<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, 1999
/ / 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) 529-8500
(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 7, 1999, there were 491,954 shares of the registrant's $.001 par
value Class A Common Stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 March 31, 1999 and December 31, 1998................. 3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and
1998........................................................................................... 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and
1998........................................................................................... 6
Notes to Condensed Consolidated Financial Statements............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 16
Item 3. Quantitative and Qualitative Disclosure about Market Risk........................................ 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 25
Item 2. Changes in Securities and Use of Proceeds........................................................ 25
Item 3. Defaults Upon Senior Securities.................................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 25
Item 5. Other Information................................................................................ 25
Item 6. Exhibits and Reports on Form 8-K................................................................. 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 1,818,513 $ 22,323,734
Restricted cash and investments............................................ 32,757,709 30,074,946
Accounts receivable, net................................................... 38,511,205 43,299,568
Other current assets....................................................... 8,031,721 8,589,050
---------------- ----------------
Total current assets..................................................... 81,119,148 104,287,298
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, net........................................... 167,878,961 173,054,329
---------------- ----------------
OTHER ASSETS:
Receivables--affiliates.................................................... 7,722,135 7,275,262
Restricted investments..................................................... 45,505,020 45,505,020
Cellular license acquisition costs, net.................................... 1,243,239,091 1,250,790,448
Deferred financing costs, net.............................................. 65,916,137 66,640,301
Other intangibles, net..................................................... 53,294,117 52,795,841
Investments in unconsolidated subsidiaries and other....................... 1,691,195 3,078,134
---------------- ----------------
Total other assets....................................................... 1,417,367,695 1,426,085,006
---------------- ----------------
Total assets........................................................... $ 1,666,365,804 $ 1,703,426,633
---------------- ----------------
---------------- ----------------
</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>
MARCH 31, DECEMBER 31,
1999 1998
----------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 34,991,050 $ 47,536,672
Accrued expenses.......................................................... 24,825,438 14,222,306
Notes payable............................................................. 17,500,000 17,500,000
Deferred revenue and customer deposits.................................... 5,787,352 5,738,381
Current portion of long-term debt......................................... 1,550,643 198,871
Accrued dividends payable................................................. 12,606,592 5,603,856
----------------- ----------------
Total current liabilities............................................... 97,261,075 90,800,086
NET LIABILITIES OF DISCONTINUED OPERATIONS.................................. 19,086,839 7,033,166
ACCOUNTS PAYABLE--AFFILIATE................................................. -- 5,011,438
LONG-TERM DEBT, net of current portion...................................... 1,104,505,561 1,103,857,333
DEFERRED CREDITS............................................................ 235,026,707 245,630,000
MINORITY INTERESTS.......................................................... 26,912,709 26,557,203
SENIOR EXCHANGEABLE PREFERRED STOCK, net.................................... 248,217,101 241,320,000
Class D Convertible Preferred Stock......................................... 85,000,000 85,000,000
Class F Preferred Stock..................................................... 30,000,000 30,000,000
Class G Preferred Stock..................................................... 25,000,000 25,000,000
STOCKHOLDERS' DEFICIT:
Class A Preferred Stock................................................... 314,286 314,286
Class A Common Stock, $.001 par value, 1,438,000 shares authorized and
573,152 shares issued................................................... 573 573
Paid-in capital........................................................... 18,298,072 18,298,072
Retained deficit.......................................................... (167,131,458) (119,269,863)
----------------- ----------------
(148,518,527) (100,656,932)
Less--
Class A Common Stock held in treasury (81,198 shares), at cost.............. (56,125,661) (56,125,661)
----------------- ----------------
Total stockholders' deficit............................................... (204,644,188) (156,782,593)
----------------- ----------------
Total liabilities and stockholders' deficit............................... $ 1,666,365,804 $ 1,703,426,633
----------------- ----------------
----------------- ----------------
</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
MARCH 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
OPERATING REVENUES:
Service revenue..................................................... $ 37,060,948 $12,482,482
Roaming revenue..................................................... 28,097,210 9,523,390
Equipment sales..................................................... 2,845,179 668,431
Other............................................................... 435,014 9,027
------------ -----------
Total operating revenues.......................................... 68,438,351 22,683,330
------------ -----------
OPERATING EXPENSES:
Cost of service..................................................... 11,548,671 5,179,914
Cost of equipment................................................... 5,817,001 1,170,847
Marketing and selling............................................... 10,210,282 4,051,792
General and administrative.......................................... 12,813,659 4,172,508
Depreciation and amortization....................................... 35,726,788 6,717,629
------------ -----------
Total operating expenses.......................................... 76,116,401 21,292,690
------------ -----------
OPERATING INCOME (LOSS) (7,678,050) 1,390,640
INTEREST EXPENSE...................................................... (28,359,880) (8,767,478)
OTHER INCOME, net..................................................... 1,608,563 1,956,413
------------ -----------
LOSS BEFORE MINORITY INTERESTS IN INCOME OF SUBSIDIARIES, INCOME TAXES
AND EXTRAORDINARY ITEMS............................................. (34,429,367) (5,420,425)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES.......................... (555,716) (632,044)
------------ -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS...................... (34,985,083) (6,052,469)
INCOME TAX BENEFIT.................................................... 13,293,965 364,655
------------ -----------
LOSS FROM CONTINUING OPERATIONS....................................... (21,691,118) (5,687,814)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of income tax benefit
of $7,388,000 and $129,000.......................................... (12,053,673) (2,240,183)
------------ -----------
LOSS BEFORE EXTRAORDINARY ITEMS....................................... (33,744,791) (7,927,997)
EXTRAORDINARY EXPENSE, net of income tax benefit of $196,000 for the
three months ended March 31, 1998................................... -- (3,118,439)
------------ -----------
NET LOSS.............................................................. (33,744,791) (11,046,436)
DIVIDENDS ON PREFERRED STOCK.......................................... (14,115,848) (4,436,577)
------------ -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS............................ $(47,860,639) $(15,483,013)
------------ -----------
------------ -----------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE.....
