<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 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, 333-50107, and 333-71633
------------------------
DOBSON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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 November 12, 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 September 30,
1999 and December 31, 1998................................ 2
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended
September 30, 1999 and 1998............................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 3. Quantitative and Qualitative Disclosure about Market Risk... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 27
Item 2. Changes in Securities and Use of Proceeds................... 27
Item 3. Defaults Upon Senior Securities............................. 27
Item 4. Submission of Matters to a Vote of Security Holders......... 27
Item 5. Other Information........................................... 27
Item 6. Exhibits and Reports on Form 8-K............................ 27
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 339,308 $ 22,323,734
Restricted cash and investments........................... 23,136,174 30,074,946
Accounts receivable, net.................................. 54,340,677 43,299,568
Other current assets...................................... 10,092,804 8,589,050
-------------- --------------
Total current assets.................................... 87,908,963 104,287,298
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 187,291,097 173,054,329
-------------- --------------
OTHER ASSETS:
Receivables--affiliates................................... 8,199,980 7,275,262
Restricted investments.................................... 34,635,000 45,505,020
Cellular license acquisition costs, net................... 1,227,578,926 1,250,790,448
Deferred costs, net....................................... 69,017,136 66,640,301
Other intangibles, net.................................... 48,138,723 52,795,841
Other..................................................... 3,810,895 3,078,134
-------------- --------------
Total other assets...................................... 1,391,380,660 1,426,085,006
-------------- --------------
Total assets.......................................... $1,666,580,720 $1,703,426,633
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.......................................... $ 30,938,111 $ 47,536,672
Accrued expenses.......................................... 22,442,570 14,222,306
Notes payable............................................. 17,500,000 17,500,000
Deferred revenue and customer deposits.................... 7,268,293 5,738,381
Current portion of long-term debt......................... 2,113,960 198,871
Accrued dividends payable................................. 21,622,406 5,603,856
-------------- --------------
Total current liabilities............................... 101,885,340 90,800,086
NET LIABILITIES OF DISCONTINUED OPERATIONS.................. 48,844,403 7,033,166
ACCOUNTS PAYABLE--AFFILIATE................................. -- 5,011,438
LONG-TERM DEBT, net of current portion...................... 1,039,843,580 1,103,857,333
DEFERRED CREDITS............................................ 219,349,800 245,630,000
MINORITY INTERESTS.......................................... 27,109,750 26,557,203
SENIOR EXCHANGEABLE PREFERRED STOCK, net.................... 440,797,350 241,320,000
Class D Convertible Preferred Stock......................... 85,000,000 85,000,000
Class F Preferred Stock..................................... -- 30,000,000
Class G Preferred Stock..................................... -- 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.......................................... (258,736,773) (119,269,863)
-------------- --------------
(240,123,842) (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............................. (296,249,503) (156,782,593)
-------------- --------------
Total liabilities and stockholders' deficit........... $1,666,580,720 $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 STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Service revenue........................................ $ 40,875,369 $ 19,216,480 $ 117,891,735 $ 47,769,305
Roaming revenue........................................ 43,990,647 19,979,904 107,295,804 45,916,023
Equipment revenue and other............................ 3,934,234 1,341,706 9,952,331 2,660,727
------------ ------------ ------------- -------------
Total operating revenues............................. 88,800,250 40,538,090 235,139,870 96,346,055
------------ ------------ ------------- -------------
OPERATING EXPENSES:
Cost of service........................................ 13,685,107 9,886,446 35,762,477 22,603,067
Cost of equipment...................................... 6,702,972 2,523,246 18,561,827 5,166,528
Marketing and selling.................................. 13,247,426 5,576,180 34,957,280 14,855,588
General and administrative............................. 14,727,809 6,669,649 40,795,364 16,219,389
Depreciation and amortization.......................... 30,119,492 13,170,131 100,019,510 29,713,544
------------ ------------ ------------- -------------
Total operating expenses............................. 78,482,806 37,825,652 230,096,458 88,558,116
------------ ------------ ------------- -------------
OPERATING INCOME:........................................ 10,317,444 2,712,438 5,043,412 7,787,939
OTHER INCOME (EXPENSE):
Interest expense....................................... (26,836,414) (9,831,825) (82,364,725) (25,039,213)
Other income, net...................................... 1,507,652 510,887 3,411,347 3,303,914
------------ ------------ ------------- -------------
LOSS BEFORE MINORITY INTERESTS IN INCOME OF SUBSIDIARIES,
INCOME TAXES, DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEMS.................................................. (15,011,318) (6,608,500) (73,909,966) (13,947,360)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES............. (644,695) (582,074) (2,124,884) (1,963,308)
------------ ------------ ------------- -------------
LOSS BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEMS.................................... (15,656,013) (7,190,574) (76,034,850) (15,910,668)
INCOME TAX BENEFIT....................................... 5,952,054 2,730,773 28,891,955 4,864,070
------------ ------------ ------------- -------------
LOSS FROM CONTINUING OPERATIONS.......................... (9,703,959) (4,459,801) (47,142,895) (11,046,598)
LOSS FROM DISCONTINUED OPERATIONS, net of income tax
benefit of $9,826,211 and $6,815,441 for the three
months ended September 30, 1999 and 1998, respectively,
and $25,626,241 and $7,267,566 for the nine months
ended September 30, 1999 and 1998, respectively........ (16,032,240) (11,130,733) (41,811,237) (17,184,832)
------------ ------------ ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEMS.......................... (25,736,199) (15,590,534) (88,954,132) (28,231,430)
EXTRAORDINARY EXPENSE, net of income tax benefit of
$671,000 in 1998....................................... -- -- -- (2,643,439)
------------ ------------ ------------- -------------
NET LOSS................................................. (25,736,199) (15,590,534) (88,954,132) (30,874,869)
DIVIDENDS ON PREFERRED STOCK............................. (18,640,823) (6,229,702) (50,512,778) (16,748,786)
------------ ------------ ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS............... $(44,377,022) $(21,820,236) $(139,466,910) $ (47,623,655)
