<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 73-1513309
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13439 NORTH BROADWAY EXTENSION 73114
SUITE 200 (Zip Code)
OKLAHOMA CITY, OKLAHOMA
(Address of principal executive offices)
(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 November 6, 1998, there were 473,152 shares of the registrant's $1.00 par
value Class A Common Stock outstanding.
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<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997............. 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30,
1998 and 1997.................................................................................. 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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............ 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk........................................ 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 24
Item 2. Changes in Securities and Use of Proceeds........................................................ 24
Item 3. Defaults Upon Senior Securities.................................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 24
Item 5. Other Information................................................................................ 24
Item 6. Exhibits and Reports on Form 8-K................................................................. 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 5,041,044 $ 2,752,399
Restricted cash and investments................................................ 18,508,358 17,561,231
Accounts receivable, net....................................................... 32,054,707 14,003,688
Receivables--affiliates........................................................ 629,252 633,146
Other current assets........................................................... 4,588,260 3,828,103
-------------- --------------
Total current assets......................................................... 60,821,621 38,778,567
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net............................................... 76,360,458 52,373,866
-------------- --------------
OTHER ASSETS:
Receivables--affiliates........................................................ 9,167,408 6,381,389
Restricted investments......................................................... -- 9,216,202
Cellular license acquisition costs, net........................................ 459,731,396 206,694,474
Deferred costs, net............................................................ 17,686,313 9,884,308
Other intangibles, net......................................................... 8,562,035 9,328,031
Deposits....................................................................... 67,300,000 5,150,000
Investments in unconsolidated subsidiaries and other........................... 1,411,711 1,761,002
Net assets of discontinued operations.......................................... -- 20,077,167
-------------- --------------
Total other assets........................................................... 563,858,863 268,492,573
-------------- --------------
Total assets............................................................... $ 701,040,942 $ 359,645,006
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................................... $ 25,404,208 $ 11,708,420
Accrued expenses............................................................... 14,008,734 7,641,021
Accrued dividends payable...................................................... 7,296,175 1,595,238
Deferred revenue and customer deposits......................................... 3,215,933 1,979,508
-------------- --------------
Total current liabilities.................................................... 49,925,050 22,924,187
NET LIABILITIES OF DISCONTINUED OPERATIONS....................................... 628,962 --
ACCOUNTS PAYABLE--AFFILIATE...................................................... -- 8,206,935
LONG-TERM DEBT................................................................... 448,056,204 335,570,059
DEFERRED CREDITS................................................................. 66,641,994 1,039,000
MINORITY INTERESTS............................................................... 22,948,727 16,954,165
SENIOR EXCHANGEABLE PREFERRED STOCK.............................................. 185,513,000 --
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............................................................... (78,464,761) (30,841,106)
-------------- --------------
(72,383,324) (24,759,669)
Less--
Class A Common Stock held in treasury, at cost................................... (11,913,000) (11,913,000)
-------------- --------------
Total stockholders' deficit.................................................... (84,296,324) (36,672,669)
-------------- --------------
Total liabilities and stockholders' deficit.................................... $ 701,040,942 $ 359,645,006
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Wireless service.................................................... $ 19,216,480 $10,215,196 $ 47,769,305 $ 26,487,441
Wireless roaming.................................................... 19,979,904 7,927,129 45,916,023 17,781,657
Wireless equipment.................................................. 1,224,492 383,105 2,502,707 740,538
Other............................................................... 117,214 195,627 158,020 703,331
------------ ----------- ------------ ------------
Total operating revenues.......................................... 40,538,090 18,721,057 96,346,055 45,712,967
------------ ----------- ------------ ------------
OPERATING EXPENSES:
Cost of service..................................................... 9,886,446 4,716,089 22,603,067 10,931,862
Cost of equipment................................................... 2,523,246 1,044,318 5,166,528 2,834,416
Marketing and selling............................................... 5,576,180 2,991,638 14,855,588 6,913,298
General and administrative.......................................... 6,669,649 2,896,792 16,219,389 8,136,923
Depreciation and amortization....................................... 13,170,131 4,695,314 29,713,544 11,942,536
------------ ----------- ------------ ------------
Total operating expenses.......................................... 37,825,652 16,344,151 88,558,116 40,759,035
------------ ----------- ------------ ------------
OPERATING INCOME: 2,712,438 2,376,906 7,787,939 4,953,932
OTHER INCOME (EXPENSE):
Interest income..................................................... 491,810 852,646 3,159,066 1,920,093
Interest expense.................................................... (9,831,825) (7,236,173) (25,039,213) (17,646,377)
Other............................................................... 19,077 (39,549) 144,848 (65,386)
------------ ----------- ------------ ------------
Total other expense, net.......................................... (9,320,938) (6,423,076) (21,735,299) (15,791,670)
LOSS BEFORE MINORITY INTERESTS IN INCOME OF SUBSIDIARIES, INCOME TAXES
AND EXTRAORDINARY ITEMS............................................. (6,608,500) (4,046,170) (13,947,360) (10,837,738)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES.......................... (582,074) (512,995) (1,963,308) (1,314,312)
------------ ----------- ------------ ------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS...................... (7,190,574) (4,559,165) (15,910,668) (12,152,050)
INCOME TAX BENEFIT.................................................... 2,730,773 194,938 4,864,070 498,758
------------ ----------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS....................................... (4,459,801) (4,364,227) (11,046,598) (11,653,292)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of income tax
(benefit) expense of $(6,815,441) and $27,850 for the three months
ended September 30, 1998 and 1997, respectively, and $(7,267,566)
and $80,003 for the nine months ended September 30, 1998 and 1997,
respectively........................................................ (11,130,733) 623,506 (17,184,832) 1,651,759
------------ ----------- ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEMS....................................... (15,590,534) (3,740,721) (28,231,430) (10,001,533)
EXTRAORDINARY EXPENSE, net of income tax benefit of $671,000 in 1998
and $85,392 in 1997................................................. -- -- (2,643,439) (2,186,223)
------------ ----------- ------------ ------------
NET LOSS.............................................................. (15,590,534) (3,740,721) (30,874,869) (12,187,756)
DIVIDENDS ON PREFERRED STOCK.......................................... (6,229,702) (252,387) (16,748,786) (727,646)
------------ ----------- ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS............................ $(21,820,236) $(3,993,108) $(47,623,655) $(12,915,402)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE.....
