<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to __________
Commission File No. 333-23769
DOBSON COMMUNICATIONS CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1110531
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13439 North Broadway Extension
Suite 200
Oklahoma City, Oklahoma 73114
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(405) 391-8500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---
At May 8, 1998, there were 473,152 shares of the registrant's $1.00 par
value Class A Common Stock outstanding.
<PAGE>
DOBSON COMMUNICATIONS CORPORATION
Index to Form 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
Page
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk. . . . . 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . 21
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 21
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 21
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
ASSETS March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,602,320 $ 3,006,668
Restricted cash and investments 18,034,596 17,561,231
Accounts receivable, net 21,331,588 15,795,919
Receivables - affiliates 629,252 633,146
Other current assets 4,169,353 4,793,398
------------ ------------
Total current assets 51,767,109 41,790,362
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net 89,659,621 88,350,278
------------ ------------
OTHER ASSETS:
Receivables - affiliates 6,231,075 6,381,389
Restricted investments 9,216,202 9,216,202
Excess purchase price over book value
of assets acquired, net 2,652,393 2,676,203
Cellular license acquisition costs, net 255,902,436 206,694,474
Deferred costs, net 18,214,458 11,012,755
Other intangibles, net 9,198,116 9,328,031
Investments in unconsolidated
subsidiaries and other 11,818,415 7,764,566
------------ ------------
Total other assets 313,233,095 253,073,620
------------ ------------
Total assets $454,659,825 $383,214,260
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
<TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 12,430,680 $ 12,839,605
Accrued expenses 10,507,550 7,845,401
Accrued dividends payable 5,911,044 1,595,238
Current portion of long-term debt 1,198,214 1,140,824
Deferred revenue and customer deposits 2,139,996 2,046,956
------------ ------------
Total current liabilities 32,187,484 25,468,024
LONG-TERM DEBT, net of current portion 269,221,068 363,068,594
DEFERRED CREDITS 1,467,793 2,872,817
MINORITY INTERESTS 17,415,833 16,954,165
SENIOR EXCHANGEABLE PREFERRED STOCK 175,000,000 -
CLASS B CONVERTIBLE PREFERRED STOCK 10,000,000 10,000,000
CLASS C PREFERRED STOCK 1,623,329 1,623,329
STOCKHOLDERS' DEFICIT:
Class A Preferred Stock 100,000 100,000
Class A Common Stock, $1 par value 1,000,000
shares authorized and 473,152 shares issued
and outstanding 473,152 473,152
Paid-in capital 5,508,285 5,508,285
Retained deficit (46,324,119) (30,841,106)
------------ ------------
(40,242,682) (24,759,669)
Less-
Class A Preferred Stock owned by Dobson Telephone (100,000) (100,000)
Class A Common Stock held in treasury, at cost (11,913,000) (11,913,000)
------------ ------------
Total stockholders' deficit (52,255,682) (36,772,669)
------------ ------------
Total liabilities and stockholders' deficit $454,659,825 $383,214,260
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three months ended
March 31,
1998 1997
------------ -----------
<S> <C> <C>
OPERATING REVENUES:
Wireless revenue $ 22,674,303 $ 9,796,562
Wireline revenue 4,854,268 4,376,440
Other 9,027 170,328
------------ -----------
Total operating revenues 27,537,598 14,343,330
------------ -----------
OPERATING EXPENSES:
Wireless cost of service 6,006,033 2,603,457
Wireline cost of service 1,491,085 655,594
Marketing and selling 5,658,589 1,577,256
General and administrative 6,334,723 3,911,496
Depreciation and amortization 8,014,314 3,596,012
------------ -----------
Total operating expenses 27,504,744 12,343,815
------------ -----------
OPERATING INCOME(LOSS): 32,854 1,999,515
OTHER INCOME (EXPENSE):
Interest income 1,933,444 248,751
Interest expense (9,088,435) (3,901,925)
Other 75,813 21,990
------------ -----------
Total other expense, net (7,079,178) (3,631,184)
LOSS BEFORE MINORITY INTERESTS IN INCOME OF
SUBSIDIARIES, INCOME TAXES, EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (7,046,324) (1,631,669)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES (632,044) (242,738)
------------ -----------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (7,678,368) (1,874,407)
INCOME TAX BENEFIT 463,000 74,976
------------ -----------
LOSS BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (7,215,368) (1,799,431)
EXTRAORDINARY EXPENSE, net of income tax
benefit of $196,000 in 1998 and $93,887 in 1997 (3,118,439) (2,403,711)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of income tax benefit of
$450,000 in 1998 (712,629) -
------------ -----------
NET LOSS (11,046,436) (4,203,142)
DIVIDENDS ON PREFERRED STOCK (4,436,577) (199,056)
------------ -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(15,483,013) $(4,402,198)
------------ -----------
------------ -----------
BASIC NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE
Before extraordinary expense and
cumulative effect of change in
accounting principle (24.62) (4.22)
Extraordinary expense (6.59)
Cumulative effect of change in
accounting principle (1.51) (5.08)
------------ -----------
BASIC NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE $ (32.72) $ (9.30)
------------ -----------
------------ -----------
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 473,152 473,152
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Three months ended March 31,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,046,436) $ (4,203,142)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 8,014,314 3,596,012
Amortization of bond premium and financing cost 475,694 -
Deferred income taxes and investment tax
credits, net (1,405,024) 18,426
Loss on disposition of assets 751 -
Extraordinary loss on financing cost 3,314,439 2,497,598
Cumulative effect of change in accounting
principle 1,162,629 -
Minority interests in income of subsidiaries 632,044 253,421
Changes in current assets and liabilities-
Accounts receivable (2,631,621) (313,776)
Other current assets 496,120 1,506,386
Accounts payable (477,916) 1,413,091
Accrued expenses 2,606,181 1,575,437
Deferred revenue and customer deposits 81,039
------------- -------------
Net cash provided by operating activities 1,222,214 6,343,453
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,866,182) (2,363,168)
Acquisitions of selected cellular systems (54,313,226) (145,706,412)
Customer lists (125,417) (5,106,640)
Decrease (increase) in receivables - affiliate 154,208 225,152
Acquisition escrow deposit (6,026,755) 1,583,706
Investments in unconsolidated subsidiaries and
other (1,148,887) (532,610)
Proceeds on sale of assets 6,700 -
------------- -------------
Net cash used in investing activities (65,319,559) (151,899,972)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 78,000,000 205,250,000
Repayments of long-term debt (171,790,136) (265,524)
Cash dividends - (7,832,676)
Issuance of preferred stock 175,000,000 -
Purchase of restricted investments - (38,639,295)
Interest from restricted investments (473,365) -
Deferred financing costs (12,043,502) (9,123,128)
------------- -------------
Net cash provided by financing activities 68,692,997 146,891,779
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,595,652 1,335,260
CASH AND CASH EQUIVALENTS, beginning of period 3,006,668 1,609,221
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 7,602,320 $ 2,944,481
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
The condensed consolidated balance sheets of Dobson Communications Corporation
("DCC") and subsidiaries (collectively with DCC, "the Company") as of March 31,
1998 and December 31, 1997, the condensed consolidated statements of operations
for the three months ended March 31, 1998 and 1997, the condensed consolidated
statement of stockholders' deficit for the three months ended March 31, 1998,
and the condensed consolidated statements of cash flows for the three months
ended March 31, 1998 and 1997 are unaudited. In the opinion of management, such
financial statements include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of financial position,
results of operations, and cash flows for the periods presented.