============ ============ ============= =============
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER
COMMON SHARE
Before discontinued operations and extraordinary
expense.............................................. $ (57.62) $ (22.59) $ (198.51) $ (58.74)
Discontinued operations................................ (32.59) (23.53) (84.99) (36.32)
Extraordinary expense.................................. -- -- -- (5.59)
------------ ------------ ------------- -------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER
COMMON SHARE........................................... $ (90.21) $ (46.12) $ (283.50) $ (100.65)
============ ============ ============= =============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING......... 491,954 473,152 491,954 473,152
============ ============ ============= =============
</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 CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations....................... $ (47,142,895) $ (15,833,787)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization........................... 100,019,510 29,713,544
Amortization of bond premium and financing cost......... 4,871,321 1,398,277
Deferred income taxes and investment tax credits, net... (26,280,200) (6,581,015)
Extraordinary loss on financing cost.................... -- 3,314,439
Minority interests in income of subsidiaries............ 2,124,884 2,068,627
Other................................................... 99,850 20,395
Changes in current assets and liabilities--
Accounts receivable..................................... (11,041,109) (10,306,742)
Other current assets.................................... (1,381,856) (69,986)
Accounts payable........................................ (16,598,561) 4,884,350
Accrued expenses........................................ 8,220,264 1,500,999
Deferred revenue and customer deposits.................. 1,529,912 1,279,125
------------- -------------
Net cash provided by operating activities............. 14,421,120 11,388,226
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (40,173,598) (23,792,922)
Acquisitions.............................................. (46,437,966) (200,790,589)
Decrease in payable--affiliate............................ (5,011,438) --
Increase in receivables--affiliate........................ (924,718) (10,056,711)
Acquisition escrow deposit................................ -- (57,150,000)
Investments in unconsolidated subsidiaries and other...... (3,752,204) (1,425,418)
Other..................................................... 25,259 6,700
------------- -------------
Net cash used in investing activities................. (96,274,665) (293,208,940)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 79,000,000 284,000,000
Repayments of long-term debt.............................. (141,098,664) (171,424,854)
Cash dividends............................................ (3,471,621) --
Issuance of preferred stock............................... 170,000,000 175,000,000
Redemption of preferred stock............................. (55,000,000) --
Purchase of restricted investments........................ -- 810,012
Maturities of restricted investments...................... 19,134,000 9,400,000
Interests on restricted investments....................... -- (1,130,925)
Deferred financing costs.................................. (8,694,596) (12,544,874)
------------- -------------
Net cash provided by financing activities............. 59,869,119 284,109,359
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...... (21,984,426) 2,288,645
CASH AND CASH EQUIVALENTS, beginning of period............ 22,323,734 2,752,399
------------- -------------
CASH AND CASH EQUIVALENTS, end of period.................. 339,308 $ 5,041,044
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
The condensed consolidated balance sheets of Dobson Communications
Corporation ("DCC") and subsidiaries (collectively with DCC, the "Company") as
of September 30, 1999 and December 31, 1998, the condensed consolidated
statements of operations for the three and nine months ended September 30, 1999
and 1998 and the condensed consolidated statements of cash flows for the nine
months ended September 30, 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 September 15, 1999, the Company purchased Arizona 1 RSA for
$24.0 million. Arizona 1 is located in the Northwest corner of the state and
covers an estimated population base of approximately 135,000 as of
September 30, 1999.
6
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
On June 24, 1999, the Company's wholly-owned subsidiary, Dobson Cellular of
Maryland, purchased the Maryland 1 RSA for $9.1 million. Maryland 1 is located
in the westernmost county of the state and a small section of West Virginia and
covers an estimated population base of approximately 56,400.
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.
On December 23, 1998, the Company's subsidiary, Dobson/Sygnet, acquired the
outstanding capital stock of 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. Beginning in July 1999, the Company had purchased the
subscribers and began operations in the Texas 10 market.
On July 29, 1998, the Company purchased the FCC cellular license and certain
assets of the California 7 RSA for $21.0 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 $31.0 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 $56.6 million. The property is
located in south-central Texas in an area bordered by Austin, Houston and San
Antonio.
The acquisition transactions were accounted for as purchases and,
accordingly, their results of operations have been included in the accompanying
condensed consolidated statements of operations from the respective dates of
acquisition. The unaudited pro forma information set forth below includes all
acquisitions which occured during 1998 and 1999, as if the purchases occurred at
the beginning of each period presented. The unaudited pro forma information is
presented for informational purposes only and
7
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
is not necessarily indicative of the results of operations that actually would
have been achieved had the acquisitions been consummated at that time:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
($ IN THOUSANDS, EXCEPT ($ IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenue.................... $ 89,848 $ 74,613 $245,421 $200,738
Loss before discontinued operations
and extraordinary
items.............................. (10,122) (18,043) (46,742) (71,094)
Net loss............................. (26,154) (40,516) (93,356) (117,272)
Net loss applicable to common
stockholders....................... (44,795) (46,746) (143,869) (140,792)
Basic net loss applicable to common
stockholders per common share...... $ (91.06) $ (95.02) $(292.44) $(286.19)
</TABLE>
3. DISCONTINUED OPERATIONS
The Company's wholly-owned subsidiary, Logix, provides switch-based
integrated communications services to small and medium sized business customers
throughout Oklahoma and Texas. Logix also operates long-haul fiber optic
facilities in Oklahoma, Texas and Colorado.
The Company intends to distribute the stock of Logix to certain of the
Company's shareholders.
Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions," the consolidated financial statements have been restated for all
periods presented to reflect the Logix operations, assets and liabilities as
discontinued operations.