Before discontinued operations and extraordinary expense............ $ (72.79) $ (21.40)
Discontinued operations............................................. (24.50) (4.73)
Extraordinary expense............................................... -- (6.59)
------------ -----------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE..... $ (97.29) $ (32.72)
------------ -----------
------------ -----------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING...................... 491,954 473,152
------------ -----------
------------ -----------
</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>
THREE MONTHS ENDED MARCH
31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations................................................. $(21,691,118) $(8,806,253)
Adjustments to reconcile net loss to net cash provided by operating activities--
Depreciation and amortization..................................................... 35,726,788 6,717,630
Amortization of bond premium and financing cost................................... 1,786,020 475,694
Deferred income taxes and investment tax credits, net............................. (10,603,293) (1,339,811)
Extraordinary loss on financing cost.............................................. -- 3,314,439
Minority interests in income of subsidiaries...................................... 555,716 657,447
Other............................................................................. 9,169 34,933
Changes in current assets and liabilities--
Accounts receivable............................................................... 4,788,363 (2,373,885)
Other current assets.............................................................. (678,328) 84,843
Accounts payable.................................................................. (12,545,622) (61,461)
Accrued expenses.................................................................. 10,603,132 2,320,864
Deferred revenue and customer deposits............................................ 48,971 25,717
------------ -----------
Net cash provided by operating activities....................................... 7,999,798 1,050,157
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................................ (7,326,705) (1,531,577)
Purchase of cellular license and properties......................................... (18,551,135) (54,313,226)
Increase in receivable--affiliate................................................... (446,873) (8,549,663)
Decrease in payable--affiliate...................................................... (5,011,438) --
Increase in deposits................................................................ -- (1,026,755)
Investments in unconsolidated subsidiaries and other................................ (260,377) (1,132,099)
Proceeds on sale of assets.......................................................... 1,091,509 6,700
------------ -----------
Net cash used in investing activities........................................... (30,505,019) (66,546,620)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................................................ 6,000,000 78,000,000
Repayments of long-term debt........................................................ (4,000,000) (171,513,854)
Issuance of preferred stock......................................................... -- 175,000,000
Interest on restricted investments.................................................. -- (473,365)
Deferred financing costs............................................................ -- (12,043,502)
------------ -----------
Net cash provided by financing activities....................................... 2,000,000 68,969,279
------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................. (20,505,221) 3,472,816
CASH AND CASH EQUIVALENTS, beginning of period........................................ 22,323,734 2,752,399
------------ -----------
CASH AND CASH EQUIVALENTS, end of period.............................................. $ 1,818,513 $ 6,225,215
------------ -----------
------------ -----------
</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
MARCH 31, 1999
(UNAUDITED)
The condensed consolidated balance sheets of Dobson Communications
Corporation ("DCC") and subsidiaries (collectively with DCC, the "Company") as
of March 31, 1999 and December 31, 1998, the condensed consolidated statements
of operations for the three months ended March 31, 1999 and 1998 and the
condensed consolidated statements of cash flows for the three months ended March
31, 1999 and 1998 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, 1998 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, 1998
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
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 cellular telephone services.
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 cellular acquisitions. DCOC has been designated an unrestricted
subsidiary under the Senior Note Indenture which covers the DCC Senior Notes
discussed in Note 4. DOC Cellular Subsidiary was created as the holding company
for the then existing cellular 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.
On September 30, 1998, the Company adopted a plan to spin off Logix as
discussed in Note 3.
In conjunction with the December 1998 acquisition of Sygnet Wireless, Inc.
("Sygnet Acquisition"), the Company formed a new subsidiary, Dobson/Sygnet
Communications Company ("Dobson/Sygnet"). Dobson/Sygnet was created as the
holding company for the subsidiaries acquired in the Sygnet Acquisition.
2. ACQUISITIONS
RECENT ACQUISITIONS
On March 16, 1999, the Company purchased certain assets and customers
relating to the Ohio 2 RSA for $3.9 million. This completes the acquisition of
the Ohio 2 market, which began on September 2, 1998, when the Company acquired
the FCC license of Ohio 2 RSA for $39.3 million. Ohio 2 is located in north
central Ohio and covers an estimated population of 262,300 people with 13,611
subscribers as of March 31, 1999.
7
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
On December 23, 1998, the Company's subsidiary, Dobson/Sygnet acquired
Sygnet Wireless, Inc. for $337.5 million. The acquired markets include cellular
systems in Ohio, Pennsylvania and New York covering an estimated population base
of 2.4 million.
On December 2, 1998, the Company completed the acquisition of the FCC
license for Texas 10 RSA. The purchase price of $55.0 million is being held in
escrow pending resolution of claims made against the titles to the FCC licenses
of the sellers. Texas 10 is located in central Texas and covers an estimated
population of 317,900. The Company is currently negotiating with AT&T Wireless
for the purchase of subscribers and the lease of certain equipment necessary to
operate the system.
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 (including
unexercised options) 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. Subsequently the Company acquired an additional .9%
interest in SCCTP for $.3 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 $56.6 million. The property is
located in south-central Texas in an area bordered by Austin, Houston and San
Antonio.
The acquisition transactions were accounted for as purchases and,
accordingly, their results of operations have been included in the accompanying
condensed consolidated statements of operations from the respective dates of
acquisition. The unaudited pro forma information set forth below includes all
acquisitions which occured during 1998, as if the purchases occurred at the
beginning of 1998. The unaudited pro forma information is presented for
informational purposes only and is not necessarily
8
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
indicative of the results of operations that actually would have been achieved
had the acquisitions been consummated at that time:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1998
---------------
($ IN
THOUSANDS)
(UNAUDITED)
<S> <C>
Operating revenue............................................................ $ 58,182
Loss before discontinued operations and extraordinary items.................. (9,492)
Net loss..................................................................... (42,543)
Net loss applicable to common stockholders................................... (49,852)
Basic net loss applicable to common stockholders per common share............ $ (101.33)
</TABLE>
3. DISCONTINUED OPERATIONS
The Company's wholly-owned subsidiary, Logix, provides switch-based
integrated communications services to small and medium sized business customers
throughout Oklahoma and Texas. Logix also operates long-haul fiber optic
facilities in Oklahoma, Texas and Colorado.
