The cost of these assets includes purchased
materials, contracted services, internal labor and applicable overhead.
F-54
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation is calculated on a straight-line basis over the following
estimated economic life of the assets:
<TABLE>
<S> <C>
3 to 20
Cellular systems.............................. years
Furniture and equipment....................... 3 to 5 years
</TABLE>
INCOME TAXES
Under provisions of the Internal Revenue Code, the partners include their
respective share of Partnership income or loss in their individual tax returns.
Accordingly, no provision for income taxes has been made in the accompanying
financial statements.
MANAGING GENERAL PARTNER FINANCING
The managing general partner advances funds to the Partnership as necessary
to finance operations and network construction. Interest is charged to the
Partnership on these advances at a rate equivalent with U S WEST NewVector
Group, Inc.'s borrowing rate which averaged 8.1% for the year ended December 31,
1996 and 7.5% for the years ended December 31, 1995 and 1994. Interest expense
incurred and paid, net of amounts capitalized for the years ended December 31,
1996, 1995 and 1994 was $50,098, $50,024 and $0, respectively.
REVENUES
The Partnership earns cellular service revenue by providing access to the
cellular network (access revenue) and for use of the network (airtime revenue).
Access revenue is billed one month in advance. Airtime and access revenues are
recognized when the service is provided.
ADVERTISING COSTS
Costs incurred for advertising are expensed as incurred.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with 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 amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain reclassifications have been made to the prior year's financial
statements in order to present them on a basis consistent with that of the
current year.
F-55
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
3. COMMITMENTS:
OPERATING LEASES
Future minimum rental payments required under operating leases for real
estate that have initial or remaining noncancelable lease terms ending after
December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 91,086
1998.............................................. 80,038
1999.............................................. 67,769
2000.............................................. 19,090
2001.............................................. 180
---------
Total............................................. $ 258,163
---------
---------
</TABLE>
Leases for real estate provide for renewal at various intervals with
provision for increased rents at each renewal.Rental expense for the years ended
December 31, 1996, 1995 and 1994 was $91,663, $103,604 and $51,809,
respectively.
4. RELATED PARTY TRANSACTIONS
In accordance with the Partnership Agreement, the managing general partner
provides many services to the Partnership as well as to other cellular
partnerships. These include legal, financial, engineering, operations, marketing
and accounting services. Costs for performing these services are charged to the
Partnership primarily on the basis of the managing general partner's time and
effort incurred on behalf of the Partnership for each activity.The Partnership
incurred costs from the managing general partner for the years ended December
31, 1996, 1995, and 1994 of $986,301, $848,279 and $529,924, respectively.
The Partnership purchases telecommunication services from an affiliate of
the managing general partner. Purchases for the years ended December 31, 1996,
1995 and 1994 were $289,404, $175,641 and $80,840, respectively.
The managing general partner provides switching services to the Partnership.
The Partnership was charged $196,202, $97,220 and $58,266 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Partnership utilizes digital transmission facilities from a U S WEST
NewVector Group, Inc. managed partnership. The Partnership was charged $4,380
for these services during the year ended December 31, 1996 and $0 for the two
years ended December 31, 1995 and 1994.
5. UPGRADE OF CELLULAR SYSTEM
During 1993, the Partnership decided to replace substantially all of its
cellular network equipment consisting primarily of cell site electronics. The
Partnership recorded a reserve of $460,000 in connection with this transaction
in order to reduce the cellular equipment to its net realizable value. During
the fourth quarter of 1995, assets with a book value of $1,132,394 and
accumulated depreciation of $200,153 were replaced in connection with the
upgrade. As part of this transaction, the Partnership's displaced cellular
equipment was transferred to the managing general partner at its fair market
value of $525,000.
F-56