8
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
3. DISCONTINUED OPERATIONS (CONTINUED)
The assets and liabilities of such operations have been classified as "Net
liabilities of discontinued operations" on the consolidated balance sheets and
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
($ IN THOUSANDS)
Cash and cash equivalents................... $ 2,539 $ 31,675
Restricted investments--current............. 40,186 37,572
Other current assets........................ 25,826 36,747
Property, plant and equipment, net.......... 115,469 89,508
Restricted investments--non-current......... 41,382 61,988
Goodwill.................................... 125,386 126,244
Other assets................................ 60,399 21,769
-------- --------
Total assets.............................. 411,187 405,503
Current liabilities......................... 39,759 36,299
Long-term debt, net of current portion...... 420,162 376,149
Other liabilities........................... 110 88
-------- --------
Total liabilities......................... 460,031 412,536
-------- --------
Net liabilities of discontinued
operations................................ $(48,844) $ (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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
($ IN THOUSANDS) ($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues......................... $ 28,619 $ 25,541 $ 85,359 $ 40,176
Loss before income taxes............. (25,858) (17,946) (67,437) (23,753)
Income tax benefit................... 9,826 6,815 25,626 7,268
Cumulative effect of change in
accounting principle............... -- -- -- (699)
Loss from discontinued operations.... $(16,032) $(11,131) $(41,811) $(17,184)
</TABLE>
9
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
4. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Revolving credit facilities................. $ 678,000,000 $ 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......................... 3,957,539 4,056,204
-------------- --------------
Total debt................................ 1,041,957,539 1,104,056,204
Less--Current maturities.................... (2,113,960) (198,871)
-------------- --------------
Total long term debt...................... $1,039,843,580 $1,103,857,333
============== ==============
</TABLE>
REVOLVING CREDIT FACILITIES
The Company's revolving credit facilities consist of the following:
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING AT INTEREST RATE
MAXIMUM SEPTEMBER 30, WEIGHTED AVERAGE RATE
CREDIT FACILITY AVAILABILITY 1999 AT SEPTEMBER 30, 1999
- --------------- ------------ -------------- ---------------------
<S> <C> <C> <C>
Dobson/Sygnet Credit
Facilities.................. $430,000,000 $406,000,000 8.7%(1)
DCOC Credit Facility.......... 160,000,000 133,000,000 6.5%
DOC Credit Facility........... 250,000,000 139,000,000 7.0%
</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.
10
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
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
$200.0 million senior secured credit facility (the "DCOC Credit Facility"). At
the same time, the Company's subsidiary, DOC, established a $250 million senior
secured credit facility (the "DOC Credit Facility"). On May 10, 1999, the
commitment level and outstanding borrowings on the DCOC Credit Facility were
reduced from the established amount of $200.0 million to $100.0 million.
Subsequently, on July 2, 1999, the Company's lenders increased the DCOC credit
facility commitment level from $100.0 million to $160.0 million. Although the
commitment levels have changed, the obligations under the DCOC Credit Facility
remain secured by all current and future assets of DCOC. In addition, the DOC
Credit Facility remains 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 expects to use the remaining
availability under the DCOC Credit Facility and DOC
11
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
4. LONG-TERM DEBT (CONTINUED)
Credit Facility to finance capital expenditures, consummate future acquisitions
and fund general corporate operations. The facilities will terminate in 2006.
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 nine months ended September 30, 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 began 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
Maryland/Pennsylvania Acquisition which was completed during the first quarter
of 1997. 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. Subsequent to September 30, 1999, we entered
into a definitive agreement to sell our nine PCS licenses for $1.1 million plus
the assumption of these notes payable.
INTEREST RATE HEDGES
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 (approximately 8.76% at September 30, 1999). The
term of the interest rate swap is 24 months. In June 1999, the Company entered
into an interest rate cap agreement
12
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
4. LONG-TERM DEBT (CONTINUED)
terminating on June 14, 2001. The cap agreement minimizes the Company's interest
rate exposure by setting a maximum rate of 7.50% plus a factor used on our
leverage (approximately 8.88% at September 30, 1999) for $160 million of its
indebtedness.
5. STOCKHOLDERS' DEFICIT:
As of September 30, 1999, the Company's authorized and outstanding capital
stock is as follows:
<TABLE>
<CAPTION>
PAR VALUE LIQUIDATION
# OF SHARES # OF SHARES PER PREFERENCE
CLASS TYPE AUTHORIZED ISSUED SHARE DIVIDENDS PER SHARE
----- --------------- ----------- ----------- --------- -------------- -----------
<S> <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 550,000 209,647 $1.00 12.25% $ 1,000
Cumulative
Additional........... Preferred Stock 184,000 69,225 $1.00 12.25% $ 1,000
Cumulative
Senior Exchangeable.. Preferred Stock 500,000 175,402 $1.00 13% Cumulative $ 1,000
Class A.............. Preferred Stock 450,000 314,286 $1.00 5% $ 70
Non-cumulative
Class D.............. Preferred Stock 85,000 75,094 $1.00 15% Cumulative $1,131.92
Class E.............. Preferred Stock 405,000 -- $1.00 15% Cumulative $1,131.92
Other................ Preferred Stock 497,000 -- $1.00 -- --
--------- -------
2,671,000 843,654
========= =======
<CAPTION>
OTHER
FEATURES,
RIGHTS,
PREFERENCES
AND
CLASS REDEMPTION DATE POWERS
----- ------------------- -----------
<S> <C> <C>
Class A.............. -- Voting
Class B.............. -- Non-voting
Class C.............. -- Non-voting
Senior Exchangeable.. Jan. 15, 2008 Non-voting
Additional........... Jan. 15, 2008 Non-voting
Senior Exchangeable.. May 1, 2009 Non-voting
Class A.............. -- Non-voting
Class D.............. after Dec. 23, 2010 Convertible
Class E.............. after Dec. 23, 2010 Non-voting
Other................ -- --
</TABLE>
In May 1999, the Company issued 170,000 shares of 13% senior exchangeable
preferred stock manditorily redeemable in 2009 for $1,000 per share. The net
proceeds from the private offering of the preferred stock were used to redeem
the 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. 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 and equal
to the 12.25% Senior Exchangeable Preferred Stock. On or before May 1, 2004, 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 May 1, 2004. Holders of the preferred stock have no voting rights.
During 1999 and 1998, the Company issued cumulative quarterly dividends in
the form of 39,226 and 5,402 additional shares of 12.25% and 13.00% Senior
Exchangeable preferred stock, respectively (resulting in a total liquidation
preference of $286.3 million and $179.1 million, respectively, as of
September 30, 1999) which represented non-cash financing activity, and thus are
not included in the accompanying condensed consolidated statements of cash
flows.
13
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
6. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of interest pledge deposits for the
Dobson/Sygnet Senior Notes. The Dobson/Sygnet Senior Notes interest pledge
deposit of approximately $57.8 million includes the initial deposit of
$67.7 million (as discussed in Note 4), net of interest earned and payments
issued to bondholders. Amortization expense of $604,407 and $237,729 was
recorded for the nine months ended September 30, 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.
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, 2000. Under SFAS 133, the Company would
record an asset of $.3 million relating to its interest rate hedge valuation at
September 30, 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 $27.8 million remained at September 30, 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, $33.2 million remained at September 30, 1999.