Before discontinued operations and extraordinary expense............ $ (22.59) $ (9.76) $ (58.74) $ (26.17)
Discontinued operations............................................. (23.53) 1.32 (36.32) 3.49
Extraordinary expense............................................... -- -- (5.59) (4.62)
------------ ----------- ------------ ------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE..... $ (46.12) $ (8.44) $ (100.65) $ (27.30)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING...................... 473,152 473,152 473,152 473,152
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................... $(30,874,869) $(12,187,756)
Adjustments to reconcile net loss to net cash provided by operating activities--
Depreciation and amortization.................................................... 37,399,250 15,473,672
Amortization of bond premium and financing cost.................................. 1,624,390 --
Deferred income taxes and investment tax credits, net............................ (14,253,819) 486,519
(Gain) Loss on disposition of assets............................................. (10,387) 19,632
Extraordinary loss on financing costv 3,314,439 2,497,598
Cumulative effect of change in accounting principle.............................. 1,162,629 --
Minority interests in income of subsidiaries..................................... 1,963,308 1,071,342
Changes in current assets and liabilities--
Accounts receivable.............................................................. (12,480,566) (2,056,381)
Other current assets............................................................. (49,023) (1,148,883)
Accounts payable................................................................. 7,998,999 4,122,827
Accrued expenses................................................................. 13,169,966 12,429,907
Deferred revenue and customer deposits........................................... 1,479,843 --
------------ ------------
Net cash provided by operating activities...................................... 10,444,160 20,708,477
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................... (41,528,017) (13,780,956)
Acquisitions....................................................................... (333,354,429) (154,784,566)
Deferred costs..................................................................... -- (1,592,979)
Increase in receivable--affiliate.................................................. (1,297,403) (1,047,284)
Deposits (62,150,000) 3,190,732
Investments in unconsolidated subsidiaries and other............................... (1,931,189) (21,124,176)
Proceeds on sale of assets......................................................... 6,700 --
------------ ------------
Net cash used in investing activities.......................................... (440,254,338) (189,139,229)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....................................................... 284,000,000 95,250,000
Repayments of long-term debt....................................................... (172,296,542) (797,708)
Cash dividends..................................................................... -- (8,361,266)
Issuance of preferred stock........................................................ 175,000,000 --
Issuance of senior notes........................................................... 350,000,000 160,000,000
Purchase of restricted investments................................................. (120,976,000) (66,258,444)
Maturities of restricted investments............................................... 9,400,000 --
Interest on restricted investments................................................. (3,135,934) (1,553,949)
Redemption of RTFC subordinated capital certificates............................... -- 1,051,057
Deferred financing costs........................................................... (23,868,695) (10,842,406)
------------ ------------
Net cash provided by financing activities...................................... 498,122,829 168,487,284
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................................ 68,312,651 56,532
CASH AND CASH EQUIVALENTS, beginning of period
From continuing operations......................................................... 2,752,399 980,571
From discontinued operations....................................................... 254,269 628,650
------------ ------------
Total cash and cash equivalents, beginning of period......................... 3,006,668 1,609,221
CASH AND CASH EQUIVALENTS, end of period.............................................
From continuing operations......................................................... 5,041,044 1,084,117
From discontinued operations....................................................... 66,278,275 581,636
------------ ------------
Total cash and cash equivalents, end of period............................... $ 71,319,319 $ 1,665,753
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
The condensed consolidated balance sheets of Dobson Communications
Corporation ("DCC") and subsidiaries (collectively with DCC, the "Company") as
of September 30, 1998 and December 31, 1997, the condensed consolidated
statements of operations for the three and nine months ended September 30, 1998
and 1997 and the condensed consolidated statements of cash flows for the nine
months ended September 30, 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, through its predecessors, was organized in 1936 as Dobson
Telephone Company and adopted its current organizational structure in 1998. The
Company is a provider of rural and suburban wireless telephone services.
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"), 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 REORGANIZATIONS
In conjunction with the January 1998 issuance of 175,000 shares of 12.25%
Senior Exchangeable Preferred Stock mandatorily redeemable in 2008 (see Note 5),
the Company formed three new subsidiaries: Dobson Cellular Operating Company
("DCOC"), DOC Cellular Subsidiary Company ("DOC Cellular Subsidiary") and Logix
Communications Enterprises, Inc. ("Logix"), formerly named Dobson Wireline
Company. DCOC was created as the holding company for subsidiaries formed to
effect certain wireless acquisitions. DCOC has been designated an unrestricted
subsidiary under the Senior Note Indenture which covers the Senior Notes
discussed in Note 4. DOC Cellular Subsidiary was created as the holding company
for the then existing wireless subsidiaries. Logix was created as the holding
company for the Company's incumbent local exchange carrier ("ILEC"), fiber and
integrated communications provider ("ICP") operations. Logix was designated an
unrestricted subsidiary under the Senior Note Indenture and the Certificate of
Designation establishing the Senior Exchangeable Preferred Stock.
7
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION (CONTINUED)
On September 30, 1998, the Company adopted a plan to spin off Logix as
discussed in Note 3 ("September 1998 Reorganization"). Collectively, the January
1998 Reorganization and the September 1998 Reorganization are known as the "1998
Reorganizations."
2. ACQUISITIONS
RECENT ACQUISITIONS
On July 29, 1998, the Company purchased the FCC cellular license and certain
assets of the California 7 RSA for $21 million. California 7 is located in the
Imperial Valley extending from east of San Diego to the Arizona state line.
On June 16, 1998, the Company acquired an 86.4% interest in the Santa Cruz
Cellular Telephone Partnership ("SCCTP") for $31 million. SCCTP owns the
cellular license and other assets for the Santa Cruz MSA. The Santa Cruz MSA is
located adjacent to the California 4 RSA purchased in April 1998. Subsequent to
September 30, 1998, the Company acquired an additional .5% interest in SCCTP for
$.2 million.
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, the California 4 RSA. The total purchase price paid by the Company
was $90.9 million. The property is located in central California adjacent to
Fresno, Modesto and Yosemite National Park.
On January 26, 1998, the Company purchased the FCC cellular license for, and
certain assets relating to, the Texas 16 RSA 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 the Arizona 5 RSA 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 $9.5 million in
connection with the acquisition. In addition, the Company loaned $6.1 million to
the current partner which acquired a 25% interest in the Arizona 5 Partnership.
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. 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 $77.6 million. The properties are located immediately outside
the Washington/Baltimore metropolitan area.