The Company intends to distribute the stock of Logix to certain of the
Company's shareholders in a tax-free spin-off. The timing of the spin-off is
subject to receipt of a favorable tax ruling or favorable tax opinion acceptable
to the Company and its shareholders and to the receipt of consents from the
holders of the Company's outstanding Senior Notes.
Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal 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 Logix operations, assets and liabilities as
discontinued operations.
9
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS (CONTINUED)
The assets and liabilities of such operations have been classified as "Net
liabilities of discontinued operations" on the consolidated balance sheets and
consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
($ IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................... $ 9,002 $ 31,675
Restricted investments--current............................................. 39,262 37,572
Other current assets........................................................ 21,933 36,747
Property, plant and equipment, net.......................................... 96,402 89,508
Restricted investments--non-current......................................... 61,379 61,988
Goodwill.................................................................... 124,973 126,244
Other assets................................................................ 40,306 21,769
----------- ------------
Total assets.............................................................. 393,257 405,503
Current liabilities......................................................... 36,285 36,299
Long-term debt, net of current portion...................................... 375,953 376,149
Other liabilities........................................................... 106 88
----------- ------------
Total liabilities......................................................... 412,344 412,536
----------- ------------
Net liabilities of discontinued operations.................................. $ (19,087) $ (7,033)
----------- ------------
----------- ------------
</TABLE>
The net loss from operations of the wireline segment was classified on the
condensed consolidated statement of operations as "Loss from discontinued
operations." Summarized results of discontinued operations are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
---------- ---------
($ IN THOUSANDS)
<S> <C> <C>
Net revenues...................................................................... $ 26,793 $ 5,290
Loss before income taxes.......................................................... (19,442) (1,670)
Income tax benefit................................................................ 7,388 129
Cumulative effect of change in accounting principle............................... -- (699)
Loss from discontinued operations................................................. (12,054) (2,240)
</TABLE>
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>
DECEMBER 31,
MARCH 31, 1999 1998
---------------- ----------------
<S> <C> <C>
Revolving credit facilities........................................ $ 742,000,000 $ 740,000,000
Dobson/Sygnet Senior Notes......................................... 200,000,000 200,000,000
DCC Senior Notes................................................... 160,000,000 160,000,000
Other notes payable................................................ 4,056,204 4,056,204
---------------- ----------------
Total debt....................................................... 1,106,056,204 1,104,056,204
Less--Current maturities........................................... (1,550,643) (198,871)
---------------- ----------------
Total long term debt............................................. $ 1,104,505,561 $ 1,103,857,333
---------------- ----------------
---------------- ----------------
</TABLE>
REVOLVING CREDIT FACILITIES
The Company's revolving credit facilities consist of the following:
<TABLE>
<CAPTION>
INTEREST RATE
AMOUNT (WEIGHTED AVERAGE
MAXIMUM OUTSTANDING AT RATE AT MARCH 31,
CREDIT FACILITY AVAILABILITY MARCH 31, 1999 1999)
- ------------------------------------------ -------------- -------------- -------------------
<S> <C> <C> <C>
Dobson/Sygnet Credit Facilities........... $ 430,000,000 $ 403,000,000 8.3%(1)
DCOC Credit Facility...................... 200,000,000 200,000,000 7.7%
DOC Credit Facility....................... 250,000,000 139,000,000 6.5%(1)
</TABLE>
- ------------------------
(1) Weighted average computation is based on actual interest rates without
giving effect to the interest rate hedge discussed below.
On December 23, 1998, the Company's subsidiary, Dobson/Sygnet, obtained $430
million of senior secured credit facilities ("Dobson/Sygnet Credit Facilities")
from NationsBank, N.A., consisting of (a) a $50.0 million, 7 3/4 year reducing
revolving credit facility ("Revolving Credit Facility"), (b) a $125.0 million,
7 3/4 year term loan ("Term Loan A"), (c) a $155.0 million, 8 1/4 year term loan
("Term Loan B") and (d) a $100.0 million, 9 year term loan ("Term Loan C").
Dobson/Sygnet's obligations under the Dobson/Sygnet Credit Facility are secured
by all current and future assets of Dobson/Sygnet. Initial proceeds were used
primarily to finance the Sygnet Acquisition described in Note 2. The Company
expects to use the remaining availability to finance Dobson/Sygnet's capital
expenditures and general operations.
11
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
Commencing with the quarter ending December 31, 2000, the borrowing under
the Revolving Credit Facility and Term Loan A will reduce quarterly under the
following annual amortization schedule:
<TABLE>
<CAPTION>
YEAR ANNUAL AMORTIZATION
- ------------------------------------------------------------------------- -------------------
<S> <C>
2000..................................................................... 5.0%
2001..................................................................... 7.5%
2002..................................................................... 7.5%
2003..................................................................... 12.5%
2004..................................................................... 15.0%
2005..................................................................... 25.0%
2006..................................................................... 27.5%
</TABLE>
Commencing with the quarter ending December 31, 2000, the borrowing under
the Term Loan B will reduce quarterly under the following annual amortization
schedule:
<TABLE>
<CAPTION>
YEAR ANNUAL AMORTIZATION
- ------------------------------------------------------------------------- -------------------
<S> <C>
2000..................................................................... 2.5%
2001..................................................................... 2.5%
2002..................................................................... 2.5%
2003..................................................................... 7.5%
2004..................................................................... 15.0%
2005..................................................................... 25.0%
2006..................................................................... 27.5%
2007..................................................................... 17.5%
</TABLE>
Term Loan C will amortize annually under the following schedule:
<TABLE>
<CAPTION>
YEAR ANNUAL AMORTIZATION
- ------------------------------------------------------------------------- -------------------
<S> <C>
1999-2006................................................................ 1.0%
2007..................................................................... 92.0%
</TABLE>
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. At the same time, the Company's subsidiary DOC established a $250 million
senior secured credit facility (the "DOC Credit Facility") to replace its
existing revolving credit facility established on February 28, 1997. The DOC
Credit 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 Credit Facility. Initial proceeds from the DCOC Credit Facility
and DOC Credit Facility were used primarily to refinance existing indebtedness
and finance the 1998 acquisitions described above. The Company expects to use
the remaining availability under the DCOC Credit Facility and DOC Credit
Facility to finance capital expenditures, consummate future acquisitions and
fund general corporate operations. The facilities will terminate in 2006.