10. SUBSEQUENT EVENT
In October 1999, the Company entered into a memorandum of understanding with
AT&T Wireless, Inc. to establish an equally-owned joint venture that will
acquire, own and operate American Cellular Corporation. Management estimates
that the aggregate acquisition price for American Cellular Corporation will be
$2.32 billion.
14
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
10. SUBSEQUENT EVENT (CONTINUED)
The acquisition will be funded with non-recourse bank debt by the joint
venture and cash equity contributions of up to approximately $372.5 million each
from the two partners. The acquisition is expected to close in the first quarter
of 2000.
In October 1999, Dobson Tower Company, a subsidiary of the Company,
completed the sale of substantially all of the towers acquired by Dobson Tower
Company in the Sygnet acquisition to American Tower Corporation for
approximately $38.7 million. In connection with the sale, another subsidiary of
the Company, Sygnet Communications, Inc., has agreed to lease the towers back
from American Tower Corporation for an initial term of ten years.
The Company has entered into definitive agreements to acquire three cellular
systems for an aggregate purchase price of approximately $125.0 million. These
acquisitions will be financed with borrowings under the Company's credit
facilities and are expected to close during the first quarter of 2000.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading provider of rural and suburban cellular cellular telephone
services. We began providing cellular telephone service in 1990 in Oklahoma and
the Texas Panhandle. We have expanded our cellular operations rapidly since
then, primarily through acquisitions. as of September 30, 1999, our cellular
systems covered a total population of approximately 5.8 million and we had
approximately 424,000 subscribers.
On October 5, 1999, we and AT&T Wireless entered into an equally-owned joint
venture to acquire, own and operate American Cellular for approximately
$2.3 billion, before expenses. American Cellular is one of the largest
independent rural cellular telephone operators in the United States. As of
September 30, 1999, American Cellular's systems covered a total population of
approximately 4.9 million and it had approximately 397,900 subscribers,
primarily in rural areas of the midwestern and eastern United States.
ACQUISITIONS
We continually evaluate opportunities to acquire additional cellular
systems. The following table sets forth the cellular markets and systems we have
acquired since 1995 (ownership in parentheses if not 100% owned by us):
<TABLE>
<CAPTION>
PURCHASE
PRICE
ACQUISITION ($ IN MILLIONS) DATE
- ----------- --------------- ----
<S> <C> <C>
Arizona 1...................................... $24.0 September 1999
Maryland 1..................................... 9.1 June 1999
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
Our cellular revenues 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. We believe 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. We believe 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 as well as declining average
revenues per minutes of use.
Roaming revenues are revenues we derive from providing service to
subscribers of other wireless providers when those subscribers "roam" into our
markets and use our systems to carry their calls. Roaming accounted for 49.5%,
49.3%, 45.6% and 47.7% of our cellular revenue for the three and nine months
ended September 30, 1999 and 1998, respectively. Roaming revenues typically
yield higher average per minute rates and higher margins than revenues from our
subscribers. We achieve these higher margins
16
<PAGE>
because we incur virtually no costs related to equipment, customer service or
collections to earn roaming revenues.While the industry trend is to reduce
roaming rates, we believe that our roaming rates are currently generally lower
than roaming rates offered by others in or near our markets and that our
currently lower roaming rates will lessen the impact of this trend with respect
to our operations. However, we cannot assure you that this trend will not
materially impact us in the future.
Our overall cellular penetration rates increased for the nine-month period
ended September 30, 1999 compared to the same period in 1998 due to the
incremental penetration gains in existing markets. We believe that as our
cellular penetration rates increase, the increase in new subscriber revenue will
exceed the loss of revenue attributable to the cellular churn rate.
We include any toll, or long-distance, revenues related to our cellular and
roaming services in service revenues and roaming revenues. Our roaming yield
(roaming service revenues, which include airtime, toll charges and surcharges,
divided by roaming minutes of use) was $0.46, $0.58, $0.50, and $0.72 per minute
for the three and nine months ended September 30, 1999 and 1998, respectively.
Despite the decline in our roaming yield, we have seen overall roaming revenues
grow due to growth in roaming minutes of use.
COSTS AND EXPENSES
Our primary operating expense categories include cost of service, cost of
equipment, marketing and selling, general and administrative and depreciation
and amortization.
Our cost of service consists primarily of costs to operate and maintain our
facilities utilized in providing service to customers and amounts paid to
third-party cellular providers for providing service to our subscribers.
Our cost of equipment represents the cost associated with telephone
equipment and accessories sold to customers. In recent years, we 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, we have incurred, and expect to continue to incur, losses on
equipment sales, which have resulted in increased marketing and selling costs
per gross additional subscriber. While we expect to continue these discounts and
promotions, we believe that the use of such promotions will result in increased
revenue from increases in the number of cellular subscribers.
Our 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. We pay
commissions to direct sales personnel for new business generated. Independent
sales agents receive commissions for generating new sales and ongoing sales to
existing customers.
Our general and administrative costs include all infrastructure costs such
as customer support, billing, collections, and corporate administration.
Our depreciation and amortization expense represents the costs associated
with the depreciation of our fixed assets and the amortization of our intangible
assets, primarily cellular license acquisition costs and customer lists.
During the first quarter 2000, we expect to incur an extraordinary pretax
loss of approximately $8.7 million as a result of writing off previously
capitalized financing costs associated with the credit facilities of our
subsidiaries, DOC and DCOC, and our senior notes, each of which we expect to
refinance in 2000.
DISCONTINUED OPERATIONS
Our 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.
17
<PAGE>
We intend to distribute the stock of Logix to certain of our shareholders.
RESULTS OF OPERATIONS
In the text below, financial statement numbers have been rounded; however,
the percentage changes are based on the actual financial statement numbers.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
OPERATING REVENUE. For the three months ended September 30, 1999, total
operating revenue increased $48.3 million, or 119.1%, to $88.8 million from
$40.5 million for the comparable period in 1998. Total service, roaming and
equipment sales and other revenue represented 46.0%, 49.5% and 4.5%,
respectively, of total operating revenue during the three months ended
September 30, 1999 and 47.4%, 49.3% and 3.3%, respectively, of total operating
revenue during the three months ended September 30, 1998.