The condensed balance sheet data at December 31, 1997 was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. The financial statements presented herein
should be read in connection with the Company's December 31, 1997 consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
1. ORGANIZATION
The Company was organized in 1936 as Dobson Telephone Company and adopted its
current organizational structure in 1998. The Company operates in two business
segments: wireless and wireline.
1997 REORGANIZATION
DCC was incorporated as an Oklahoma corporation in February 1997. Under an
Agreement and Plan of Reorganization effective February 28, 1997 ("1997
Reorganization"). Under this plan, DCC acquired all of the outstanding Class A
Common Stock, Class C Common Stock and Class B Convertible Preferred Stock of
Dobson Operating Company ("DOC"). In exchange, the holders of the Class A Common
Stock and Class B Convertible Preferred Stock of DOC received equivalent shares
of stock of DCC. The holders of Class C Common Stock received 100,000 shares of
Class A Preferred Stock of DCC. In addition, DCC assumed all DOC outstanding
stock options, substituting shares of DCC Class B Common Stock for the DOC stock
subject to options. As a result of the 1997 Reorganization, DCC became the
parent company of DOC and the stock of certain subsidiaries of DOC was
distributed to DCC.
1998 REORGANIZATION
In conjunction with the January, 1998 issuance of 175,000 shares of 12.25%
Senior Exchangeable Preferred Stock mandatorily redeemable in 2008 (see Note 4),
the Company formed three new subsidiaries: Dobson Cellular Operating
<PAGE>
Company ("DCOC"), DOC Cellular Subsidiary Company ("DOC Cellular Subsidiary")
and Dobson Wireline Company ("DWC") (collectively, the "1998 Reorganization").
DCOC was created as the holding company for subsidiaries formed to effect
certain cellular acquisitions. DCOC has been designated an unrestricted
subsidiary under the Senior Note Indenture which covers the Senior Notes
discussed in Note 3. DOC Cellular Subsidiary was created as the holding
company for the then existing cellular subsidiaries. DWC was created as the
holding company for the Company's ILEC, fiber and CLEC operations. DWC
was designated an unrestricted subsidiary under the Senior Note Indenture and
the Certificate of Designation establishing the Senior Exchangeable Preferred
Stock.
2. ACQUISITIONS OF SELECTED CELLULAR SYSTEMS
RECENT ACQUISITIONS
On January 26, 1998, the Company purchased the FCC cellular license for, and
certain assets relating to, the Texas RSA 16 for $56.6 million. The property is
located in south-central Texas in an area bordered by Austin, Houston and San
Antonio.
On October 1, 1997, the Company purchased for $39.8 million a 75% interest in
the Gila River Cellular General Partnership (the "Arizona 5 Partnership"), which
owns the cellular license for Arizona RSA 5 as well as the associated tangible
operating assets. Certain affiliates of the Company indirectly owned a 20.6%
interest in the Arizona 5 Partnership and received approximately $9.5 million in
connection with the acquisition. In addition, the Company loaned $5.2 million
to the current partner which acquired the remaining 25% interest in the Arizona
5 Partnership.
On March 3, 1997, the Company purchased the FCC cellular license for, and
certain assets relating to Maryland RSA 2 for $75.8 million. The property is
located to the east of the Washington/Baltimore metropolitan area. This
acquisition and the one completed on February 28, 1997 are referred to together
as the "Maryland/Pennsylvania Acquisition".
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 $77.6 million. The properties are located immediately outside
the Washington/Baltimore metropolitan area.
The acquisition transactions were accounted for as purchases and, accordingly,
their results of operations have been included in the accompanying consolidated
statements of operations from the respective dates of acquisition. The
unaudited pro forma information set forth below includes the 1998 acquisitions
and 1997 acquisitions accounted for as if the purchases occurred at the
beginning of the respective periods presented. The unaudited pro forma
information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved
had the acquisitions been consummated at that time:
<PAGE>
<TABLE>
Three Months
Ended March 31,
---------------------------
1998 1997
------------ -----------
(Unaudited)
<S> <C> <C>
Operating revenue $ 28,853,777 $24,718,829
Loss before
extraordinary items and
cumulative effect of
change in accounting
principle (7,548,167) (4,741,260)
Net loss (10,916,236) (7,312,733)
Net loss applicable
to common stockholders (15,352,813) (7,511,789)
Basic net loss applicable
to common stockholders
per common share (32.45) (15.88)
</TABLE>
PENDING ACQUISITIONS
On May 6, 1998, the Company entered into a definitive agreement to purchase the
cellular license for, and certain assets relating to, the California 7 RSA for
$21.0 million. California 7 is located in the Imperial Valley south of San
Diego.
On April 1, 1998 the Company acquired for $90.9 million all of the capital stock
of the corporations that own the Cellular 2000 Partnership (the "California 4
Partnership"). The Partnership owns the cellular license and system for the
California 4 RSA. California 4 is located in northern California between Fresno
and Modesto.
On March 26, 1998, the Company entered into a definitive agreement to purchase
the common stock of American Telco, Inc. ("ATI") for approximately $130 million.
ATI is based in Houston, TX and provides telecommunications services to
customers in five major Texas markets, including Houston, Dallas, Fort Worth,
San Antonio and Austin.
On March 25, 1998, the Company entered into a definitive agreement to purchase
approximately 70% of the outstanding stock of the corporation that owns the FCC
cellular licenses for, and certain assets relating to, the Santa Cruz, CA MSA
for $25.2 million, subject to adjustment. The property is adjacent to
California RSA 4 and is located southwest of San Jose and north of the Monterey
Peninsula, on California's Pacific coastline. Management of the Company
anticipates the transaction will close late in the second quarter of 1998.