12
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
The Dobson/Sygnet Credit Facilities, the DCOC Credit Facility and the DOC
Credit 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.
In connection with the closing of the DOC Credit Facility, the Company
extinguished a previous 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 consolidated statement of operations, net of tax, for
the three months ended March 31, 1998 as an extraordinary expense.
SENIOR NOTES
On December 23, 1998, the Company's subsidiary, Dobson/Sygnet, issued $200
million of 12.25% Senior Notes maturing in 2008 ("Dobson/Sygnet Senior Notes").
The net proceeds were used to finance the Sygnet Acquisition described in Note 2
and to purchase $67.7 million of securities pledged to secure payment of the
first six semi-annual interest payments on the Dobson/Sygnet Senior Notes, which
begin on June 15, 1999. The pledged securities are reflected as restricted cash
and investments in the Company's consolidated balance sheets. The Dobson/Sygnet
Senior Notes are redeemable at the option of the Company in whole or in part, on
or after December 15, 2003, initially at 106.125%. Prior to December 15, 2001,
the Company may redeem up to 35% of the principal amount of the Dobson/Sygnet
Senior Notes at 112.25% with proceeds from equity offerings, provided that at
least $130 million remains outstanding.
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
acquisition of the Company's Maryland markets and to purchase securities pledged
to secure payment of the first four semi-annual interest payments on the DCC
Senior Notes, which began on October 15, 1997. The pledged securities are
reflected as restricted cash and investments in the Company's 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 equity offerings, provided that
after any such redemption at least $104 million remains outstanding.
OTHER NOTES PAYABLE
Other notes payable represents the amount financed with the United States
Government for nine PCS licenses.
INTEREST RATE HEDGES
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 DOC Credit Facility. In 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. In March 1999, the Company entered into an
interest rate swap that effectively fixed the interest rate on $110.0 million of
the principal outstanding on the Dobson/Sygnet credit facilities at
approximately 5.48% plus a factor used on our leverage. The term of the interest
rate swap is approximately 24 months.
13
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' DEFICIT:
As of March 31, 1999, the Company's authorized and outstanding capital stock
is as follows:
<TABLE>
<CAPTION>
LIQUIDATION
# OF SHARES # OF SHARES PAR VALUE PREFERENCE
CLASS TYPE AUTHORIZED ISSUED PER SHARE DIVIDENDS PER SHARE REDEMPTION DATE
- -------------- ----------------- ----------- ----------- ----------- -------------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Common Stock 1,438,000 573,152 $ .001 As declared -- --
Class B Common Stock 31,000 -- $ .001 As declared -- --
Class C Common Stock 31,000 -- $ .001 As declared -- --
----------- -----------
1,500,000 573,152
Senior
Exchangeable Preferred Stock 550,000 197,309 $ 1.00 12.25% Cumulative $ 1,000 Jan. 15, 2008
Additional Preferred Stock 184,000 65,151 $ 1.00 12.25% Cumulative $ 1,000 Jan. 15, 2008
Class A Preferred Stock 450,000 314,286 $ 1.00 5% Non-cumulative $ 70 --
Class C Preferred Stock 100,000 -- $ 1.00 8% Cumulative $ 16.23 --
Class D Preferred Stock 85,000 75,094 $ 1.00 15% Cumulative $1,131.92 after
Dec. 23, 2010
Class E Preferred Stock 405,000 -- $ 1.00 15% Cumulative $1,131.92 after
Dec. 23, 2010
Class F Preferred Stock 205,000 30,000 $ 1.00 16% Cumulative $ 1,000 Dec. 31, 2010
Class G Preferred Stock 62,000 37,853 $ 1.00 16% Cumulative $ 660.40 90 days after an
initial public
offering
Class H Preferred Stock 62,000 -- $ 1.00 16% Cumulative $ 660.45 after
Dec. 23, 2010
Other Preferred Stock 397,000 -- $ 1.00 -- -- --
----------- -----------
2,500,000 719,693
<CAPTION>
OTHER
FEATURES,
RIGHTS,
PREFERENCES
CLASS AND POWERS
- -------------- -------------
<S> <C>
Class A Voting
Class B Non-voting
Class C Non-voting
Senior
Exchangeable Non-voting
Additional Non-voting
Class A Non-voting
Class C Non-voting
Class D Convertible
Class E Non-voting
Class F Non-voting
Class G Non- voting,
convertible
Class H Non-voting
Other --
</TABLE>
In January 1999, the Company issued cumulative quarterly dividends in the
form of 6,494 additional shares of Senior Exchangeable preferred stock (having a
liquidation preference of $6.5 milion) which represented non-cash financing
activity, and thus are not included in the accompanying condensed consolidated
statement of cash flows.
6. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of interest pledge deposits for the
Dobson/Sygnet Senior Notes and the DCC Senior Notes. The Dobson/Sygnet Senior
Notes interest pledge deposit of approximately $68.8 million includes the
initial deposit of $67.7 million (as discussed in Note 4), plus interest earned.
The DCC Senior Notes interest pledge deposit of approximately $9.5 million
includes an initial deposit of $38.4 million, net of interest earned and
payments issued to bondholders. Amortization expense of $232,070 and $145,818
was recorded for the three months ended March 31, 1999 and 1998, respectively,
for bond premiums recorded with the purchase of the restricted investments.
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-dilutive.
14
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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. Under SFAS 133, the Company would
record a liability of $3.4 million relating to its interest rate hedge valuation
at March 31, 1999. The Company has not determined the timing or method of
adoption of SFAS 133.
9. 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 $65.0 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 $32.5 million remained at March 31, 1999.
The Company entered into an additional equipment supply agreement with a
second vendor on January 13, 1998. The Company agreed to purchase approximately
$81.0 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, $55.2 million remained at March 31, 1999.