The following table sets forth the components of our revenue for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue......................................... $40,875 $19,216
Roaming revenue......................................... 43,991 19,980
Equipment sales and other............................... 3,934 1,342
------- -------
Total................................................. $88,800 $40,538
------- -------
</TABLE>
Service revenue increased $21.7 million, or 112.7%, to $40.9 million in the
three months ended September 30, 1999 from $19.2 million in the same period of
1998. Of the increase, $19.1 million was attributable to acquisitions. The
remaining $2.6 million was primarily attributable to increased penetration and
usage in the existing company markets. Our subscriber base increased 160.1% to
approximately 424,000 at September 30, 1999 from approximately 163,000 at
September 30, 1998. Approximately 193,800 subscribers were added since
September 30, 1998 as a result of acquisitions. Our average monthly service
revenue per subscriber decreased 19.5% to $33 for the three months ended
September 30, 1999 from $41 for the comparable period in 1998 due to the
addition of new lower rate subscribers in New York, Ohio and Pennsylvania and
competitive market pressures.
Roaming revenue increased $24.0 million, or 120.2%, to $44.0 million in the
three months ended September 30, 1999 from $20.0 million for the comparable
period of 1998. Of the increase, $16.3 million was attributable to acquisitions.
The remaining $7.7 million was primarily attributable to increased roaming
minutes in our existing markets due to expanded coverage areas and increased
usage in these markets.
Equipment sales and other revenue of $3.9 million in the three months ended
September 30, 1999 represented an increase of $2.6 million, or 193.2%, from
$1.3 million in the same period of 1998, as we sold more equipment during the
three months ended September 30, 1999 as a result of growth in subscribers.
COST OF SERVICE. For the three months ended September 30, 1999, the total
cost of service increased $3.8 million, or 38.4% to $13.7 million from
$9.9 million for the comparable period in 1998. This increase primarily
attributable to acquisitions. As a percentage of service and roaming revenue,
cost of cellular service decreased to 16.1% for the three months ended
September 30, 1999 from 25.2% for the same period in 1998. This decrease was
primarily a result of a reduction in rates charged by third-party cellular
providers for providing service to the Company subscribers.
18
<PAGE>
COST OF EQUIPMENT. For the three months ended September 30, 1999, cost of
equipment increased $4.2 million, or 165.6% to $6.7 million during 1999 from
$2.5 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
$7.6 million, or 137.6%, to $13.2 million for the three month period ended
September 30, 1999 from $5.6 million in the comparable period of 1998. This was
a result of an increase in gross subscriber adds. The number of gross
subscribers added in the third quarter of 1999 was approximately 45,300. The
number of gross subscribers added in the third quarter 1998 was approximately
17,000.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $8.0 million, or 120.8%, to $14.7 million for the three month period
ended September 30, 1999 from $6.7 million for the same period in 1998. This
increase year over year is a result of increased infrastructure costs such as
customer service, billing, collections and administrative costs as a result of
our overall growth. As a percentage of total operating revenue, general and
administrative costs remained substantially unchanged. However, our average
monthly general and administrative costs per average subscriber decreased 14.3%
to $12 for the three months ended September 30, 1999 from $14 for the comparable
period in 1998. The decrease in general and administrative costs per subscriber
is a result of efficiencies gained from the integration of acquired companies.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended
September 30, 1999, depreciation and amortization expense increased
$16.9 million, or 128.7% to $30.1 million in the three months ended
September 30, 1999 from $13.2 million in the same period of 1998. Depreciation
and amortization of assets acquired in acquisitions accounted for substantially
all of the increase in the third quarter 1999 compared to the same period in
1998.
INTEREST EXPENSE. For the three months ended September 30, 1999, interest
expense increased $17.0 million, or 173.0%, to $26.8 million in the three months
ended September 30, 1999 from $9.8 million in the same period of 1998. The
increase was primarily a result of increased borrowings to finance our
acquisitions.
OTHER INCOME (EXPENSE), NET. For the three months ended September 30, 1999,
our other income increased $1.0 million, or 195.1%, to $1.5 million from
$.5 million for the comparable 1998 period. The increase was primarily the
result of an increase in interest income that we earned on restricted
investments.
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES. For the three months ended
September 30, 1999, our minority interests in income of subsidiaries was
comparable to the 1998 period. This was a result of the increased income earned
from subsidiaries in established markets in which we do not own a 100% interest,
offset by losses from subsidiaries in newly-acquired markets in which we do not
own a 100% interest.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. For the three months ended
September 30, 1999, our loss, net of income tax benefits, from discontinued
operations increased $4.9 million to $16.0 million from $11.1 million for the
comparable 1998 period. The increase in this loss was a result of increased
losses by our ICP and local exchange carrier subsidiary, Logix, that has
substantially expanded its operations from 1998 to 1999. As previously
discussed, we intend to distribute the capital stock of Logix to our current
stockholders.
NET INCOME (LOSS). For the three months ended September 30, 1999, our net
loss was $25.7 million. Our net loss increased $10.1 million, or 65.1%, from
$15.6 million in the three months ended September 30, 1998. The increase in our
net loss is primarily attributable to increased depreciation and amortization
expense and interest expense resulting from our 1998 and 1999 business
acquisitions and financings, as well as the increase in our loss from
discontinued operations.
19
<PAGE>
DIVIDENDS ON PREFERRED STOCK. For the three months ended September 30,
1999, our dividends on preferred stock increased $12.4 million, or 199.2%, to
$18.6 million from $6.2 million for the comparable 1998 period. This increase
was primarily the result of additional dividends on our December 1998 and May
1999 issuances of senior preferred stock.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
OPERATING REVENUE. For the nine months ended September 30, 1999, total
operating revenue increased $138.8 million, or 144.1%, to $235.1 million from
$96.3 million for the comparable period in 1998. Total service, roaming and
equipment sales and other revenue represented 50.1%, 45.6% and 4.3%,
respectively, of total operating revenue during the nine months ended
September 30, 1999 and 49.6%, 47.7% and 2.7%, respectively, of total operating
revenue during the nine months ended September 30, 1998.