The acquisition transactions were accounted for as purchases and,
accordingly, their results of operations have been included in the accompanying
condensed consolidated statements of operations from the respective dates of
acquisition. The unaudited pro forma information set forth below includes the
1998 acquisitions and 1997 acquisitions accounted for as if the purchases
occurred at the beginning of the respective periods presented. The unaudited pro
forma information is presented for informational
8
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
purposes only and is not necessarily indicative of the results of operations
that actually would have been achieved had the acquisitions been consummated at
that time:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenue....................................... $ 40,904 $ 33,365 $ 109,832 $ 92,996
Loss before discontinued operations and extraordinary
expense............................................... (4,658) (6,694) (15,515) (23,633)
Net loss................................................ (15,789) (13,585) (48,220) (45,624)
Net loss applicable to common stockholders.............. (22,019) (19,197) (65,862) (62,430)
Net loss applicable to common stockholders per common
share................................................. $ (46.54) $ (40.57) $ (139.20) $ (131.94)
</TABLE>
PENDING ACQUISITIONS
On September 2, 1998, the Company entered into a definitive agreement to
acquire the FCC license for, and certain assets relating to, the Texas 10 RSA
for $55.0 million, subject to adjustment. Texas 10 is located in central Texas.
In September 1998, the Company placed $3 million into escrow pending closing of
the acquisition. The acquisition is expected to close in the fourth quarter of
1998.
On August 20, 1998, the Company entered into a definitive agreement to
purchase the FCC license for the Ohio 2 RSA for $39.3 million, subject to
adjustment. In September 1998, the Company placed $39.3 million into escrow
pending closing of the acquisition. The Company expects to enter into agreements
with AirTouch to acquire the subscribers and to lease certain equipment
necessary to operate Ohio 2. The license covers the area in north central Ohio
near Sandusky. The acquisition is expected to close in the fourth quarter of
1998. See Note 4 for discussion of financing arrangements.
As of July 28, 1998, the Company entered into a definitive agreement to
acquire Sygnet Wireless, Inc. ("Sygnet Acquisition") through a merger valued at
approximately $647.5 million. Sygnet owns and operates cellular systems in Ohio,
Pennsylvania and New York covering an estimated population base of 2.4 million
people. In July 1998, the Company placed $25 million into escrow pending closing
of the acquisition. The Sygnet acquisition is expected to close in the fourth
quarter of 1998.
3. DISCONTINUED OPERATIONS
On September 30, 1998, the Company's Board of Directors authorized the
distribution of the wireline segment to the holders of the Company's common
stock on a tax-free basis, subject to the receipt of a private letter ruling
from the Internal Revenue Service ("IRS") under Internal Revenue Code 355(e).
The request was filed with the IRS on October 6, 1998, and a ruling is expected
in the second quarter of 1999. The wireline segment, which consists of Logix and
its subsidiaries, operates as an ICP under the LOGIX-SM- brand name in Oklahoma
and Texas, owns local telephone exchanges in Oklahoma and operates regional
fiber optic transmission networks in Oklahoma, Texas and Colorado. Pursuant to
Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal
9
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS (CONTINUED)
of a Segment of a Business, and Extraordinary, Unusual, and Infrequently
Occurring Events and Transactions," the consolidated financial statements have
been restated for all periods presented to reflect the wireline operations,
assets and liabilities as discontinued operations.
The assets and liabilities of such operations have been classified as "Net
assets (liabilities) of discontinued operations" on the condensed consolidated
balance sheets and consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
($ IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................. $ 66,278 $ 254
Restricted investments--current........................................... 43,448 --
Other current assets...................................................... 14,090 2,758
Property, plant and equipment, net........................................ 54,097 35,976
Restricted investments--non-current....................................... 79,533 --
Goodwill.................................................................. 124,481 --
Other assets.............................................................. 20,896 12,965
------------- ------------
Total assets............................................................ 402,823 51,953
Current liabilities....................................................... 26,184 2,544
Long-term debt, net of current portion.................................... 376,544 27,498
Other liabilities......................................................... 724 1,834
------------- ------------
Total liabilities....................................................... 403,452 31,876
------------- ------------
Net assets (liabilities) of discontinued operations....................... $ (629) $ 20,077
------------- ------------
------------- ------------
</TABLE>
The net income from operations of the wireline segment was classified on the
condensed consolidated statement of operations as "Income (loss) from
discontinued operations." Summarized results of discontinued operations are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues............................................... $ 25,541 $ 5,229 $ 40,176 $ 15,221
Income (loss) from continuing operations before income
taxes.................................................... (17,946) 651 (23,753) 1,949
Income tax benefit (provision)............................. 6,815 (27) 7,268 (80)
Extraordinary item......................................... -- -- -- (217)
Cumulative effect of change in accounting principle........ -- -- (700) --
Income from discontinued operations........................ (11,131) 624 (17,185) (1,652)
</TABLE>
The net cash flows of the wireline segment have been reported in the
condensed consolidated statements of cash flows as "Net cash (used in) provided
by discontinued operations."
10
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Revolving credit facilities............................................ $ 284,000,000 $ 171,513,855
DCC Senior Notes....................................................... 160,000,000 160,000,000
Other notes payable.................................................... 4,056,204 4,056,204
-------------- --------------
Total long-term debt................................................. $ 448,056,204 $ 335,570,059
-------------- --------------
-------------- --------------
</TABLE>
REVOLVING CREDIT FACILITIES
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. As of September 30, 1998, $143 million was outstanding under the DCOC
Credit Facility. At the same time, the Company's subsidiary DOC established a
$250 million senior secured credit facility (the "DOC Bank Facility") to replace
its existing revolving credit facility established on February 28, 1997 and
discussed below. The DOC Bank Facility is 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. DCOC is designated an unrestricted
subsidiary with regard to the DOC Facility. The Company and DOC's wholly owned
subsidiaries other than Logix and the Arizona 5 Partnership have guaranteed
DOC's obligations under the DOC Bank Facility. As of September 30, 1998, $141
million was outstanding under the DOC Bank Facility. The DCOC Credit Facility
and the DOC 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 approximately 6.9% at September 30,
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 DOC 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 nine months ended September 30, 1998 as an extraordinary expense.