10. SUBSEQUENT EVENT
On May 5, 1999, the Company completed the private offering for $170 million
of a series of 13% senior exchangeable preferred stock due 2009. The net
proceeds from the private offering of the preferred stock will be used to redeem
outstanding shares of the Company's Class F and Class G Preferred Stock, to
reduce bank debt at DCOC and for general corporate purposes, including
acquisitions.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a leading provider of rural cellular telephone services.
Since it commenced providing cellular services in 1990 in Oklahoma and the Texas
Panhandle, the Company has rapidly expanded its cellular operations with an
acquisition strategy targeting underdeveloped rural and suburban areas which
have a significant number of potential customers with substantial needs for
cellular communications. At March 31, 1999, the Company's cellular systems
covered a population of 5.7 million in Arizona, California, Kansas, Maryland,
Missouri, New York, Ohio, Oklahoma, Pennsylvania and Texas.
ACQUISITIONS
The Company continually evaluates opportunities to acquire additional
cellular systems. The following table sets forth the cellular markets and
systems acquired by the Company since 1995 (ownership in parentheses if not 100%
owned by the Company):
<TABLE>
<CAPTION>
PURCHASE PRICE
ACQUISITION ($ IN MILLIONS) DATE
- ---------------------------------------------------------- --------------- ------------------
<S> <C> <C>
Sygnet.................................................... $ 337.5 December 1998
Texas 10.................................................. 55.0 December 1998
Ohio 2.................................................... 39.3 September 1998
California 7.............................................. 21.0 July 1998
Santa Cruz (87.3%)........................................ 31.2 June 1998
California 4.............................................. 90.9 April 1998
Texas 16.................................................. 56.6 January 1998
Arizona 5 (75%)........................................... 39.8 October 1997
East Maryland............................................. 75.8 March 1997
West Maryland............................................. 77.6 February 1997
Kansas/Missouri........................................... 30.0 March 1996
</TABLE>
REVENUE
The cellular revenues of the Company consist of service, roaming and
equipment sales revenues. There has been an industry trend of declining average
revenue per minute, as competition among service providers has led to reductions
in rates for airtime and subscriptions and other charges. The Company believes
that the impact of this trend will be mitigated by increases in the number of
cellular telecommunications subscribers and the number of minutes of usage per
subscriber. There has also been a broad trend in the cellular 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 41.1% and 42.0% of the Company's cellular revenue for
the three months ended March 31, 1999 and 1998, 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 such lower roaming rates mitigate against this trend; however,
there can be no assurance that such trend will not materially impact it in the
future. The Company's roaming yield (roaming revenue, which includes airtime,
toll charges and surcharges, divided by roaming minutes of use) was $.57 and
$.67 per minute for the three months ended March 31, 1999 and 1998,
respectively.
The Company's overall cellular penetration rates increased for the
three-month period ended March 31, 1999 compared to the same period in 1998 due
to the incremental penetration gains in existing
16
<PAGE>
markets. The Company believes that as its cellular penetration rates increase,
the increase in new subscriber revenue will exceed the loss of revenue
attributable to the cellular churn rate.
In recent years, the Company and other cellular providers, 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 equipment sales, which
have resulted in increased marketing and selling costs per gross additional
subscriber. 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 cellular subscribers.
COSTS AND EXPENSES
The Company's primary operating expense categories include cost of service,
cost of equipment, marketing and selling, general and administrative and
depreciation and amortization.
The Company's 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.
The Company's cost of equipment represents the cost associated with
telephone equipment and accessories sold to customers.
The Company's marketing and selling costs include advertising, compensation
paid to sales personnel and independent agents and all other costs to market and
sell cellular products and services and costs related to customer retention.
Commissions are paid to direct sales personnel for new business generated.
Independent sales agents receive commissions for generating new sales and
ongoing sales to existing customers.
The Company's general and administrative costs include all infrastructure
costs such as customer support, billing, collections, and corporate
administration.
DISCONTINUED OPERATIONS
The Company, through its wholly-owned subsidiary, Logix, provides
switch-based integrated communications services to small and medium-sized
business customers throughout Oklahoma and Texas. Logix also operates long-haul
fiber optic facilities in Oklahoma, Texas and Colorado.
The Company intends to distribute the stock of Logix to certain of the
Company's shareholders in a tax-free spin-off. The timing of the spin-off is
subject to receipt of a favorable tax ruling or favorable tax opinion acceptable
to the Company and its shareholders and to the receipt of consents from the
holders of the Company's outstanding Senior Notes.
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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
OPERATING REVENUE. For the three months ended March 31, 1999, total
operating revenue increased $45.7 million, or 201.7%, to $68.4 million from
$22.7 million for the comparable period in 1998. Total service, roaming and
equipment revenue represented 54.2%, 41.1% and 4.2%, respectively, of total
operating revenue during the three months ended March 31, 1999 and 55.0%, 42.0%,
and 2.9%, respectively, of total operating revenue during the three months ended
March 31, 1998.
17
<PAGE>
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue....................................................... $ 37,061 $ 12,483
Roaming revenue....................................................... 28,097 9,523
Equipment sales....................................................... 2,845 668
Other revenue......................................................... 435 9
--------- ---------
Total............................................................... $ 68,438 $ 22,683
--------- ---------
--------- ---------
</TABLE>
Service revenue increased $24.6 million, or 196.9%, to $37.1 million in the
three months ended March 31, 1999 from $12.5 million in the same period of 1998.
Of the increase, $22.4 million was attributable to acquisitions. The remaining
$2.2 million was primarily attributable to increased penetration and usage in
the Central and Eastern Regions. The Company's subscriber base increased 246.2%
to 381,846 at March 31, 1999 from 110,283 at March 31, 1998. Approximately
230,045 subscribers were added since March 31, 1998 as a result of acquisitions.
The Company's average monthly service revenue per subscriber decreased 12.8% to
$34 for the three months ended March 31, 1999 from $39 for the comparable period
in 1998 due to the addition of new lower rate subscribers in the Northern Region
and competitive market pressures.
Roaming revenue increased $18.6 million, or 195.0%, to $28.1 million in the
three months ended March 31, 1999 from $9.5 million for the comparable period of
1998. Of the increase, $13.9 million was attributable to acquisitions. The
remaining $4.7 million was primarily attributable to increased roaming minutes
in the Central and Eastern Regions due to expanded coverage areas and increased
usage in these markets.