The following table sets forth the components of our revenue for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue........................................ $117,892 $47,769
Roaming revenue........................................ 107,296 45,916
Equipment sales and other.............................. 9,952 2,661
-------- -------
Total................................................ $235,140 $96,346
======== =======
</TABLE>
Service revenue increased $70.1 million, or 146.8%, to $117.9 million in the
nine months ended September 30, 1999 from $47.8 million in the same period of
1998. Of the increase, $56.0 million was attributable to acquisitions. The
remaining $14.1 million was primarily attributable to increased penetration and
usage in the existing company markets. Our subscriber base increased 160.1% to
approximately 424,000 at September 30, 1999 from approximately 163,000 at
September 30, 1998. Approximately 193,800 subscribers were added since
September 30, 1998 as a result of acquisitions. Our average monthly service
revenue per subscriber decreased 17.5% to $33 for the nine months ended
September 30, 1999 from $40 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 $61.4 million, or 133.7%, to $107.3 million in the
nine months ended September 30, 1999 from $45.9 million for the comparable
period of 1998. Of the increase, $41.5 million was attributable to acquisitions.
The remaining $19.9 million was primarily attributable to increased roaming
minutes in the existing company markets due to expanded coverage areas,
deployment of digital technology in most of our markets, and increased usage in
these markets.
Equipment sales and other revenue of $10.0 million in the nine months ended
September 30, 1999 represented an increase of $7.3 million, or 274.0%, from
$2.7 million in the same period of 1998, as we sold more equipment during the
nine months ended September 30, 1999 as a result of growth in subscribers.
COST OF SERVICE. For the nine months ended September 30, 1999, the total
cost of service increased $13.2 million, or 58.2% to $35.8 million from
$22.6 million for the comparable period in 1998. Of the increase, $11.3 million
was attributable to acquisitions. The remaining $1.9 million was primarily
attributable to increased subscribers and minutes of use in the existing company
markets. As a percentage of service and roaming revenue, cost of cellular
service decreased to 15.9% for the nine months ended September 30, 1999 from
24.1% for the same period in 1998. This decrease was primarily a result of a
reduction in rates charged by third-party cellular providers for providing
service to our subscribers.
20
<PAGE>
COST OF EQUIPMENT. For the nine months ended September 30, 1999, cost of
equipment increased $13.4 million, or 259.3% to $18.6 million during 1999 from
$5.2 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
$20.1 million, or 135.3%, to $35.0 million for the nine month period ended
September 30, 1999 from $14.9 million in the comparable period of 1998. The
increase was a result of an increase in gross subscriber adds. The number of
gross subscribers added in the nine months ended September 30, 1999 was
approximately 121,000. The number of gross subscribers added in the nine months
ended September 30, 1998 was approximately 48,900.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $24.6 million, or 151.5%, to $40.8 million for the nine month period
ended September 30, 1999 from $16.2 million for the same period in 1998. This
increase year over year is a result of increased infrastructure costs such as
customer service, billing, collections and administrative costs as a result of
our overall growth. Our average monthly general and administrative costs per
average subscriber decreased 14.3% to $12 for the nine months ended
September 30, 1999 from $14 for the comparable period in 1998. The decrease in
general and administrative costs per subscriber was a result of efficiencies
gained from the integration of acquired companies.
DEPRECIATION AND AMORTIZATION EXPENSE. For the nine months ended
September 30, 1999, depreciation and amortization expense increased
$70.3 million, or 236.6% to $100.0 million in the nine months ended
September 30, 1999 from $29.7 million in the same period of 1998. Depreciation
and amortization of assets acquired in acquisitions accounted for substantially
all of the increase in the nine months ended September 30, 1999 compared to the
same period in 1998.
INTEREST EXPENSE. For the nine months ended September 30, 1999, interest
expense increased $57.4 million, or 228.9%, to $82.4 million in the nine months
ended September 30, 1999 from $25.0 million in the same period of 1998. The
increase was primarily a result of increased borrowings to finance our
acquisitions.
OTHER INCOME (EXPENSE), NET. For the nine months ended September 30, 1999,
our other income increased $.1 million, or 3.3%, to $3.4 million from
$3.3 million for the comparable 1998 period. This increase was primarily the
result of an increase in interest income earned on restricted investments less
expenses that we incurred pursuing acquisitions that were not consummated.
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES. For the nine months ended
September 30, 1999, our minority interests in income of subsidiaries increased
$0.1 million, or 8.2%, to $2.1 million from $2.0 million for the comparable 1998
period. This increase was attributable to increased income earned from
subsidiaries in established markets in which we do not own a 100% interest,
which was offset by losses from subsidiaries in newly-acquired markets in which
we do not own a 100% interest.
EXTRAORDINARY EXPENSE. During the first quarter 1998, we 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.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. For the nine months ended
September 30, 1999, our loss, net of income tax benefits, from discontinued
operations increased $24.6 million to $41.8 million from $17.2 million for the
comparable 1998 period. The increase in this loss was a result of increased
losses by our ICP and local exchange carrier subsidiary, Logix, that has
substantially expanded its operations from 1998 to 1999. As previously
discussed, we intend to distribute the capital stock of Logix to our current
stockholders.
NET INCOME (LOSS). For the nine months ended September 30, 1999, our net
loss was $89.0 million. Our net loss increased $58.1 million, or 188.1%, from
$30.9 million in the nine months ended September 30, 1998. The increase in our
net loss was primarily attributable to increased depreciation and amortization
21
<PAGE>
expense and interest expense resulting from our 1998 and 1999 business
acquisitions and financings, as well as the increase in our loss from
discontinued operations.
DIVIDENDS ON PREFERRED STOCK. For the nine months ended September 30, 1999,
our dividends on preferred stock increased $33.8 million, or 201.6%, to
$50.5 million from $16.7 million for the comparable 1998 period. This increase
was primarily the result of additional dividends on our December 1998 and May
1999 issuances of senior preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
We are a holding company with no direct operations and no significant assets
other than the stock of our subsidiaries. We depend on the cash flows of our
subsidiaries to meet our obligations, including our obligations to pay interest
and principal on our indebtedness, and dividends on our 12 1/4% Senior
Exchangeable Preferred Stock and our 13% Senior Exchangeable Preferred Stock.
Our subsidiaries are separate legal entities that have no obligation to pay any
amounts owed by us or to make any funds available to us. The ability of our
subsidiaries to distribute funds to us are and will be restricted by the terms
of existing and future indebtedness including our credit facilities.
Our cellular operations require substantial capital to acquire, construct
and expand cellular telephone systems and to fund operating requirements. We
have financed our operations through bank debt and the sale of debt and equity.
At September 30, 1999, we had a working capital deficit of $14.0 million (a
ratio of current assets to current liabilities of .9:1) and an unrestricted cash
balance of $.3 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.