<PAGE>
3. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Revolving credit facility $ 78,000,000 $171,513,855
Senior Notes 160,000,000 160,000,000
Mortgage notes payable 28,363,078 28,639,359
Other notes payable 4,056,204 4,056,204
------------ ------------
Total debt 270,419,282 364,209,418
Less- Current maturities 1,198,214 1,140,824
------------ ------------
Total long-term debt $269,221,068 $363,068,594
------------ ------------
------------ ------------
</TABLE>
REVOLVING CREDIT FACILITY
On March 25, 1998, the Company's subsidiary, DCOC, established a $200 million
senior secured credit facility (the "DCOC Credit Facility"). DCOC's obligations
under the DCOC Credit Facility are secured by all current and future assets of
DCOC, including the Texas 16 and California 4 assets and assets acquired in
future wireless acquisitions. The Company's subsidiary, DOC, also established
a $250 million senior secured credit facility (the "Amended Bank Facility") to
replace the existing revolving credit facility established on February 28, 1997
and discussed below. The Amended Bank Facility continues to be secured by all
of DOC's stock and the stock or partnership interests of its restricted
subsidiaries and all assets of DOC and its restricted subsidiaries. The DCOC
Credit Facility and the Amended Bank Facility require the Company to maintain
certain financial ratios. The failure to maintain such ratios would constitute
an event of default, notwithstanding the Company's ability to meet its debt
service obligations. Interest on borrowings under the new credit agreements
accrue at variable rates (weighted average rate of 7.19% at March 31, 1998).
Initial proceeds were used primarily to refinance existing indebtedness and
finance the 1998 acquisitions described above. The Company expects to use the
remaining availability to finance capital expenditures, consummate future
acquisitions and fund general corporate operations. The facilities will
terminate in 2006.
In connection with the closing of the Amended Bank Facility, the Company
extinguished its then existing credit facility and recognized a pretax loss of
approximately $3.3 million as a result of writing off previously capitalized
financing costs associated with the revolving credit facility. Such amount is
included in the Company's condensed consolidated statement of operations, net of
tax, for the three months ended March 31, 1998 as an extraordinary expense.
<PAGE>
In April 1997, the Company entered into an interest rate hedge agreement to
hedge the Company's interest expense on its indebtedness under the revolving
credit facility. The existing hedge agreement continues to be in effect for
both the DCOC Credit Facility and the Amended Bank Facility. The agreement
provides for a rate cap of 8% plus a factor, based on the Company's leverage
ratio (cap at March 31, 1998 was 9.625%), terminating on the earlier of April
24, 2000 or the date an option to enter into an interest rate swap transaction
is exercised by the counterparty. Under the swap agreement, the interest rate
would be fixed at 6.13% plus the factor used to determine the rate cap or a
floating LIBOR rate, terminating on April 24, 2002. The Company accounts for
this as a hedge.
On February 28, 1997, the Company's bank credit agreement was amended and
restated to provide the Company with a $200 million revolving credit agreement
facility maturing in 2005. Interest on borrowings under the new credit
agreement accrued at a variable rate. Initial proceeds were used to refinance
existing indebtedness, finance the February and March 1997 acquisitions
described above and for general corporate purposes, including $7.5 million to
pay a dividend to holders of its Class A Common Stock. In connection with the
closing of the revolving credit facility, the Company extinguished its then
existing credit facility, and recognized a pretax loss of approximately $2.5
million as a result of writing off previously capitalized financing costs
associated with the old revolving credit facility. This loss has been reflected
as an extraordinary item, net of tax, in the Company's condensed consolidated
statement of operations for the three months ended March 31, 1997.
SENIOR NOTES
On February 28, 1997, the Company issued $160 million of 11.75% Senior Notes
maturing in 2007. The net proceeds were used to finance the
Maryland/Pennsylvania Acquisition described above and to purchase securities
pledged to secure payment of the first four semi-annual interest payments on the
notes, which began on October 15, 1997. The pledged securities are reflected as
restricted cash and investments in the Company's balance sheet. The senior
notes are redeemable at the option of the Company in whole or in part, on or
after April 15, 2002, initially at 105.875%. Prior to April 15, 2000, the
Company may redeem up to 35% of the principal amount of the senior notes at
111.750% with proceeds from sales of stock, provided that after any such
redemption at least $104 million remains outstanding.
4. PREFERRED STOCK
In January 1998, the Company issued 175,000 shares of 12.25% senior exchangeable
preferred stock mandatorily redeemable in 2008 for $1,000 per share. Holders of
the preferred stock are entitled to cumulative dividends from the date of
issuance and a liquidation preference over the other classes of capital stock.
Additionally, the preferred stock is redeemable at the option of the Company on
or after January 15, 2003. Holders of the preferred stock have no voting
rights.
<PAGE>
5. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of an interest pledge deposit of
approximately $27.3 million.
6. TAXES
The income tax benefit for the three months ended March 31, 1998 and 1997 differ
from amounts computed at the statutory rate due primarily to net operating
losses for which no benefit has been recognized.
7. EARNINGS PER COMMON SHARE
Basic loss per common share is computed by the weighted average number of shares
of common stock outstanding during the year. Diluted net loss per common share
has been omitted because the impact of stock options and convertible preferred
stock on the Company's net loss per common share is anti-dillutive.
8. RECENT PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities,"
effective for fiscal years beginning after December 15, 1998, with earlier
application encouraged. The Company adopted SOP 98-5 as of January 1, 1998.
SOP 98-5 requires costs of start-up activities and organization costs to be
expensed as incurred. The Company has recognized a pretax loss of approximately
$1.2 million as a result of adopting this SOP. This loss has been reflected as a
cumulative effect of change in accounting principle, net of tax, in the
accompanying condensed consolidated statement of operations.
9. REPORT OF BUSINESS SEGMENTS
The Company operates in two reportable segments: Wireless Telecommunications
and Wireline Telecommunications. These segments are strategic business units
that offer different products and services. The segments are managed separately
because each business requires different technology and marketing strategies.