Equipment sales of $2.8 million in the three months ended March 31, 1999
represented an increase of $2.1 million, or 325.7%, from $.7 million in the same
period of 1998, as the Company sold more equipment during the three months ended
March 31, 1999 as a result of growth in subscribers.
COST OF SERVICE. For the three months ended March 31, 1999, the total cost
of service increased $6.3 million, or 123.0% to $11.5 million from $5.2 million
for the comparable period in 1998. Of the increase, $4.7 million was
attributable to acquisitions. The remaining $1.6 million was primarily
attributable to increased subscribers and minutes of use in the Central and
Eastern Regions and expanded use of rerating agreements with providers adjacent
to the Company's markets. As a percentage of service and roaming revenue, cost
of cellular service decreased to 17.7% for the three months ended March 31, 1999
from 23.5% for the same period in 1998. This decrease is primarily a result of a
reduction in rates charged by third-party cellular providers for providing
service to the Company subscribers.
COST OF EQUIPMENT. For the three months ended March 31, 1999, cost of
equipment increased $4.6 million, or 396.8% to $5.8 million during 1999 from
$1.2 million in the same period of 1998, primarily from increases in the volume
of equipment sold due to the growth in subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $6.1
million, or 152.0%, to $10.2 million for the three month period ended March 31,
1999 from $4.1 million in the comparable period of 1998. As a percentage of
total operating revenue, marketing and selling costs decreased to 14.9% for the
three months ended March 31, 1999 from 17.9% for the same period in 1998. The
number of gross subscribers added in the first quarter of 1999 was 35,065. The
number of gross subscribers added in the first quarter 1998 was 11,196.
18
<PAGE>
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $8.6 million, or 207.1%, to $12.8 million for the three month period
ended March 31, 1999 from $4.2 million for the same period in 1998. As a
percentage of total operating revenue, general and administrative costs
increased slightly to 18.7% for the three month period ended March 31, 1999 from
18.4% in the comparable period of 1998. The increase year over year is a result
of increased infrastructure costs such as customer service, billing, collections
and administrative costs as a result of the overall growth of the Company.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended March 31,
1999, depreciation and amortization expense increased $29.0 million, or 431.8%
to $35.7 million in the three months ended March 31, 1999 from $6.7 million in
the same period of 1998. Depreciation and amortization of assets acquired in
acquisitions accounted for substantially all of the increase in the first
quarter 1999 compared to the same period in 1998.
INTEREST EXPENSE. For the three months ended March 31, 1999, interest
expense increased $20.0 million, or 228.9%, to $28.8 million in the three months
ended March 31, 1999 from $8.8 million in the same period of 1998. The increase
was primarily a result of increased borrowings in 1998 to finance the Company's
acquisitions.
EXTRAORDINARY EXPENSE. During the first quarter 1998, the Company incurred
an extraordinary pretax loss of approximately $3.3 million as a result of
writing off previously capitalized financing costs associated with revolving
credit facilities that were refinanced in March 1998.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the year 2000 or process data that
includes it, potentially causing data miscalculations, inaccuracies, operational
malfunctions or failures.
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. We have been in contact with all of the vendors of
products and services that we believe are critical to our operations. The
representation from our vendors pertaining to Year 2000 compliance has come in
writing directly to us, in contracts, and by accessing Year 2000 information
available at their Web sites. While all of the vendors have provided some type
of assurance that their products will be Year 2000 compliant, not all have
provided us expressly with a "Year 2000 Compliance Statement" and/or a "Year
2000 Warranty." Our focus with our vendors has been directed toward what
assurances of Year 2000 compliance they can provide in the form of documented
Year 2000 planning and testing and third party audits.
From an information systems standpoint, the Company has historically relied
on outsourcing relationships for most of its business and operational support
applications. In addition, the Company uses packaged software from outside
vendors for those applications that it has not outsourced. As a result, the
Company has focused on identifying 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
19
<PAGE>
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.
However, there are two critical systems that will not be replaced until third
quarter 1999. Those systems are one Ericsson switching system in New York and
portions of our ITDS billing system. The Ericsson switching equipment will be
replaced with Year 2000 compliant Nortel equipment. The Company expects to
complete this replacement in the third quarter of 1999. In the first quarter of
1999, the Company decided to replace its current billing system vendor, ITDS,
with a new vendor, H.O. Systems, which is Year 2000 compliant. The Company is in
the process of implementing the H.O. Systems software throughout its other
markets and expects to complete the implementation in the third quarter of 1999.
The Company estimates total costs of approximately $.75 million to upgrade or
replace those systems that are not Year 2000 compliant and will not be upgraded
through existing maintenance or service agreements. The estimated costs for Year
2000 compliance do not include the costs of upgrading the New York system or
replacing the billing vendor, as those decisions were made for business reasons
outside of the Year 2000 issue and would have been made regardless of whether
the systems currently in place were Year 2000 compliant. All of the Company's
automated systems and services are or will be Year 2000 compliant by the end of
the third quarter of 1999.
The Company's contingency planning is being addressed in two parts. First,
in the event that a product or service is not compliant by the end of the second
quarter of 1999, where feasible, the Company has identified alternate compliant
products or services that can replace them. Second, possible disruptions to
operations after the rollover to the Year 2000 are being addressed as a part of
the Company's overall disaster recovery plan, which will be completed by the end
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, if a critical vendor
does not provide adequate assurance that its product is Year 2000 compliant
through test plans, test results or third party audit results, the Company will
either replace the product with one that has provided proof of compliance or
will conduct its own Year 2000 tests.
In the event any of the Company's vendors have represented that it is Year
2000 compliant and, in fact, it is not, the Company would have no recourse
against this vendor other than an action for damages for either breach of
contract or, in the absence of a contractual obligation, for negligence if the
Company could establish that the vendor had a legal duty to the Company to be
Year 2000 compliant. If the Company is unable to provide systems and services to
its customers, because either their own systems or those of its vendors are not
Year 2000 compliant, the Company's reasonably likely worst case scenario is that
the Company would experience a reduction in their operating revenues which could
adversely affect their ability to meet our operating and financial obligations,
including the Company's obligations with respect to the notes.