Our net cash provided by operating activities totaled $14.4 million for the
nine month period ended September 30, 1999, while the net cash provided by
operating activities totaled $11.4 million for the same period of 1998. The
increase of $3.0 million was primarily due to depreciation and amortization,
offset by the change in deferred credits, the change in current assets and
liabilities and our net loss for the period.
Net cash used in investing activities, which totaled $(96.3) million and
$(293.2) million for the nine months ended September 30, 1999 and 1998,
respectively, principally related to acquisitions and capital expenditures in
all periods. Acquisitions and their related costs accounted for $46.4 million
and $200.8 million and capital expenditures were $40.1 million and
$23.8 million for the nine month periods ended September 30, 1999 and 1998,
respectively.
Net cash provided by financing activities was $59.9 million the nine month
period ended September 30, 1999 compared to $284.1 million for the same period
of 1998. Financing activity sources for the nine months ended September 30, 1999
consisted primarily of the issuance of $170.0 million senior exchangeable
preferred stock, maturities of restricted investments of $19.1 million and
proceeds from long-term debt of $79.0 million, offset by the redemption of
$55.0 million Class F and G preferred stock and repayments of long-term debt
totaling $141.1 million.
In March 1999, we 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 based on
our leverage (approximately 8.76% at September 30, 1999). The term of the
interest rate swap is 24 months. In June 1999, we entered into an interest rate
cap agreement terminating on June 14, 2001. The cap agreement minimizes our
interest rate exposure by setting a maximum rate of 7.50% plus a factor based on
our leverage (approximately 8.88% at September 30, 1999) for $160 million of its
indebtedness.
The minority partners in our partnerships that own certain of our cellular
operations receive distributions equal to their share of the profit multiplied
by estimated income tax rates. Under our bank
22
<PAGE>
credit agreements, our 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 us is paid or extinguished.
Our capital expenditures (excluding cost of acquisitions and discontinued
operations) were $40.2 million for the nine months ended September 30, 1999 and
we expect our capital expenditures to be approximately $70.0 million to
$75.0 million for all of 1999. We have not budgeted any amounts to be expended
in 1999 with respect to the systems which may be acquired in other acquisitions
or our PCS system. The amount and timing of capital expenditures may vary
depending on the rate at which we expand and develop our cellular systems and
whether we consummate additional acquisitions.
We have agreed to purchase approximately $65.0 million of cell site and
switching equipment between June 1997 and November 2001. Of this commitment,
approximately $27.8 million remained at September 30, 1999. Under another
equipment supply agreement, we agreed to purchase approximately $81.0 million of
cell site and switching equipment by January 13, 2002. Of this commitment,
$33.2 million remained at September 30, 1999.
We have received a commitment from Bank of America, N.A. and its affiliate,
Banc of America Securities LLC, on behalf of a group of banks, to provide us
with an $800.0 million credit facility, the proceeds of which will be used
primarily to consolidate the indebtedness of DCOC under its $160.0 million
credit facility (the "DCOC Credit Facility") and of DCOC under its
$250.0 million senior secured credit facility (the "DOC Credit Facility"), to
pay the cash portion of certain of our pending acquisitions and to fund our
expected repurchase of our outstanding $160.0 million principal amount of
11 3/4% senior notes due 2007. This new credit facility will include a
$300.0 million revolving credit facility and a $500.0 million term loan
facility, both of which will mature in 2007.
Our new credit facility will replace the DCOC Credit Facility and the DOC
Credit Facility. As of September 30, 1999, we had outstanding indebtedness of
$133.0 million and availability of approximately $27.0 million under the DCOC
Credit Facility. As of September 30, 1999, we had outstanding indebtedness of
$139.0 million and we had approximately $60.0 million of availability under the
DOC 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. 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 DOC Credit Facility and the DCOC Credit Facilities
are not secured, however, by each companies' FCC licenses. Each of the DCOC
Credit Facility and the DOC Credit Facility require that we maintain specified
financial ratios. The failure of maintain these ratios would constitute an event
of default, notwithstanding our ability to meet debt service obligations. To
date, we have met the required financial ratios. The DCOC Credit Facility and
the DOC Credit Facility each amortize quarterly beginning June 30, 2000 and
terminate on June 30, 2006. Weighted average interest rates on the DCOC Credit
Facilities were 6.5% as of September 30, 1999. The interest rate on the DOC
Credit Facility was 7.0% on September 30, 1999.
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 us to maintain certain financial
ratios. The failure to maintain such ratios would constitute and event of
default, notwithstanding Dobson/Sygnet's ability to meet its debt service
obligations. The Dobson/Sygnet credit facilities amortize quarterly beginning
December 31, 2000, and terminate December 31, 2008. At September 30, 1999, we
had an unused commitment level of $24.0 million under the Dobson/Sygnet credit
facilities, subject to covenant limitations.
23
<PAGE>
The Dobson/Sygnet Senior Notes bear interest at an annual rate of 12.25% and
mature in 2008. Of the net proceeds, $67.7 million, (as discussed in Note 4)
were used to purchase securities pledged to secure the first six semi-annual
interest payments, which began June 15, 1999.
We recently entered into definitive agreements to acquire the FCC licenses
for, and certain assets related to, Alaska 1 RSA, Alaska 3 RSA and
Michigan 3 RSA for an aggregate purchase price of $125.0 million. These
acquisitions are expected to close in the first quarter of 2000. We are also a
party to an agreement to purchase the FCC license for, and certain assets
related to, Pennsylvania 2 RSA for $6.0 million. Because the seller's title to
the Pennsylvania 2 license remains subject to administrative and judicial review
the closing of that acquisition has been delayed. On October 18, 1999, the FCC
issued an order, which, when final, will dismiss all outstanding claims against
the seller's title. We expect this order to become final in November 1999 if
none of the dismissed parties files an appeal. Pending the closing of this
acquisition, we are managing the operation of the Pennsylvania 2 cellular system
under the supervision and control of the seller. On June 28, 1999 we concluded
our 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 using available funds under our credit facilities. During
third quarter 1999, we also acquired Arizona 1 RSA for $24.0 million. Arizona 1
is located in northwestern Arizona. We have no definitive agreements with
respect to any acquisitions other than our acquisitions of Alaska 1, Alaska 3,
Michigan 3 and Pennsylvania 2 and the American Cellular acquisition.