In April 1997, the Company entered into an interest rate hedge agreement
terminating on April 24, 2002 to hedge the Company's interest expense on $160
million of its indebtedness under the revolving credit facilities. Subsequent to
September 30, 1998, the counterparty exercised its rights under the swap
agreement, fixing the interest rate at 6.13% plus a factor based on the
Company's leverage. 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 ("1997 Credit Facility"). Interest on borrowings under
the credit agreement accrued at a variable rate. Initial proceeds were used to
refinance existing indebtedness, finance the Maryland/Pennsylvania Acquisition
described in
11
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
Note 2 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 nine months ended September 30, 1997.
SENIOR NOTES
On February 28, 1997, the Company issued $160 million of 11.75% Senior Notes
maturing in 2007 ("DCC Senior Notes"). 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 condensed consolidated balance
sheets. The DCC 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
DCC Senior Notes at 111.750% with proceeds from sales of stock, provided that
after any such redemption at least $104 million remains outstanding.
SYGNET FINANCING
On July 20, 1998, in connection with the pending Sygnet Acquisition, the
Company received commitments for a new $450 million credit facility to be
secured by the assets acquired in the Sygnet Acquisition. The Company also
obtained commitments for bridge financing in the aggregate of $280 million. The
Company is presently exploring alternative financing to replace these existing
commitments, in whole or in part. Although the Company has commitments in place
that will allow it to close the Sygnet Acquisition, it is still evaluating
financing options and has not yet determined the final capital structure.
5. 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 quarterly
dividends from the date of issuance and a liquidation preference of $1,000 per
share with rights over the other classes of capital stock. In 1998, the Company
has issued cumulative quarterly dividends in the form of 10,513 additional
shares of preferred stock (having a liquidation preference of $10.5 milion)
which represented non-cash financing activity, and thus are not included in the
accompanying condensed consolidated statement of cash flows. On and before
January 15, 2003, the Company may pay dividends, at its option, in cash or in
additional shares having an aggregate liquidation preference equal to the amount
of such dividends. 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.
6. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of securities pledged to secure
payment of interest on the DCC Senior Notes through April 1999.
12
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. TAXES
The income tax benefit amounts for the nine months ended September 30, 1998
and 1997 differ from amounts computed at the statutory rate due primarily to net
operating losses for which no benefit has been recognized.
8. 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-dilutive.
9. RECENT PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Derivatives and Hedging ("SFAS 133").
SFAS 133 establishes uniform hedge accounting criteria for all derivatives
requiring companies to formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. Under SFAS 133, derivatives will
be recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the fair value recognized as a component of
comprehensive income or in current earnings. SFAS 133 will be effective for
fiscal years beginning after June 15, 1999. The Company has not yet evaluated
the impact of adopting SFAS 133 and has not determined the timing or method of
adoption of SFAS 133.
10. COMMITMENTS
Effective December 6, 1995 (amended December 20, 1995, June 24, 1997 and
September 30, 1998), the Company entered into an equipment supply agreement in
which the Company agreed to purchase approximately $65 million of cell site and
switching equipment between June 24, 1997 and November 23, 2001 to update the
cellular systems for newly acquired and existing MSAs and RSAs. Of this
commitment, approximately $34.6 million remained at September 30, 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 site and switching equipment between January 13, 1998 and
January 12, 2002 to update the cellular systems for newly acquired and existing
MSAs and RSAs. Of this commitment, $67 million remained at September 30, 1998.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
Dobson Communications Corporation is a provider of rural and suburban
wireless telephone services. Since it commenced providing wireless service in
1990 in Oklahoma and the Texas Panhandle, the Company has rapidly expanded its
wireless operations with an acquisition strategy targeting underdeveloped rural
and suburban areas which have a significant number of potential customers with
substantial needs for wireless communications. At September 30, 1998, the
Company's cellular systems covered 2.8 million Pops ("Pops" means the estimate
of the 1998 population of an MSA or RSA as derived from the Cellular Telephone
Atlas: 1998 by Paul Kagan Associates, Inc.) and had 163,020 subscribers in
Arizona, California, Kansas, Maryland, Missouri, Oklahoma, Pennsylvania and
Texas. In July 1998, the Company entered into an agreement to acquire Sygnet
Wireless, Inc. for $337.5 million (the "Sygnet Acquisition") plus the assumption
of liabilities. Sygnet owns and operates a large cluster of cellular systems
covering 2.4 million Pops in New York, Ohio and Pennsylvania. On September 2,
1998, the Company placed $39.3 million into escrow for the purchase of the FCC
license for Ohio 2 RSA. In addition, the Company entered into a definitive
agreement on September 2, 1998 to acquire the FCC license and certain assets
relating to the Texas 10 RSA for $55.0 million.
DISCONTINUED OPERATIONS
The Company, through its subsidiary Logix Communications Enterprises, Inc.
("Logix"), provides integrated local, long distance, data and other wireline
telecommunications services to small and medium-sized business customers
throughout the southwest United States. Logix operates long-haul fiber optic
facilities in Oklahoma, Texas and Colorado and incumbent local exchange services
in Oklahoma. In 1997, Logix began offering integrated communication provider
("ICP") services in Oklahoma and since its acquisition of American Telco Inc.
and its affiliate, American Telco Network Services, Inc. (the "American Telco
Acquisition") on June 15, 1998, has offered these services in several major
Texas cities. The Company intends to distribute the stock of Logix to the
Company's shareholders, subject to receipt of a favorable tax ruling from the
Internal Revenue Service. Logix is accounted for as a discontinued operation in
the Company's condensed consolidated financial statements.
ACQUISITIONS
The following table sets forth the cellular markets and systems acquired by
the Company in 1997 and 1998 and pending acquisitions:
<TABLE>
<CAPTION>
ACQUISITION (OWNERSHIP % IF LESS THAN 100%) DATE
- ----------------------------------------------------------------------------- PURCHASE PRICE ---------
---------------
(IN MILLIONS)
<S> <C> <C>
Sygnet....................................................................... $ 647.5 Pending
Texas 10..................................................................... $ 55.0 Pending
Ohio 2....................................................................... $ 39.3 Pending
California 7 (1)............................................................. $ 21.0 7/29/98
Santa Cruz (86.89%) (1)...................................................... $ 31.2 6/16/98
California 4 (1)............................................................. $ 90.9 4/1/98
Texas 16 (1)................................................................. $ 56.6 1/26/98
Arizona 5 (75%) (2).......................................................... $ 39.8 10/1/97
East Maryland (2)............................................................ $ 75.8 3/3/97
West Maryland (2)............................................................ $ 77.6 2/28/97
</TABLE>
- ------------------------
(1) Collectively, the Texas 16, California 4, Santa Cruz and California 7
acquisitions comprise the "1998 Acquisitions."