LIQUIDITY AND CAPITAL RESOURCES
Dobson Communications is a holding company with no direct operations and no
significant assets other than the stock of its subsidiaries. The Company depends
on the cash flows of its subsidiaries to meet their obligations, including their
obligations to pay interest and principal on their indebtedness, and dividends
on the Senior Preferred Stock and Preferred Stock. The Company's subsidiaries
are separate legal entities that have no obligation to pay any amounts owed by
the Company or to make any funds available to the Company. The ability of the
Company's subsidiaries to distribute funds to the Company are and will be
restricted by the terms of existing and future indebtedness including the
Company's credit facilities.
20
<PAGE>
The Company's cellular operations require substantial capital to acquire,
construct and expand cellular telephone systems and to fund operating
requirements. The Company has financed its operations through bank debt and the
sale of debt and equity.
At March 31, 1999, the Company had a working capital deficit of $(16.1)
million (a ratio of current assets to current liabilities of .8:1) and an
unrestricted cash balance of $1.8 million, which compares to working capital of
$13.5 million (a ratio of current assets to current liabilities of 1.1:1) and an
unrestricted cash balance of $22.3 million at December 31, 1998.
The Company's net cash provided by operating activities totaled $6.2 million
for the three month period ended March 31, 1999 compared to $1.1 million for the
same period of 1998. The increase of $5.1 million was primarily due to
depreciation and amortization, the change in deferred credits and the change in
current assets and liabilities offset by the Company's net loss for the period.
Net cash used in investing activities, which totaled $30.5 million and $66.5
million for the three months ended March 31, 1999 and 1998, respectively,
principally related to acquisitions and capital expenditures in all periods.
Acquisitions and their related costs accounted for $18.6 million and $54.3
million and capital expenditures were $7.3 million and $1.5 million for the
three month period ended March 31, 1999 and 1998, respectively.
Net cash provided by financing activities was $3.8 million the three month
period ended March 31, 1999 compared to $69.0 million for the same period of
1998. Financing activity sources for the three months ended March 31, 1999
consisted primarily of $6.0 million of proceeds from bank borrowings offset by
the repayment of $4.0 million.
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 $160.0
million of indebtedness under its revolving credit facilities. In 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. In March 1999, the Company entered into an
interest rate swap that effectively fixed the interest rate on $110.0 million of
the principal outstanding on the Dobson/Sygnet Credit Facilities at
approximately 5.48% plus a factor used on our leverage. The term of the interest
rate swap is approximately 24 months.
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 to the Company is paid or
extinguished.
The Company's capital expenditures (excluding cost of acquisitions and
discontinued operations) were $7.3 million for the three months ended March 31,
1999 and the Company expects its capital expenditures (excluding cost of
acquisitions) to be approximately $45 million to $50 million for all of 1999.
The Company has not budgeted any amounts to be expended in 1999 with respect to
the systems which may be acquired in other 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 and whether
the Company consummates additional acquisitions.
On December 23, 1998, a subsidiary of the Company acquired all of the
outstanding capital stock of Sygnet for $337.5 million. The Sygnet Acquisition
was financed through borrowings under the Dobson/ Sygnet Credit Facilities, the
net proceeds of offering the Additional Preferred Stock, the Equity Investments
and the Tower Sale Leaseback ("Sygnet Financing").
The Company has agreed to purchase approximately $65.0 million of cell site
and switching equipment between June 1997 and November 2001. Of this commitment,
approximately $32.5 million remained at March 31, 1999. Under another equipment
supply agreement, the Company agreed to purchase
21
<PAGE>
approximately $81.0 million of cell site and switching equipment by January 13,
2002. Of this commitment, $55.2 million remained at March 31, 1999.
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 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 1999 with respect to the buildout of a PCS system.
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"). Under the terms of the DCOC Credit Facility, an additional
$75.0 million revolving credit facility may be established for acquisitions.
This uncommitted facility requires that the Company have borrowings outstanding
of at least two-thirds of the committed amount under the DCOC Credit Facility.
DCOC's obligations under the DCOC Credit 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 $250.0 million senior secured credit facility (the "DOC Credit
Facility") to replace a prior bank facility. The DOC Credit Facility is 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 Logix and the Arizona 5 Partnership, have guaranteed
DOC's obligations under the DOC Credit Facility. The DCOC Credit Facility and
the DOC Credit 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. To date, the Company has met the required financial ratios. The DOC
Credit Facility and DCOC Credit Facility each amortize quarterly beginning June
30, 2000 and terminate on June 30, 2006. At March 31, 1999, the Company had
credit available of $111.0 million under the DOC Credit Facility, subject to
covenant limitations and no availability under the DCOC Credit Facility. The
Company expects to borrow $9.1 million under the DOC Credit Facility to close
the Maryland 1 Acquisition and $6.0 million under the Dobson/Sygnet Credit
Facilities to close the Pennsylvania 2 Acquisition.
Dobson/Sygnet is a party to a credit agreement with NationsBank for an
aggregate $430.0 million, consisting of a $50.0 million revolving credit
facility and $380.0 million of term loan facilities. The obligations under the
Dobson/Sygnet Credit Facilities are secured by a pledge of the capital stock of
Dobson/Sygnet's operating subsidiary as well as a lien on substantially all of
the assets of Dobson/Sygnet and its operating subsidiary. The Dobson/Sygnet
Credit Facilities require Dobson/Sygnet and the Company to maintain certain
financial ratios. The failure to maintain such ratios would constitute an event
of default, notwithstanding Dobson/Sygnet's ability to meet its debt service
obligations. The ability of Dobson/Sygnet to borrow under the Dobson/Sygnet
Credit Facilities will be limited by the requirement that, on a quarterly basis
beginning December 31, 2000, the amount available under the Dobson/Sygnet Credit
Facilities will reduce until they terminate. At March 31, 1999, the Company had
credit available of $27.0 million under the Dobson/Sygnet Credit Facilities,
subject to covenant limitations.