The Company evaluates and measures performance of each segment based on
operating cash flow. The Company accounts for intersegment sales and transfers
as if the sales or transfers were to third parties, that is, at current market
prices. The Company allocates corporate overhead, income taxes, interest
expense and amortization of deferred financing costs to each segment. A summary
of the Company's operations by segment is as follows:
<PAGE>
<TABLE>
Three months ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING INFORMATION:
Operating revenue-
Wireless Telecommunications
External . . . . . . . . . . . . . . . . . . . . $22,674,303 $ 9,796,562
Wireline Telecommunications
External . . . . . . . . . . . . . . . . . . . . 4,854,268 4,384,648
Intersegment . . . . . . . . . . . . . . . . . . 470,000 467,594
Other (1)
External . . . . . . . . . . . . . . . . . . . . 9,027 162,120
Intersegment . . . . . . . . . . . . . . . . . . 349,104 922,936
Intersegment revenue . . . . . . . . . . . . . . . (819,104) (1,390,530)
----------- -----------
Total operating revenue. . . . . . . . . . . . . 27,537,598 14,343,330
Income (loss) before income taxes,
extraordinary items and cumulative
effect of change in accounting principle-
Wireless Telecommunications. . . . . . . . . . . . $(6,803,173) $(2,197,232)
Wireline Telecommunications. . . . . . . . . . . . (1,670,132) 530,941
Other. . . . . . . . . . . . . . . . . . . . . . . 794,937 (208,116)
----------- -----------
Total income (loss) before income taxes,
extraordinary items and cumulative effect
of change in accounting principle . . . . . . . $(7,678,368) $(1,874,407)
----------- -----------
----------- -----------
</TABLE>
<TABLE>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INFORMATION:
Segment assets-
Wireless Telecommunications. . . . . . . . . . . . $ 350,563,223 $ 299,223,415
Wireline Telecommunications. . . . . . . . . . . . 53,376,311 56,905,807
Other unallocated assets (2) . . . . . . . . . . . 405,458,344 333,055,938
Intersegment receivables . . . . . . . . . . . . . (354,738,053) (305,970,900)
------------- -------------
Total segment assets . . . . . . . . . . . . . . $ 454,659,825 $ 383,214,260
</TABLE>
- -------------
(1) Revenue from segments below the quantitative thresholds are attributable to
two entities of the Company. Those entities include a small finance and
leasing company and a corporate holding company.
(2) Other unallocated assets primarily consist of corporate receivables from
subsidiaries, restricted cash and investments (see Note 4) and deferred
financing cost.
10. COMMITMENTS
Effective December 6, 1995 (amended December 20, 1995 and June 24, 1997), the
Company entered an equipment supply agreements in which the Company agreed to
purchase approximately $30 million of cell site and switching equipment between
June 24, 1997 and June 23, 2001, to update the cellular systems for the newly
acquired and existing MSA and RSAs. Of this commitment, approximately $13.8
million remained at March 31, 1998.
The Company entered into an additional equipment supply agreement with a second
vendor on January 13, 1998. The Company agreed to purchase approximately $81
million of cell sites and switching equipment between January 13, 1998 and
January 12, 2002 to updated the cellular systems for the newly acquired and
existing MSAs and RSAs. Of this commitment, $81 million remained at March 31,
1998.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company provides diversified telecommunication products and services. The
Company's wireless segment currently provides rural cellular telephone services
in Oklahoma and northern Texas (the "Oklahoma/Texas Cluster"), Kansas and
Missouri (the "Kansas/Missouri Cluster"), Maryland and Pennsylvania (the
"Maryland/Pennsylvania Cluster"), Arizona ("Arizona 5"), south central Texas
("Texas 16") and northern California ("California 4"). Upon consummation of the
pending wireless acquisitions described below, the Company will also own and
operate rural cellular systems in southern California. The Company's wireline
segment owns interests in, and operates, regional fiberoptic transmission
networks in Oklahoma, Texas and Colorado ("Fiber"), owns and operates local
telephone exchanges in Oklahoma ("ILEC") and recently began to resell local,
long distance and wireless services in Oklahoma City and Tulsa, Oklahoma and
Amarillo, Texas ("CLEC"). Following completion of the pending wireline
acquisition described below, the Company will also provide services in five
major Texas markets including Houston, Dallas, Fort Worth, San Antonio and
Austin.
RECENT EVENTS
On May 6, 1998, the Company entered into a definitive agreement to purchase the
FCC cellular license for, and certain assets relating to the California RSA 7
for $21.0 million, subject to adjustment. California RSA 7 is located in the
Imperial Valley south of San Diego.
On April 1, 1998, the Company acquired all of the capital stock of the
corporations which owned the Cellular 2000 Partnership. The Cellular 2000
Partnership owns the FCC cellular license and system for, and certain assets
relating to, California RSA 4. The total purchase price paid by the Company was
approximately $90.9 million, subject to adjustment. California RSA 4 is located
in northern California between Fresno and Modesto.
On March 26, 1998, the Company entered into a definitive agreement to purchase
the common stock of American Telco, Inc. and American Telco Network Services,
Inc. (collectively, "ATI") for approximately $130 million, subject to
adjustment. ATI, based in Houston, Texas provides CLEC services to primarily
commercial customers in five major Texas markets, including Houston, Dallas,
Fort Worth, San Antonio and Austin.
On March 25, 1998, the Company entered into a definitive agreement to purchase
70% of the outstanding stock of the corporation that owns the FCC cellular
license for, and the assets relating to the Santa Cruz, CA MSA for $25.2
million, subject to adjustment.
On March 25, 1998, the Company established a new $200 million senior secured
credit facility and amended its existing revolving credit facility to establish
a $250 million senior secured credit facility. A portion of the credit
facilities were used to refinance existing indebtedness. The remaining unused
portion will be used primarily to consummate acquisitions, finance capital
expenditures and fund general corporate operations. Interest on the facilities
will accrue at variable rates and will terminate in 2006.
<PAGE>
On January 26, 1998, the Company purchased the FCC cellular licenses for, and
certain assets relating to the Texas RSA 16 for $56.6 million, subject to
adjustment using proceeds from the Senior Exchangeable Preferred Stock offering.
Texas RSA #16 is located in south central Texas between Houston, San Antonio and
Austin.
On January 22, 1998, the Company issued, in a private offering, 175,000 shares
of 12.25% Senior Exchangeable Preferred Stock. The net proceeds to the Company
were approximately $167.0 million. Dividends on the Senior Exchangeable
Preferred Stock are cumulative and payable quarterly, commencing April 15, 1998,
in cash or, until January 15, 2003 at the option of the Company, in additional
shares of Senior Exchangeable Preferred Stock. The Senior Exchangeable
Preferred Stock is exchangeable, in whole but not in part, at the option of the
Company, into 12.25% Senior Subordinated Exchange Debentures due 2008. The
Company may redeem the Senior Exchangeable Preferred Stock or, if issued, the
Exchange Debentures, in whole or in part, at any time on or after January 15,
2003. In addition, at any time prior to January 15, 2001, the Company may
redeem up to 35% of the Senior Exchangeable Preferred Stock or Exchange
Debentures originally issued from the proceeds of sales of the Company's common
stock.