14
<PAGE>
(2) Collectively, the West Maryland, East Maryland and Arizona 5 acquisitions
comprise the "1997 Acquisitions."
The Company's wireless operations are located in three regions, the East
Region (Maryland and Pennsylvania), the Central Region (Kansas, Missouri,
Oklahoma and Texas) and the West Region (California and Arizona).
REVENUE
The wireless revenues of the Company consist of service, roaming and
equipment revenues. The Company's results have been affected by an industry
trend of declining average revenue per minute, as competition among service
providers has led to reductions in rates for airtime, access 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 wireless telecommunications 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.
Roaming accounted for 49.3%, 42.3%, 47.7% and 38.9% of the Company's
wireless revenue for the three months ended September 30, 1998 and 1997 and the
nine months ended September 30, 1998 and 1997, respectively. While the industry
trend is to reduce roaming rates, the Company believes that its roaming rates
are generally lower than rates offered by others in or near the Company's
systems and that its roaming rates are not materially impacted by this trend;
however, there can be no assurance that such trend will not materially impact
the Company in the future. The Company's roaming yield (roamer service revenue,
which includes airtime, toll charges and surcharges, divided by roaming minutes
of use) was $.58, $.62, $.72 and $.70 for the three months ended September 30,
1998 and 1997 and the nine months ended September 30, 1998 and 1997,
respectively.
The Company's year-to-date wireless churn rate has decreased since 1997 due
to improved retention in the Maryland/Pennsylvania properties and the addition
of the Texas 16, California 4 and Santa Cruz acquisitions which have experienced
a low churn rate. The Company's year-to-date cellular penetration rates
increased in 1998 compared to the period ended September 30, 1997 as a result of
acquisitions and incremental penetration gain on existing markets.
In recent years, the Company and other wireless companies have increased the
use of discounts on phone equipment and free phone promotions as competition
between service providers has intensified. As a result, the Company has
incurred, and expects to continue to incur, losses on wireless equipment sales.
While the Company expects to continue these discounts and promotions, the
Company believes that the use of such promotions will result in increased
revenue from increases in the number of wireless subscribers.
COSTS AND EXPENSES
The Company's primary operating expense categories include cost of service
and equipment, marketing and selling, general and administrative and
depreciation and amortization.
Cost of service consists primarily of costs to operate and maintain the
Company's facilities utilized in providing service to customers and amounts paid
to third-party cellular providers for providing service to the Company's
subscribers. Cost of equipment represents the cost associated with wireless
telephone equipment sold to customers.
Marketing and selling costs include advertising, compensation paid to sales
personnel and independent agents and all other costs to market and sell wireless
products. Commissions are paid to direct sales
15
<PAGE>
personnel for new business generated. Independent sales agents receive
commissions for generating new sales and ongoing sales to existing customers.
General and administrative costs include all infrastructure costs such as
customer support, billing, collections, and corporate administration.
Depreciation and amortization relate primarily to switching and cell site
equipment and license costs.
The size and scope of the Company's wireless operations increased
substantially as a result of acquisitions in 1997 and 1998, and will increase
further upon consummation of the pending acquisitions. Although the Company's
EBITDA (earnings before interest expense, income taxes, depreciation and
amortization, other income, discontinued operations and extraordinary items) has
increased as a result of acquisitions made to date and will increase further as
a result of the pending acquisitions, the increased amortization and interest
expense and dividends associated with the Senior Notes, additional bank
borrowings and Senior Preferred Stock resulted in increased losses in 1997 and
the first nine months of 1998. Losses are expected to increase following the
completion of the pending acquisitions and will continue until the Company
expands the acquired systems and increases its subscriber base. Acquisitions
have affected the comparability of the historical results of operations for the
periods discussed and such results may not be indicative of future performance.
RESULTS OF OPERATIONS
In the text below, financial statement numbers have been rounded; however,
the percentage changes are based on the actual financial statements.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
OPERATING REVENUE. For the three months ended September 30, 1998, total
operating revenue increased $21.8 million, or 116.5%, to $40.5 million from
$18.7 million for the comparable period in 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Wireless service................................................... $ 19,216 $ 10,215
Wireless roaming................................................... 19,980 7,927
Wireless equipment................................................. 1,225 383
--------- ---------
40,421 18,525
Other revenue........................................................ 117 196
--------- ---------
Total.............................................................. $ 40,538 $ 18,721
--------- ---------
--------- ---------
</TABLE>
Wireless service revenue increased $9.0 million, or 88.1%, to $19.2 million
for the three months ended September 30, 1998 from $10.2 million in the same
period of 1997. Of the increase, $7.0 million was attributable to the Arizona 5
and 1998 Acquisitions. The remaining $2.0 million was primarily attributable to
increased penetration and usage in the Central and East Regions. The Company's
wireless subscriber base increased 91.4% to 163,020 at September 30, 1998 from
85,185 at September 30, 1997. The Company's average monthly wireless service
revenue per subscriber decreased .3% to $40.53 for the three months ended
September 30, 1998 from $40.67 for the comparable period in 1997 due to
competitive market pressures.
Wireless roaming revenue increased $12.1 million, or 152.0%, to $20.0 for
the three months ended September 30, 1998 from $7.9 million for the comparable
period of 1997. Of the increase, $10.0 million was
16
<PAGE>
attributable to the Arizona 5 and 1998 Acquisitions. The remaining $2.1 million
was primarily attributable to increased roaming minutes in the Central and East
Regions due to expanded coverage area and usage in these markets.
Wireless equipment sales of $1.2 million for the three months ended
September 30, 1998 represented an increase of $.8 million, or 219.6%, from $.4
million in the same period of 1997, as the Company made an effort to generate
more revenue per phone sold in the current period. The increase is also due to
increases in the volume of sales related to growth in subscribers.
COST OF SERVICE. For the three months ended September 30, 1998, cost of
service increased $5.2 million, or 109.6%, to $9.9 million from $4.7 million for
the comparable period in 1997. Of the increase, $4.3 million was attributable to
the Arizona 5 and 1998 Acquisitions. The remaining $.9 million was primarily
attributable to increased subscribers and minutes of use in the Central and East
Regions and expanded use of rerating agreements with wireless providers adjacent
to the Company's markets. As a percentage of wireless service and roaming
revenue, cost of wireless service decreased slightly to 25.2% in the third
quarter of 1998 from 26.0% in the comparable period of 1997.