The Dobson/Sygnet Notes bear interest at an annual rate of 12.25% and mature
in 2008. Of the net proceeds $67.7 were used to purchase securities pledged to
secure the first six semi-annual interest payments, which begin June 15, 1999.
As part of the Sygnet Financing, Sygnet sold to Dobson Tower, a wholly owned
subsidiary of the Company, substantially all of the towers it owned for $25.0
million. Dobson Tower then leased these towers
22
<PAGE>
back to Sygnet under an operating lease, with net annual lease payments of
approximately $1.4 million. Dobson Tower obtained the funds for such purchase
from borrowings under a new credit facility of $17.5 million and the sale of
$7.7 million of preferred stock of Dobson Tower to an affiliate of the Company.
The Company, through Dobson/Sygnet's predecessor, is party to an agreement
to purchase the FCC license for, and certain assets related to, Pennsylvania 2
RSA for $6.0 million (the "Pennsylvania 2 Acquisition"). Because the seller's
title to the license remains subject to administrative and judicial review, the
closing of such acquisition has been delayed. Pending such closing,
Dobson/Sygnet is managing the operation of the cellular system in the market
under the supervision and control of the seller. Recently, the Company entered
into an agreement for the purchase of the FCC license for, and certain assets
related to, Maryland 1 RSA and an unserved portion of Cumberland, Maryland MSA
for $9.1 million in cash (the "Maryland 1 Acquisition"), subject to adjustment.
The Company has no agreements with respect to any acquisitions other than the
Pennsylvania 2 Acquisition and the Maryland 1 Acquisition.
Although the Company cannot provide any assurance, the Company believes
that, assuming successful implementation of the Company's strategy, including
the further development of its cellular systems and significant and sustained
growth in its cash flow, borrowings under the Dobson/Sygnet Credit Facilities,
the DOC Credit Facility, the Tower Sale Leaseback, the DCOC Credit Facility and
cash flow from operations, will be sufficient to consummate the Maryland 1
Acquisition and the Pennsylvania 2 Acquisition and are expected to be sufficient
to satisfy the Company's currently expected capital expenditure, working capital
and debt service obligations. However, the Company will need to refinance the
Dobson/Sygnet Credit Facilities, the DOC Credit Facility, the DCOC Credit
Facility, the DCC Senior Notes and the Dobson/ Sygnet Notes at their maturities
and refinance its mandatory redemption obligations with respect to its preferred
stock, including the Additional Preferred Stock and Senior Exchangeable
Preferred Stock. The Company's ability to do so will depend on, among other
things, its financial condition at the time, the restrictions in the instruments
governing its indebtedness and other factors, including market conditions beyond
the control of the Company. The actual amount and timing of the Company's future
capital requirements may differ materially from the Company's estimates as a
result of, among other things, the demand for the Company's services and
regulatory, technological and competitive developments. Sources of additional
financing may include commercial bank borrowings, vendor financing and the sale
of equity or debt securities. The Company cannot assure you that any such
financing will be available on acceptable terms or at all.
EFFECT OF NEW ACCOUNTING STANDARDS
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 in current earnings. SFAS
133 will be effective for fiscal years beginning after June 15, 1999. Under SFAS
133, the Company would record a liability of $3.4 million relating to its
interest rate hedge valuation at March 31, 1999. The Company 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
23
<PAGE>
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk relates to changes in interest rates.
Market risk is the potential loss arising from adverse changes in market prices
and rates, including interest rates. The Company does not enter into derivatives
or other financial instruments for trading or speculative purposes. The
objective of our financial risk management is to minimize the negative impact of
interest rate fluctuations on our earnings and equity. The counterparty is a
major financial institution. During the first quarter 1999, the Company had an
interest rate hedge on $160 million of its outstanding indebtedness under the
DOC Credit Facility. Increases in interest expense related to the interest rate
hedge for the three months ended March 31, 1999 and 1998 were reflected in
income and were immaterial.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. Based
on our market risk sensitive instruments outstanding at March 31, 1999, we have
determined that there was no material market risk exposure to our consolidated
financial position, results of operations or cash flows as of such date.
24
<PAGE>
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--Three Months Ended March 31, 1999
</TABLE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K during the quarter ended
March 31, 1999, which reported the acquisition of Sygnet Wireless, Inc. and
its wholly-owned subsidiary, Sygnet Communications, Inc. under "Item 2.
Acquisition of Assets." The date of the report was January 7, 1999.
The Company filed a Current Report on Form 8-K/A to amend the previous
Current Report filed on January 7, 1999 solely to add the financial
statements of the business acquired required by Item 7(a), pro forma
financial statements required by Item 7(b) and additional exhibits required
by Item 7(c). The date of the report was January 19, 1999.
25
<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: May 17, 1999 DOBSON COMMUNICATIONS CORPORATION
(registrant)
/s/ EVERETT R. DOBSON
-----------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: May 17, 1999 /s/ BRUCE R. KNOOIHUIZEN
-----------------------------------------
Bruce R. Knooihuizen
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,818,513
<SECURITIES> 78,262,729
<RECEIVABLES> 40,316,244
<ALLOWANCES> (1,805,039)
<INVENTORY> 0
<CURRENT-ASSETS> 81,119,148
<PP&E> 210,541,037
<DEPRECIATION> (42,662,076)
<TOTAL-ASSETS> 1,666,365,804
<CURRENT-LIABILITIES> 97,261,075
<BONDS> 1,104,505,561
388,217,101
314,286
<COMMON> 573
<OTHER-SE> (204,959,047)
<TOTAL-LIABILITY-AND-EQUITY> 1,666,365,804
<SALES> 2,845,179
<TOTAL-REVENUES> 68,438,351
<CGS> (5,817,001)
<TOTAL-COSTS> (76,116,401)
<OTHER-EXPENSES> 1,608,563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (28,359,880)
<INCOME-PRETAX> (34,985,083)
<INCOME-TAX> 13,293,965
<INCOME-CONTINUING> (21,691,118)
<DISCONTINUED> (12,053,673)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,744,791)
<EPS-PRIMARY> (97.29)
<EPS-DILUTED> 0
</TABLE>