Although we cannot provide any assurance, assuming successful implementation
of our strategy, including the further development of our cellular systems and
significant and sustained growth in our cash flows, we believe that borrowings
under our new credit facility and cash flows from operations should be
sufficient to allow us to consummate our pending acquisitions and are expected
to be sufficient to satisfy our currently expected capital expenditures, working
capital and debt service obligations. The actual amount and timing of our future
capital requirements may differ materially from our estimates as a result of,
among other things, the demand for our services and regulatory, technological
and competitive developments. We currently expect that we may have to refinance
our indebtedness at their respective maturities commencing in 2006. We will also
need to refinance our mandatory redemption obligations under our senior
preferred stock. Sources of additional financing may include commercial bank
borrowings, vendor financing and the sale of equity or debt securities. We
cannot assure you that any such financing will be available on acceptable terms
or at all.
IMPACT OF YEAR 2000 ISSUE
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, these 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, we established a multi-disciplined team to perform a year
2000 impact analysis. The team consists of representatives from each of our
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 that brought a structured approach to the
assessment and management reporting process, as well as disaster recovery
approach.
We completed an inventory of our automated systems and services and
identified significant risk areas by line of business, specific compliance
requirements and costs and estimated completion dates for affected systems. The
services we provide are based on the systems of Regional Bell Operating
Companies and other systems outside our control. We have had contact with all of
the vendors of products and services that we believe are critical to our
operations. Our vendors' representations pertaining to year 2000 compliance have
come in writing directly to us, in contracts and by accessing year 2000
information available at their web sites. While all of our vendors have provided
some type of assurance that their
24
<PAGE>
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 obtaining assurances of year 2000
compliance in the form of documented year 2000 planning and testing and third
party audits, whenever available.
We do not have large scale legacy applications used by many
telecommunications providers. From an information systems standpoint, we have
historically relied on outsourcing relationships for most of our business and
operational support applications. Those applications that have not been
outsourced to service providers have been deployed using packaged software from
outside vendors. As a result, the focus of our remediation efforts is not a
large scale in-house effort, but rather an 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 our information
systems, services and telecommunications infrastructure, year 2000 compliant
versions were to be included as a part of existing maintenance and/or service
agreements at no additional cost to us and were in place and tested by the end
of the second quarter of 1999. All critical systems relating to call delivery,
billing, accounting, payroll and customer care were fully year 2000 compliant by
the end of October 1999. There are some non-critical systems that have yet to be
replaced or upgraded for business reasons. While these non-critical systems do
not represent a threat to the business, we will retire, upgrade or replace them
by the end of 1999. The cost of upgrading or replacing those systems that were
not covered by existing service or maintenance agreements was approximately
$0.75 million. Our estimated upgrade costs does not include the cost of
upgrading and/or replacing those non-year 2000 compliant systems that were
replaced or upgraded based on non-year 2000 related business reasons.
We will continue to analyze systems and services that utilize date-embedded
codes that may experience operational problems when year 2000 is reached. We
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 we do business to coordinate year 2000
compliance. Our year 2000 contingency and business continuity plans are in
development and will be completed during the fourth quarter of 1999. If we are
unable to provide systems and services to our customers, because either our own
systems or those of our vendors are not year 2000 compliant, our reasonably
likely worst case scenario is that we would experience a reduction in our
operating revenues, which could adversely affect our ability to meet our
operating and financial obligations.
25
<PAGE>
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, we would record an asset of $.3 million relating to its interest rate
hedge valuation at September 30, 1999. We have not determined the timing or
method of adoption of SFAS 133.
FORWARD-LOOKING STATEMENTS
The description of our 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 our
performance to differ materially from the plans include, without limitation, our
ability to satisfy the financial covenants of our outstanding debt and preferred
stock instruments and to raise additional capital; our ability to manage our
rapid growth successfully and to compete effectively in our cellular business
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
ours; 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. We undertake no obligation to update or revise these forward-looking
statements to reflect events or circumstances after the date hereof including,
without limitation, changes in our business strategy or planned capital
expenditures, or to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our 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. We do 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 third quarter 1999, we had an interest rate hedge on $110.0 million
of our outstanding indebtedness under the Dobson/Sygnet Credit Facilities and an
interest rate cap agreement on $160.0 million of other of our indebtedness.
Increases in interest expense related to the interest rate hedge for the three
months and nine months ended September 30, 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 September 30, 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.
26
<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
- ------- -----------
<C> <S>
27.1 Financial Data Schedule--Nine Months Ended September 30,
1999
</TABLE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K during the quarter ended
September 30, 1999, which reported the acquisition of Maryland 1 Rural Service
Area (RSA), by its wholly-owned subsidiary, Dobson Cellular of Maryland, Inc.
under "Item 5. Other Events." The date of the report was July 7, 1999.
The Company filed a Current Report on Form 8K/A to amend the previous
current report filed on July 7, 1999 solely to add the additional exhibits
required by Item 7(c). The date of the report was July 27, 1999.
27
<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>
Date: November 15, 1999 Dobson Communications Corporation
(registrant)
/s/ EVERETT R. DOBSON
---------------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: November 15, 1999
/s/ BRUCE R. KNOOIHUIZEN
---------------------------------------------
Bruce R. Knooihuizen
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 339,308
<SECURITIES> 0
<RECEIVABLES> 55,964,151
<ALLOWANCES> (1,623,474)
<INVENTORY> 6,615,531
<CURRENT-ASSETS> 87,908,963
<PP&E> 236,692,839
<DEPRECIATION> (49,401,742)
<TOTAL-ASSETS> 1,666,580,720
<CURRENT-LIABILITIES> 101,885,340
<BONDS> 1,039,843,580
525,797,350
314,286
<COMMON> 573
<OTHER-SE> (240,438,701)
<TOTAL-LIABILITY-AND-EQUITY> 1,666,580,720
<SALES> 9,952,331
<TOTAL-REVENUES> 235,139,870
<CGS> 18,561,827
<TOTAL-COSTS> 230,096,458
<OTHER-EXPENSES> (3,411,347)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,364,725
<INCOME-PRETAX> (76,034,850)
<INCOME-TAX> 28,891,955
<INCOME-CONTINUING> (47,142,895)
<DISCONTINUED> (41,811,237)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (88,954,132)
<EPS-BASIC> (283.50)
<EPS-DILUTED> (283.50)
</TABLE>