COST OF EQUIPMENT. For the three-month period ended September 30, 1998,
cost of wireless equipment increased $1.5 million, or 141.6%, to $2.5 million
from $1.0 million in the comparable period of 1997, due to increases in the
volume of sales related to growth in subscribers and a higher per unit cost in
the West Region.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $2.6
million, or 86.4%, to $5.6 million for the three-month period ended September
30, 1998 from $3.0 million in the comparable period of 1997. As a percentage of
total operating revenue, marketing and selling costs decreased to 13.8% in the
third quarter of 1998 from 16.0% in the same period of 1997. The decrease was
primarily due to efficiencies of scale attained as a result of acquisitions and
a reduction in commissions as a percentage of revenue. The number of gross
wireless subscribers added in the third quarter of 1998 was 17,009. The number
of gross wireless subscribers added in the third quarter of 1997 was 9,031.
GENERAL AND ADMINISTRATIVE COSTS. For the three-month period ended
September 30, 1998, general and administrative costs increased $3.8 million, or
130.2%, to $6.7 million from $2.9 million for the same period in 1997. As a
percentage of total operating revenue, general and administrative costs
increased to 16.5% in the third quarter of 1998 from 15.5% in the comparable
period of 1997. The increase was primarily due to increased billing costs as a
result of the growth in wireless subscribers, the Arizona 5 and 1998
Acquisitions and increased salary costs resulting from additional administrative
personnel.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended September
30, 1998, depreciation and amortization expense increased $8.5 million, or
180.5%, to $13.2 million in the third quarter of 1998 from $4.7 million in the
same period of 1997. Depreciation and amortization of assets acquired in the
Arizona 5 and 1998 Acquisitions accounted for $8.4 million of the increase in
the third quarter of 1998 compared to the same period of 1997.
INTEREST INCOME. For the three months ended September 30, 1998, interest
income of $.5 million was a result of interest earned on securities purchased
with proceeds from the Senior Notes. As the Company continues to utilize the
securities to fund semi-annual interest payments, interest income will decline.
INTEREST EXPENSE. For the third quarter of 1998, interest expense increased
$2.6 million, or 35.9%, to $9.8 million from $7.2 million in the comparable
period of 1997. The increase was primarily a result of increased borrowings in
1998 to finance the Company's acquisitions.
17
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
OPERATING REVENUE. For the nine months ended September 30, 1998, total
operating revenue increased $50.6 million, or 110.8%, to $96.3 million from
$45.7 million for the comparable period in 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Wireless service...................................................... $ 47,769 $ 26,487
Wireless roaming...................................................... 45,916 17,782
Wireless equipment.................................................... 2,503 741
--------- ---------
96,188 45,010
Other revenue........................................................... 158 703
--------- ---------
Total............................................................... $ 96,346 $ 45,713
</TABLE>
Wireless service revenue increased $21.3 million, or 80.3%, to $47.8 million
in the first nine months of 1998 from $26.5 million in the same period of 1997.
Of the increase, $16.4 million was attributable to the 1998 Acquisitions and
1997 Acquisitions and the remaining $4.9 million was attributable to increased
penetration and usage in the Central and East Regions. The Company's wireless
subscriber base increased 91.4% to 163,020 at September 30, 1998 from 85,185 at
September 30, 1997. Approximately 54,417 subscribers were added since September
30, 1997 as a result of the Arizona 5 and 1998 Acquisitions. The Company's
average monthly wireless service revenue per subscriber decreased 3.7% to $39.58
for the nine months ended September 30, 1998 from $41.08 for the comparable
period in 1997 due to the addition of new lower rate subscribers in the East
Region and competitive market pressures.
Wireless roaming revenue increased $28.1 million, or 158.2%, to $45.9
million in the first nine months of 1998 from $17.8 million for the comparable
period of 1997. Of the increase, $24.1 million was attributable to the 1998
Acquisitions and 1997 Acquisitions and the remaining $4.0 million was primarily
attributable to increased roaming minutes in the Central and East Regions due to
expanded coverage area and usage in these markets.
Wireless equipment sales of $2.5 million in the first nine months of 1998
represented an increase of $1.8 million, or 238%, from $.7 million in the same
period of 1997, as the Company sold more equipment during the first nine months
of 1998.
COST OF SERVICE. For the nine months ended September 30, 1998, cost of
service increased $11.7 million, or 106.8%, to $22.6 million from $10.9 million
for the comparable period in 1997. Of the increase, $10.0 million was
attributable to the 1998 Acquisitions and 1997 Acquisitions and the remaining
$1.7 million was primarily attributable to increased subscribers and minutes of
use in the Central and East Regions and expanded use of rerating agreements with
wireless providers adjacent to the Company's markets. As a percentage of
wireless service and roaming revenue, cost of wireless service decreased
slightly to 24.1% in the first nine months of 1998 from 24.7% in the comparable
period of 1997.
COST OF EQUIPMENT. For the nine-month period ended September 30, 1998, cost
of wireless equipment increased $2.4 million, or 82.3%, to $5.2 million from
$2.8 million in the first nine months of 1997, primarily from increases in the
volume of equipment sold due to the growth in subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $8.0
million, or 114.9%, to $14.9 million in the first nine months of 1998 from $6.9
million in the comparable period of 1997. As a percentage of total operating
revenue, marketing and selling costs increased slightly to 15.4% in the first
nine months of 1998 from 15.1% in the same period of 1997. The increase in
dollars was primarily due to
18
<PAGE>
the higher level of cellular wireless subscribers added period to period and
additional personnel added in 1998. Gross wireless subscribers added in the
first nine months of 1998 was approximately 48,882. The number of gross wireless
subscribers added in the first nine months of 1997 was 22,273.
GENERAL AND ADMINISTRATIVE COSTS. For the nine-month period ended September
30, 1998, general and administrative costs increased $8.1 million, or 99.3%, to
$16.2 million from $8.1 million for the same period in 1997. As a percentage of
total operating revenue, general and administrative costs decreased to 16.8% in
the first nine months of 1998 from 17.8% in the comparable period of 1997. The
dollar increase was primarily due to increased billing costs as a result of the
growth in wireless subscribers, the 1997 and 1998 Acquisitions and increased
salary costs resulting from additional administrative personnel. The decrease as
a percentage of total operating revenue is a result of the Company's strategy to
integrate new operations in its existing management structure and a reduction in
the Company's uncollectible rate.