On October 1, 1997, the Company purchased a 75% interest in the Gila River
Cellular General Partnership (the "Arizona 5 Partnership"), which owns the
cellular license for Arizona RSA 5 as well as the associated tangible operating
assets, and Gila River Telecommunications Subsidiary, Inc. ("GRTSI") purchased a
25% interest in the Arizona 5 Partnership. As part of this transaction, the
Company purchased the stock of Associated Telecommunications and Technologies,
Inc. ("ATTI"), which owned 49% of one of the partners of the Arizona 5
Partnership (with a 41.95% interest). Of the $14.2 million purchase price for
ATTI, $9.5 million was paid to a director and the chief executive officer and
the chairman of the board of the Company, who together owned two-thirds of the
ATTI stock. Upon completion of these transactions, the Company paid a net
purchase price of $39.8 million for its 75% interest in the Arizona 5
Partnership. In addition, the Company loaned GRTSI a portion of the purchase
price for the remaining 25% interest in the Arizona 5 Partnership it acquired.
The Company also guaranteed, on a short-term basis, $10.9 million of
indebtedness of GRTSI.
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 $77.6 million. The properties are located immediately outside
the Washington/Baltimore metropolitan area. On March 3, 1997, the Company
purchased the FCC cellular license for, and certain assets relating to, Maryland
RSA #2 for $75.8 million. The property is located to the east of the
Washington/Baltimore metropolitan area. The acquired properties make-up the
"Maryland/Pennsylvania Cluster."
On February 28, 1997, the Company's bank credit agreement was amended and
restated to provide the Company with a $200 million secured revolving credit
facility maturing in 2005 ("the Bank Facility"). Interest on borrowings under
the Bank Facility accrued at variable rates. Initial loan proceeds were used to
<PAGE>
refinance existing indebtedness, finance the acquisition of the
Maryland/Pennsylvania Cluster and for general corporate purposes, including
the payment of a $7.5 million dividend to holders of the Company's Class A
Common Stock. The principal stockholder used $6.0 million of the dividend to
repay a loan which had been guaranteed by the Company and approximately $.5
million to repay indebtedness owed to the Company with respect to certain
legal fees. As a result of the $7.5 million dividend, the holders of Class B
Convertible Preferred Stock were issued 100,000 shares of Class C Preferred
Stock, having a liquidation preference of approximately $1.6 million. In
connection with the closing of the Bank Facility, the Company extinguished its
then existing credit facility. The Company financed the Arizona 5 Partnership
acquisition with borrowings under the Bank Facility.
On February 28, 1997, the Company issued pursuant to a private offering $160
million of 11.75% Senior Notes maturing in 2007 and used the net proceeds
($155.2 million) to finance the acquisitions of the Maryland/Pennsylvania
Cluster ($116.9 million) and to purchase securities ($38.4 million) which have
been pledged to secure payment of the first four semi-annual interest payments
on the notes, which begin on October 15, 1997. Except for the first four
interest payments, the senior notes are unsecured obligations of the Company,
redeemable at the option of the Company, in whole or in part, on or after April
15, 2002 at 105.875% of the principal amount outstanding, declining ratably to
100% on or after April 15, 2004, plus accrued interest. In addition, at any
time prior to April 15, 2000, the Company may redeem up to 35% of the aggregate
principal amount with the net proceeds of sales of capital stock of the Company
at 111.750% of principal amount, plus accrued interest; provided that after any
such redemption at least $104 million aggregate principal amount remains
outstanding.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
OPERATING REVENUE. For the three months ended March 31, 1998, total operating
revenue increased $13.2 million, or 92.0%, to $27.5 million from $14.3 million
for the comparable period in 1997. Total wireless, wireline and other revenue
represented 82.34%, 17.63%, and 0.03% of total operating revenue, respectively,
during the three months ended March 31, 1998 and 68.3%, 30.51%, and 1.19% of
total operating revenue, respectively, the three months ended March 31, 1997.
The following table sets forth components of the Company's wireless
wireline and other revenues:
<TABLE>
For The Three For The Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Wireless revenue:
Wireless service $12,482,482 $ 6,283,676
Wireless roaming 9,523,390 3,373,288
Wireless equipment 668,431 139,598
----------- -----------
Total: 22,674,303 9,796,562
Wireline revenue:
ILEC 3,648,978 3,574,487
Fiber 858,015 801,953
CLEC 347,275 8,208
----------- -----------
Total: 4,854,268 4,376,440
Other revenue: 9,027 162,120
----------- -----------
$27,537,598 $14,343,330
----------- -----------
----------- -----------
</TABLE>
<PAGE>
WIRELESS. The Company's operating revenue from its cellular operations
(service, roaming, and equipment) increased $12.9 million or 131.5% to $22.7
million in the first quarter of 1998, from $9.8 million in the first quarter of
1997.
Wireless service revenue increased $6.2 million, or 98.6%, to $12.5 million in
the first quarter of 1998 from $6.3 million in the first quarter 1997. Of the
increase, $3.6 million was attributable to the acquisition of the
Maryland/Pennsylvania Cluster in 1997. An additional $1.4 million was generated
by the fourth quarter 1997 acquisition of a 75% ownership in the partnership
which owns Arizona 5 ($1.4 million represents 100% of revenues generated by the
partnership in the first quarter 1998). A further $.4 million was generated by
the first quarter 1998 acquisition of Texas 16. The remaining $.8 million was
primarily attributable to increased penetration and usage in the
Maryland/Pennsylvania Cluster, Oklahoma/Texas Cluster and the Kansas/Missouri
Cluster. The Company's cellular subscriber base increased 39.9% to 110,283 at
March 31, 1998, from 78,852 at March 31, 1997. The Company added 7,537 and
approximately 4,000 subscribers, respectively, as a result of the acquisition
of Arizona 5 and Texas 16. The Company's average monthly wireless service
revenue per subscriber decreased 7.5% to $39.10 for the three months ended
March 31, 1998 from $42.28 for the comparable period in 1997 due to the
addition of new lower rate subscribers in the Maryland/Pennsylvania Cluster and
competitive market pressures.
Wireless roaming revenue increased $6.1 million, or 182.3%, to $9.5 million in
the first quarter of 1998 from $3.4 million in the first quarter of 1997. Of
the increase, $2.2 million was attributable to the acquisition of the Maryland
Cluster in 1997. An additional $1.6 million was generated by the fourth quarter
1997 acquisition of a 75% ownership in the partnership which owns Arizona 5
($1.6 million represents 100% of revenues generated by the partnership in the
first quarter 1998). A further $2.1 million was generated by the first quarter
1998 acquisition of Texas 16. The remaining $.2 million was primarily
attributable to increased roaming minutes in the Oklahoma/Texas Cluster and
Kansas/Missouri Cluster due to expanded coverage area in these markets and an
increase in cellular minutes of use.
Wireless equipment sales of $.7 million in the first quarter of 1998 represented
an increase of $.6 million or 378.8% from $.1 million in the first quarter of
1997, as the Company sold more equipment during the first quarter of 1997.