DEPRECIATION AND AMORTIZATION EXPENSE. For the nine months ended September
30, 1998, depreciation and amortization expense increased $17.8 million, or
148.8% to $29.7 million in the first nine months of 1998 from $11.9 million in
the same period of 1997. Depreciation and amortization of assets acquired in
acquisitions accounted for $17.7 million of the increase in the first nine
months of 1998 compared to the same period of 1997. The remaining increase
relates to additions in existing markets.
INTEREST INCOME. For the nine months ended September 30, 1998, interest
income of $3.2 million was a result of interest earned on securities purchased
with proceeds from the Senior Notes to fund the first four semi-annual interest
payments.
INTEREST EXPENSE. For the first nine months of 1998, interest expense
increased $7.4 million, or 41.9%, to $25 million from $17.7 million in the
comparable period of 1997. The increase was primarily a result of increased
borrowings in the first nine months of 1998 to finance the Company's
acquisitions.
EXTRAORDINARY EXPENSE. In 1998 and 1997, the Company incurred an
extraordinary pretax loss of approximately $3.3 million and $2.3 million,
respectively, as a result of writing off previously capitalized financing costs
associated with revolving credit facilities that were refinanced in March 1998
and February 1997.
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.
In April 1998, the Company established a multi-disciplined team to perform a
Year 2000 impact analysis for the Company. The team consists of representatives
from each of the lines of business, as well as representatives from key
corporate departments, and is headed by a full-time Year 2000 compliance
manager. The team created a Year 2000 assessment methodology which brought a
structured approach to the assessment and management reporting process, as well
as disaster recovery approach.
To date, the Company has completed an inventory of its automated systems and
services and an impact analysis that identified significant risk areas by line
of business, specific compliance requirements and costs and estimated completion
dates for affected systems. All of the Company's automated systems and services
are or will be Year 2000 compliant by the end of the second quarter of 1999.
The Company does not have large scale legacy applications used by many
telecommunications providers. From an information systems standpoint, the
Company has historically relied on outsourcing relationships for most of its
business and operational support applications. Those applications that have
19
<PAGE>
not been outsourced to service providers have been deployed using packaged
software from outside vendors. Management has also focused on evaluating
software systems of pending acquisitions. As a result, the remediation phase is
not focused on a large scale in-house effort, but on identification of third
party systems and services that are not currently Year 2000 compliant and
oversight of third party compliance efforts.
The results of the impact analysis revealed that for most of the Company's
information systems, services and telecommunications infrastructure, Year 2000
compliant versions will be included as a part of existing maintenance and/or
service agreements at no additional cost to the Company and should be in place
and tested by the second quarter of 1999. The Company estimates total costs of
approximately $.5 million to upgrade or replace those systems that are not Year
2000 compliant and will not be upgraded through existing maintenance or service
agreements. In addition, the Company's contingency plan for the Year 2000 is
encompassed by a disaster recovery plan for the business which will be in place
by the end of the second quarter of 1999.
The Company will continue to analyze systems and services that utilize
date-embedded codes that may experience operational problems when the Year 2000
is reached. The Company will continue communicating with third party vendors of
systems software and equipment, suppliers of telecommunications capacity and
equipment, roaming partners customers and others with which it does business to
coordinate Year 2000 compliance. To further mitigate risks, the Company will
conduct its own Year 2000 tests on mission critical systems as Year 2000
compliant versions are released by vendors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's wireless operations require substantial capital to acquire,
construct and expand wireless telephone systems and to fund operating
requirements. The Company has financed its wireless operations through bank debt
and the sale of debt and equity.
At September 30, 1998, the Company had working capital of $10.9 million (a
ratio of current assets to current liabilities of 1.2:1) and an unrestricted
cash balance of $5.0 million, which compares to working capital of $15.9 million
(a ratio of current assets to current liabilities of 1.7:1) and an unrestricted
cash balance of $2.8 million at December 31, 1997.
The Company's net cash provided by operating activities totaled $10.4
million for the nine-month period ended September 30, 1998 compared to $20.7
million for the same period of 1997. The decrease of $10.3 million was primarily
due to the Company's net loss for the 1998 period, of which $17.2 million
related to discontinued operations, offset by net changes in current assets and
liabilities, depreciation and amortization and deferred income taxes and
investment tax credits.
Net cash used in investing activities totaled $440.3 million and $189.1
million for the nine months ended September 30, 1998 and 1997, respectively. The
1998 investing activities principally related to acquisitions, escrow deposits
and capital expenditures. Of the 1998 investing activities, discontinued
operations accounted for approximately $17.8 million of capital expenditures and
$131.5 of acquisition expenditures (for the acquisition of Houston-based
American Telco, Inc. and its subsidiary, American Telco Network Services, Inc.,
in June 1998). In 1997, investing activities consisted primarily of acquisitions
of wireless systems in the East Region, as well as capital expenditures.
Net cash provided by financing activities was $498.1 million for the nine
months ended September 30, 1998 compared to $168.5 million for the nine months
ended September 30, 1997. Financing activities for the nine months ended
September 30, 1998 consisted primarily of $284 million of proceeds from
long-term debt and $175 million of proceeds from the issuance of Senior
Exchangeable Preferred Stock ("Senior Preferred Stock"), offset by the repayment
of $171.5 million of bank debt and approximately $12.7 million of deferred
financing costs incurred in connection with the issuance of Senior Preferred
Stock and the establishment of new credit facilities in March 1998 discussed
below. In 1998, financing activities of the
20
<PAGE>
discontinued operations provided proceeds of $350 million from the issuance of
12.25% Senior Notes. Approximately $11.2 million of deferred financing costs
were incurred in connection with this Senior Notes offering.
In March 1998, the Company's subsidiary Dobson Cellular Operations Company
("DCOC") established a $200 million senior secured credit facility (the "DCOC
Facility"), with an additional $75 million committed for future acquisitions.
DCOC's obligations under the DCOC Facility are secured by all existing and
future assets of DCOC, and are guaranteed by DCOC's subsidiaries. In addition,
the Company's subsidiary Dobson Operating Company ("DOC") established a $250
million senior secured credit facility (the "DOC Facility") to replace a prior
bank facility. The DOC Facility is 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. DCOC is designated an unrestricted subsidiary
with regard to the DOC Facility. The Company and DOC's wholly owned subsidiaries
other than Logix and the Arizona 5 Partnership have guaranteed DOC's obligations
under the DOC Facility. The DCOC Facility and the DOC 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.