WIRELINE. Total wireline operations revenue increased $.5 million, or 10.7%, to
$4.9 million for the three months ended March 31, 1998 compared to $4.4 million
for the same period in 1997.
<PAGE>
ILEC revenue increase $.08 million or 2.1% to $3.65 million for the three months
ended March 31, 1998 compared to $3.57 million for the three months ended March
31, 1997. This increase was primarily due to an increase in toll charges and an
increase in the number of access lines served.
The Company's revenue from its fiber operations increased $.06 million, or 7.0%,
to $.86 million in the first quarter of 1998 from $.8 million in the first
quarter of 1997 primarily due to additional revenue from existing customers.
CLEC revenues of $.3 million in the first quarter of 1998 consisted primarily of
charges for local and long-distance service and equipment sales.
COST OF SERVICE AND EQUIPMENT SALES. For the three month period ended March 31,
1998, the total cost of service and equipment sales increased $4.3 million, or
136.3%, to $7.5 million from $3.2 million for the comparable period in 1997.
<TABLE>
For The Three For The Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Wireless cost of service:
Wireless service $4,830,580 $1,813,022
Wireless equipment 1,175,453 790,435
---------- ----------
Total: 6,006,033 2,603,457
Wireline cost of service:
ILEC 409,938 502,103
Fiber 210,413 153,491
CLEC 870,734 -
---------- ----------
Total: 1,491,085 655,594
---------- ----------
Total: $7,497,118 $3,259,051
---------- ----------
---------- ----------
</TABLE>
WIRELESS. Cost of wireless service increased $3.0 million, or 166.4% to $4.8
million during the three months ended March 31, 1998 from $1.8 million for the
three months ended March 31, 1997. Of the increase, $1.6 million was
attributable to the acquisition of the Maryland/Pennsylvania Cluster in 1997. An
additional $.9 million was attributable to the fourth quarter 1997 acquisition
of a 75% ownership in the partnership which owns Arizona 5 ($.9 million
represents 100% of revenues generated by the partnership in the first quarter
1998). A further $.3 million was due to the first quarter 1998 acquisition of
Texas 16. The remaining $.2 million was primarily attributable to increased
subscribers and minutes of use in the Oklahoma/Texas Cluster and Kansas/Missouri
Cluster and expanded use of rerating agreements with wireless providers adjacent
to our markets. As a percentage of cellular service and roaming revenue, cost
of wireless service increased from 18.8% in the first quarter of 1997 to 22.0%
in the first quarter of 1998. This is primarily due to the expanded use of
rerating agreements noted above, as well as additional facility lease costs
relating to the Maryland RSA 2 acquisition.
<PAGE>
Cost of wireless equipment increased $.4 million or 48.7% to $1.2 million during
the first quarter of 1998 from $.8 in the first quarter of 1997, primarily from
increases in the volume of equipment sold due to the growth in subscribers.
WIRELINE. Cost of ILEC telephone service decreased $.1 million or 18.4% to $.4
million during the first quarter of 1998 from $.5 million in the first quarter
of 1997. As a percentage of wireline telephone service revenue, cost of
wireline telephone service decreased to 11.2% in the first quarter of 1998 from
14.0% in the first quarter of 1997. This is primarily due to certain labor
costs previously charged to operating and maintaining Company facilities being
directed to projects relating to the implementation of new facilities.
Cost of fiber service increased $57 thousand or 37.3% to $210 thousand in the
first quarter of 1998 from $153 thousand in the first quarter of 1997. The
increase was the result of increased labor costs associated with operating
and maintaining the Company's facilities and costs associated with
networking, including service provided by certain third party carriers
incurred as a result of increased revenues.
CLEC operations commenced in the fourth quarter of 1997. Cost of service for
the first three months of 1998 consisted primarily of wholesale charges from
third party service providers and costs associated with the operations and
maintenance of Company facilities.
MARKETING AND SELLING COSTS. Marketing and selling costs increased
$4.1 million, or 258.8%, to $5.7 million in the first quarter of 1998 from
$1.6 million in the comparable in 1997. As a percentage of total operating
revenue, marketing and selling costs increased to 20.5% in the first quarter of
1998 from 11.0% in the first quarter of 1997. The increase was primarily due to
the higher level of cellular subscribers added period to period. Gross cellular
subscribers added in the first quarter of 1998 was approximately 10,000 with
Texas 16 making up approximately 4,000 of the gross cellular subscribers
added in the first quarter of 1998. The number of gross cellular subscribers
added in the first quarter of 1997 was 3,393. Additionally, the Company
incurred $1.6 million of marketing costs in the first quarter of 1998
associated with its recently launched CLEC operations.
GENERAL AND ADMINISTRATIVE COSTS. For the three month period ended March 31,
1998, general and administrative costs increased $2.4 million, or 62.0%, to
$6.3 million from $3.9 million for the same period in 1997. As a percentage of
total operating revenue, general and administrative costs decreased to 23.0% in
the first quarter of 1998 from 27.3% in the first quarter of 1998. The dollar
increase was primarily due to increased billing costs as a result of the growth
in cellular subscribers, the acquisition of the Maryland/Pennsylvania Cluster
and increased salary costs resulting from additional personnel in the Company's
cellular and CLEC operations. The decrease as a percentage of total operating
revenue is a result of the Company's strategy to integrate new cellular
operations in its existing management structure.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three month period ended March
31, 1998, depreciation and amortization expense increased $4.4 million or 122.9%
to $8.0 million in the first quarter of 1998 from $3.6 million in the first
quarter of 1997. Amortization of assets acquired in the
<PAGE>
Maryland/Pennsylvania Cluster accounted for a $2.0 million dollar increase
in the first quarter of 1998 compared to the same period of 1997. An
additional $1.5 million was attributable to the fourth quarter 1997
acquisition of a 75% ownership in the partnership which owns Arizona 5 ($1.5
million represents 100% of revenues generated by the partnership in the first
quarter 1998). A further $.6 million was due to the first quarter 1998
acquisition of Texas 16.
OTHER EXPENSE. For the three months ended March 31, 1998, total other expense
(consisting of interest income, interest expense and other) increased $3.4
million, or 95.0% to $7.1 million from $3.6 million for the comparable period in
1997. Interest income of $1.9 million, was a result of interest earned on
securities purchased with the proceeds from the Senior Exchangeable Preferred
Stock. For the first quarter of 1998, interest expense increased $5.2 million to
$9.1 million from $3.9 million in the comparable period of 1997. The increase
was primarily a result of increased borrowings in the first quarter 1997 to
finance the Company's cellular acquisitions.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programming being written using
two digits rather than four to define the applicable year. Any of the Company's
systems, as well as those of key suppliers and customers, that have date
sensitive logic may interpret a date using "00" as the year 1900 rather than
2000. This may result in inaccurate processing or possible system failure
causing potential disruption of operations including among other things a
temporary inability to process transactions, send invoices, supply services or
engage in similar normal business activities.
The Company has undertaken and expects to continue to undertake capital projects
with respect to its information systems, including upgrades or replacements of
the Company's accounting, personal computer and networking systems. The Company
has established processes for evaluating and managing the risks and costs
associated with the Year 2000 transition, including working with its software
vendors. The Company has identified and analyzed and continues to analyze both
internally developed and acquired software that utilizes date embedded codes
that may experience operational problems when the Year 2000 is reached. The
Company is also communicating with third party vendors of systems software and
equipment, suppliers of telecommunications capacity and equipment, customers and
others with which it does business to coordinate Year 2000 compliance.
Management is currently unable to predict the full extent to which the Year 2000
issue will affect the Company's internal systems or those of its vendors and
third party network service providers. Any failure by such vendors or third
party network service providers to resolve the Year 2000 issues on a timely
basis, or in a manner that is compatible with the Company's systems, could have
a material adverse affect on the Company. Although the Company may incur
substantial costs, particularly costs resulting from charges by its vendors or
third party network service providers, in correcting the Year 2000 issues;
however, such costs cannot currently be estimated. Additionally, such costs
will be expensed as incurred, which will have a negative effect on the current
operating results.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's Wireless Operations require substantial capital to acquire,
construct and expand cellular telephone systems and to fund operating
requirements. The Company historically has financed its Wireless Operations
through bank debt and proceeds from the sale of debt and equity. While the
Company's Wireline Operations have historically been financed through government
loans, other sources of financing will be required for the ATI acquisition
and for working capital.
At March 31, 1998, the Company had working capital of $19.6 million (a ratio of
current assets to current liabilities of 1.6:1) and a cash balance of $7.6
million, which compares to working capital of $16.3 million (a ratio of current
assets to current liabilities of 1.6:1) and a cash balance of $3.0 million at
December 31, 1997.
The Company's net cash provided by operating activities totaled $1.2 million for
the three month period ended March 31, 1998 compared to $6.3 million for the
three months ended March 31, 1997. The decrease of $5.1 million was primarily
due to the Company's increased net loss offset by an increase in depreciation in
amortization.
Cash flow used in investing activities, which totaled $65.3 million and $151.9
million in the three months ended March 31, 1998 and 1997, respectively. The
1998 investing activities principally related to the Texas 16 cellular system
acquisition and escrow deposits relating to the ATI and Santa Cruz acquisitions,
as well as capital expenditures. In 1997, investing activities consisted
primarily of the acquisitions of cellular systems in Maryland/Pennsylvania
Cluster and Arizona 5 in 1997, as well as capital expenditures. Acquisitions
accounted for $54.3 million and $155.2 million and capital expenditures were
$3.9 million and $2.4 million in the three months ended March 31, 1998 and
1997, respectively.
Net cash provided by financing activities was $68.7 million for the three months
ended March 31, 1998 compared to $146.9 million for the three months ended March
31, 1997. Financing activities in the three months ended March 31, 1998
consisted primarily of $78.0 million of proceeds from long-term debt, offset by
the repayment of $171.8 million financed through net proceeds obtained from the
issuance of $175.0 of Senior Exchangeable Preferred Stock. The Company also
incurred approximately $12.0 million of deferred financing costs in connection
with the Senior Exchangeable Preferred Stock issuance and the March 1998 credit
facilities discussed below.
In March 1998, the Company's subsidiary, Dobson Cellular Operations Company
("DCOC"), established a $200.0 million senior secured credit facility (the "DCOC
Credit Facility"). DCOC's obligations under the DCOC Credit Facility are secured
by all current and future assets of DCOC, including the Texas 16 and California
4 assets and assets acquired in any of future wireless acquisitions, and are
guaranteed by DCOC's subsidiaries. The Company's subsidiary, Dobson Operating
Company ("DOC"), established a $250.0 million senior secured credit facility
(the "Amended Bank Facility") to replace the existing Bank Facility. The
Amended Bank Facility continues to be secured by all of DOC's stock and the
stock or partnership interests of its subsidiaries and all assets of DOC and
its restricted subsidiaries. The Company and DOC's subsidiaries other than
Dobson Wireline and the Arizona 5 Partnership have guaranteed DOC's
obligations under the New Bank Facility. The DCOC Credit Facility and the
Amended Bank Facility require the Company to maintain certain financial
ratios. The failure to maintain such ratios would constitute an event of
default, notwithstanding the Company's ability to meet its debt service
obligations.
<PAGE>
The Amended Bank Facility and DCOC Credit Facility each amortize quarterly
beginning June 30, 2000 and terminate on June 30, 2006. The Company's
government loans have scheduled maturities until 2028 and the Senior Notes
mature in February 2007. Such indebtedness may need to be refinanced at their
respective maturities. 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.
In March 1998, the Company entered into a definitive agreement to purchase
the stock of ATI for approximately $130.0 million. At the time of the
agreement, the Company placed $5.0 million into an escrow account pending
closing. The Company has obtained a commitment letter for a $155.0 million
bridge facility ("Bridge Notes") to be established at Dobson Wireline
Company. The Bridge Notes will be used to finance the ATI acquisition and to
provide additional operating capital. The Bridge Notes will bear interest at
13%, increasing by 1% after six months from the issuance date and increasing
by an additional .5% at the end of each subsequent three-month period.
Interest is payable quarterly in arrears and the Bridge Notes mature one year
from the date of issuance. The Bridge Notes would be secured by
substantially all of the assets of the Dobson Wireline Company, including the
Pending Wireline Acquisitions. The Bridge Notes, if utilized, are expected
to be extinguished with proceeds from either a private debt offering to be
completed during 1998 or through the issuance of senior rollover notes (the
"Rollover Notes"). The Rollover Notes would be used in their entirety to
redeem 100% of the outstanding principal amount of the Bridge Notes. The
Rollover Notes would bear interest at a variable rate and mature ten years
after the date of issuance. The Rollover Notes would be secured with the
same assets secured under the Bridge Notes.
In April 1997, the Company entered into an interest rate hedge agreement to
hedge the Company's interest expense on its indebtedness under its existing
facility. The current hedge agrement continues to be in effect for both the
DCOC Credit Facility and the Amended Bank Facility. The agreement provides
for a rate cap of 8% plus a factor, based on the Company's leverage ratio
(cap at March 31, 1998 was 9.625%), terminating on the earlier of April 24,
2000 or the date an option to enter into an interest rate swap transaction is
exercised by the financial partner. Under the swap agreement, the interest
rate would be fixed at 6.13% plus the same factor used to determine the rate
cap or a floating LIBOR rate, terminating on April 24, 2002. The Company
accounts for this as a hedge.