The DOC Facility and DCOC Facility each amortize quarterly beginning June
30, 2000 and terminate on June 30, 2006. At September 30, 1998, the Company has
unused credit available of $109 million under the DOC Facility and $57 million
under the DCOC Facility, subject to covenant limitations. The Senior Notes
mature in 2007. The Company's ability to repay or refinance indebtedness upon
maturity 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 April 1997, the Company entered into an interest rate hedge agreement
terminating on April 24, 2002 to hedge the Company's interest expense on $160
million of indebtedness under its revolving credit facilities. Subsequent to
September 30, 1998, the counterparty exercised its rights under the swap
agreement, fixing the interest rate at 6.13% plus a factor based on the
Company's leverage. The Company accounts for this as a hedge.
The minority partners in the Company's partnerships that own certain of its
wireless 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 to the Company is paid or
extinguished.
The Company's capital expenditures (excluding cost of acquisitions and
discontinued operations) were $23.7 million for the nine months ended September
30, 1998 and the Company expects its capital expenditures (excluding cost of
acquisitions) to be approximately $30.2 million for all of 1998. The Company has
not budgeted any amounts to be expended in 1998 or 1999 with respect to the
systems which may be acquired in 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 wireless systems and whether
the Company consummates additional acquisitions.
The Company has agreed to purchase approximately $65 million of cell site
and switching equipment between June 1997 and November 2001. Of this commitment,
approximately $34.6 million remained at September 30, 1998. Under another
equipment supply agreement, the Company agreed to purchase approximately $81
million of cell site and switching equipment by January 13, 2002. Of this
commitment, $67 million remained at September 30, 1998.
The Company has budgeted in 1999 approximately $8.8 million related to the
systems which may be acquired in the acquisitions of Texas 10 ($5.6 million) and
Ohio 2 ($3.2 million).
In April 1997, the Company was granted PCS licenses in nine markets in
Oklahoma, Kansas and Missouri. The Company financed $4.1 million of the $5.1
million purchase price with government loans
21
<PAGE>
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 or 1999 with respect to the buildout of a PCS
system.
On July 20, 1998, in connection with the pending Sygnet Acquisition, the
Company received commitments for a new $450 million credit facility to be
secured by the assets acquired in the Sygnet Acquisition. The Company also
obtained commitments for bridge financing in the aggregate of $280 million. The
Company is presently exploring alternative financing to replace these existing
commitments, in whole or in part. The final Sygnet Acquisition capital structure
has not been determined, but management expects proceeds of any new borrowings
necessary for the Sygnet Acquisition, together with borrowings under the DOC
Facility, the DCOC Facility, cash on hand and cash flow from operations, will be
sufficient to fund pending acquisitions, the Company's capital expenditures and
its working capital and debt service requirements. If the Company is unable to
consummate the Sygnet Acquisition, the Company may be required to forfeit its
$25 million deposit which is currently in escrow. Additional financing will be
required 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, vendor financing and a potential $75 million future increase
in commitment contemplated by the DCOC 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.
RECENT PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Derivatives and Hedging ("SFAS 133").
SFAS 133 establishes uniform hedge accounting criteria for all derivatives
requiring companies to formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. Under SFAS 133, derivatives will
be recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the fair value recognized as a component of
comprehensive income or in current earnings. SFAS 133 will be effective for
fiscal years beginning after June 15, 1999. The Company has not yet evaluated
the impact of adopting SFAS 133 and has not determined the timing or method of
adoption of SFAS 133.
FORWARD-LOOKING STATEMENTS
The description of the Company's plans set forth herein, including planned
capital expenditures and acquisitions, are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These plans involve a number of risks and uncertainties.
Important factors that could cause actual capital expenditures, acquisition
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 outstanding debt and preferred stock 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
22
<PAGE>
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 update or revise these forward-looking statements to
reflect events or circumstances after the date hereof including, without
limitation, changes in the Company's business strategy or planned capital
expenditures, or to reflect the occurrence of unanticipated events. For further
information regarding these and other risk factors, see "Business" in the
Company's Form 10-K for the year ended December 31, 1997.
23
<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 AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule--Nine Months Ended September 30, 1998
27.2 Financial Data Schedule--Nine Months Ended September 30, 1997 (Restated)
</TABLE>
(b) Reports on Form 8-K
Not applicable
24
<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.
<TABLE>
<S> <C> <C>
Date: November 16, 1998 DOBSON COMMUNICATIONS CORPORATION
(registrant)
/s/ EVERETT R. DOBSON
-----------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: November 16, 1998 /s/ BRUCE R. KNOOIHUIZEN
-----------------------------------------
Bruce R. Knooihuizen
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,041,044
<SECURITIES> 18,508,358
<RECEIVABLES> 32,054,707
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 60,821,621
<PP&E> 90,856,057
<DEPRECIATION> 14,495,599
<TOTAL-ASSETS> 701,040,942
<CURRENT-LIABILITIES> 49,925,050
<BONDS> 448,056,204
197,136,329
100,000
<COMMON> 473,152
<OTHER-SE> (84,869,476)
<TOTAL-LIABILITY-AND-EQUITY> 701,040,942
<SALES> 96,346,055
<TOTAL-REVENUES> 96,346,055
<CGS> 27,769,595
<TOTAL-COSTS> 27,769,595
<OTHER-EXPENSES> 60,788,521
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,039,213
<INCOME-PRETAX> (13,947,360)
<INCOME-TAX> (4,864,070)
<INCOME-CONTINUING> (11,046,598)
<DISCONTINUED> (17,184,832)
<EXTRAORDINARY> (2,643,439)
<CHANGES> 0
<NET-INCOME> (30,874,869)
<EPS-PRIMARY> (65.25)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
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0
0
<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 45,712,967
<TOTAL-REVENUES> 45,712,967
<CGS> 13,766,278
<TOTAL-COSTS> 13,766,278
<OTHER-EXPENSES> 26,992,757
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,646,377
<INCOME-PRETAX> (10,837,738)
<INCOME-TAX> (498,758)
<INCOME-CONTINUING> (11,653,292)
<DISCONTINUED> 1,651,759
<EXTRAORDINARY> (2,186,223)
<CHANGES> 0
<NET-INCOME> (12,187,756)
<EPS-PRIMARY> ($25.76)
<EPS-DILUTED> 0
</TABLE>