The 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. Under the Company's bank credit
agreements, 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 in amounts sufficient to fund the interest and
principal payments owed by certain of its beneficial owners of its stock with
respect to debt incurred in November 1994 to purchase common stock. The Company
does not expect to pay dividends on its common stock in the foreseeable future.
<PAGE>
The Company's capital expenditures (excluding cost of acquisitions) were $3.9
million for the three month period ended March 31, 1998 and the Company expects
its capital expenditures (excluding cost of acquisitions) to be approximately
$41.2 million for 1998. Of the capital expenditures expected to be made in 1998,
$26.0 is expected to be made in the Company's wireless operations and $13.8
million is expected to be made in its wireline operations. The Company has not
budgeted any amounts to be expended in 1998 with respect to the systems which
may be acquired in the future, in any pending acquisitions or the Company's
PCS system. The amount and timing of capital expenditures may vary depending
on the rate at which the Company expands and develops its cellular systems,
whether the Company consummates additional acquisitions, whether the Company
expands its fiber optic network or CLEC operations and the adoption of new
regulations relating to support revenue.
In January 1998, the Company entered into an agreement with Lucent Technologies
Inc. ("Lucent") to purchase, over a four-year period, 300 cell sites, two
switches and certain related hardware and software. The agreement also requires
the Company to pay an annual software maintenance fee and to make certain
additional payments based on the number of subscribers added in the areas
serviced by the cell sites. The aggregate net cost to the Company under this
agreement is estimated to be $81 million, of which $8.2 million has been
budgeted for 1998.
In April 1997, the Company was granted PCS licenses in nine markets in Oklahoma,
Kansas and Missouri. The aggregate bid for these licenses was $5.1 million after
an FCC authorized discount of 15% by reason of the Company's status as a "small
business." The Company has financed $4.1 million of the purchase price with
government loans secured by liens on the PCS licenses at an annual interest rate
of 6.25%, amortizing quarterly over eight years beginning in 1999. The Company
is required to build out systems covering 25% of the population covered by each
of the PCS licenses by 2002. The Company currently anticipates that the cost to
build out the minimum PCS system will be $10.0 million to $30.0 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 bear the expense of relocating
incumbent microwave licensees, as mandated by FCC rules. The Company has not
budgeted any amounts for capital expenditures in 1998 with respect to the
buildout of a PCS system.
Although there can be no assurance, management believes the proceeds from the
sale of the Senior Exchangeable Preferred Stock, together with borrowings
under the Amended Bank Facility, the DCOC Credit Facility, the Bridge Notes
or private debt offering, cash on hand, and cash flow from operations will be
sufficient to fund the Santa Cruz, California 7, and ATI acquisitions, the
Company's capital expenditures and its working capital and debt service
requirements. The Company will require additional financing to pursue other
future acquisitions, and to meet the required PCS buildout. Sources of
additional capital may include public or private debt or equity financings,
government financing, vendor financing and a potential $75 million future
increase in commitment contemplated by the DCOC Credit Facility. There can be
no assurance that any additional financing will be available to the Company
or, if available, that it can be obtained on terms acceptable to the Company
and within the limitations contained in the Company's financing arrangements.
The successful implementation of the Company's strategy, including the
further development of its cellular systems and significant and sustained
growth in the Company's cash flows, is necessary for the Company to meet its
debt service and dividend requirements, including its obligations on the
Senior Preferred Stock.
<PAGE>
FORWARD-LOOKING STATEMENTS
The description of the Company's plans set forth above, including planned
acquisitions, are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These plans
involve a number of risks and uncertainties. The important factors that could
cause actual capital expenditures, acquisitions activity, or the Company's
performance to differ materially from the plans include, without limitation, the
Company's ability to satisfy the financial covenants of its existing debt
instruments and to raise additional capital; the Company's ability to manage its
rapid growth successfully and to compete effectively in its cellular, fiber and
resale businesses against competitors with greater financial, technical,
marketing and other resources; changes in end-user requirements and preferences;
the development of other technologies and products that may gain more commercial
acceptance than those of the Company; and adverse regulatory changes. Readers
are cautioned not to place undue reliance on these forward looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
release publicly the result of any revisions to these forward looking statements
which may be made to reflect events or circumstances after the date hereof
including, without limitation, changes in the Company's business strategy or
planned capital expenditures, as to reflect the occurrence of unanticipated
events. For further information regarding these and other risk factors, see
"Risk factors" and "Business" in the Company's Prospectus dated May 14, 1997
filed with the Securities and Exchange Commission under Rule 424(b) of the
Securities Act of 1933.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- - Not applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - Not applicable
ITEM 2. CHANGES IN SECURITIES
- - Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - Not applicable
ITEM 5. OTHER INFORMATION
- - Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K during the quarter ended
March 31, 1998, which reported the acquisition of Texas RSA #16 under "Item
2. Acquisition of Assets." The date of the report was February 10, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1998 Dobson Communications Corporation
(registrant)
/s/ EVERETT R. DOBSON
-------------------------------------
Everett R. Dobson
Chairman of the Board, President
and Chief Executive Officer
Date: May 15, 1998 /s/ BRUCE R. KNOOIHUIZEN
-------------------------------------
Bruce R. Knooihuizen
Vice President and Chief Financial
Officer (principal financial officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,602,320
<SECURITIES> 27,250,798
<RECEIVABLES> 21,960,840
<ALLOWANCES> 0
<INVENTORY> 1,583,352
<CURRENT-ASSETS> 51,767,109
<PP&E> 138,431,296
<DEPRECIATION> (48,771,675)
<TOTAL-ASSETS> 454,659,825
<CURRENT-LIABILITIES> 32,187,484
<BONDS> 269,221,068
186,623,329
100,000
<COMMON> 473,152
<OTHER-SE> (52,828,834)
<TOTAL-LIABILITY-AND-EQUITY> 454,659,825
<SALES> 27,537,598
<TOTAL-REVENUES> 27,537,598
<CGS> 7,497,118
<TOTAL-COSTS> 7,497,118
<OTHER-EXPENSES> 20,007,626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,088,435
<INCOME-PRETAX> (7,678,367)
<INCOME-TAX> (463,000)
<INCOME-CONTINUING> (7,215,367)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,118,439)<F1>
<CHANGES> (712,629)<F2>
<NET-INCOME> (11,046,436)
<EPS-PRIMARY> (32.72)<F3>
<EPS-DILUTED> 0
<FN>
<F1>NET OF INCOME TAX BENEFIT.
<F2>NET OF INCOME TAX BENEFIT.
<F3>BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE.
</FN>
</TABLE>
